By Pratik Avhad, Senior Analyst, Insight

The Indian pharmaceutical (pharma) industry has an annual revenue of US$38 billion – globally it’s the third largest in the world by volume and 11^th by value. It comprises over 3,000 pharma companies and 10,500 manufacturing facilities. It also produces drugs at around a third of the US costs and half of the European costs. Moreover, Indian pharma companies supply around 20 per cent of the worlds’ generics and 62 per cent of its vaccines.^1,2 This is the first of three blogs exploring the past, present and future of the Indian pharma market. This first blog examines the evolution of the industry, with subsequent ones exploring the transformations now underway, and the likely future for the industry.

The evolution of the pharma industry
The first Indian pharma company was established in 1901, and commenced operating in Calcutta (now Kolkata).³ There then followed four distinct periods:

• 1911-1970: before 1970 the patent regime was based on the Indian Patents and Design Act, 1911, which recognised both product and process patents. During this period, foreign companies dominated the market, with only a limited number of domestic companies.
• 1970-1995: the Government’s Patents Act 1970 established new recommendations and amendments to the 1911 Act.⁴ This new Patents Act recognised process patents, but not product patents, which meant that the patenting regime was focused solely on manufacturing. It also enabled domestic pharma companies to reverse engineer the manufacturing process of drugs without paying royalty to the original patent holders. Consequently, the number of patents granted between 1970-1971 and 1980-1981, fell by three-quarters. Furthermore, the 1979 Drug Price Control Order, set a ceiling on the overall profits of pharma companies.^5,6 This period saw a huge rise in the number of domestic pharma companies (from 2,000 in 1970 to 24,000 in 1995), creating a booming generic drugs industry. It also led to a large-scale exodus of foreign pharma companies.⁷
• 1995-2005: the experience gained by focussing manufacturing on generic drugs enabled Indian pharma companies to expand their capacities and gain a global reach, as a number of Indian pharma companies entered the export market. This period saw an intensification of pharma export growth, aided by the 1991 economic liberalisation of India, which opened the economy to privatisation and globalisation.⁸
• 2005-2018: the 2005 Patents (Amendment) Act abolished the process patenting system and introduced product patents. This prevented Indian pharma companies from producing generic copies while these drugs were still covered by patent protection, encouraging foreign pharma companies to return to India. In this post-process patent paradigm, Indian pharma started investing more in research and development (R&D) to compete with their foreign peers, with some companies developing their own new molecules, while others entered into R&D joint ventures with foreign pharma companies.^9,10

What does the current market segmentation look like?
By 2019, the main business segments were:

• Active Pharmaceutical Ingredient (API) manufacturers – APIs comprise the substance or mixtures of substances that produce the intended pharmacological activity or other effect of the drug,¹¹ and account for around 20 per cent of India’s pharma exports.¹²
• Formulation manufacturers – is the process in which various chemical substances, including active ingredients, are combined to form a final medicinal product. From April 2018 to March 2019, the Indian pharma industry exported US$14 billion worth of drug formulations (including biologics).¹³
• Biotechnology companies – including biopharma, bio-services, bio-agriculture, bio-industrial and bio-informatics. Biopharma has the largest share (62 per cent) of the biotechnology market.¹⁴
• Contract Research and Manufacturing Services – pharma companies have turned increasingly to outsourcing to reduce research and manufacturing costs. This business segment grew by 48 per cent between 2015 and 2018, and is expected to grow by over 25 per cent from 2018 to 2021.¹⁵

‘The pharmacy of the world?’
Over the past 120 years, the Indian pharma industry has become known as ‘pharmacy of the world’ due to its vital role in delivering cost-effective and high-quality generic drugs globally (Figure 1). Generic drugs comprise the largest segment (71 per cent); over-the-counter and patented drugs account for the remaining 21 and nine per cent, respectively.¹⁶

Figure 1. India’s pharma export market in 2019

Source: Pharmaceutical Export Promotion Council (Pharmexcil), 2019

Although the Indian pharma industry continues to play an important role in increasing access to affordable drugs globally, in 2007 it experienced a sharp decline and since then, growth has been somewhat volatile (Figure 2).

Figure 2: The Indian pharma industry YoY sales growth

* Estimated

Source: Deloitte analysis

The main reasons for the volatility are:

• Pricing pressure in the US and Europe – a rapid rise in companies in other countries producing competing generic drugs resulted in a significant erosion of generic drugs prices over the past ten years.¹⁷ In the US, the Prescription Price Index, which monitors changes in consumer prices for a fixed basket of commonly used drugs, has seen generic drug prices decline by more than 70 per cent since 2008.¹⁸
• Regulatory compliance issues – India exports 50 per cent of its products to highly regulated markets and, in the past few years, regulators have highlighted issues with quality control and manufacturing slippages. The number of warning letters issued by the FDA rose by over 200 per cent, from 42 in 2015 to 127 in 2018.¹⁹
• New domestic tax regime – the July 2017 Indian Goods and Service Tax (GST) resulted in higher manufacturing costs, slow-moving inventory and smaller profit margins. Consequently, the industry grew at only 5.5 per cent in 2017, but recovered to 9.4 per cent in 2018.²⁰
• Reduction in product launches – in 2011, India launched 3,505 new pharma products, by 2018 the number was 3,150 products (a 10 per cent reduction), due largely to a ban on fixed dose combination (FDC) drugs. There was also a reduction in new acute therapy product launches, due to competing products and price controls by the Indian National Pharmaceutical Pricing Authority (NPPA).²¹
• Domestic price regulations – the NPPA’s 2012 revised drug pricing mechanism calculates a drug’s ceiling price from the mean of the prices of all brands that have more than one per cent of market share for that category.²² By March 2019, the NPPA had price-capped more than 1,000 drugs,²³ and companies slowed down production of drugs subject to these price controls.²⁴
• Rising API costs – Rises in the cost of APIs is directly proportional to an increase in the price of formulated drugs. In the past two years, prices of APIs coming from China and other countries (India imports over 60 per cent of APIs) have gone up by 15-80 per cent (depending on the active ingredient). These increased costs of API imports is negatively affecting pharma profit margins.^25,26 

