New Trends in India’s Pharmaceutical Market

INTRODUCTION

India’s pharmaceutical market currently stands ninth in the world market for pharmaceuticals with a 1.5% share. The market was valued at more than $3 billion last year (1998). At its annual growth rate of 15% (almost double the world’s 6% annual growth rate), this market is expected to reach $6 billion by 2001 and should more than double to $13.3 billion in 2006. India’s official OTC market currently stands at over $130 million, and the industry’s heart disease sector is expected to grow from $90 million now to more than $350 million in 2005.

Current demand in the Indian pharmaceutical sector stands at about $4 to $5 billion, and is forecast to increase at an annual rate of 15 – 20% in the future. Nevertheless, average per capita expenditure on pharmaceuticals in India is only $3 — compared to $412 in Japan, $222 in Germany and $191 in the US. This is due in part to the prevalence of alternative healing methods in India, such as ayurvedic medicine and homeopathy, but also because prices for drugs have been kept artificially low by the Indian government. In fact, India’s pharmaceutical industry is one of the most highly regulated industries in the country. Price controls have a strong effect on profitability in the industry, and weak patent protection poses a long-term threat to investment in India’s drug market. Foreign firms also find it difficult to operate in India due to arbitrary Bureau of Industrial Cost and Pricing (BICP) pricing changes, arbitrary local FDA decisions, high import duties (about 42%) and complex import procedures.

However, while the pharmaceutical sector in India will most likely stay regulated in the short term, there are plans for reform. The sheer size and growth of India’s domestic pharmaceutical industry is making it increasingly difficult for the government to regulate prices for every single firm, and pressure from the World Trade Organization is also speeding up discussions within the national government to improve patent protection. As a result, foreign pharmaceutical firms can expect improved market opportunities in India’s enormous drug market over next several years.

 

MARKET STRUCTURE OF THE INDIAN PHARMACEUTICAL INDUSTRY

The Indian pharmaceutical industry is highly fragmented — there are now more than 20,000 domestic manufacturers of end-use pharmaceuticals, particularly because of the industry’s low capital requirement and the lack of product patents. Only about 300 of these are in the organized sector. This structure causes intense competition, especially in the bulk drug markets, with profitability falling as demand expands.

For value purposes, drugs in India are generally classified into two categories — bulk drugs and formulations. Due to India’s low overhead costs, bulk drugs comprise the largest sector in the country’s pharmaceutical market. India’s bulk drug sector also makes up about 6% of the international bulk drug market. Drug intermediates are used as raw materials for the production of bulk drugs, which are either sold directly or retained by companies for the production of formulations. Formulations can be subdivided into generic drugs and branded or “ethical” drugs, the latter of which are made under process patent and sold under a separate brand name. Expected short-term growth for the two types of drugs has been 20% for bulk drugs and 15% for formulations.

The import of finished pharmaceuticals is almost negligible, and confined to very specific types like anti-cancer drugs. In 1994, the import of drugs, pharmaceuticals and intermediates was estimated at $450 million, and included the following: antibiotics, penicillin and its salts, erythromycin and its preparations, vitamins and provitamins, vaccines (polio, human and veterinary), preparations containing insulin, caustic and other hormones, and tetracycline and its preparations.

Essential drugs comprised of antibiotics, antibacterial, anti-TB, anti-parasitic, and cardiovascular constitute a major portion of turnover of the industry. Indian companies dominate this class of drugs with a market share of 71%. Multinational companies are reluctant to enter these markets as most of them are under government price controls.

 

REGULATORY ENVIRONMENT

There are two major government agencies responsible for drug regulation and control:

1) the Drugs Controller of India (DCI), and
2) the State Food and Drug Administrations (FDAs).

The DCI, under the Ministry of Health, has five main functions:

1) Controlling the quality of imported drugs,
2) Coordinating the activities of State FDAs,
3) Enforcing new drug legislation,
4) Granting approval to new drugs, and
5) Controlling the quality of imported drugs.

State FDAs, on the other hand, monitor the drug manufacture, sale, and testing by companies in their jurisdiction. There are also two main statutory bodies formed by Parliament:

1) the Drugs Technical Advisory Board, whose technical experts advise the Central and State Governments on special technical matters involving drug regulation, and
2) the Drugs Consultative Committee, where Central and State drug officials ensure that drug control measures are enforced uniformly in all states.

Current Reforms: Maharashtra FDA

The most powerful state-FDA is located in the western state of Maharashtra, where the country’s pharmaceutical industry has been concentrated for the past 46 years. Over 50% of manufactured drugs in India are currently produced in Maharashtra, and Maharashtra’s FDA therefore plays a large role in determining national policy on the import and local manufacture of pharmaceuticals in India. It monitors drug quality and safety through pre- and post-licensing checks, as well as through periodic inspections and drawing drug samples from companies from time to time.

