ba indian pharmaceutical market research report 10 07

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2007 Boston Analytics. All Rights Reserved.

An Introduction to the IndianPharmaceutical Industry

An In-Depth Study of Indias Domestic and OutsourcedPharmaceutical Market

October 2007


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Table of Contents

An Introduction to Indias Domestic Pharmaceutical Market ...............................................7Dynamics of the Indian Domestic Pharmaceutical Market ..............................................................................8Growth-Drivers of the Indian Domestic Pharmaceutical Market...................................................................11

Advantages of Outsourcing Pharmaceutical Activities to India.........................................20Indian Pharmaceutical Industry Catering to the Globe..................................................................................24

Outsourced Pharmaceutical Activities (16)(21).......................................................................26Global Pharmaceutical Outsourcing Market ...................................................................................................26The Indian Pharmaceutical Outsourcing Market ............................................................................................27Contract Research Outsourcing in India .........................................................................................................28Contract Manufacturing Outsourcing (CMO) in India.....................................................................................32

Other Services in India ......................................................................................................................................32

Conclusion..............................................................................................................................34Appendices .............................................................................................................................35


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Table of Exhibits

Exhibit 1: Domestic and global reach of Indias pharmaceutical industry........................ 7Exhibit 2: Size of Indias pharmaceutical industry (20002010(E)) .................................... 8Exhibit 3: Area-wise sales and growth rates (2006)............................................................ 9Exhibit 4: Market share and growth rate of key players...................................................... 9Exhibit 5: Manufacturing units in the Indian pharmaceutical industry (19702010(E)).. 10Exhibit 6: Life expectancy at birth in India (20002005).................................................... 12Exhibit 7: Age-grouped population distribution (20012026(E)) ...................................... 12Exhibit 8: Indian population growth (19852010(E))........................................................... 13Exhibit 9: Projected growth of yearly household income ($)............................................ 13Exhibit 10: Consumer expenditure on health goods and medical services in India(20002005) ............................................................................................................................ 14Exhibit 11: Patients medical expenses contrasted with health insurance written inIndia........................................................................................................................................ 15Exhibit 12: Comparison of healthcare infrastructure between India and other

developing and developed countries................................................................................... 15Exhibit 13 Healthcare-worker density across 6 countries; number of doctors andhealthcare-workers in India .................................................................................................. 16Exhibit 14: Country comparison of healthcare spending by public and privatesectors (2006) ........................................................................................................................ 17Exhibit 15: Percentage of contribution to sales by therapeutic areas (20042006)........ 18Exhibit 16: R&DDrug Discovery and Development........................................................ 20Exhibit 17: Stage-specific R&D cost savings achieved by outsourcing R&D activitiesto India.................................................................................................................................... 21Exhibit 18: Educational institutes in India (20012005)..................................................... 22Exhibit 19: Number of FDA-approved plants (2006) .......................................................... 23Exhibit 20: Indiaan attractive outsourcing destination.................................................. 24Exhibit 21: India catering to the globe................................................................................ 25Exhibit 22: Global pharmaceutical outsourcing industry (20042010(E)) ....................... 26


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Exhibit 23: Indias pharmaceutical outsourcing market (20042010(E)).......................... 27Exhibit 24: Activity analysis of Indias pharmaceutical outsourcing market (2006)....... 27Exhibit 25: Indian pharmaceutical outsourcing marketCRO (20042010(E))............... 28Exhibit 26: Indian pharmaceutical outsourcing marketCRO (2006).............................. 28Exhibit 27: R&D value-chain activities................................................................................ 29Exhibit 28: Outsourcing scale and skills avilability........................................................... 29Exhibit 29: Indias pharmaceutical outsourcing marketCMO (20042010(E)).............. 32Exhibit 30: Indias pharmaceutical outsourcing marketCMO (2006) ............................ 32Exhibit 31: Indias pharmaceutical outsourcing arketother services

(20042010(E)) ....................................................................................................................... 33


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AbstractThe Indian pharmaceutical industry addresses domestic and globalmarkets through goods and services that encompass finished drugdosages (Formulations), Active Pharmaceutical Ingredients (API),

Research and Development (R&D), and related contract services.

The domestic market comprises manufacture and sales of variousformulations and APIs. The global market consists of export offormulations, APIs, and outsourcing services related to R&D andmanufacturing, also known as Contract Research andManufacturing Services (CRAMS).

Domestically, major revenue sources are the production and salesof Active Pharmaceutical Ingredients and generic drugs. Most of thedrugs sold in India are generic formulations. Manufacturerspreference for generic drugs is attributable to the low cost ofresearch and the absence of an enforceable product patent regimeprior to 2005. With more than 24,000 companies, the Indianpharmaceutical market is highly fragmented. This market which in2006 reached revenues of $ 6.2 B and is growing at a compoundannual growth rate (CAGR) of 13.5% -- is projected to reach $ 10.3B in revenues by 2010. Contributing factors to industry growthinclude increasing population, an increasing consumer baseespecially in the middle and upper income brackets, the need forimproved healthcare infrastructure, and Indian companies reverse-engineering skills. Among the major identified therapeuticsegments, the bulk of Indian pharmaceutical sales is attributable toanti-infective drugs (18%), gastro-intestinal drugs (11%), andcardiovascular drugs (10%).

India also is the destination for a large and growing volume ofoutsourced production and R&D by Multinational PharmaceuticalCompanies (MPCs). Key factors that make India an attractiveoutsource include its lower costs of production and R&D, thehighest number of plants certified by the US FDA outside the US(75), and highly skilled professionals. The services of these Indiancompanies include Contract Manufacturing Organizations (CMOs),Contract Research Organizations (CROs) and other relatedservices. The Indian pharmaceutical outsourcing market shows ahealthy CAGR of 37.6% and is expected to increase from $ 929 Min 2006 to $ 3.33 B by 2010.

In 2006, the Indian pharmaceutical CRO market was worth $ 265M, with clinical trials contributing more than half of revenue.Projected figures for 2010 are $ 600 M, with a CAGR of 22.7%.Most of these companies are developing first-rate facilities for pre-clinical trials as well as expertise in research-biology and research-chemistry. Thisis expected to further accelerate growth in the nearterm. The Indian pharmaceutical CMO market was worth $ 620 M in2006, and derives 60% of revenues from chemical synthesis. It iswell set to reach $ 2.5 B by 2010 with a CAGR of 41.7%. Indiancompanies offering other pharmaceutical-related outsourcedservices (accounting, sales and marketing, etc.) yielded revenues of$ 44 M in 2006 and have the potential to generate revenuesreaching $ 229 M by 2010.


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Indias share in the global pharmaceutical outsourcing industry isexpected to increase from 1.8% (in 2006) to 4.4% (in 2010). Thevarious advantages offered by the Indian pharmaceuticaloutsourcing industry are attracting global investment on a scale thatwill spur the growth of the Indian pharmaceutical industry as awhole.


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Indian pharmaceuticalindustry addressesdomestic and global

markets

The Indian Pharmaceutical Industrya FocusedStudy of Domestic and Outsourced Markets

The Indian pharmaceutical industry addresses the needs of twobroad categories of marketdomestic and global.

Domestic revenue is generated through sales and promotion ofvarious drug categories. These include:

Ethical drugs (available only with written instructions from adoctor to a pharmacist)

Over-the-Counter (OTC) drugs

Active Pharmaceutical Ingredients (APIs).

Global market needs are met with services that include:

Outsourced R&D and manufacturing services, also knownas Contract Research And Manufacturing Services(CRAMS), implemented by Contract ManufacturingOrganizations (CMO) and Contract Research Organizations(CRO).

Manufacturing and sale of generics and APIs for theoverseas market

Drug discovery/modification.

