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92 CHAPTER - 4 INDIAN PHARMACEUTICAL INDUSTRY : AN OVERVIEW 4.1 INTRODUCTION: The pharmaceutical sector in India is one of the highly organized industrial sectors in India, characterized by a multitude of manufacturers. It is highly fragmented industry with more than 20,000 domestic players as manufacturers of end-use pharmaceuticals. Only about 330 of these are in the organized sector; out of which 45 units have an international presence. Due to the presence of low cost manufacturing facilities, educated and skilled manpower and cheap labor force, the industry is reaching new heights in the field of production, manufacturing and research & development 1 . The Indian pharmaceuticals industry grew from US$0.32 billion in 1980-81 to US$ 21.26 billion in 2009-10.The industry ranks 3rd in terms of volume of production (10% of global share) and 14th largest by value. As per the Directory of Pharmaceutical Manufacturing Units in India, 2007, published by National Pharmaceutical Pricing Authority, Government of India, there are 10563 pharmaceutical manufacturers across the country. Out of total 10563 pharmaceutical manufacturers in the country, 8174 unit (77.4%) manufacture formulation drugs and 2389 units (22.6%) are engaged in manufacturing of bulk drugs. ___________________________________________________________________ 1 see www.indianbusiness.nic.in

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CHAPTER - 4

INDIAN PHARMACEUTICAL INDUSTRY : AN OVERVIEW

4.1 INTRODUCTION:

The pharmaceutical sector in India is one of the highly organized

industrial sectors in India, characterized by a multitude of

manufacturers. It is highly fragmented industry with more than 20,000

domestic players as manufacturers of end-use pharmaceuticals. Only

about 330 of these are in the organized sector; out of which 45 units

have an international presence.

Due to the presence of low cost manufacturing facilities, educated and

skilled manpower and cheap labor force, the industry is reaching new

heights in the field of production, manufacturing and research &

development 1. The Indian pharmaceuticals industry grew from US$0.32

billion in 1980-81 to US$ 21.26 billion in 2009-10.The industry ranks

3rd in terms of volume of production (10% of global share) and 14th

largest by value.

As per the Directory of Pharmaceutical Manufacturing Units in India,

2007, published by National Pharmaceutical Pricing Authority,

Government of India, there are 10563 pharmaceutical manufacturers

across the country. Out of total 10563 pharmaceutical manufacturers in

the country, 8174 unit (77.4%) manufacture formulation drugs and 2389

units (22.6%) are engaged in manufacturing of bulk drugs.

___________________________________________________________________ 1 see www.indianbusiness.nic.in

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The state-wise distribution of number of formulation and bulk drugs

manufacturers show that most of the concentration is in the five states of

Maharashtra (29.7%), Gujarat (14.4%), West Bengal (7.2%), Andhra

Pradesh (6.9%) and Tamil Nadu (5.4%) which accounts for more than

60% of the total number of manufacturers in the country (see table 4.2

and graph 4.1).

Table : 4.1

State –wise Distribution of Pharmaceutical Manufacturing Units in India

State No. of Manufacturing Units %

Share

Cumulative

% Share Formulation Bulk Drugs Total

Maharashtra 1928 1211 3139 29.7 29.7

Gujarat 1129 397 1526 14.4 44.1

West Bengal 694 62 756 7.2 51.3

Andhra Pradesh 528 199 727 6.9 58.2

Tamil Nadu 472 98 570 5.4 63.6

Others 3423 422 3845 36.4 100.0

Total 8174 2389 10563 100.0 -

(Source: Bulk Drugs Manufacturing Association)

Graph : 4.1

Concentration of Pharmaceutical Manufacturing Units

in India-2007

29.7

14.47.26.95.4

36.4

Maharashtra

Gujarat

West Bengal

Andhra Pradesh

Tamil Nadu

Others

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4.2 GLOBAL PHARMACEUTICAL MARKET:

The global pharmaceuticals market generated total revenues of

$534.8 billion in 2005, this representing a Compound Annual Growth

Rate (CAGR) of 7.7 per cent for the five-year period spanning 2001-2005.

