India's pharmaceutical industry is well positioned for sustainable growth and expansion, according to KPMG – CII Report titled, “Indian Pharma Inc. – A Continuing Success Story” released today at the Pharma Summit 2007. The industry has grown at a CAGR of 13 percent from 2002-2007 and is expected to grow at a CAGR of 16 percent over 2007-2011. Over the last couple of years, the pharmaceuticals industry has grown at approximately 1.5-1.6 times the growth of economy. The rise in disposable income has a positive impact on healthcare spend. In 2005, 6.2 percent of disposable income was spent on healthcare as compared to 2.8 percent in 1995. This augurs well for the pharma industry, as the strong economic momentum is likely to continue with the Indian economy expected to grow by 8–9 percent in the next few years.

On the international front, Indian generic drug makers are playing an important role in the global consolidation process and are augmenting their market presence across regulated as well as semi regulated markets through their organic as well as inorganic initiatives. In spite of increasing competitive intensity on account of continued pricing pressure, several significant opportunities are being leveraged by Indian generic players.

Contract Research and Manufacturing Services (CRAMS), is becoming one of the most promising opportunities for the Indian pharma industry. India, with its intrinsic competitive advantages, remains as one of the most preferred outsourcing destinations and is now playing a vital role in manufacturing as well as drug development value chain of various innovator pharma companies.

According to John Morris, Head, Global Pharmaceutical Practice, KPMG, “ The Indian pharmaceutical industry is at a critical juncture given its inherent strengths and its ability to be a dominant player in the global pharmaceutical industry. It has become a strategic imperative for global pharma companies to make India an integral part of their manufacturing value chain to maintain lean cost structures and combat intense competition in the global generics industry”.

MNC pharma companies are increasingly focusing on realigning their manufacturing activities in order to concentrate on core activities such as R&D and brand building - thereby reinforcing the potential for cost savings through contract manufacturing. At the same time, existing global CRAMS players are facing adverse business conditions, on account of increasing regulatory compliances on environmental issues and competition from low cost countries.

According to the report, Pharma Multinationals are also increasingly using India as a base for exports not only to the immediate neighboring markets, but also to other markets around the world such as Japan, South Africa, Latin America and Europe. Pharma multinationals are also exploiting India’s competencies in the field of Information Technology and its strong and low cost IT skill sets; by setting up centers for their global clinical data management functions in India.

The report suggests the following growth drivers for CRAMs:

· Contract Manufacturing - At present, the global manufacturing outsourcing opportunity is estimated at USD 20 billion and is expected toreach USD 31 billion by 2010

· Contract Research - Contract Research also offers significant opportunity to the Indian pharma industry which is becoming a global R&D hot-spot for innovator pharma companies. The global contract research opportunity was pegged at USD 14 billion in 2006 and is expected to reach USD 24 billion by 2010. Declining R&D productivity, coupled with an increasing number of products going off patent is expected to drive the growth of the contract research segment

· Clinical Research - At present, a majority of clinical trials conducted in India are for Phase II and Phase III. The government is in the process of considering the recommendation of the Drug Technical Advisory Board (DTAB) to allow Phase I clinical trials for the drugs discovered abroad. If this happens, then it will enable the Indian CRAMS industry to provide a wide range of drug discovery services

· Government Support - On the regulatory front, the government is also trying to promote the growth of this industry by providing a tax exemption on all services carried out by the contract research and clinical trials industry. This step is likely to further boost clinical trial outsourcing to India

Following the patent product regime, many Indian pharma companies have embarked on Research and Development (R&D) to achieve sustainable long term advantage. These companies are now adopting innovative funding models to advance their R&D activities. Currently, as many as 10-12 companies have molecules under various stages of development. R&D investments by Indian companies have also increased significantly and now account for as much as 7-9 percent of sales for leading pharma companies.

New drug discovery is a costly and lengthy process. It takes anywhere between (approximately) 10-12 years, for a new drug to reach the market from the laboratory and costs approximately USD 800 million to 1.2 billion. The government and other regulatory bodies can play a significant role in determining the success of drug discovery research in India. One form of government support, would be the PPP models that can give the much needed impetus to this segment.

Growth through collaborations

Various JVs have been formed between Indian and MNC pharma players for strengthening their manufacturing capabilities, technology-sharing and leveraging on the partner’s experience in product filings, regulatory compliance, etc. Recently, many Indian pharma companies have formed JVs for expanding into semi-regulated markets.

Generics

Over the last few years, Indian pharma companies have been scaling up their presence in the non-traditional business segments such as drug discovery and development, contract research and manufacturing, etc., and are focusing on building their competencies in every area of the pharma value chain. However generics continue to remain the mainstay of the industry. Globally, the generics industry is expected to grow at a Compound Annual Growth Rate (CAGR) of 11 percent between 2006 and 2010 and touch USD 94 billion by 2010. At present, India has only 10 percent market share in this industry.

Says, Hitesh Gajaria, Head, Pharmaceuticals, KPMG in India, “The Indian pharmaceutical industry is now well positioned for sustainable growth. The domestic market also has strong underlying growth drivers such as increasing spends on healthcare, increasing penetration of health insurance and changing disease profile which should sustain the double digit growth witnessed over the last few years. If government and industry act together to drive reforms that strengthen knowledge and compliance, enabling companies to follow different collaborative business models, India will be well-positioned to emerge as one of the main pharmaceutical growth markets of the world”.

Pharmaceutical companies today, operate in multiple markets spanning multiple segments and with varied business models. Collaborations will be the key to success in such a dynamic business environment. For multinational pharma companies that are augmenting their market presence (after the new product patent system), by utilizing domestic industry's skills and infrastructures to boost their research and manufacturing activities, partnerships will be crucial.

This knowledge paper prepared by KPMG in partnership with CII presents the latest trends and insights on the Indian pharmaceutical industry. This report aims to be helpful to key stakeholders of the pharmaceutical and healthcare market and provide them with an in-depth analysis of the business prospects.

- End -

About KPMG

KPMG is the global network of professional services firms of KPMG International. KPMG member firms provide audit, tax and advisory services through industry focused, talented professionals, who deliver value for the benefit to their clients and communities.

The member firms of KPMG International in India were established in September 1993. KPMG in India has offices in Mumbai, Delhi, Bangalore, Chennai, Hyderabad, Kolkata and Pune and services over 2,000 international and national clients. The firms in India have access to Indian and expatriate professionals.