B. Pharm + MBA (Pharma. Tech.) Lecture No.

4 March, 2012

Size and Scope of the Indian Pharma Market

Ranked 3rd largest by Production Volume
Ranked 14th By Domestic Consumption Value

24,000 licensed pharmaceutical companies

2,400 registered pharmaceutical producers

Approx 425 out of 465 bulk drugs used, are manufactured in India
Sale of all types of medicines in the country is expected to reach around US$19.22 billion by 2012.

Pharma Rankings 2011

as per IMS (Rank 1 to 25)

January December 2011 RANK MANUFACTURERS 12M. 12M.% TOTAL MARKET 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 53,802.84 100 5.06 3.95 3.82 3.77 3.37 2.95 2.77 2.69 2.51 2.41 2.38 2.16 2.09 2.03 2.00 1.87 1.82 1.75 1.71 1.64 1.63 1.62 1.52 1.46 1.32 14.9 11.7 9.1 12.7 22.8 22.7 17.7 29.0 13.7 42.6 28.0 11.9 18.6 15.3 8.1 15.6 7.0 24.2 11.7 15.4 14.5 22.1 22.2 14.6 1.1 4.7 Values In M.S. Growth Crores % +/-%

CIPLA 2,722.60 GLAXOSMITHKLINE 2,125.35 ABBOTT HEALTHCARE2,053.03 SUN PHARMA 2,030.83 MANKIND 1,815.27 19.97 ALKEM 1,588.19 ABBOTT 1,491.28 LUPIN LIMITED 1,448.62 MACLEODS PHARMA 1,349.95 INTAS 1,294.56 33.31 ZYDUS CADILA 1,280.25 RANBAXY 1,163.77 SANOFI 1,123.17 DR REDDYS LABS 1,091.26 TORRENT PHARMA 1,078.50 43.97 ARISTO PHARMA 1,006.39 USV 978.76 ALEMBIC 942.52 MICRO LABS 917.72 PFIZER 880.23 52.75 GLENMARK PHARMA 874.53 WOCKHARDT 871.75 NOVARTIS 815.39 FDC 784.07 IPCA LABS 707.84

60.29

Pharma Rankings 2011

as per IMS (Rank 26 to 50)

January December 2011 RANK MANUFACTURERS 12M. 12M.% 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 EMCURE ELDER PHARMA GERMAN REMEDIES UNICHEM WYETH LIMITED ZUVENTUS PHARMA CADILA PHARMA MERCK LIMITED FRANCO INDIAN STANCARE 69.63 HIMALAYA DRUG RANBAXY GLOBAL CHC ASTRA ZENECA INDOCO SOLVAY PHARMA 72.94 REXCEL BLUE CROSS UNIQUE PHARM MEDLEY PHARMA UNISEARCH 75.52 RAPTAKOS BRETT WIN MEDICARE BIOCHEM WALLACE JANSSEN 77.75 661.61 589.11 559.45 484.78 473.30 465.44 462.85 460.77 454.33 416.58 398.16 391.06 341.56 336.74 310.21 309.67 306.86 265.74 257.63 252.68 250.85 248.73 247.96 232.90 223.27 1.23 1.09 1.04 0.90 0.88 0.87 0.86 0.86 0.84 0.77 0.74 0.73 0.63 0.63 0.58 0.58 0.57 0.49 0.48 0.47 0.47 0.46 0.46 0.43 0.41 11.6 17.8 9.0 6.2 24.6 29.4 13.3 10.5 8.4 6.7 8.4 33.7 23.9 1.3 28.1 10.2 17.0 16.2 12.5 2.4 15.0 12.8 7.0 10.5 16.3 Values In Crores M.S. % Growth +/-%