Maharashtra’s FDA underwent some major changes over the past few years to improve its efficiency and raise its credibility. Under the present Commissioner, Anil Kumar Lakhina, the Indian FDA has revamped its structure, introduced a new drug management system, and instituted a new electronic drug renewal application procedure via its website. It has also started codifying all pharmacopoeial, patent and proprietary combinations of drugs — there are currently 50,000 drugs all licensed by the FDA and 4,300 of them have already been codified.

Drug Application Procedures

Foreign pharmaceutical firms looking to export drugs to India must first obtain a license from DCI, which is granted upon assurance that the firm’s manufacturer abroad complies with Indian production and safety standards. These standards are becoming more harmonized with international Good Manufacturing Practice (GMP) and ISO requirements. Next, before any drugs are released for import into India, the importer must submit the following documents to the Central Drug Control Organization:

1) documents of import (Bills of Entry),
2) protocols test and analysis,
3) a sample of the product(s) label, and
4) a drug sample.

The drug sample is tested by the government, which in turn releases a consignment to the importer if the test results approve the drug as meeting “standard quality.” Importers are also permitted to import drugs for experiment, test research or clinical trial under a test license.

Companies looking to manufacture drugs locally must go through a “preparatory” or Pre-Licensing Phase to show that their manufacturing facilities are up to standard. After being granted a license, the manufacturer must also produce a test batch of drugs that is approved by the government for safety.

All companies must also follow specific labeling requirements. Both importers and local manufacturers must label every product with the following information:

1) name of the drug;
2) a correct statement of the net content of the drug;
3) content of active ingredients;
4) name and address of the manufacturer;
5) batch or lot number preceded by the words “Batch,” “B,” “Lot No.,” or “Lot”;
6) manufacturing license number (if applicable);
7) number of the license under which the drug is imported (if applicable); and
8) date of manufacture and expiration date, which must not exceed 60 months. Pharmaceutical companies must have their label and pack insert approved by the DCI before the drug is marketed.

The specific requirements for drug approval and renewal of imported and locally manufactured drugs are available from the Maharashtra FDA. As mentioned above, drug renewal applications are now accepted via the web, but until computer signatures are legitimized, new drug applications will still have to be completed in hardcopy.

 

PRICE CONTROL

Since 1961, pharmaceuticals in India have fallen under heavy price regulation. Domestic drug prices in India are among the lowest in the world; the Organization of Pharmaceutical Producers of India (OPPI) says that year-on-year price increases for pharmaceuticals in the country are lower than the wholesale price index each year and considerably lower than the CPI. This applies to both controlled and decontrolled drugs, where increases were just 1.1% and 3.6% respectively for 1997 over 1996. This has severely affected the profitability of the industry, especially since the prices of basic raw materials and the costs of packing have shot up over the past five years. Pharmaceutical manufacturers have also suffered from high transaction costs, including obstacles and difficulties associated with administrative processes, dishonesty of public agents, delays in obtaining finance, and transportation bottlenecks.

Price controls are implemented under a Drug Price Control Orders (DPCO). Under Section 3 of the Essential Commodities Act, there have been four major revisions of DPCOs in 1970, 1979, 1987 and 1995. In 1995, the DPCO was revised twice — once on January 6th and again on July 19th — to coordinate the price descriptions of controlled and decontrolled formulations. Drugs falling under DPCO are generally either of the following:

1) those that have a minimum annual turnover of Rs 4 crore (US$1 million), and
2) those of popular use in which there is a monopoly situation (a monopoly in India exists if for any bulk drug, with an annual turnover of US$250,000 or more, there is a single formulator with a market share of 90% or more).

For drugs where there is “sufficient” market competition, i.e. where there are at least five bulk drug producers and at least 10 formulators, and where none has more than a 40% market share in retail trade, price control is not mandated by the government. Such drugs not falling under government price control are called “decontrolled” drugs.

Aside from lowering profitability and constraining the market, there are many administrative problems with DPCOs that have been worsening as the Indian drug industry expands. The government often fails to update the financial data on which it bases its criteria for inclusion, aggravated by the long time lag between the collection of data and announcement of new pricing policy. As a result, basis data for determining prices is at least three months old at the time of approval, and the price benchmarks used end up being historical instead of prospective.
Furthermore, there are serious problems with the way the government calculates the fixed prices for many drugs. For example, it does not take raw material price volatility or exchange fluctuations into account when calculating prices. Also, the government determines drug prices solely upon cost, not quality, of production (no distinction in pricing is made, therefore, between a drug produced under Good Manufacturing Practices (GMP) and one that is not).

The DPCO has also been gradually losing importance due to the emergence of a large number of manufacturers in the bulk drug industry. Thus, to improve its efforts at drug price control, the government set up the National Pharmaceutical Pricing Authority (NPPA) in August 1997 to update the list of bulk drugs covered under DPCO 1995 by inclusion or exclusion on the basis of established criteria and guidelines. The NPPA was also authorized to fix and revise prices of controlled bulk drugs and monitor the prices of decontrolled drugs and formulations and oversee the implementation of DPCO 1995.

The government’s stance on price control has been mixed. Although it has set up organizations like NPPA, the number of drugs under price control has gradually been reduced over time (see Figure 1 below), and sources in India’s Ministry of Health have stated that the price control system may undergo further changes depending on the emergence of a much wider and much more assertive medical insurance system in the country.

