Drugs manufacturing industry in India to reach $31 B by 2022

Indian pharmaceutical industry is predicted to grow at a CAGR of 9-12% during the 2018-22 period to reach a size of USD 26-31 billion.

Definition / Scope
Market Overview
Market Risks
Top Market Opportunities
Market Drivers
Market Restraints
Industry Challenges
Pricing Trends
Regulatory Trends
Other Key Market Trends
Market Size and Forecast
Market Outlook
Technology Roadmap
Distribution Chain Analysis
Competitive Landscape
Competitive Factors
Key Market Players
Strategic Conclusion
References

Definition / Scope

The definition of a drug includes medicines that are meant for internal as well as external use including substance used for the diagnosis, treatment or prevention of disease. It also includes components of the drug as well as devices that are used internally or externally for the diagnosis, treatment or prevention of disease.

A generic drug contains the same active ingredients as the branded drug and gives the same therapeutic effect as branded drugs. It is not necessary for them to contain the same inactive ingredients. It is identical in strength, dosage form and route of administration and has the same use indications.

A branded drug is originally developed and manufactured by a pharmaceutical company with a huge investment in research & development and the drug is exclusively sold by the company in the market with patent protection so that the company can recover the investments it made for the manufacturing of the drug.

ANDA: Drug manufacturers need to clear the Abbreviated New Drug Application (ANDA) process with the United States Food and Drug Administration (USFDA) to market the generic drug. It involves seeking approval from the USFDA by drug formulators through submission of supporting documents to market a generic drug in the USA.

NDA: To market the drug in the USA, the pharmaceutical company has to submit New Drug Application (NDA) to the USFDA and get approval from it regarding the safety and efficacy of the drug.

OTC drugs refer to those drugs which do not require a prescription from doctors for its purchase and are sold over the counter. These drugs can be easily bought from local chemists, general stores, supermarkets, etc.

The pharmaceutical industry is categorized into five sub-segments – Domestic Formulation Companies (DFC), Export Oriented Formulation Companies (EOFC), API Manufacturers (APIM), Contract Manufacturing of Formulations (CMF), and Nutraceuticals Products (NP).

Active Pharmaceutical Ingredients Manufacturing (APIM) is the primary active ingredient that is manufactured in the initial stage of pharmaceutical and drug production. It is the ingredient that results in the desired therapeutic effect in the human body.

Contract Research and Manufacturing Services (CRAMS) is an outsourcing process that implies the outsourcing of research and product manufacturing services at a lower cost.

Market Overview

India is a substantial market for generic drugs. Generic drugs form 70% of the pharmaceutical market. Globally, India accounts for 20% of worldwide exports. Patented drugs constitute 9% of the revenue generation.

Indian pharmaceutical spending per capita is recorded at USD 25/person per year comparing the global average of USD 107.

The major exporting market includes the US, Russia, the UK, South Africa, Nigeria, Germany, etc. Top 5 export countries account for 48.50% of India’s total export. while the majority of import comes from countries like Switzerland, the US, Germany, and France.

In 2017-18, India exported pharmaceutical products worth USD 17.27 billion. By 2020, the industry estimates the exports to grow by 30 percent to reach USD 20 billion.

Besides, India is the only country in the world that has the highest number of USFDA-approved plants for generic drug manufacturing outside the US. India has 2633 FDA approved drugs and 546 USFDA approved plants, which is the highest number outside the US.

The Indian pharmaceuticals sector has received FDI worth USD 15.72 Billion between April 2000 and March 2018. The Indian Government also plans to set up a USD 700 million venture capital (VC) fund to give a boost to drug discovery and strengthen the pharma infrastructure in the country.

Anti-infective drugs represent a 16% share in term of dollar value that the pharmaceutical market earns. Similarly, Cardiovascular is the second most attractive segment that accounts for 13% in value terms. Anti-diabetic, analgesic, respiratory, and vitamin drugs hold single-digit share just above 6 % each in value term.