The Indian pharmaceutical industry is one of the worlds largest,

industries world-wide contributing to 8% in volume and 1% in value in

relation to global pharmaceutical sales. Of the total pharmaceutical

market, formulations account for 78% and bulk drugs for the balance

22%.

During 2000-05, the pharmaceutical market in India has showed

consistently strong growth and accounted for 6.6% share of the Asia-

Pacific market. The India’s pharmaceutical market had a total revenue of

$6.4 billion in 2005; represented by a CAGR of 9.5% for the five-year

period spanning 2001-2005. A study by the Indian Commission for

Health in India reveals that, in 2004 56% of the Indian health

expenditure in on drugs that worth around $17.9 billion but most of this

is on traditional medicines rather than allopathic drugs. In 2010, the

Indian pharmaceuticals market is forecast to have a value of $9.4 billion,

an increase of 47.1% since 2005. The CAGR of the market in the period

2005-2010 is predicted to be 8 per cent.

The Indian pharmaceutical companies have been doing extremely well

in developed markets of USA and Europe, to list a few, they are

Ranbaxy, Dr Reddy’s Labs, Wockhardt, Cipla, Nicholas Piramal and

Lupin. Globally, the pharmaceutical industry ranks 4th in terms of

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volume and 13th in terms of value. The leading players in the Indian

pharmaceuticals market are Cipla, GlaxoSmithKline, Ranbaxy, Nicholas

Piramal, Sun Pharma, Pfizer,Dr Reddy’s, Zydus Cadila, Torrent, Sanofi-

Aventis and Aristo2 .

Globally, at present, the Indian pharmaceutical industry ranks 4th in

terms of volume (8% share of global sales) and 13th in terms of value (1%

share of global sales). Indian pharmaceutical industry is a highly

organized sector and it is estimated to be worth US$ 4.5 billion, growing

at over 9% annually. Currently this sector is in the front position of

India’s science based industries in the complex field of drug manufacture

and technology. Indian pharmaceutical sector’s value of output grew

more than tenfold from US$ 1.1 billion in 1990 to over US$ 12.4 billion

during 2005-06 due to low costs, knowledge skills, increasing number of

enterprises, improved quality and buoyant demand—both in domestic

and international market.

4.3 HISTORY OF INDIAN PHARMACEUTICAL INDUSTRY:

Indian pharmaceutical industry started its journey in 1903 when

Professor P.C. Roy formed Bengal Chemical and Pharmaceutical Works in

Kolkata. During the first half of the 20th century the colonial government

was not interested in local production, so India remained largely

dependent on the UK, France and Germany for medicines.

_____________________________________________________________________ 2 see www.researchandmarkets.com, September 2006

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The new and independent government in 1947 emphasized on

industrialization to achieve self-reliance and, therefore, invested heavily

in pharmaceuticals among other industries and reduced import of

medicines. The Government took its first concrete steps towards

selfreliance in pharmaceutical sector in 1954 with the establishment of

Hindustan Antibiotics Ltd. (HAL), and in 1961 by establishing Indian

Drug and Pharmaceuticals Ltd. (IDPL).

Until 1991, India’s industrial policy regime was amongst the most

inward-looking anywhere. But in June 1991 the scenario had drastically

changed and marked the turning point of India’s policy regime towards

the world. As a part of the overall integration with the global economy,

India has also accepted GATT/WTO, Intellectual Property Rights (IPR)

regime. In the past, Indian pharmaceutical companies have earned huge

revenues by selling copies of Western companies’ patent product. In

2005, this practice has come to an end with implementation of stronger

intellectual property (IP) protection laws.