Total Pharma

53,803

100.00

+15

Value Growth Rank Company (Rs cr.) M.S. % +/-%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Abbott Cipla Ranbaxy GSK Sun Pharma Zydus Cadila Mankind Alkem Pfizer Lupin Mcleods Intas Sanofi Aristo Emcure Dr Reddys Torrent Wockhardt USV Micro Labs 3,855 2,723 2,524 2,166 2,100 1,970 1,815 1,795 1,719 1,449 1,350 1,306 1,283 1,199 1,127 1,091 1,079 1,075 979 949 7.16 5.06 4.69 4.02 3.90 3.66 3.37 3.34 3.20 2.69 2.51 2.43 2.38 2.23 2.09 2.03 2.00 2.00 1.82 1.76 +20 +12 +16 +9 +22 +13 +23 +16 +16 +14 +43 +28 +16 +7 +18 +8 +16 +16 +24 +15

January 2012 rankings

Rank 1 2 3 4 5 Company Abbott Cipla Sun Pharma Zydus Cadila GSK

Pharma Industry Evolution

Phase I Early Years Market share domination by foreign companies Absence of Indian companies

1970

1980

PhaseII Government Control Indian Patent Act 1970 Drug prices capped Local companies begin to make an impact

1990 Production

Phase III Development Phase Process development

infrastructure creation Export initiatives

Pharma Industry Evolution

2000

Phase IV Growth Phase Rapid expansion of domestic market International market development Research Orientation

2010

Phase V Innovation and Research New IP law Discovery Research Convergence

The evolution of the Indian Pharma Industry

The government started to encourage the growth of drug manufacturing by Indian companies in the early 1960s, and with the Patents Act in 1970. However, economic liberalization in 90s by the former Prime Minister P.V. Narasimha Rao and the then Finance Minister, Dr. Manmohan Singh enabled the industry to become what it is today. This patent act removed product patents from food and drugs, and though it kept process patents, these were shortened to a period of five to seven years. The lack of patent protection made the Indian market undesirable to the multinational companies that had dominated the market, and while they streamed out Indian companies carved a niche in both the Indian and world markets with their expertise in reverse-engineering new processes for manufacturing drugs at low costs.

The India Advantage for MNCs

Generics making up 99.8% of the prescription market.

Growth about 14 to 15% Growth driven by the growing number of patients gaining access to affordable medicines Regulatory process being upgraded New policy being discussed to let market driven prices prevail Low resources and investments for innovation in R&D India advantage being extended to Global players for cost containment in R&D and production. India having potential to become Global hub for Pharma market worldwide Highest no. of USFDA approved facilities outside the US

The Rapidly Changing Market Place

Thanks to the 1970 Patent Act, multinationals represent only 35% of the market, down from 70% thirty years ago. January 1, 2005 enactment of an amendment to Indias patent law that reinstated product patents for the first time since 1972. The legislation took effect on the deadline set by the WTOs Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which mandated patent protection on both products and processes for a period of 20 years. Under this new law, India will be forced to recognize not only new patents but also any patents filed after January 1, 1995.

The Rapidly Changing Market Placecontd.

Indian companies achieved their status in the domestic market by breaking these product patents. In the domestic market, this new patent legislation has resulted in fairly clear segmentation. The multinationals narrowed their focus onto high-end patients who make up only 12% of the market, taking advantage of their newly bestowed patent protection.

Meanwhile, Indian firms have chosen to take their existing product portfolios and target semi-urban and rural populations eg. Mankind, Alkem, Aristo, Nicholas Piramal.
Now MNCs like Sanofi, Novartis, Aventis, GSK and Pfizer are also exploring semi-urban rural markets.

Higher the Value Curve Better Pricing Advantage

High New Chemical Entity & Drug Discovery OTC & New Drug Delivery Systems Value- Added and Branded Generics Conventional Dosage Forms Intermediate & Bulk Substances Commodity Generics

Low Bottom Line

12

Technological/ Marketing Complexity

Growing Importance of the Emerging Markets

According to IMS, almost 80 per cent of current sales for most global companies comes from regulated markets. This is forecasted to grow at a compounded annual rate of only three to six per cent. In comparison, emerging markets (EMs) are likely to grow at a 12-15 per cent rate.

EMs contributed almost half of global growth in the past few years (despite a 20 per cent market share) and this contribution is projected to increase to 70 per cent in the next five years.