Exhibit 1: Market for the Indian pharmaceutical industry(1)

Exhibit 1: Domestic and global reach of Indias pharmaceutical industry

Indian PharmaceuticalIndustry

Over the counter (OTC) drugs Ethical promotion of generic

products API

Indian Global Business Supply partner/Sourcing base Generic manufacturing Drug discovery and modification API

Outsourcing CRAMS

CMO CRO

Global MarketDomestic Market

Indian PharmaceuticalIndustry

Over the counter (OTC) drugs Ethical promotion of generic

products API

Indian Global Business Supply partner/Sourcing base Generic manufacturing Drug discovery and modification API

Outsourcing CRAMS

CMO CRO

Global MarketDomestic Market

Diversity of generic drugsin the Indianpharmaceutical market

An Introduction to Indias Domestic PharmaceuticalMarket

Generic drugs form the bulk of what is sold in the Indian domesticpharmaceutical market. The various forms of generics include plainvanilla (standard unaltered form), value-added drugs (developedusing innovative pharmaceutical techniques), and branded generics(generic drugs marketed by the company which developed theoriginal molecule). An absence of product patent protection until theyear 2005, low average disposable incomes of Indian drugpurchasers, and the vast R&D investments of time and capitalrequired to introduce new patented drugs are the chief reasons for

the industrys focus on generic products rather than the more


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The Indianpharmaceuticalmarket showed aCAGR of 11.7%between 20002006

Key therapeuticsegments

expensive research-based products of regulated markets in the US,Europe, and Japan. For instance, while Lipitor (Pfizers cholesterol-lowering drug) costs 46 per tablet to a patient in the US, thegeneric form is available at only 6 per tablet in India. This price

gap explains why India, despite having the worlds second largestpopulation, has a domestic pharmaceutical revenue ($ 6.2 B in2006) lower than that of smaller countries like Japan ($ 60 B) andGermany ($ 27 B)

Dynamics of the Indian Domestic Pharmaceutical Market

In 2006 the Indian pharmaceutical industry was worth $ 6.2 B. The2000-2006 CAGR of 11.7% is projected to rise to 13.5% by 2010,yielding a $ 10.3 B market. In 2005, the Indian pharmaceuticalindustry ranked 13

thin terms of value and 4

thin terms of volume in

the global market.

Exhibit 2: Industry growth between 20002010(E) (in $ B)(2)

Exhibit 2: Size of Indias Pharmaceutical Industry(20002010(E))

3.3 3.73.24.1

4.75.3

6.27.0

8.0

9.1

10.3

0.0

3.0

6.0

9.0

12.0

2000

2001

2002

2003

2004

2005

2006

2007(E)

2008(E)

2009(E)

2010(E)

Year

Rev

enues($B)

CAGR: 13.5%

E: Estimated

The key therapeutic segments are anti-infectives (18%), gastro-

intestinals (11%), cardiovascular (cardiac), vitamins/minerals,analgesics, respiratory, dermatological drugs, gynecologicaldrugs, hormones, neurological/CNS drugs, and anti-diabetics.Among these, anti-infectives have conventionally been the highest-selling segment in the Indian market and are expected to continueto dominate the market in the near future with a growth rate of 20%.They are followed by gastro-intestinals, with a growth rate of 18%,and cardiac drugs, with a growth rate of 13%.

CAGR: 11.7%

3.3 3.73.24.1

4.75.3

6.27.0

8.0

9.1

10.3

0.0

3.0

6.0

9.0

12.0

2000

2001

2002

2003

2004

2005

2006

2007(E)

2008(E)

2009(E)

2010(E)

Year

Rev

enues($B)

CAGR: 13.5%

CAGR: 11.7%


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Exhibit 3: Area-wise sales and growth rates in 2006(3)

Exhibit 3: Area-wise Sales and Growth Rates in the Indian Pharmaceutical Industry in 2006

Area-wise Pharmaceutical Sales (2006) Growth Rate of Therapeutic Segments

(20052006)

18%

13%

17%18%

16%

20%

13%

18%19%

22%

20%

23%

0%

5%

10%

15%

20%

25%

Anti-in

fectives

Gastro-intestinals

Vitamins/Minerals/Nutrients

Pain/An

algesics

AcuteRe

spiratory

Derma

Gynec

H

ormones

Cardiac

Neuro/CNS

Anti-diabetics

ChronicRe

spiratory

Therapeutic Areas

GrowthRate(%)

Gastro-intestinals

11%Neuro/CNS 5%

Cardiac 10%

Vitamin/Mineral

Deficiency 9%

Anti-infectives 18%

Pain/Analgesics 8%Acute Respiratory,

7%

Derma 5%

Gynec 5%

Hormones 2%

Anti-diabetics 4%

Chronic Respiratory

3%

Other Acute 12%

Other Chronic 1%

100% = $ 6.2 B

Gastro-intestinals

11%Neuro/CNS 5%

Cardiac 10%

Vitamin/Mineral

Deficiency 9%

Anti-infectives 18%

Pain/Analgesics 8%Acute Respiratory,

7%

Derma 5%

Gynec 5%

Hormones 2%

Anti-diabetics 4%

Chronic Respiratory

3%

Other Acute 12%

Other Chronic 1%

100% = $ 6.2 B

The top 10 playersaccount for a marketshare of 36.6% with

the leadercontributing 5.2%

The Indian pharmaceutical market remains highly fragmented.(3),(4)

Approximately 24,000 companies of various sizes vie for a share ofthe $ 6.2 B market. Of these, around 300 belong to the organizedsector, and 15,000 to the small-scale (unorganized) sector. The restof the companies are too small for economies of scale.

Exhibit 4: Market share and growth rate of key players(3)

Exhibit 4: Market Share and Growth Rate of Key Players in the Indian Pharmaceutical Industry

Market Share of Key Players (2006) Growth Rate of Key Players (2005-2006)Glaxo

Smithkline

5.2%Ranbaxy

5.1%

Dr. Reddy's

Labs 2.3%

Sun Pharma

3.2%

Zydus Cadila

3.5%

Nicholas

Piramal 4.3%

Cipla 5.1%

Others

63.4%

Alkem 3.0%

Pfizer 2.6%

Lupin 2.3%

100% = $ 6.2 B

Glaxo

Smithkline

5.2%Ranbaxy

5.1%

Dr. Reddy's

Labs 2.3%

Sun Pharma

3.2%

Zydus Cadila

3.5%

Nicholas

Piramal 4.3%

Cipla 5.1%

Others

63.4%

Alkem 3.0%

Pfizer 2.6%

Lupin 2.3%

100% = $ 6.2 B

6%

20%

16%15%

13%

16%

19%

14%

24%

18% 18%

0%

5%

10%

15%

20%

25%

GlaxoSmithkline

Ranbaxy

Cipla

NicholasPiramal

ZydusCadila

SunPharma

Alkem

Pfizer

Lupin

Dr.Reddy'sLabs

Industry

Key Players

GrowthRate(%)


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Disparity in qualitycontrol investmentsbetween smaller unitsand larger players

Exhibit 4 shows that the key players of the Indian pharmaceuticalmarket are GSK, Ranbaxy, Cipla, Nicholas Piramal, ZydusCadila, Sun Pharma, Alkem, Pfizer, Lupin, and DRL. These tencompanies account for a market share of 36.6%. GSK, the largestplayer, contributes 5.2%, followed by Ranbaxy (5.1%) and Cipla(5.1%).

Despite the limits to growth caused by the markets fragmentednature, 2006 saw the pharmaceutical industry grow at a rate of 18%over the previous year. This is attributable to an increase inconsumer expenditure on healthcare, as well as growth in healthinsurance. A detailed discussion of these positive drivers follows inthe section titled Growth Drivers of the Indian DomesticPharmaceutical Market.

Market fragmentation is also reflected in the growing number ofmanufacturing units. Exhibit 5 shows that the number ofmanufacturing units has increased steadily from 2,257 in 1970 to20,053 in 2000, and is expected to reach 39,546 by 2010 at a

CAGR of 7.4%.

Exhibit 5: Manufacturing units in the Indian pharmaceutical industry19702010(E)

(1),(4)

Exhibit 5: Manufacturing Units in the Indian PharmaceuticalIndustry (19702010(E))

16,000

20,053

5,156

2,257

39,546

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1970 1980 1990 2000 2010(E)

NumberofManufa

cturingUnits

Year

CAGR: 7.4%

16,000

20,053

5,156

2,257

39,546

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1970 1980 1990 2000 2010(E)

NumberofManufa

cturingUnits

Year

CAGR: 7.4%

There are several reasons for this spurt in the number of units.

Poor Regulatory Standards Result in Low Entry Barriers forSmaller Players.

The average investment of a small firm is $ 26,829. That of a largerunit averages $ 675,609. The Total Output/Net Fixed Investment is52.1 for smaller units as compared to 30.8 for larger units, showingthat productivity of small plants is unhampered by size. The outputvalue per dollar invested in smaller plants is 69% higher than that oflarger units, although the larger units enjoy various scale benefitslike purchase of raw materials. Our research shows that lowerinvestment of smaller units indicate a lack of investment in

manufacturing infrastructure such as air control devices to checkcontamination, air conditioning, and effluent treatment plants.


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Excise duty based onproduction costshelps smaller players

Increased life

expectancy will boostthe future growth ofthe Indianpharmaceuticalindustry

Excise Structure and Trade Margin

Up until January 2005, excise was levied on the cost of production.This worked against organized players, since excise on their higher

production costs elevates overall product cost. On the other hand,this excise provided additional benefits to the low-costmanufacturers and further increased the manufacturing cost gapbetween small and large manufacturers. This gap is expected towiden as a result of the prevalence of under-invoicing among smallmanufacturers.

For small players with their own regional brands, there is a widedisparity between maximum retail price (MRP) and ex-factory costs.For small companies that sell unbranded generics, the MRP can befour to seven times the ex-factory prices.