The Indian pharmaceutical sector has come a long way, being almost

non-existing during 1970, to a prominent provider of health care

products; meeting almost 95% of the country’s needs. Currently the

Indian pharmaceutical sector is valued at approximately $8 billion

(Tanuja Talwar and Pooja Sareen, Nov2010). It ranks 3rd by volume of

production (10% of global share) and 14th by value (1.5% of global share)

Nearly 40% of the world’s bulk drug requirement is met by India. Today

the Indian pharmaceutical sector is truly global evidenced by some big

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ticket acquisitions of foreign companies like Sun Pharma’s acquisition of

Taro Pharma, Wockhardt’s acquisition of Negam Labs, Nicholas-

Piramal’s acquisition of Abbott Labs, DRL’s acquisition of Betapharm etc.

The government started to encourage the growth of drug

manufacturing by Indian companies in the early 1960s, and the Patents

Act, in 1970, removed composition patents from food and drugs, and

though it kept process patents, these were shortened to a period of five to

seven years. The lack of patent protection made the Indian market

undesirable to the multinational companies that had dominated the

market, and, while they streamed out, Indian companies started to take

their places. They carved a niche in both the Indian and world markets

with their expertise in reverse-engineering new processes for

manufacturing drugs at low costs.

4.4 GROWTH OF INDIAN PHARMACEUTICAL INDUSTRY:

Since independence, the pharmaceutical industry was dominated by

Multinational Companies (MNCs). The market share of Multinational

Companies was almost 100% at the time of Independence. Considering

the healthcare of the Indian Public, the Govt. of India encouraged the

domestic pharmaceutical companies in India. When the international

norms recognized the product patent, the government of India enacted

the Indian Patent Act in 1970 (process patent), with the objectives of

allowing the domestic companies to grow. The Indian Patent Act

recognized the “Process” to manufacture a product and not the end

“Product”. Indian companies took advantage of the Patent Act and

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succeeded in reducing molecules, which were under Patent Production or

at a cost that was lower than the original research cost. By taking the

cost advantages, the Indian Pharmaceutical companies fixed their prices

lower than the prices fixed by the Multinational Companies

manufacturing the drugs. Apart from the Indian Patent Act 1970, DPCO,

FERA and increased imports tariffs also helped the growth of the

domestic pharmaceutical companies. With a view to the above effect, the

Multinational Companies’ market share, decreased from 100% in 1947

to 80% in 1970 and 33% in 1991 with corresponding increase in

domestic company’s market share (see table 4.2).

Table : 4.2

Market Share of Indian Pharmaceutical Industry (since Independence)

Market Share���� Multi-National

Companies

Domestic

Companies Year

1947 100% -

1970 80% 20%

1991 onwards 33% 67%

(Source:Annual Report 2008-09, Department of Pharmaceuticals, GOI)

Till 1970s India’s pharmaceuticals market was mostly supplied by

large MNCs. Low-priced bulk drugs were only produced domestically with

the help of the World Health Organisation. These state-run firms

provided the foundation for the sector’s growth since the 1970s. Back

then, India’s government aimed to reduce the country’s strong

dependence on pharmaceutical imports by flexible patent legislation and

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to create a self-reliant sector. In addition, it introduced high tariffs and

limits on imported medicines and demanded that foreign pharmaceutical

companies reduce their shares in their Indian subsidiaries to two-fifths.

This made India a less attractive location for international companies,

many of which left the country as a consequence.

Table : 4.3

Growth of Indian Pharmaceutical Sector

Year Growth of Indian Pharmaceutical Sector(Rs. Crores)

Domestic Market Exports Imports Total Market Size

2000-01 - - - -

2001-02 - - - -

2002-03 30365 12826 2865 42326

2003-04 32575 15213 2956 47332

2004-05 34128 17857 3139 52029

2005-06 39989 22216 4515 62566

2006-07 45367 24942 5867 68442

2007-08 50946 30760 6734 78610

2008-09 55454 38433 8552 89335

2009-10 - *42154 * 9828 -

(Source: Annual Report 2008-09, Department of Pharmaceuticals, GOI) * indicates projected data by Directorate General of Commercial Intelligence and Statistics,kolkota

The Indian pharmaceutical sector covers more than ninety five

percent of domestic pharmaceutical needs and witnessed tremendous

growth over the past years. The domestic market size increased from

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Rs.30,365 crores in 2002-03 to Rs.55,454 crores in 2008-09(see

table:4.3).