What happens next?
The success of the industry is largely due to its ability to produce good-quality, cost-effective generic drugs, backed by structural cost-advantages due to innovative approaches in manufacturing. Current challenges, however, include generic price erosion, growing market competition, increased regulatory scrutiny, new tax regimes, domestic price regulations and dependency on raw materials from other countries. Consequently, the time is ripe for the Indian pharma industry to learn the lessons from the past in designing its future. Stay tuned for our second blog which explores how the industry is adapting to the rapidly changing global dynamics and its preparedness to tackle the challenges it is facing!

The situation in India in relation to COVID-19 (as at 19 March)
India, like most other countries, is seeing an increasing number of confirmed COVID-19 cases but, as yet, lags some other countries in terms of scale of impact. As at March 19, there were 194 confirmed cases and four deaths.²⁷ Actions to date include cancellation of all non-official visas until April 15, closure of schools, colleges, malls, cinema halls, public museums, monuments and other such places where there is possibility of large public gatherings. Restrictions are put in place on the export of 26 APIs to ensure adequate domestic supplies owing to increasing spread of the virus in the country and supply disruption from China.²⁸ COVID-19 is declared as a ‘notified disaster’ in the country which is enabling states to respond quickly and access resources from the State Disaster Response Fund (SDRF).²⁹

Pratik Avhad, Senior Analyst, Deloitte

Pratik is a senior analyst within the Insight team based in Hyderabad, India. He supports Deloitte’s UK Centre for Health Solutions by producing independent and objective business research and analysis into key industry challenges and associated solutions.

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¹ https://www.ipa-india.org/static-files/pdf/publications/position-papers/2019/ipa-way-forward.pdf
² https://www.investindia.gov.in/sector/pharmaceuticals
³ https://www.farmavita.net/documents/Indian%20Pharmaceutical%20Industry.pdf
⁴ https://www.mondaq.com/india/Intellectual-Property/54494/Patent-Law-in-India
⁵ https://books.google.co.uk/books?id
⁶ https://ccs.in/internship_papers/2002/27.pdf
⁷ https://shodhganga.inflibnet.ac.in/bitstream/10603/15865/11/11_chapter%203.pdf
⁸ https://www.researchgate.net/publication/284609334_Regional_Evolution_of_Indian_Pharmaceutical_Industry_Pre_and_Post-TRIPS_Assessment
⁹ https://www.researchgate.net/publication/284609334_Regional_Evolution_of_Indian_Pharmaceutical_Industry_Pre_and_Post-TRIPS_Assessment
¹⁰ https://link.springer.com/chapter/10.1007/978-981-13-8102-7_13
¹¹ https://www.registrarcorp.com/fda-drugs/definitions/
¹² https://www.business-standard.com/article/companies/bulk-drug-exports-rise-as-indian-makers-cash-in-on-china-s-regulatory-woes-119050700586_1.html
¹³ https://www.ibef.org/industry/pharmaceutical-india.aspx
¹⁴ https://www.ibef.org/industry/biotechnology-india.aspx
¹⁵ https://www.ibef.org/industry/pharmaceutical-india.aspx
¹⁶ https://www.ibef.org/industry/indian-pharmaceuticals-industry-analysis-presentation
¹⁷ https://www.fda.gov/about-fda/center-drug-evaluation-and-research-cder/generic-competition-and-drug-prices
¹⁸ https://www.iqvia.com/-/media/iqvia/pdfs/ap-location-site/india/us-generics-market-evolution-of-indian-players.pdf
¹⁹ https://www.pharmaknowledgecentre.com/indias-global-leadership-in-us-fda-approvals-2018-19-update/
²⁰ https://www.business-standard.com/article/companies/indian-pharma-industry-records-9-4-growth-in-2018-dispels-gst-gloom-119011000018_1.html
²¹ https://www.businesstoday.in/sectors/pharma/how-decline-in-new-product-launches-is-impacting-indian-pharma-industry/story/278723.html
²² https://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/government-brings-42-non-scheduled-cancer-drugs-under-price-control/articleshow/68189265.cms?from=mdr
²³ https://medibulletin.com/heres-the-complete-list-of-42-anti-cancer-drugs-under-price-control/
²⁴ https://www.business-standard.com/article/economy-policy/ceiling-prices-of-21-key-medicines-raised-by-50-nppa-invokes-dpco-2013-119121400054_1.html
²⁵ https://www.business-standard.com/article/companies/rising-api-prices-to-hit-drug-firms-profit-by-300-500-bps-in-2-3-quarters-118090500330_1.html
²⁶ https://www.ibef.org/industry/indian-pharmaceuticals-industry-analysis-presentation
²⁷ https://www.mohfw.gov.in/
²⁸ https://timesofindia.indiatimes.com/business/india-business/government-bans-export-of-26-pharma-ingredients/articleshow/74467687.cms
²⁹ https://www.livemint.com/news/india/india-declares-coronavirus-outbreak-as-a-notified-disaster-11584184739353.html