In 2008, one inbound deal took place, where Ranbaxy was bought over by Daiichi Sankyo for $4 billion. In 2009, about five inbound deals took place. Sanofi-Aventis bought Shantha for $625 million, Hospira Inc acquired Orchid for $400 million Mylan acquired Matrix for $133 million Pfizer Animal Health's bought Ventex AFCL from ICICI Venture for $75 million and Ventoquinol's acquired Wockhardt's animal health business for $31 million In 2010, apart from $3.7-billion Abbott-Piramal deal, the only single deal in pure pharma space was that of US-based Avantor's buyout of RFCL from ICICI Venture for $112 million. In 2011, Reckitt Benckiser acquired Paras Pharma for US$ 726 mio.

If you cant buy them off, join them

With the rising significance of India as one of the largest generic drug markets and escalating valuations which makes the pharmaceutical space here a tough acquisition target, global pharma majors remain active for entering partnerships, joint ventures and alliances with their Indian counterparts. During this year, two global pharma majors entered JVs with top Indian players to sell generic drugs in India as well as other emerging markets. In January, Bayer AG entered into a 50:50 joint venture, Bayer Zydus Pharma, to distribute pharmaceuticals in India with Cadila

Healthcare Ltd.
Similarly, US-based Merck joined hands with Sun Pharma, eyeing emerging markets.

If you cant buy them off, join them2

In October 2010, Pfizer, the world's largest drug maker, entered into a marketing alliance with biotech major Biocon Ltd to, initially, market globally four of the latters insulin biosimilar products. The $350-million deal allows each other to market insulin in separate markets.

If you cant buy them off, join them3

In 2010, Anglo-Swedish drug maker AstraZeneca signed its first branded generics supply deal, with Torrent Pharmaceuticals.

In 2009, a similar deal was signed by British drug maker GlaxoSmithKline with Dr Reddy's Laboratories.

If you cant buy them off, join them4

signed a deal with drugs.
Lupin

for anti-diabetic

will market and distribute the entire range of Huminsulin brand of Eli Lilly in the country and in Nepal. has signed a deal with market Galvus (Vildagleptin) in the metros. to

USV will manage marketing activities in tier II and III towns in the next phase.

Growing Importance of India for MNCs

The Indian market is growing at a healthy rate and attracts all the major MNCs to strengthen their presence here. Also, India has a 1/5th share of global population which helps in expanding the pharma markets quite well.

The valuation remains high and they prefer the alliance route than the acquisition one for the time being.
Another key feature of EMs is that consumers primarily pay for most medications from private means, unlike in regulated markets where a large portion is borne by state/insurance players. Coupled with relatively lower incomes, consumers are thus more pricesensitive than in other markets, the study says. Also, the manufacturing cost in India is 35-40 per cent cheaper than that of US or European markets. Through the alliances, apart from India, all the other emerging markets like Australia, Africa, Middle East and Latin America can be tapped.

Global Companies: Local Approach

Pharma MNCs are currently launching branded generics in the Indian market via product localisation, a strategy that involves local branding, sourcing and pricing. This strategy helps them launch products at competitive prices, thereby addressing affordability issues.
With localisation, the pharma MNCs operating in India have been able to improve their growth rates and this strategy is expected to yield future growth. The scaling up of field force by pharma MNCs in India to increase geographic penetration and the launch of new products in the Indian market has led to an increase in personnel costs for them. This, along with the increase in promotional and marketing expenditure on new launches, has brought pressures on operating margins, although they are still largely within the range of comfort. The margins are expected to improve once the incremental investments in marketing and sales translate into higher sales and profits.

Global Companies: Local Approach

The pharma MNCs are launching products from their global portfolios at a fraction of the global prices in the Indian market e.g.

Diovan (Novartis), Januvia (Merck Sharp & Dohme), Galvus (Novartis) and Crestor (Astra Zeneca).
These are being sold in India at a discount of up to 80% to the global prices.