Among the third world countries, it is ranked very high in terms of

technology, quality and the product mix of medicines manufactured.

Today, most of the medicines is produced locally. The highly fragmented

Indian pharmaceutical industry has around 30,000 players, out of which

330 are in the organized sector ( Sudarshan Maity, Nov,2010).

4.5 INDIAN PHARMACEUTICAL INDUSTRY AND TRIPS:

With the economic reforms in India that resulted in globalization India

became a signatory to GATT and also TRIPS. Hence India was under

compulsion to introduce product patent by 1st Jan 2005, giving a

moratorium period of 10 years from 1st Jan 1995 to 31st Dec 2004. In

view of the TRIPS agreement the Indian pharmaceutical companies have

gone for major structural changes starting from 1st Jan 1995 in the form

of Merger, Acquisition, Consolidation and investing more on Research &

Development. All these above measures were taken for the purpose of

retaining the current market share, export share, inventing new

products, reducing the cost and improving the quality to international

levels and betterment of Research and development. Indian

Pharmaceutical Industry started thinking internationally and acting

globally. It shifted from reengineering to invention of new products, from

process to product patent. Hence, there was a conversion of business risk

and financial risk into product risk. In this changing situation, a study

on the stand of the pharmaceutical industry and the change in capital

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structure they have undergone in order to face the product patent regime

with effect from 1st Jan 1995 is very essential.

4.6 INDIAN PHARMACEUTICAL INDUSTRY AND R & D :

One of the distinctive features of the big Pharmaceutical firms is their

high level of investments in research and development. The expenditure

made by by In-house R&D units in industry has consistently increased.

Through industry efforts, many new medicines and equipments have

been developed and marketed. These drugs hadled to striking declines in

mortality from heart diseases and strokes over the last four decades. A

few years ago, investment in R&D was as low as 0.001% of the total

global R&D, but now companies are focusing on drug discovery and

R&D. The investment of companies in R& D increased in the recent years

and there are 10 top pharmaceutical companies in India that invested

more than Rs.100 crores in R&D during 2008-09 (see table 4.4).

Table 4.4 Investment in R & D by Top Ten Indian Companies in 2008-09 (amount in Rs.Crores)

S.No. Company Names R & D Expenses

Sales R&D expenses as % of Sales

1. Ranbaxy Laboratories Ltd. 460.5 3,656.2 12.6

2. Dr. Reddy’s Laboratories Ltd. 292.8 4,146.2 7.1

3. Sun Pharma Inds Ltd. 188.3 1,722.1 10.9

4. Cipla Ltd. 175.7 3,658.0 4.8

5. Cadila Health Care Ltd. 161.8 1,758.5 9.2

6. Lupin Ltd. 142.1 2,051.7 6.9

7. Wockhardt Ltd. 126.7 1,189.0 10.7

8. Torrent Pharmaceutical Ltd. 112.1 8,95.2 12.5

9. Panacea Biotech Ltd. 107.2 843.0 12.7

10. Aurobindo Pharma Ltd. 107.2 1,991.0 12.7

Source: (www.indiastat.com)

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The key to success in this industry is the research and development of

drugs and the approval of the patent from Food and Drug Association

(FDA) of USA for the world market. Research and Development is the

starting point of the industry value chain and also the most important

value creator. India is putting efforts to develop modern technology in

pharmaceutical industry. The key issue in promoting research and

development is to induct technology at par with the advanced countries.