Small marketers/manufacturers also gain by passing on a portion of

the differential between the MRP and ex-factory cost to the tradechannels (in some cases, including doctors) to encourage volumesales.

Growth-Drivers of the Indian Domestic PharmaceuticalMarket

Despite fragmentation, the Indian pharmaceutical industry showeda CAGR of 11.7% during 20002006. Further growth is expectedbecause of a number of key factors.

Life expectancy is on a rise(4),(5),(6)

The average life expectancy in India is 63 years as compared to

78 years in developed countries. However, Indias improvinghealthcare delivery infrastructure has ensured the continued rise inlife expectancy and maternity child care measures. There has beena strengthening of specific programs, such as the ExpandedProgram on Immunization (EPI) and the introduction of OralRehydration Therapy (ORT) in 198687. Ongoing measures seekto control local endemic diseases.

The consequent increase in life expectancy drives the growingproportion of an aging population -- the 60+ age-group will accountfor 11% of total population by 2021. This will further boost growth ofthe pharmaceutical industry.


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The growing elderlypopulation is likely toboost the

pharmaceuticalindustry

Exhibit 6 Gender-wise change in life expectancy (20002005)(5)

Exhibit 6: Indian Life Expectancy at Birth (20002005)

62.7 61.7 62.0 62.2 62.6 63.159.8 60.0

60.860.560.360.1

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2000 2001 2002 2003 2004 2005

Year

LifeExpectancy(Years)

Male Female

Exhibit 7 Age-grouped distribution of population(6)

Exhibit 7: Population Distribution (20012026(E))

63 64 64

7 8 89 11

2927

2523

3235

646058

12

0

10

20

30

40

50

60

70

2001 2006 2011(E) 2016(E) 2021(E) 2026(E)

Year

PopulationDistri

bution(%)

014 Years 1559 Years > 60 Years

CAGR: 2.1%

CAGR: (1.6%)

CAGR: 0.4%63 64 64

7 8 89 11

2927

2523

3235

646058

12

0

10

20

30

40

50

60

70

2001 2006 2011(E) 2016(E) 2021(E) 2026(E)

Year

PopulationDistri

bution(%)

014 Years 1559 Years > 60 Years

CAGR: 2.1%

CAGR: (1.6%)

CAGR: 0.4%

Rising population

With a population approximating 1.2 B, India is potentially a vastmarket for the pharmaceutical industry. The growing middle-class ofaround 300 M people has an increasing disposable income andhigher healthcare expectations. Around 1/3

rdof the middle class

can afford quality private healthcare services, and this number isconstantly growing. This points to increased healthcare spendingand greater opportunities for the pharmaceutical market.


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Exhibit 8 Indian population growth (19852010)(1),(6)

Exhibit 8: Indian Population (19852010(E))

771

860

954

1,0461,134

1,246

0

200

400

600

800

1,000

1,200

1,400

1985 1990 1995 2000 2005 2010(E)

IndianPopulation(inM)

Year

CAGR: 1.9%

771

860

954

1,0461,134

1,246

0

200

400

600

800

1,000

1,200

1,400

1985 1990 1995 2000 2005 2010(E)

IndianPopulation(inM)

Year

CAGR: 1.9%

Rising Income of Indian Households

Exhibit 9 shows that the number of middle-income households(income $ 2,275$ 12,500) is expected to rise significantly.Number of middle-

income householdsprojected at 98 M by20092010

This will translate into greater spending power in healthcare, furtherboosting the pharmaceutical industry.

Exhibit 9 projected growth of yearly household income(20052006 and 20092010(E))

(6)

Exhibit 9: Projected growth of yearly household income ($)

5 10

66

98

132

114

0

50

100

150

200

250

20052006 20092010(E)

No.ofHouseholds(inM)

>$ 12,195 $ 2,157$ 12,195 $ 12,195 $ 2,157$ 12,195


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Consumerexpenditure on

healthcare showed aCAGR of 12.4% in20002005

The growing numbersof healthcareinsurance premiumpolicies is likely tospur the Indianpharmaceuticalmarket

Increased Consumer Expenditure on Healthcare(5)

The years of 2000-2005 saw a shift in the Indian consumersmindset, as evidenced by the increasing priority accorded tohealthcare as a proportion of overall consumer expenditure. Duringthis period, consumer expenditure on health goods and medicalservices showed a CAGR of 12.4%. There was an increase inconsumer expenditure on pharmaceuticals, medicalappliances/equipment (11.7%) as well as on outpatient services(12.7%). At 14%, consumer expenditure on hospital servicesshowed the highest increase during 20002005. This reflects theprimacy of healthcare as a growing concern for the Indianconsumer.

Exhibit 10 Consumer expenditure on health goods and medicalservices(5)

Exhibit 10: Consumer Expenditure on Health Goods andMedical Services in India (20002005)

8,411 9,47810,804 12,262

13,948 14,600

2,912

3,401

4,093

4,694

5,3495,614

7,237

10,988

9,7448,462

13,13412,519

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2000 2001 2002 2003 2004 2005

Year

C

onsumerExpenditureon

H

ealthGoodsandMedical

Services(in$M)

Increasing Penetration of Health Insurance(4),(7),(8)

In stark contrast to the US, where insurers pay more than 80% ofthe individuals healthcare cost, Indian insurers contribute a verysmall proportion. At present only 3% of the healthcare cost of anIndian patient is paid by insurers; 80% of costs are borne by theindividual (refer exhibit 11). However, the insurance sector shows

significant improvement, as evidenced by the 37.3% increase in thenumber of policies sold in 20032004 compared to 2001-2002.Sales of health insurance premiums written in India totaled $ 129.1M in 2001. By 2006, sales rose to $ 711 M, a CAGR of 40.7%. By2012, premium sales are projected at $ 3.8 B. This rise inhealthcare insurance coverage is attributable to the InsuranceRegulatory and Development Authority (IRDA) bill, which has liftedentry restrictions for private players and allowed foreign players toenter the market. Additionally, the increase in consumersdisposable income further boosts Indias insurance sector.

Pharmaceuticals, medical appliances/equipment Outpatient services Hospital Services

18,560

21,341

24,641

27,944

31,81633,348

CAGR: 12.4%

8,411 9,47810,804 12,262

13,948 14,600

2,912

3,401

4,093

4,694

5,3495,614

7,237

10,988

9,7448,462

13,13412,519

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2000 2001 2002 2003 2004 2005

Year

C

onsumerExpenditureon

H

ealthGoodsandMedical

Services(in$M)

Pharmaceuticals, medical appliances/equipment Outpatient services Hospital Services

18,560

21,341

24,641

27,944

31,81633,348

CAGR: 12.4%


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Exhibit 11 Patients medical expenses contrasted with health insurance written in India(4),(7),(8)

Exhibit 11: Patients medical expenses contrasted with health insurance written in India

Break-up of Medical Costs in India (2006) Health Insurance Premium Written in India(20012012(E))

129.1 187.2245.4 303.5

390.0

711.0

3,800.0

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2001 2002 2003 2004 2005 2006 2012(E)

Year

HealthInsurancePremiumwritten($M)

Centre

2%

State

12%

Local

2%

Insurance

3%

Out of Pocket

80%

Social

Insurance

1%

Indias healthcareinfrastructurecompares unfavorably

to other developingcountries

Expanding Healthcare Infrastructure

Steep discrepancies exist between the healthcare infrastructure ofIndia and that of developed countries.

Exhibit 12 Comparison of healthcare infrastructure between Indiaand other developing and developed countries

(4)

Exhibit 12: Comparison of healthcare infrastructure betweenIndia and other developing and developed countries

India DevelopingCountries

DevelopedCountries

Life Expectancy(Years)

63 65 78

Infant Mortality per000 Births

70 59 6

Hospital Beds per000 Population

1.5 4.3 7.4

Indias low literacy rate and poor healthcare infrastructure arefactors in the countrys shortage of doctors and hospitals.


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Exhibit 13 Healthcare worker density across 6 countries andnumber of doctors in India

(1),4)

Exhibit 13 Healthcare Workers density across 6 countries

Density of Healthcare Workers (per 000 Individuals)

2.49 2.53

11.88

14.44 14.55

16.57

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

India China Japan US Germany UKDensityofHealthcareWorkers

Number of Doctors in India (19952004)

572,073

599,990

600,000

490,909

495,455

463,636

445,455

518,182

536,364

545,455

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

NumberofDoctors

Year

CAGR: 3.4%

572,073

599,990

600,000

490,909

495,455

463,636

445,455

518,182

536,364

545,455

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

NumberofDoctors

Year

CAGR: 3.4%

At 1/6

ththat of the US, the density of healthcare workers (per 000)

in India is very low. The majority of Indias population lives in ruralareas, and poor healthcare service penetration leaves themundersupplied and underprovided.