Market Risks

New product failure

The largest portion of the cost is incurred during the research and development (R & D) phase of a new drug and the percentage of the total cost on R & D vary with the type of drug being developed, the chances of failure, and the molecular formulation of the drug being tested for the first time.

It is estimated that the development of any new innovative drug costs around USD 800 million and even more than estimated cost. Likewise, it takes nearly 12 years on average to develop a new drug. Moreover, according to the FDA, the proportion of all news drugs entering phase I trials that ultimately gain approval has fallen to 8 percent from a historical average of about 14 percent.

Therefore, in case of product failure, the negative payback would likely to oust business from the global competition.

Top Market Opportunities

The cost of manufacturing drugs in India remains 30‐40 percent less comparing the cost to produce similar drugs in the USA, China, and Europe driven by lower labor costs.

The US market is seeing the expiry of patents for many blockbuster drugs over the coming years. Patents for products in excess of USD 100 billion have expired over the past five-seven years, which has resulted in a number of new generic formulations entering the US market.

This leaves a large opportunity for a country like India where the companies are focused on higher revenue generation by sales to regulated markets and are prepared for the same. As a result, it can be assumed that the exports by Indian companies will increase over the coming years.

Market Drivers

Rising pollution

Rising air and water pollution is resulting in an increased incidence of various diseases, leading to higher pharmaceutical consumption. 11 of the 12 cities with the highest levels of pollution are located in India. Kanpur, a city in India, with a population of 3 million, tops the list with a yearly average of 319 micrograms per cubic meter of PM 2.5, the most hazardous particle commonly measured.

Changing lifestyles

Individual lifestyle choices are increasingly affected by stress, resulting in a higher risk of obesity, hypertension, depression, diabetes, and cardiovascular problems. Moreover, with rising in disposable incomes for global middle-class families, the demand for better healthcare is gradually increasing.

Higher incidences of chronic diseases

50% of all heart attacks in Indians occur under 50 years of age and 25% of all heart attacks in Indians occur under 40 years of age.

Rising ANDA approval

India accounts for the second largest number of Abbreviated New Drug Applications (ANDAs).

Patent Expiration

In 2018, over USD 100 billion of patents are estimated to be expired. It creates a whole new Greenfield market for new entrants and existing businesses to grab the unfulfilled market supply. Major drugs such as Nexium, Gleevec, and Namenda are set to open up for competition in the generics market over the next five years.

Market Restraints

Introduction of Generic Drugs and Price Control INtervention by the Government

Currently, the regulatory body controls price for 24% of the Indian pharmaceutical market. However, it has exempted the price cap for drugs manufactured by foreign companies in India for up to 5 years.

Furthermore, the market is witnessing a threat from generic drugs made available by the government in a large volume nation-wide resulting in 3.5% slowdown in market growth during 2016-2018.

Industry Challenges

The industry will require additional 1.4-1.6 million pharmaceutical manpower in various functions such as R&D, quality control, manufacturing, etc. by 2020. Additionally, the FDA has been tightly scrutinising the quality and standard of the drugs manufactured in India.

India has more than 2,500 FDA approved drugs that are manufactured here. Plant shutdowns, import ban, critical observation across the value chain have put a spotlight on export, which will affect the company’s overall profitability as India is one of the largest exporters of generic drugs worldwide.

Another challenge that the industry players face is the impact of the price change on finished products. Drugs Price Control Order (DPCO) has stipulated the norm that stock must be recalled for relabelling in the event of price change. The consequence if it, therefore, is the unwanted logistics expenses and the wastage of the drugs in the shelves.

Pricing Trends

NPPA is mandated for the pricing of drugs. Under para 3 of DPCO’95 Government is empowered to fix the Maximum Sale Prices of Bulk Drugs specified in the First Schedule with a view to regulate the equitable distribution and increasing supply of Bulk Drugs specified in the First Schedule and making it available at a fair price from different manufacturers.