The Government of India is encouraging private and public sectors

through Public–Private Partnership (PPP) model in terms of ownership of

assets and responsibility and also in attracting the foreign investors to

increase FDI inflows through automatic route in the pharmaceutical

sector for research and development. In recent years some positive

initiatives and measures have been taken by the Government. Important

among them are:

• Recognition of the pharmaceutical industry as a knowledge-based

industry.

• Reduction in interest rates for export financing.

• Additional deduction in computation of tax liability for research and

development expenses, and also tax-holiday facility.

• Reduction in the price control of pharmaceuticals.

The Indian pharmaceutical industry is taking full advantage of

benefits offered by the Government and has been allocating money to

research and development. The industry’s focal points are drug discovery

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and patent approval, development of drug delivery systems, and

biotechnology and bioinformatics.

There is a visible paradigm shift in the sense that now the world is

moving from a “Business process outsourcing” cult to “Knowledge

process outsourcing”. The emphasis is more on the knowledge so that the

intellectual capital among the employees is developed into the

organizations. One such area is the “research and development” done in

the pharmaceutical industry in formulation of cost effective drugs. This

paper attempts to gauge the importance of this knowledge capital as

against the structural capital employed (CE).

The Intellectual Capital in pharmaceutical industry can be traced

into three important aspects (Shurveer S. Bhanawat and Nidhi

Bhanawat, Nov,2011):

1. The skilled manpower which is the core for R&D activities of these

firms, the expenses the firms makes on their training and

development, etc. these are integral part of human capital.

2. The huge investment that the firm makes on the R&D infrastructure,

this is an inseparable component of the structural capital.

3. The continuous efforts of the firm in developing new molecules result

in a substantial patent ownership in these firms. This intellectual

property forms a part of the organizational assets and capital.

Since these industries invest so much of their resources on these, it

is necessary to study their relative importance and also their contribution

to the overall performance of these firms.

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4.7 SIX SIGMA IN INDIAN PHARMACEUTICAL INDUSTRY:

Six Sigma has become a dynamic methodology, which has been

utilized by a number of companies worldwide so as to improve processes,

reduce the costs so as to increase profitability, and growth of the

company in long run. Motorola first initiated it in 1980. Six Sigma is a

Greek letter, which stands for standard deviation. The standard deviation

measures the variation in a process. Six Sigma is powerful data driven

management methodology that delivers validated improvement in

profitability and productivity.

In a pharmaceutical company, where a large amount of money is

invested in the Research and Development work, implementation of Six

Sigma can work wonders not only in reducing unnecessary costs but also

in the improvement of the processes involved so as to increase its

efficiencies, thus, ultimately, resulting in the increase of profitability of

the organization. Pharma Business leaders and regulators increasingly

understand the importance of implementation of the Six Sigma and it is

all set to revolutionize the pharma manufacturing sector. Implementation

of Six Sigma in a pharmaceutical company like Cipla, Ranbaxy etc in

India will surely help the company to utilize its resources in a proper

manner, which will be significantly reflected in their Income Statement

with increasing profits ( Arindam Banerjee, Nov,2010).

In a pharmaceutical company Six sigma can be utilized in every span

of area of the company like Production, Research and Development,

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Accounting and Finance, Maintenance etc. Some of the areas where Six

Sigma can be utilized are:-

i. Reducing lead-time for a product development

ii. Reducing Billing Errors

iii. Increasing Machine Efficiency

iv. Increasing and Enhancing the process of new Technology and

equipment Reducing defects and a proper control and check on

Quality level

v. Having a proper Inventory Control System in the organization

vi. Increase in the quality of the customer service.

vii. Improvement in the process of Marketing andSales and Logistics.