However, with increasing literacy rates and healthcare awareness,this trend shows signs of reversing. The number of doctors isincreasing: from 445,455 in 1995 to 600,000 in 2004 (CAGR of3.4%). The consequent increased penetration of healthcareinfrastructure will add greater momentum to the overall healthcare

sector.

Globally, hospitals account for 1/4th

of pharmaceutical market sales.In India, the proportion is only 1/11

th.An additional 780,000 beds

over the next ten years will strengthen the hospital sector, therebyboosting the pharmaceutical market.


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Government Incentives

Exhibit 14: Country comparison of healthcare spending by publicand private sectors

(4)

Exhibit 14: Healthcare spend by Public and Private Sectors

(2006) Healthcare Spend as a Percentage of GDPCountry Public Sector Private Sector Total

Philippines 1.6 1.8 3.4

Pakistan 0.9 3.2 4.1

India 0.9 4.0 4.9

China 1.9 3.4 5.3

Russia 3.8 1.5 5.3

Mexico 2.5 2.9 5.4

UK 5.9 1.4 7.3

Japan 6.0 1.8 7.8

Italy 6.0 2.1 8.1

Brazil 3.4 4.9 8.3Germany 8.0 2.6 8.6

Canada 6.6 2.5 9.1

US 5.8 7.2 13.0

World Average 5.4 3.9 9.3

Current statistics indicate that the Indian public sector share ofhealthcare as a percentage of GDP is less than that of developednations. However, recent government measures are aimed atrectifying this situation.

The National Rural Health Mission (NRHM) launched in April 2005

seeks to provide effective healthcare to the rural population with aspecial focus on 18 states with weak public health indicators and/orweak infrastructure. These states are Arunachal Pradesh, Assam,Bihar, Chhattisgarh, Himachal Pradesh, Jharkhand, Jammu andKashmir, Manipur, Mizoram, Meghalaya, Madhya Pradesh,Nagaland, Orissa, Rajasthan, Sikkim, Tripura, Uttarakhand, andUttar Pradesh.

In the finance bill of 20072008, the Government allocated a sum of$ 3,822 M to healthcare, a 22% increase from the previous year. Asa result, the governments demand for pharmaceutical products isexpected to increase in the next 45 years..


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18

Drug Sales for Acute and Chronic Diseases(1),(3),(9)

As shown in Exhibit 15, revenues from the chronic and acutesegments showed a consistent increase in 20042006, a trend thatis expected to continue.

Exhibit 15: Percentage of contribution to sales by major therapeutic areas(1),(3)

Exhibit 15: Percent contribution to sales bytherapeutic areas (%) (20042006)

Chronic (2006)

Acute (2006)

Cardiac

43.5%Anti-

diabetics17.4%

Others

4.4%Respiratory

13.0%

Neuro/CNS

21.7%

77.0% 76.0% 77.0%

23.0% 24.0% 23.0%

0.0%

25.0%

50.0%

75.0%

100.0%

2004 2005 2006

Chronic

ContributiontoSales

(%)

($ 3.6 B)

($ 1.1 B)

($ 4.8 B)

($ 1.3 B)

($ 4.0 B)

($ 1.4 B)

Although the market

is dominated by drugsused to cure acutediseases, the chronicsegment is expectedto reverse this trendand drive growth inthe long term

Increasing Urbanization Is Leading to a Surge in ChronicDiseases

Indias population is expected to show an increase in lifestyle-related diseases such as high blood pressure, diabetes, etc.According to the census of 2001, the urbanization rate of 27.78% isexpected to rise to 41% over the next 20 years. Consequently,lifestyle-related diseases are expected to increase. By 2020, thesediseases are likely to be responsible for nearly 50% of drug sales inIndia as compared to only 23% in 2006. Cancer, diabetes, andcardiovascular disease are projected at 1/3

rdof the incremental

demand during 20072020. Owing to the recurring nature ofailments in the chronic segment, an increased demand for

medicines is foreseen; in most cases, treatment is required for thepatients lifetime.

Anti-infectives

23.4%

Derma 6.5%

Vitamins/Minerals/

Nutrients 11.7%

Respiratory 9.1%

Gynec

6.5%

Hormones 2.6%

Others 15.5%

Gastro-intestinals

14.3%

Pain/Analgesics

10.4%

Acute

77.0% 76.0% 77.0%

23.0% 24.0% 23.0%

0.0%

25.0%

50.0%

75.0%

100.0%

2004 2005 2006

Chronic

ContributiontoSales

(%)

($ 3.6 B)

($ 1.1 B)

($ 4.8 B)

($ 1.3 B)

($ 4.0 B)

($ 1.4 B)

Acute


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19

Indian pharmaceuticalcompanieshistorically reliedupon reverse-

engineering skills

Increase in Manufacturing FacilitiesThe Indian Patent Act of 1970, which came into force in 1972,granted only process patents; product patents were not recognized.This encouraged reverse-engineering practices among domesticpharmaceutical players. Products manufactured in other countrieswere recreated using alternative processes distinct from the original

method. This is borne out by the rise in the number ofpharmaceutical companies manufacturing units which grew from2,257 in 1970 to 20,053 in 2000. Despite speculations of slowergrowth after the introduction of product patents in 2005, the numberof manufacturing units has grown. This trend is likely to continue fortwo major reasons:

1) Generic drugs constitute 90%95% of the drugs sold inIndia; very few patent-protected drugs are presentlymarketed in India. Consequently, the post-patent ruling isunlikely to hurt the existing infrastructure.

2) An increase in contract manufacturing outsourced to Indiais likely to encourage growth of pharmaceutical

manufacturing units.Once patent-protected drugs are popularized, the mid to long-termmay witness consolidation of small to medium-sized manufacturingunits to meet regulatory and infrastructural requirements.


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20

Advantages of Outsourcing PharmaceuticalActivities to India

Low production and R&D costs, a constant supply of qualifiedskilled professionals, government support, and improvedinfrastructure that answers to global pharmaceutical needs are

among the numerous benefits of outsourcing pharmaceuticalactivities to India.

India as a Favorable Destination for PharmaceuticalOutsourcing

India is increasingly a favorable destination for foreign playersprimarily because of low costs supported by a stable economy andan abundant talent pool.

Low Production and R&D Costs

Outsourcing achieves average cost savings of 35% and 60% formanufacturing and R&D respectively. The process of drug

discovery and development places considerable demands on acompanys resources and capital. Extensive process stages areinvolved in the development of an FDA-approved drug. In the USand Europe, it takes 14 years and around $ 1.7 B to develop a drug,of which $ 0.75 B is incurred in the clinical development timeframe.

Exhibit 16: Timeframes and costs for process stages across the value chain for R&D and development of anFDA approved drug

(1),(10)

Exhibit 16: R&DDrug Discovery and Development

6.0 14.03.5

Cost($B)

ResearchBiology

ResearchChemistry

Pre-ClinicalDevelopment

0

0.25

0.5

0.75

1

1.25

1.5

1.75

2

5,00010,000 Compounds 250 Compounds

One FDAapproved drug

Target identification,validation, screening andoptimization

Phase I Phase II Phase III Phase IV

Clinical Development

5 Compounds

Lab and animaltesting is done

Here drugs are tested on

humans to gauge the drugsafety and finally one drug isapproved in this wholeprocess

6.0 14.03.5

Cost($B)

ResearchBiology

ResearchChemistry

Pre-ClinicalDevelopment

0

0.25

0.5

0.75

1

1.25

1.5

1.75

2

5,00010,000 Compounds 250 Compounds

One FDAapproved drug

Target identification,validation, screening andoptimization

Phase I Phase II Phase III Phase IV

Clinical Development

5 Compounds

Lab and animaltesting is done

Here drugs are tested on

humans to gauge the drugsafety and finally one drug isapproved in this wholeprocess

Time (Years)

In contrast, Exhibit 17 shows that the same drug discovery anddevelopment process when conducted in India saves companiesaround $ 1 B per drug. Due to low production costs and availabilityof talent, the greater part of cost saving occurs in the researchchemistry phase of the drug discovery and development process.Additionally, with Indian labor wages at 1/7

ththe levels in developed

countries, outsourcing to India brings the wage differential into play,and translates into 35% cost savings compared to the US andEurope.