Favourable demographics and changing disease patterns characterise increasing demand

India has witnessed rapid epidemiological transition as a consequence of economic and social change.
Historically, acute disease segments have dominated the market, with the anti-infective sub-segment contributing a major share. However, with growing urbanisation, the disease profile of the Indian population has become increasingly skewed toward lifestyle-related ailments such as obesity, heart disease, stroke, cancer, diabetes and respiratory diseases.

The number of people suffering from chronic diseases such as cancer, diabetes, neuropsychiatric conditions and cardiovascular disease is set to double in India by 2020.
Thus, change in patient demographics will fuel demand for quality and

affordable products in the domestic market.

Expanding health care infrastructure and changing demographics to supplement growth

The Indian healthcare sector is forecasted to reach $280 billion by 2020, contributing expected GDP expenditure of eight per cent by 2012, compared with 4.2 per cent in 2009, according to a report by an industry body. Over the past two decades, Indias thriving economy has driven the need for urbanisation, thereby creating an expanding middle class with increased disposable income to spend on healthcare. Other key growth drivers for this sector include a growing population, the opening of new hospitals, growing lifestyle related health issues, less expensive treatment costs, the growth of medical tourism, improving health insurance penetration and government initiatives. The overall growth of the Indian healthcare sector is likely to create a sizeable demand for quality and affordable medicines, thereby providing significant growth opportunities for both domestic and pharma MNCs.

Rural-centric initiatives to enhance market access:

Robust consumption in the rural economy is expected to be a key growth driver. Rural India accounts for more than 70 per cent of all Indian households and close to 40 per cent of the total consumption pie. A large number of companies are organising their efforts to derive a major portion of their overall sales from this untapped market. Additionally, pharma MNCs are looking to implement new and effective business models in India and improve the health of patients. Delivering patient health outcomes implies getting involved in the cycle of care, rather than just delivering drugs to a health care system.

A few rural initiatives include:

Sanofi-Aventis Saath 7:
In 2009, Sanofi-Aventis launched the Saath 7 programme in India, in which certified counsellors help diabetic patients understand their diseases and provide personalised consultation through home visits.

Mercks Sparsh:
In 2009, Mercks Indian subsidiary, MSD Pharmaceuticals, launched Sparsh, a multilingual helpline for diabetics on its drugs Januvia and Janumet to provide diet, exercise, and adherence advice.

More examples of rural initiatives:

J&Js Mobile Health for Mothers:
In September 2010, Johnson & Johnson (J&J) launched a mobile health initiative for expectant mothers in India. Mobile Health for Mothers provides free text messages on prenatal care, appointment reminders and calls from health coaches.

Pfizer-ITC:
In July 2011, Pfizer collaborated with FMCG major ITC to enhance its product sales in the rural markets. According to the agreement, Pfizer will sell its over-the-counter products through ITC channels in rural areas. Such noble initiatives can be expected to help pharma MNCs further augment their brand awareness in the domestic market and help tap the segments growth potential.

Domestic companies need to transform their business model to play a larger role in global pharma market
The Indian pharma industry has been able to claim a share in the global market by leveraging its strengths and enhancing its regulatory and technical maturity. Formulations manufactured in India constitute 20 per cent of the global generics market by value, and the overall share of Indian manufactured formulations is as high as 46 per cent in the generics segment in the emerging markets. However, with the onset of the patent regime, the traditional reverse engineering capabilities of Indian pharma companies are no longer helpful, as they would not be able to replicate the patented product and launch it in the domestic market. In future, India would be required to leverage its strengths in supply of low cost medicines across the world and invest in newer areas to drive growth.

New Opportunities
for Domestic Companies
Opportunities exist ranging from the low-value added segment, comprising of NDDS ($134 billion opportunity by 2013), Super generics ($135 billion worth of product expiring between 2010 and 2015) and Biosimilars ($115 billion worth of biologics expiring by 2015), to the High value New Chemical Entity (NCE)/New Biopharmaceutical Entity segment. Thus, domestic companies can look forward to pursue all these opportunities and build capabilities to conduct drug discovery and in house development.