The Indian Pharmaceutical Companies which have applied six sigma

are as follows:

1. Eli Lilly

2. Zydus Cadila

3. Dr. Reddy Laboratories Limited

4. Pfizer

4.8 MERGERS AND ACQUISITIONS IN INDIAN PHARMACEUTICAL INDUSTRY:

The Mergers and Acquisitions/ Licensing Deals in Indian

Pharmaceutical Industry are as follows:

1. Orchid Chemicals & Pharmaceuticals Ltd, a Chennai-based

pharmaceutical company, has entered into an agreement to acquire

US-based generic marketing company Karalex Pharma LLC, in an all-

cash deal.

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2. In May 2010, Glenmark Pharmaceuticals licensed its chronic pain

molecule to Sanofi Aventis for a cumulative deal of US$ 321.7 million.

3. Dr Reddy’s Laboratories has signed an agreement with Alchemia, an

Australian pharmaceutical company, for marketing

Fondaparinuxsodium (which is used for the treatment and prevention

of deep vein thrombosis (DVTs)) in all markets outside North America.

According to the agreement, Dr Reddy’s will pay to Alchemia a royalty

on sales at an agreed proportion.

4. Super Religare Laboratories (SRL), a diagnostic chain, has signed a

definitive agreement to buy Piramal Healthcare’s diagnostic chain for

US$ 128.6 million, making it the country’s largest diagnostic

player.(Sudarshan Maity, Nov 2011)

Table 4.5 The Major Deals between Domestic Companies & MNC’s during 2006 to 2010

S.No Domestic Operation Acquired

MNC Year

Amount $ million

1. Matrix Lab Mylan Inc 2006 736

2. Dabur Pharma Fresenius Kabi 2008 219

3. Ranbaxy Daiichi Sankyo 2008 4.6

4. Shanta Biotech Sanofi Aventis 2009 783

5. Orchard Chemicals

(injectible business) Hospira 2009 400

6. Piramal Health Care

(domestic formulations)

Abbott

Laboratories 2010 3.72

(Source: www.economictimes.indiatimes.com)

4.9 GLOBAL RECESSION AND INDIAN PHARMACEUTICAL INDUSTRY:

Despite global recession and financial crisis, during the year 2008-09

and 2009-10, pharmaceutical industry managed to expand its revenue.

The reasons behind the growth of pharmaceutical industry are the strong

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domestic demand, growing preference for generic version drugs

worldwide and favourable rupee-dollar exchange rate. The aggregate

income of the drugs and pharmaceutical companies for the first two

quarter of 2010-11 grew by 13% and 7.8%, respectively, as compared to

the previous year. As per the report of Centre for Monitoring Indian

Economy (CMIE), the estimated growth in aggregate income for the next

two quarters would be 9.5% and 10.2%, respectively (Parimal Kr. Sen,

Indrani Saha and Palash Garani, Nov,2011).

4.10 FOREIGN DIRECT INVESTMENT IN INDIAN PHARMACEUTICAL SECTOR:

The Indian Pharmaceutical Sector ranks amongst ranks amongst the

top twenty sectors attracting FDI inflows. During the early years of

liberalization, it ranked amongst top 10 sectors attracting FDI inflows.

but later on of 199. The trends of FDI inflows in the Indian

pharmaceutical sector , growth rate of FDI inflows into the sector, share

of pharmaceutical FDI in the total FDI inflows, impact of FDI inflows in

India on FDI in pharmaceutical sector and Government initiative

regarding FDI have been discussed below.

4.10.1 Trends of FDI Inflows in India and Pharmaceutical Sector:

The FDI inflows increases from Rs.409 crores in 1991-92 to Rs.13,548

crores in 1997-98 but further decreases to Rs.10,311crores during 1999-

2000 (see Table 4.6 and Graph 4.2) For the years from 2000-01 to 2009-

10, the FDI inflows in India is on an increasing trend except for the years

2002-03 and 2003-04. The FDI inflows in India increased from Rs.12,645

crores in 2000-01 to Rs.19,361crores but declines to Rs.14,932 crores in

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2002-03 and Rs.12,117 crores in 2003-04. The FDI inflows further

increased to Rs.17,138 crores in 2004-05 and Rs.17,138 cores in 2009-

10. .During the year 2008, FDI inflows are Rs.98,664 crores with an

increase of more than Rs.18000 crores over the previous year, which

reveals that there is no influence of global financial crisis on FDI inflows

in India.