Figure 1. Price Control Trends in India

Source: “Drug prices review committee extended.” Financial Express, September 14, 1998.

Until decisive reforms are made in the pricing of pharmaceuticals, foreign drug companies can continue to expect intense price competition from local manufacturers. Aside from government price controls, foreign companies are at a disadvantage in the market due to significant import tariffs — the government recently decided, for example, to impose an additional 8% import duty hike for foreign products — and retail pharmacy-driven distribution bottlenecks that can create 15% mark ups in drug prices (compared to just 5% in the U.S.).

 

PATENT PROTECTION

In late 1998, under pressure from the WTO, India finally decided to amend its 1970 Patents Act which to date was the country’s only legislation providing patent protection for pharmaceuticals. The 1970 Indian Patents Act was grossly inadequate in that it only provided process protection for pharmaceuticals, which as opposed to full product protection did not give a patent to the original inventor of the product, but rather only for a specific production process. Products could therefore be copied easily by developing a new process for producing the same drug. Furthermore, the Indian Patents Act only provided 7 years of process protection for pharmaceuticals, about half the average 15 years required to develop and test a new drug.

Given the high number of pharmaceutical firms in the informal/unorganized sector, foreign drug companies in India have therefore run a large risk that their patented drugs will be pirated. Lack of adequate patent protection has been one of the main reasons that investment in the industry has slowed over the past several years — research-based pharmaceutical companies in India have estimated that they lose up to $500 million each year through patent piracy, and pharmaceutical R&D remains low as a percentage of total sales compared to developed countries.

However, recent pressure from the WTO to adhere to its Trade-Related Intellectual Property Rights (TRIPs) agreement has forced the Indian government to shift its patent coverage from process to product protection. While the government still has not arrived at a consensus on how it would like the future product patent regime to look like, it has developed an outline for when reforms are expected to occur. By April 19, 1999, India will enact a provision setting up a formal “mailbox” where companies can begin filing for product patents. This box will be opened in 2005. By January 1, 2000, companies will be granted Exclusive Marketing Rights (EMRs) for their products that have been patented in a WTO signatory country and received marketing approval. EMRs bring with them a five-year, patent-like monopoly for products covered by the product patent applications made under the mailbox system. By January 1, 2005, product patents will be awarded, and under the TRIPs agreement will be effective for 20 years.

However, there will be some difficulties. Granting an EMR will probably take about two years, and the government can still exercise control over drug prices through DPCOs and its Monopolies & Restrictive Trade Practices Commission. Foreign manufacturers should also be aware that EMRs (and hence the marketing monopoly rights) cease to exist once a product patent is granted. Products which were selling under an EMR may or may not be granted patent, whereas any product can be granted a product patent regardless of whether it was once under EMR.

India has also established a controversial patents amendment ordinance that includes compulsory licensing provisions. Under these provisions, the government can withdraw an EMR from a company if it feels that the product is unsafe. The provisions also allow the government to fix floor prices for essential drugs, and places the burden on the company to prove that an application filed for patent is its invention (earlier, the burden was on the drug controller). It remains to be seen whether the WTO will approve these provisions in upcoming meetings.

In anticipation of the new patent regime, Indian pharmaceutical companies have already started to form new joint ventures with multinationals to strengthen R&D in the industry and profit from what should be a more favorable intellectual property environment. Many are forging special partnerships where an Indian company provides base ingredients while a foreign firm converts the base drug to an effective pharmaceutical. Multinationals have also accelerated their patent applications in India — patent applications tripled from 1996 to 1997 — and many international companies are also eyeing the strong Indian network of public sector laboratories and research capabilities at private Indian companies for development work in India. The government has helped foster this trend as well, by relaxing its 40% equity cap to 51% for multinational firms in 1995, and by planning to relax conditions relating to tax incentives for domestic R&D in its upcoming 1999 budget.

 

CONCLUSION

If proposed reforms such as relaxing price control and improving patent protection go through, India’s pharmaceutical market will offer many opportunities for foreign pharmaceutical companies in the future. The growing number of joint ventures formed between foreign and Indian pharmaceutical manufacturers already reflect high hopes that these reforms (or at least effective patent legislation) will be carried out in the next few years. Foreign drug manufacturers can also benefit from the industry’s efficient process development and modern manufacturing equipment; labor, equipment, and capital cost advantages to manufacturing in India, and a highly skilled labor force with excellent chemical synthesis capabilities.

However, there are still major structural obstacles to success in India’s pharmaceutical market — transportation and distribution bottlenecks, corrupt inspectors, and an entrenched bureaucracy. Foreign pharmaceutical companies should therefore make sure that they perform thorough market research for their product, understand the industry’s regulations completely, and establish reliable connections in the country to ensure that they remain in the industry for the long run. Only if they are willing to put up with the industry’s inefficiencies and maintain a long-term vision can foreign drug companies expect success from the enormous Indian pharmaceutical market.