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21

Exhibit 17: Stage-specific R&D cost savings gained by outsourcing R&D activities to India(A),(1),(10)

Exhibit 17: Stage-specific R&D cost savings achieved by outsourcing R&D activities to India

0

400

800

1,200

1,600

2,000

Total R&D Cost

without Offshoring

Research Biology Research Chemistry Pre-Clinical

Development

Clinical

Development

Total R&D Cost

When Offshored to

India

1,700

669Cost($M)

150

416

65400

Cost Savings At Each Stage Of The R&D Through Outsourced Activities

$ 1,031 M

Total costsavings of

60%

0

400

800

1,200

1,600

2,000

Total R&D Cost

without Offshoring

Research Biology Research Chemistry Pre-Clinical

Development

Clinical

Development

Total R&D Cost

When Offshored to

India

1,700

669Cost($M)

150

416

65400

Cost Savings At Each Stage Of The R&D Through Outsourced Activities

$ 1,031 M

Total costsavings of

60%


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22

Good educationalstandards andgrowing numbers of

educationalinstitutions arebuilding a talent poolof skilled workers

The government

contributes to thegrowth of R&Dthrough partnershipsand by offeringbenefits to companies

India as a Consistent Source of Qualified Skilled Professionals

Low costs and an abundant talent pool combine to make India anattractive hub for outsourcing activities in the pharmaceuticaldomain.

The number of colleges for general education is growing steadily.Selected educational statistics of the Ministry of Human ResourceDevelopment, Government of India, listed close to 13,500 collegesfor professional and general education in 2005.

Exhibit 18: Number of institutes (by type) in India (20012005)(11)

Exhibit 18: Educational institutes in India (20012005)

Colleges for General Education

Colleges for Professional Education

(Engg., Tech., Arch., Medical & Education colleges)

Universities/Deemed University/Institutes of National Importance

7,929 8,7379,166 9,427

10,377

2,2232,409

2,610 2,751

3,201254272

304

407304

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2001 2002 2003 2004 2005

CAGR:12.5%

CAGR: 9.5%

CAGR:7.0%









7,929 8,7379,166 9,427

10,377

2,2232,409

2,610 2,751

3,201254272

304

407304

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2001 2002 2003 2004 2005

CAGR:12.5%

CAGR: 9.5%

CAGR:7.0%7,929 8,737

9,166 9,42710,377

2,2232,409

2,610 2,751

3,201254272

304

407304

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2001 2002 2003 2004 2005

CAGR:12.5%

CAGR: 9.5%

CAGR:7.0%

CAGR:12.5%

CAGR: 9.5%

CAGR:7.0%

The pharmaceutical industry requires a constant supply of skilledprofessionals. Each year, approximately 257,000 students enroll inMedicine, Dentistry, Nursing, Pharmacy, Ayurvedic and Unani,Homeopathy, etc.

Government Support

Indias Department of Biotechnology (established in 1986) hasfunded more than 1,800 R&D projects, helped in the development

of 12 vaccines, and transferred 54 technologies to the biotechindustry, of which 17 have been commercialized.

It typically takes 3-4 months to get approval for pre-clinical andclinical trials. The Government is taking steps to expedite theprocess. For example, two government-sponsored breeding centerswill supply genetically modified animals to Indian vendors. Thus,facilities for testing non-human primates are now available to thepublic sector through government-funded research centers like theCentral Drug Research Institute, Lucknow.


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23

India has world-classfacilities andinfrastructure for drug

manufacture

Improving infrastructure

India has the worlds largest number of FDA-approved plants (75)located outside of the US. India has almost three times the numberof FDA- approved plants as China.

Our research shows that US FDA-approved plants can be set up in

India at half the cost of instituting similar plants in the US or Europe.

Exhibit 19: Number of FDA-approved plants in variouscountries

(12),(13)

Exhibit 19: Number of FDA-approved plants (2006)

75

55

2725

108

5

0

10

20

30

40

50

60

70

80

India Italy China Spain Taiwan Israel Hungary

NumberofFDA

ApprovedPlants

75

55

2725

108

5

0

10

20

30

40

50

60

70

80

India Italy China Spain Taiwan Israel Hungary

NumberofFDA

ApprovedPlants

Additionally, Indian Good Manufacturing Practice (GMP) normsare becoming increasingly strict. The Mashelkar Committee reportof November 2003 confirms that governmental amendments toSchedule M, which defines the standard manufacturing practices,

are bringing bring Indian standards closer to GMP norms of theWHO.

However, since these GMP norms reduce cost competitiveness,small manufacturers are reluctant to adopt them. While the majorityof large units have already taken steps to adapt to the mandatorymanufacturing standards of highly regulated markets like the US,Europe, and Australia, small firms show reluctance to follow suit,owing to the heavy investments entailed in updating existing units.There has been a clear tendency among small firms in theConfederation of Indian Pharmaceutical Industry (CIPI) to delay theimplementation of Schedule M. In response to these reservations,the Government extended the deadline for implementation of

Schedule M from December 31, 2003 to December 31, 2004, andthen again to June 30, 2005. Major steps have been put in place todevelop quality standards and uniformity across manufacturingpractices.

The factors outlined above contribute towards making India apreferred hub for pharmaceutical activities. The overall benefits aresummarized in Exhibit 20.


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24

Exhibit 20: Economical service of high quality and good infrastructure make India an attractive outsourcingdestination

(1),(14)

Exhibit 20: Indiaan attractive outsourcing destination

Wage Benefit

Labor wages at 1/7th thelevels as in developedcountries

Cost savings across thevalue chain of thepharmaceutical industry

CRO: 80%

CMO: 3040%

Other Activities: 80%

Cost Benefit

Low Overheads

Talent Availability

Annual Indian graduatesin chemistry outnumberthose in the US by overfive times at thebachelors level and byover three times at themasters level. Indianengineering graduatesoutnumber those in theUS by over five times

India has considerabletalent capability ofreverse engineering skills

KnowledgeAdvantage

Largest Talent Base

Quality withEconomy

Largest talent poolcoupled with the low-costlabor makes India thefavored destination foractivities outsideUS/Europe

Higher Profitability

Low Cost SkilledWorkforce

Infrastructure/External

Environment

India has second largestnumber (75) of FDAapproved plants after US

Set up of US FDAapproved plants in India ispossible at 50% of thecost as in US/Europe

Extension of the productpatents to pharma andrationalization of theprovisions relating to time-

lines e.g., patentapplications

Lower Capital Cost

ExistingInfrastructure andLow Cost of New

Build Out

Wage Benefit

Labor wages at 1/7th thelevels as in developedcountries

Cost savings across thevalue chain of thepharmaceutical industry

CRO: 80%

CMO: 3040%

Other Activities: 80%

Cost Benefit

Low Overheads

Talent Availability

Annual Indian graduatesin chemistry outnumberthose in the US by overfive times at thebachelors level and byover three times at themasters level. Indianengineering graduatesoutnumber those in theUS by over five times

India has considerabletalent capability ofreverse engineering skills

KnowledgeAdvantage

Largest Talent Base

Quality withEconomy

Largest talent poolcoupled with the low-costlabor makes India thefavored destination foractivities outsideUS/Europe

Higher Profitability

Low Cost SkilledWorkforce

Infrastructure/External

Environment

India has second largestnumber (75) of FDAapproved plants after US

Set up of US FDAapproved plants in India ispossible at 50% of thecost as in US/Europe

Extension of the productpatents to pharma andrationalization of theprovisions relating to time-

lines e.g., patentapplications

Lower Capital Cost

ExistingInfrastructure andLow Cost of New

Build Out

India plays animportant role in thesupply ofpharmaceuticals toglobal markets

Indian Pharmaceutical Industry Catering to the Globe

India serves global clients through various business models andofferings, such as outsourcing of services (including R&D) andmanufacturing. Strong reverse-engineering skills, a robust talentpool, government support for exports, low production and R&Dcosts, and world-class infrastructure to assure high qualitystandards are some of the factors that enable India to play a pivotalrole in the global pharmaceutical market. India is considered aglobal destination for supplies of high-standard APIs.

A central factor in Indias place in the global pharmaceutical market

is its reverse-engineering expertise, whereby a drug made byforeign pharmaceutical companies after years of R&D is formulatedat a much lower cost. The innovator-company patent is challengedin the US through a Para IV filing, which is made when the applicantbelieves that its product or the use of its product does not infringeon the innovator's listed patents.