Pricing for Scheduled Drugs

Para 8 of DPCO, 1995 empowers the Government to fix from time to time retail price of scheduled formulations in accordance with the formula laid down in para 7 of the DPCO. Under para 9 of DPCO, the Government is empowered to fix ceiling prices of scheduled formulations from time to time, in accordance with the formula laid down in para 7 keeping in view the cost for efficiency for both, of major manufacturers of such formulations and such price shall operate as the ceiling sale price for all such packs including those sold under generic name and for every manufacturer of such formulations.

These prices are fixed/ revised from time to time and notified in the official gazette. The manufacturers and formulators are required to follow the prices fixed/revised by the Government from time to time (both for bulk drugs and formulations including ceiling prices) within 15 days from the issued of such order by the Government. No one can sell any scheduled drug/formulation at a price higher than the price fixed by NPPA / Government.

Pricing for Non-Scheduled Drugs

In respect of drugs, not covered under the Drugs (Prices Control) Order, 1995 i.e.non‐scheduled drugs, manufacturers fix the prices by themselves without seeking approval of Government / NPPA.

Such prices are normally fixed depending on Page 79 of 153 various factors like the cost of bulk drugs used in the formulation, cost of excipients, cost of R&D, cost of utilities/packing material, sales promotion costs, trade margins, quality assurance cost, landed cost of imports, etc. As a part of price monitoring activity, NPPA regularly examines the movement in prices of non‐scheduled formulations.

Pricing of Imported and Domestic Formulations

In respect of formulations manufactured in the country, ex‐factory price worked out by adopting the norms/ guidelines forms the basis whereas in the case of imported formulations, landed cost of import forms the basis of price fixations.

The vast difference between imported and indigenously produced medicines containing the same salt is observed in almost all cases wherever equivalent substitutes are available in domestic markets.

This is despite the fact that the provision in DPCO was incorporated to consider/ allow lower margin i.e. up to 50% for imported formulations as against the 100% for indigenously produced medicines under para 7 of DPCO 1995.

Regulatory Trends

The primary statute that regulates the Indian pharmaceutical industry is the Drugs and Cosmetics Act, 1940 (“DCA”) and the rules framed there under viz. Drugs and Cosmetics Rules, 1945 (“DCR”).

The Department of Industry Policy and Promotion (DIPP) has recently adopted a new policy called the National Intellectual Property Rights Policy (NIPR Policy). This policy encourages drug manufacturers to spend extensible money and time on R & D for innovative drugs while ensuring the patent rights to the innovator and return on the investment.

Another major reform is the relaxing FDI restriction on pharmaceutical investment whereby permitting up to 100% under automatic route that will facilitate to have the leverage by the act of Merger & Acquisition in operational efficiency between Indian and International manufacturers. For Brownfield pharmaceutical projects, FDI has been allowed up to 74% through automatic route and beyond that through government approval.

In 2018, the Ministry of Health and Family Welfare had published draft rules to amend the Good Manufacturing Practices (“GMP”) listed in Schedule M of the Drugs & Cosmetics Rules 1945 (“D&C Rules”).

The GMP is a set of rules under the Drugs and Cosmetics Act, 1940, which lay down mandatory best practices to be followed for manufacturing a drug that is to be sold in India.

The draft rules emphasize testing of the drug at all stages of manufacturing and not just the finished product. Moreover, the draft rules put in place a mechanism for drug recall in case a product is known or suspected to be defective.

The Drugs Technical Advisory Board (“DTAB”) – the highest statutory decision-making body on technical matters related to drugs in India accepted the proposal in 2018 to amend the Drugs and Cosmetics Act, 1940 (“D&C Act”) to hold drug marketing companies (companies that do not have manufacturing capabilities but avail of the manufacturing facilities of a third party) liable for manufacturing deficiencies, in addition to the manufacturer of the drug.

For the purpose of the D&C Act, the DTAB has stated that the marketing company should be treated as an agent of the manufacturer and that defenses prescribed under the D&C Act should not be applicable to the marketer for the deficiencies.