As far as quantum of FDI is concerned, the IPI attracts Rs 48 crores of

FDI in 1991-92 which gradually decreases to 8 crores in 1992-93Rs. 254

crores in 1993-94 and Rs.228 Crores in 1999-2000 but slightly

decreases to 226 crores in 2000-01 which further increases to 288

crores in 2001-02. FDI declines to 192 crores in 2002-03

The FDI in IPI is high during the year 2004-05 , 2007-08 and

2009-10 amounting to Rs.1343 crores, Rs.1326 crores and Rs.1005

crores respectively.

The Compounded Annual Growth Rtae (CAGR) calculated as

[CAGR= (Ending Value/Starting Value) ^1/n -1] of FDI inflow in India

is 35.05% and FDI inflows in Indian Pharmaceutical Sector is 17.36%.

The FDI in IPI during the year 1991-92 is 11.75 % of the total FDI

inflows in to the country, but gradually decreases to 0.7% in 1992-93,

7.6% in 1993-94 and 0.7% in 1994-95 (see Table 4.6 and Graph 4.2). FDI

in IPI as a percentage of total FDI inflows showed a higher percentage in

the years 2003-04 and 2004-05 and 2005-06 amounting to 4.1%, 7.8%

and 3.1% respectively. FDI further declined to 0.6% in 2008-09 and 0.8%

in 2009-10. It is also evident from the table that the rate with which FDI

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inflows are increasing in India is higher than that of FDI inflows in

Indian Pharmaceutical Industry.

Table: 4.6

Trends of FDI inflows in India and Indian Pharmaceutical Sector

Year FDI inflows in

India (Rs.Crores)

FDI inflows in Pharmaceutical Sector

(Rs.Crores)

Share of Pharmaceutical FDI in total FDI Inflows (%)

1991-1992 409 48 11.7

1992-1993 1,094 08 0.7

1993-1994 2,018 154 7.6

1994-1995 4,312 31 0.7

1995-1996 6,916 177 2.6

1996-1997 9,654 167 1.7

1997-1998 13,548 125 0.9

1998-1999 12,343 122 0.9

1999-2000 10,311 228 2.2

2000-2001 12,645 226 1.7

2001-2002 19,361 288 1.4

2002-2003 14,932 192 1.2

2003-2004 12,117 502 4.1

2004-2005 17,138 1343 7.8

2005-2006 24,613 760 3.1

2006-2007 70,630 970 1.3

2007-2008 98,664 1326 1.3

2008-2009 122,919 810 0.6

2009-2010 123,378 1005 0.8

CAGR 35.05% 17.36% -

1/N 0.1 0.1 -

(Source: Department of Industrial Policy and Promotion, Ministry of commerce and Industry, GOI)

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Graph: 4.2

Trends of FDI inflows in India and Pharmaceutical Sector

020000400006000080000

100000120000140000

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-200

0

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

Years

Am

ount of FDI in

flow

s

(Rs.

Cro

res)

FDI in India FDI in Indian Pharmaceutical Sector

4.10.2 Growth of FDI Inflows in India and Pharmaceutical Sector:

The growth in FDI inflows in India decreased from 167.48% in 1992-93 to

-16.46% in 1999-2000, but further increases to 53.11% in 2001-02 (see

Table 4.7). The growth in FDI decreased from 53.11% in 2002 to -22.88%

in 2003 and -18.85% in 2004 but further increased to 186.96% in 2007

and 0.37% in 2010. the growth in FDI inflows is recorded very high

during 2006-07 and negative during 2003 and 2004.