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Exhibit 21: The Indian pharmaceutical industry addresses globe needs(1),(15)

Exhibit 21: India Catering to the Globe

Drug discovery andModification

Generic manufacturingSupply partner/Sourcing

base

API/Intermediates/Dosage forms

OutsourcingServices

Para II/III Generics Para IV Generics NDDS* based NCE** Research

CiplaBioconNPILDishmanCadila

CMO CRO

ShasunJubilantCadilaSyngeneDishman

VimtaLabs

Clingene

RanbaxyDr ReddysSun PharmaWockhardtCadila

Dr ReddysRanbaxySun Pharma

RanbaxySun PharmaCipla

Dr ReddysRanbaxyGlenmarkSun Pharma

Outsourcing Indian Global Business

InfrastructureUS FDAapproved

plants

Governmentsupport

High qualitystandards

Strong reverseengineering

skills/Knowledge base

Low cost ofproduction/Low cost for

R&D

Strong talentpool

Global hub forPharmaceutical

Outsourcing

Drug discovery andModification

Generic manufacturingSupply partner/Sourcing

base

API/Intermediates/Dosage forms

OutsourcingServices

Para II/III Generics Para IV Generics NDDS* based NCE** Research

CiplaBioconNPILDishmanCadila

CMO CRO

ShasunJubilantCadilaSyngeneDishman

VimtaLabs

Clingene

RanbaxyDr ReddysSun PharmaWockhardtCadila

Dr ReddysRanbaxySun Pharma

RanbaxySun PharmaCipla

Dr ReddysRanbaxyGlenmarkSun Pharma

Outsourcing Indian Global Business

InfrastructureUS FDAapproved

plants

Governmentsupport

High qualitystandards

Strong reverseengineering

skills/Knowledge base

Low cost ofproduction/Low cost for

R&D

Strong talentpool

Global hub forPharmaceutical

Outsourcing

NDDS*New Drug Discovery and Search; NCE**New Chemical Entity

The Indianpharmaceuticalindustryscompetence attractsproduction andresearch outsourcingfrom several foreignplayers

Indian companies with extensive foreign operations are Ranbaxy,Sun Pharmaceuticals and Dr. Reddys Laboratories. Thesecompanies are involved in the field of new drug discovery andmodification ventures as well as Para II/III/IV filings (A Para II filingfor the launch of a generic drug is made when the drug is already

off-patent. A Para III filing is made when the applicant does not planto sell the generic drug until the original drug is off-patent).

Wockhardt is chiefly involved in generic manufacturing. Cipla andGlenmark focus on new drug discovery and research.

In the outsourcing space, the main players concerned with supplyare Cipla, Biocon, NPIL, Dishmman and Cadila. Key players inthe outsourcing services market include Shasun, Jubilant,Dishman, Syngene, Clingene and Vimta Labs.

The chief business model evolved through these capabilities isoutsourcing. The following section focuses primarily on the various

facets of outsourcing.


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26

CROs and CMOs

receive the bulk oftheir revenue fromoutsourcing

Outsourced Pharmaceutical Activities (16)(21)

Pharmaceutical outsourcing constitutes contract research, contractmanufacturing and other support activities.

Contract research: Contract Research Organizations (CROs)provide services that form the pharmaceutical R&D value chain,including drug discovery, product development and formulation,pre-clinical and clinical trial management spanning phases IIV.The share of CROs in the industrys research operations is 27%.

Contract manufacturing: Contract Manufacturing Organizations(CMOs) concern themselves with drug manufacture. Theseservices are further integrated into the pharmaceutical supply chainwith the provision of value-added services like processdevelopment and process optimization. The share of CMOs in theindustrys manufacturing operations is 68%.

Other services: the Indian pharmaceutical industry offers supportservices including sales and marketing, information technology,finance and accounting, human resources, procurement, andCustomer Relationship Management (CRM).

Global Pharmaceutical Outsourcing Market

The global pharmaceutical outsourcing market was worth $ 52 B in2006. It is expected to reach $ 76 B by 2010, at a CAGR of 10.0%in the 20062010 period. In 2006, CMO activity accounted for themajor share (approx. 68%) of the totalglobal outsourcing market.

Exhibit 22: Revenues of the 2004-2010 global pharmaceutical outsourcing market (by value); contributionbased on activity and outsource destination

(22),(23),(24)

Exhibit 22: Global Pharmaceutical OutsourcingIndustry (20042010(E))

By Activity (2006)

By Destination (2006)

100% = $ 52 B

CMO68%

CRO27%

Others Services 5%

100% = $ 52 B

CMO68%

CRO27%

Others Services 5%

100% = $ 52 B

CMO68%

CRO27%

Others Services 5%

41

52

76

63

0

10

20

30

40

50

60

70

80

90

2004 2006 2008(E) 2010(E)

GlobalOutsourcingRe

venues

($B)

100% = $ 52 B

Others67%

India2%

China31%

100% = $ 52 B

Others67%

India2%

China31%

100% = $ 52 B

Others67%

India2%

China31%

CAGR: 10.0%

Year

CAGR: 12.6%

41

52

76

63

0

10

20

30

40

50

60

70

80

90

2004 2006 2008(E) 2010(E)

GlobalOutsourcingRe

venues

($B) CAGR: 10.0%

CAGR: 12.6%

Year


27/39

27

Indiaspharmaceuticaloutsourcing market is

expected to have aCAGR of 37.6% by2010

The Indian Pharmaceutical Outsourcing Market

The Indian pharmaceutical outsourcing market was valued at $ 929M in 2006. It is expected to reach $ 3.33 B by 2010, with a CAGR of37.6% during 20062010. Consequently, Indias contribution to theglobal pharmaceutical outsourcing market is expected to increase

from 1.8% in 2006 to 4.4% in 2010. Exhibit 23 depicts the growingmarket for pharmaceutical outsourcing in India, and also capturesits increasing contribution to the global outsourcing market.

Exhibit 23: The value of the Indian pharmaceutical outsourcingmarket (20042010) and its contribution to the global outsourcingmarket

(1),(14)

Exhibit 23: Indias pharmaceutical outsourcing market(20042010(E))

470

929

3,329

1,742

1.2%

1.8%

2.7%

4.4%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2004 2006 2008(E) 2010(E)

Year

PharmaceuticalOutsourcing

Market($M)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

PercentageoftheGlobal

OutsourcingMarket

Market Value % Share of the Global

CAGR: 40.6%

CAGR: 37.6%

470

929

3,329

1,742

1.2%

1.8%

2.7%

4.4%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2004 2006 2008(E) 2010(E)

Year

PharmaceuticalOutsourcing

Market($M)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

PercentageoftheGlobal

OutsourcingMarket


CAGR: 40.6%

CAGR: 37.6%

Exhibit 24: The majority market shares of CMO (66%) and CRO(29%)

(1),(14)

Exhibit 24: Activity analysis of Indias pharmaceuticaloutsourcing market (2006)

CMO66%

CRO29%

Others Services 5%

100% = $ 929 M

CMO66%

CRO29%

Others Services 5%

100% = $ 929 M


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28

Clinical trials accountfor the majority (52%)of outsourced activity.

Contract Research Outsourcing in India

In 2006 the global CRO market was valued at $ 14.3 B. This figureis expected to have a CAGR of 13.8% and reach $ 24 B by 2010. In2006, clinical trials accounted for more than 50% of outsourcedactivity.

The Indian CRO market stood at $ 265 M in 2006. By 2010, it isexpected to have a CAGR of 22.7% and reach $ 600 M.

Exhibit 25: The CRO outsourcing market in India (20042010) andits contribution to the global outsourcing market

(1),(14)

Exhibit 25: Indian Pharmaceutical Outsourcing MarketCRO (20042010(E))

399

600

265

131

1.2%

1.9%

2.2%

2.5%

0

100

200

300

400

500

600

700

800

2004 2006 2008(E) 2010(E)

0.0%

1.0%

2.0%

3.0%


IndianPharmaceuticalCROMarket($M)

Percentage

oftheGlobalPharmaceutical

O

utsourcingMarket

CAGR: 42.8%CAGR: 22.7%

399

600

265

131

1.2%

1.9%

2.2%

2.5%

0

100

200

300

400

500

600

700

800

2004 2006 2008(E) 2010(E)

0.0%

1.0%

2.0%

3.0%


IndianPharmaceuticalCROMarket($M)

Percentage

oftheGlobalPharmaceutical

O

utsourcingMarket

CAGR: 42.8%CAGR: 22.7%

In 2006, clinical trials accounted for 52% of the total outsourcingmarket of CROs in India, followed by pre-clinical trials whichconstituted about 30%. Research chemistry and research biologytogether constituted 18%.

Analysis of 50 pharmaceutical companies that outsource theiractivities to India shows that the preferred locations for outsourcedactivities are Mumbai, Bangalore, Ahmedabad, Delhi and NCR,and Hyderabad (A).