With the implementation of GST, most medicines fall under the category of 12% whereas essential drugs including insulin fall under the category of 5%. In the pre-GST regime, the formulations including excise duty and VAT were taxed at around 9% and the tax on inputs of bulk drugs was 12.5%.

Other Key Market Trends

Nearly half of the workforce is employed in the production and quality control division of the pharmaceutical business. Similarly, one-fifth of the workforce is deployed in research or lab testing. This is the most qualified workforce in the pharmaceutical industry. This group of employees represents roughly 5-8% who holds Ph.D. or M.Tech or M.Sc degree.

The remaining 30% of the employees are recruited as marketing, logistics, and sales function of the business. 15-25% of the workforce recruited as the support function is management graduate. The low skilled staff that has high school degree represent up to 25%. Labor cost is comparatively 50-55% cheaper than in Western countries.

India’s cost of production is 33% lower than that of the USA. Cheap labor is a major factor in the lower cost of production.

Market Size and Forecast

India’s pharmaceutical industry is the world’s largest supplier of generic drugs, accounting for 20% of global export volume. The domestic market accounts for over 3% of the global pharmaceutical industry in value terms and 10% in volume. In 2018, the Indian pharmaceutical market grew to USD 21.23 billion from USD 19.3 in the previous year.

Market Outlook

The year 2019 will witness a 10% growth of Pharmaceutical business to amount USD 23.35 billion. It is predicted to grow at a CAGR of 9-12% in the 2018-22 period to reach a size of USD 26-31 billion.

Technology Roadmap

AI and Virtual clinical trial

The predictive and analytic powers of AI enable companies to make smarter, faster, and more strategic decisions. AI will increase drug development efficiency by not wasting research efforts, for example creating alternative hypotheses for trials by discovering more data to enable drug repurposing.

A data-driven approach can discover trial aspects that are of vital or strategic importance, thereby enhancing the ability to make critical decisions. Additionally, with the influx of data from new devices, it will enable real-time, on-the-go, instant results.

The National University of Singapore (NUS) has created an AI platform called CURATE.AI, which uses a patient’s clinical data including historical records to rapidly identify the drug doses and future modifications in dosage basis the tumor size or level of cancer biomarkers. The data is further used to generate a unique course of treatment customized to the patient’s needs and requirements.

Likewise, the penetration of AI in pharma manufacturing is a very nascent stage; however, companies are gradually exploring the usage of AI and advanced analytics in manufacturing operations. The potential use of AI systems includes reducing the drug production time, improving safety and quality, and identifying ways to repurpose existing drugs.

Dr. Reddy’s in India has leveraged AI in its manufacturing process and quality assessment. The company’s manufacturing division is obligated to document every step as a part of regulatory compliance.

The documentation had visible errors in terms of language. The company is also expected to create a standard operating procedure (SOP) for each process and subprocess in the quality labs.

SOPs are large complex documents and the chances of errors are high. To address these issues, the company created an AI-based solution on how to write smart SOPS.

Distribution Chain Analysis

The value chain of the pharmaceuticals sector essentially comprises R&D, production and marketing and sales. All the other stakeholders interplay within the boundaries of these key processes.

R & D: The research and development comprise various phases for new molecule formulation, new therapy area, biologics, biosimilars, and biologics.
Production: The various activities of the production process include procurement, quality control, process, equipment handling, storage, and warehouse.
Marketing & Sales: In this stage, marketing, distribution, and sales activities are carried out.

To make the value chain robust, lead identification, clinical trials, vendor assessment, process optimization, quality control, and product and marketing strategy combined with distribution strategy are the key success factors.

Competitive Landscape

Branded generic drugs account for nearly 80% of the Indian pharmaceutical market by sales. The market is highly fragmented and competitive. Cost-efficiency coupled with a skilled workforce continues to make it an attractive destination for investment and research.

Overall, the threat of new drug manufacturers and the threat of substitute drugs is very low in the Indian pharmaceutical industry. Nevertheless, the bargaining power of patients and competitive rivalry is acute despite the medium bargaining power of suppliers.

Competitive Factors

The development of new drugs and protecting intellectual property are the key competing and success factors. The competitive environment is subject to continuous research and development and substantial investment in this research.

Other factors that determine the company’s value proposition include quality control, meeting customer specifications, and efficient logistics system. The introduction of new products by competitors and changes in medical practices and procedures can result in product obsolescence. Price is also a competitive factor.

Key Market Players

Sun Pharmaceutical Industries Ltd

Sun Pharma is the world’s fifth largest specialty generics pharmaceutical company and is also India’s largest and most valuable pharmaceutical enterprise by size and market capitalization. It’s market capitalization as of June 2019 held USD 13.47 billion (INR 935.62 billion).

The global revenue for 2018 fell off by 15.1% from previous year’s USD 4.64 billion (INR 322 billion) total revenue. The company generated 32% of its global revenue from India alone. The international market captures 68% market share for its revenue source.

The company has acquired global rights for OTX-101 and Odomzo in 2016. Likewise, the Company received the U.S. Food and Drug Administration (USFDA) acceptance of the Biologics Licence Application (BLA) for ILUMYA™ in 2017.

The Company has operations spanning segments like specialty products, branded generics, complex and pure generics, over-the-counter (OTC) products, antiretrovirals (ARVs), and active pharmaceutical ingredients (APIs). It also manufactures intermediates for specialty APIs, offering a full range of dosage forms, including tablets, capsules, injectables, ointments, creams, and liquids.

Cipla

Cipla is a leading global pharmaceutical company based in India that manufactures high-quality, branded and generic medicines. The company has a vast portfolio with more than 1,500 products in the market. The company’s business is divided into three strategic units – Active Pharmaceutical Ingredients (API), Respiratory and Cipla Global Access.

It made USD 2.19 billion (INR 15219 crore), an increase of 4.02% from the previous year in revenue in 2018. The company invested 7.1% of the previous year’s profit in R & D in 2018. 39% of its revenue comes from the Indian market. It’s market capitalization as of June 2019 amounts USD 6.49 billion (INR 45130 crore).

Dr. Reddy’s Lab

Dr. Reddy’s Lab is India’s third largest multinational pharmaceutical company. The US market accounts for 52% of the company’s global generics sales and 42% of all sales. In 2018, it filed 19 new abbreviated new drug applications (ANDAs) and one new drug application (NDA) under 505(b)(2) route with the USFDA.

Till the end of 2018, it had 110 generic filings pending approval from the USFDA, comprising 107 ANDAs and three new drug applications (NDAs) filed under the 505(b)(2) route of the US Federal Food, Drug, and Cosmetic Act. The company makes 80% of its revenue from global generics drugs. In 2018, it made total revenue of USD 2.05 billion (INR 142 billion), a marginal increase from the previous. It’s market capitalization stood USD 6.23 billion in June 2019.

Piramal Enterprises Limited

Piramal Enterprises Limited (PEL) is one of India’s large diversified companies, with a presence in Financial Services, Pharmaceuticals and Healthcare Insight & Analytics. PEL’s pharmaceutical division is India’s fourth largest drugs provider. Its revenue from pharma division was over USD 622 million (INR 4322 crore). 10% of its pharma revenue was generated from India. It’s market capitalization as of June 2019 was USD 6.2 billion.

Strategic Conclusion

India’s drugs manufacturing industry offers a lucrative long-term potential, driven by increasing per capita income, rising healthcare awareness, higher incidence of chronic ailments and gradually increasing insurance coverage.

Nevertheless, Government intervention on price controls and other regulatory scrutiny coupled with competitive intensity will likely to be the key industry challenges.

Companies choosing to enhance the productivity of the domestic business and innovating consistently to ensure high brand equity with doctors will help achieve the market share.