Exhibit 26: The CRO outsourcing market in India in 2006(1),(14)

Exhibit 26: Indian Pharmaceutical Outsourcing MarketCRO (2006)

Pre-clinicalTrials,30%

Research-Chemistry& Research-Biology,

18% Clinical Trials52%

100% = 265 M

Pre-clinicalTrials,30%



100% = 265 M



100% = 265 M


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29

The R&D development value-chain includes research biology,research chemistry, pre-clinical development, and clinicaldevelopment phases IIV. (See appendix for definitions)

Exhibit 27: Activities involved in R&D value chain(24),(25)

Exhibit 27: R&D value-chain activities

Research Biology

First: Target Identification

Genetic research

Proteomics (Proteinexpression and purification,Protein structural analysis,Protein to proteininteraction)

Chemoinformatics

Bioinformatics

Expression profiling

Basic molecular-biologytechnologies (Genesequencing, DNA and RNApreparation, mRNA library)

Second: Target Validation

Functional genomics

Protein biochemistry

Disease models

Genetically modified mice

Bioimaging

Clinical management(Protocol design, Patientrecruitment, Trialmanagement andmonitoring, Central lab,Report writing)

Data management(Clinical data

management,Biostatistics)

Regulatory (Drugregistration, Regulatoryconsulting)

First: CompoundGeneration

Analog preparation(Building blocks, Referencecompounds)

Synthesis (Focus library,Combinatorial chemistry,Natural compoundextraction)

Drug design (Computeraided, structural based)

Structural chemistry (NMR,X-ray crystallography)

Analytical chemistry

Second: Screening

Compound synthesis

HTS and UHTS

Assay development

Third: Lead Optimization

Assay execution

SAR evaluation

Medicinal chemistry

Cell-based models forefficacy

Pharmacology (Safety,Efficacy)

PKDM (Bioanalysis, Invitro ADME, In vivoADME)

Toxicology (General,Reproductive,Genotoxicology,

Immunotoxicology,Carcinogenicity)

Animal model for efficacy

Research ChemistryPre-clinical

DevelopmentClinical Development

Phase IIVResearch Biology

First: Target Identification

Genetic research

Proteomics (Proteinexpression and purification,Protein structural analysis,Protein to proteininteraction)

Chemoinformatics

Bioinformatics

Expression profiling

Basic molecular-biologytechnologies (Genesequencing, DNA and RNApreparation, mRNA library)

Second: Target Validation

Functional genomics

Protein biochemistry

Disease models

Genetically modified mice

Bioimaging

Clinical management(Protocol design, Patientrecruitment, Trialmanagement andmonitoring, Central lab,Report writing)

Data management(Clinical data

management,Biostatistics)

Regulatory (Drugregistration, Regulatoryconsulting)

First: CompoundGeneration

Analog preparation(Building blocks, Referencecompounds)

Synthesis (Focus library,Combinatorial chemistry,Natural compoundextraction)

Drug design (Computeraided, structural based)

Structural chemistry (NMR,X-ray crystallography)

Analytical chemistry

Second: Screening

Compound synthesis

HTS and UHTS

Assay development

Third: Lead Optimization

Assay execution

SAR evaluation

Medicinal chemistry

Cell-based models forefficacy

Pharmacology (Safety,Efficacy)

PKDM (Bioanalysis, Invitro ADME, In vivoADME)

Toxicology (General,Reproductive,Genotoxicology,

Immunotoxicology,Carcinogenicity)

Animal model for efficacy

Research ChemistryPre-clinical

DevelopmentClinical Development

Phase IIV

Exhibit 28: Outsourcing Scale and Skills Availability in India(1),(25)

Exhibit 28: R&D value-chain: outsourcing scale and skills availability in India

Clinical DevelopmentPhase IIV

Research Biology Research Chemistry Pre-clinical Development

High Outsourcing

Medium Outsourcing

Low Outsourcing

High Skill Availability

Medium Skill Availability

Low Skill Availability

Scale ofOutsourcingin India

Skill Avaliability inIndia

Knowledge ofpharmacodynamics

Understanding of regulatoryrequirements

Knowledge of sampling and

data analysis packages such asSAS,SPSS and Epi.Info forstatistical programming

Knowledge of protocol draftingprocedure

Good oral and writtencommunication and knowledgeof MS-Office for clinical datamanagement

Assist in maintaining protocollevel documentation of datamanagement activities

Knowledge of pharmacology

Knowledge of InternationalCommittee of Harmonization(ICH) guidelines like Quality,Safety, Efficacy and MultiDisciplinary Topics

Knowledge of GxP guidelines

like Good Clinical Practice(GCP), Good LaboratoryPractice (GLP) and GoodClinical Data ManagementPractice (GCDMP)

Knowledge of developingappropriate animal models fordrug discovery program

Knowledge of pharmacokineticand toxicokinetic/metabolismstudies

Knowledge of modern analyticalinstruments like HPCL,GC,TLC,AAS, UV, IR, GC, ICP

Knowledge of LC-MS/MS/NMR

Expertise in designing

molecules in therapeutic areas Screening of compounds

Performing biochemical assays

Setting up and validating newassays

Developing recombinantproducts, therapeuticmonoclonal antibodies, andnovel production platforms

Knowledge of molecularSpectroscopy

Knowledge of drug deliverysystems

Knowledge of development of

P8 non-infringing compositions Knowledge of medical

diagnostics

Knowledge on genetics

Screening compounds

IT-Skills for bioinformatics

Microbiological testing

Clinical DevelopmentPhase IIV


High Outsourcing

Medium Outsourcing

Low Outsourcing






























diagnostics


Screening compounds




High Outsourcing

Medium Outsourcing

Low Outsourcing






























diagnostics


Screening compounds




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Contribution ofresearch chemistrytowards revenues is

set to increase in thenear future

Exhibit 28 highlights the intensive research and knowledge-orientedskills demanded in research biology and research chemistry ascompared to Phase IV, which chiefly entails data-managementskills since it involves activities such as clinical data-management,patient recruitment, trial management, monitoring, etc. Moreover,contract research-related outsourcing is based on a skill-based

maturity.

The number of global trials conducted in India has surged from 40in 2002 to 200 in 2005. Historically, Multinational PharmaceuticalCompanies (MPCs) needed to set up their captive bases in order toconduct clinical trials. Today, given the rise in the number ofcontract research organizations, clinical trials can be outsourced.Increased capabilities in data-management further expeditebusiness.

Activity in the Research Biology Domain Is Likely to GatherMomentum in the Long Term

India conducts activities such as chemo-informatics and genesequencing with expertise. However, proficiency in end-to-endactivities needs to be developed. This skill-gap is attributable to theindustrys traditional focus on process reverse-engineering.Consequently, growth in this innovative field has been inhibited. Toencourage the requisite skill-set, the Indian government hasinitiated steps to promote research and development. Thistranslates into a long-term time-frame of opportunity for researchbiology outsourcing to India.

Near-term Opportunities in Research Chemistry

The legacy of process reverse-engineering has served to refine theskill-sets of scale-up, process optimization and manufacturing in

Indian vendors of biopharmaceutical R&D. Moreover, provencapabilities in data-management and information technology havemade India a favored destination for the outsourcing of labor-intensive activities involved in clinical data management andbiometrics. MPCs have used these skills and secured high qualityoutput in chemistry, while obtaining cost savings of 80%.

Additionally, the Indian pharmaceutical industrys shift towards drugdiscovery has brought about improvements in chemistry research.

Owing to governmental tax incentives, pharmaceutical companiesspend heavily on R&D. This has resulted in an expansion of focustowards chemistry. The top 10 domestic companies with highest

revenues have more than doubled their R&D budgets from anaverage of 2.8% to 7% of sales. Several have doubled their R&Dpersonnel.


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Indian companies aresteadily attractingpre-clinical andclinical trials

More and more vendors now offer end-to-end solutions in chemistryresearch. This allows large-scale rather than piecemealoutsourcing.

Evolving Capabilities in Pre-clinical Development

MPCs are increasingly confident in outsourcing pre-clinicaldevelopment work to India. However, off-shoring of end-to-end workis still not a practical option in the short term, given Indias limitedfacilities for studying non-human primates and insufficientlaboratories that meet Good Laboratory Practice (GLP) standards.

Indian capabilities in pre-clinical trials have evolved primarilybecause of these advances implemented by domestic companies:

(i) Upgrading of laboratories and vivaria (the centers that manageand house research organisms and samples).

(ii) Development of expertise in conducting pharmacokinetic, drugmetabolism, and toxicity studies in rodents and, to a lesserextent, in canines.

As a result of Indias vast population, the frequency and magnitudeof patient enrollment per site is high. Further it is available topatients at 60-70% of cost. Moreover, treatment-navet of mostpatients facilitates trials.


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Contract Manufacturing Outsourcing (CMO) in India

The 2006 global pharmaceutical CMO market of $35 B is expectedto reach $ 48 B by 2010, at a CAGR of 8.2% during 20062010. In2006, chemical synthesis constituted close to 67% of total workoutsourced in the global contract manufacturing market.

The Indian CMO market stood at $ 620 M in 2006. It is expected tohave a CAGR of 41.7% and reach $ 2.5 B by 2010.

Chemical synthesis constituted 60% of the total outsourcing marketby CMOs in India, followed by formulation and packaging whichconstituted about 40%.

Exhibit 29: Value of the CMO segment of the Indianpharmaceutical outsourcing market (20042010) and itscontribution to the global outsourcing market

(1),(23)

Exhibit 29: Indias pharmaceutical outsourcing marketCMO (20042010(E))

PercentageoftheGlobalPharmaceutical

OutsourcingMarket1,245

2,500

620319

1.1%

1.8%

3.0%

5.3%

0

500

1,000

1,500

2,000

2,500

3,000

2004 2006 2008(E) 2010(E)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

CMO Market Value % Share of the Global

IndianPharmaceuticalCMOMarket($M)

Year

CAGR: 39.4%

CAGR: 41.7%PercentageoftheGlobalPharmaceutical

OutsourcingMarket1,245

2,500

620319

1.1%

1.8%

3.0%

5.3%

0

500

1,000

1,500

2,000

2,500

3,000

2004 2006 2008(E) 2010(E)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

CMO Market Value % Share of the Global

IndianPharmaceuticalCMOMarket($M)

Year

CAGR: 39.4%

CAGR: 41.7%

Exhibit 30: Activities in the CMO segment of the Indianpharmaceuticals outsourcing market (2006)

(1),(23)

Exhibit 30: Indias pharmaceutical outsourcing marketCMO (2006)

100% = $ 620 M

ChemicalSynthesis,

60%

Formulation&

Packaging,40%

100% = $ 620 M

ChemicalSynthesis,

60%

Formulation&

Packaging,40%

Other Services in India

Other services can be broadly classified into finance and

accounting, information technology, and various support servicesincluding sales and marketing, customer relationship management,human resources, and procurement.


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Exhibit 31: Value of market for supplementary services of Indiaspharmaceutical outsourcing market (20042010) and theircontribution to the global outsourcing market

(1),(14)

Exhibit 31: Indias pharmaceutical outsourcing marketother services (20042010(E))

2044

229

981.1%

1.8%

3.0%

5.3%

0

50

100

150

200

250

2004 2006 2008(E) 2010(E)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Revenue ($ M) % Share of the Global

PercentageoftheGlobalPharmaceutica

l

OutsourcingMarket

IndianPharmaceuticalOtherServices

Market($M)

Year

CAGR (%):48.3%

CAGR (%):51.0%

2044

229

981.1%

1.8%

3.0%

5.3%

0

50

100

150

200

250

2004 2006 2008(E) 2010(E)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Revenue ($ M) % Share of the Global

PercentageoftheGlobalPharmaceutica

l

OutsourcingMarket

IndianPharmaceuticalOtherServices

Market($M)

Year

CAGR (%):48.3%

CAGR (%):51.0%

In 2006 the global pharmaceutical outsourcing market for theseservices was $ 2.44 B, and is expected to reach $ 4.35 B by 2010,at a CAGR of 15.6% during 20062010.

The Indian pharmaceutical outsourcing market for other serviceswas $ 44 M in 2006, and is expected to reach $ 229 M by 2010, at aCAGR of 51% during the 20062010 period.

Exhibit 31 depicts the growth in other services of thepharmaceutical outsourcing market (20042010) and activity-wiseshare of the market in 2006.

Outsourcing Other Services Can Help MPCs Reach the LastMile

Outsourcing of sales and marketing activities can help MPCs utilizethe locally established sales and distribution networks of theirvendors, besides reducing sales and distribution costs. Activitiessuch as data-management, IT strategy and transformation, andcustomer relationship management are outsourced heavily due tothe established capabilities of business process outsourcing (BPO)service providers and the countrys vast talent pool.


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ConclusionGlobally and domestically, Indias pharmaceutical industry has hugeuntapped potential in terms of supply and demand. Acute diseasetherapeutics currently dominate the domestic market. This sectorshows 18% growth, closely followed by the 17% growth of thechronic disease market. The focus on the acute disease sector isattributable to Indias growing younger population which is lesssusceptible to chronic disease. In the long term, lifestyle-relatedchronic diseases are likely to pose the greatest challenge to theindustry, leading India to follow the pattern of developed countries,in which the chronic disease segment predominates.

The Indian market is presently dominated by Indian companies.Although this trend is expected to continue in near future, theforeseeable long term is likely to witness a growing presence ofglobal companies and the launch of their research products.

Indias suitability as an attractive location for the pharmaceuticaloutsourcing business owes to the low cost and high quality of itsproducts. Indian contract manufacturing is expected to register agrowth of 41.7% during 20062010. Even though further costadvantages may grab China a small share of Indias CMO pie,Indias US FDA-approved plants seem poised to attract substantialadditional business. Additionally, with Indian CROs expected togrow at 23.7% until 2010, India remains the stronger contender forR&D-based outsourced services.

High profit margins and growth opportunities in the Indianpharmaceutical industrys service sector make India a promisingfocus for global mergers and acquisitions. Global generic

companies already have some Indian API-based companies ontheir acquisition radar because of increasing demand for low-pricequality APIs.

Collaboration between Indian companies active in the US andEurope and research-based global companies would facilitate theentry of authorized generics into the market. The strong R&D base,reverse engineering skills, and wide domestic distribution ofcompanies like Ranbaxy and Dr. Reddys render them attractivecollaborators with research-based companies.

These unique features of the Indian pharmaceutical marketunderscore a large and growing domestic market as well as Indias

potentially vast role in the global pharmaceutical market.


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Appendices

Exhibit A: Activities outsourced by companies to India(1),(14)

Exhibit A: Companies that Outsourced Activities in India can be Listed as Below

Exhibit B: Company presence in various outsourced pharmaceutical activities to India(1),14)

Exhibit B: Company-wise analysis of tasks outsourced to India


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Exhibit C: Pharmaceutical industry value chain and activities

Exhibit C: Pharmaceutical Industry Value Chain

Sales&

Marketing

Manufacturing

ChemicalSynthesis

Formulation Packaging

Research Biology: Includes target identification and targetvalidation which involve choosing a molecule to target with adrug and testing the target and confirming its role in thedisease

Research Chemistry: Includes compound generation,screening and lead optimization which involve creatingmolecules/compounds and testing hundreds and thousands ofthem against the target to identify any that might be promisingand then further optimizing them to be more effective and safer

Pre-clinical Development: Includes lab and animal testing todetermine if the drug is safe enough for human testing

Clinical Development Phase I-III: Includes performing thetesting in humans by increasing the number of patients onwhich the drug is tested in each stage

Phase IV: The drug after being introduced to the market ismonitored and if there are any alterations that are essential, thedrug is brought back into the clinical development phases forfurther modifications

Chemical Synthesis:Includes extraction orfermentation which is used tomake the active drugsubstance or activepharmaceutical ingredient(API)

Formulation: Includes theprocesses to manufacturethe pill or dosage

Packaging: Includesprocesses like packagingand labeling of the final drug

Includessetting upthe salesanddistributionnetwork forcarrying outeffectivesales. Alsoincludes theadvertisingandpromotionof the drugs

ResearchBiology

ResearchChemistry

Pre-clinicalDevelopment Phases

Research and Development

PhaseIV

ClinicalDevelopment

I II III

Sales&

Marketing

Manufacturing

ChemicalSynthesis


Manufacturing

ChemicalSynthesis


Research Biology: Includes target identification and targetvalidation which involve choosing a molecule to target with adrug and testing the target and confirming its role in thedisease

Research Chemistry: Includes compound generation,screening and lead optimization which involve creatingmolecules/compounds and testing hundreds and thousands ofthem against the target to identify any that might be promisingand then further optimizing them to be more effective and safer

Pre-clinical Development: Includes lab and animal testing todetermine if the drug is safe enough for human testing

Clinical Development Phase I-III: Includes performing thetesting in humans by increasing the number of patients onwhich the drug is tested in each stage

Phase IV: The drug after being introduced to the market ismonitored and if there are any alterations that are essential, thedrug is brought back into the clinical development phases forfurther modifications

Chemical Synthesis:Includes extraction orfermentation which is used tomake the active drugsubstance or activepharmaceutical ingredient(API)

Formulation: Includes theprocesses to manufacturethe pill or dosage

Packaging: Includesprocesses like packagingand labeling of the final drug

Includessetting upthe salesanddistributionnetwork forcarrying outeffectivesales. Alsoincludes theadvertisingandpromotionof the drugs

ResearchBiology

ResearchChemistry



PhaseIV

ClinicalDevelopmentResearch

BiologyResearchChemistry



PhaseIV

ClinicalDevelopment

I II III

Exhibit D: Shows how India is poised to become a favorable outsourcing destination for activities in thepharmaceutical domain

Exhibit D: By 2015, India is poised to become a favorable destination for pharmaceuticaloutsourcing activities (illustrative)

HighLow

Shaded portion indicates the degree of attractiveness

Wage rate

Govt. support

Talent availability

Overall

Distribution Networkcapability/last mile reach

Time to market

Regulatory environment

Competency to deliver

Quality of skill

Key Factors India in 2007

Lower cost of skill across the value chainactivities

Increasing support for life sciences park

Increase in number of graduates relevant tothe pharmaceutical industry

All these factors combine to make Indiaan attractive pharmaceutical outsourcingd

ba indian pharmaceutical market research report 10 07

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