The growth rate of FDI inflows in the Indian Pharmaceutical Sector

shows a varying trend. It increases from -83.33% in 1992-1993 to 1825%

in 1993-94 and further decreased to -2.2% in1998-99 and decreases

from 1.7% in 2000-01 to 1.2% in 2002-03, but increased to 4.1% in

2003-04 and 7.8% in 2004-05. The pharma FDI again gradually

decreased to 0.6% in 2008-09 and 0.8% in 2009-10..

The growth rate of FDI in IPI is high during the years 2003-04 and

2004-05 to an extend of more than 100% over the previous year.

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Table: 4.7

Growth rate of FDI Inflows in India and Pharmaceutical Sector

S.No Year Growth rate of FDI(%) Growth rate of FDI in IPI(%)

1. 1991-1992 - -

2. 1992-1993 167.48 -83.33

3. 1993-1994 84.46 1825.00

4. 1994-1995 113.68 -79.87

5. 1995-1996 60.39 470.97

6. 1996-1997 39.59 -5.65

7. 1997-1998 40.34 -25.15

8. 1998-1999 -8.89 -2.40

9. 1999-2000 -16.46 86.89

10. 2000-2001 22.64 -0.88

11. 2001-2002 53.11 27.43

12. 2002-2003 -22.88 -33.33

13. 2003-2004 -18.85 161.46

14. 2004-2005 41.44 167.53

15. 2005-2006 43.62 -43.41

16. 2006-2007 186.96 27.63

17. 2007-2008 39.69 36.70

18. 2008-2009 24.58 -38.91

19. 2009-2010 0.37 24.07

(Source: Department of Industrial Policy and Promotion, MCI, GOI)

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14.10.3 Impact of FDI inflows in India on FDI Inflows in the Pharmaceutical Sector:

A regression analysis was done to assess the effect of Total FDI

inflows in India on FDI inflows in The Indian Pharmaceutical Sector. FDI

in India is considerd as independant variable and FDI in Indian

Pharmaceutical Sector as a dependant variable. The R Square value is

.512 which means that FDI inflows in India marginally effects the FDI

inflows in the Indian Pharmaceutical Sector. The beta(t) is 4.221 with a

significance value of .001 which means that FDI in India significantly

influences FDI in Indian Pharmaceutical Sector.

Table:4.8 Regression analysis to assess the impact of FDI inflows in India on FDI

inflows in the Pharmaceutical Sector

Regression Table:4.8a

Variables Entered/Removedb

FDIa . EnterModel1

VariablesEntered

VariablesRemoved Method

All requested variables entered.a.

Dependent Variable: IPIb.

Table:4.8b

Model Summary

.715a .512 .483 319.3968Model1

R R SquareAdjustedR Square

Std. Error ofthe Estimate

Predictors: (Constant), FDIa.

Table:4.8c

ANOVAb

1817408 1 1817407.697 17.815 .001a

1734243 17 102014.290

3551651 18

Regression

Residual

Total

Model1

Sum ofSquares df Mean Square F Sig.

Predictors: (Constant), FDIa.

Dependent Variable: IPIb.

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Table:4.8d

Coefficientsa

209.828 92.256 2.274 .036

7.791E-03 .002 .715 4.221 .001

(Constant)

FDI

Model1

B Std. Error

UnstandardizedCoefficients

Beta

StandardizedCoefficients

t Sig.

Dependent Variable: IPIa.

i. INDIAN PHARMACEUTICAL INDUSTRY AND FDI: GOVERNMENT INITIATIVE:

Government has allowed hundred per cent foreign direct investment

(FDI) under the automatic route. At present the key players in Indian

pharmaceutical sector are Ranbaxy Laboratories Limited, the biggest

pharmaceutical manufacturing company in India, Dr. Reddy’s

Laboratories, the manufacturers and marketers of a wide range of

pharmaceuticals both in India and abroad, Clipla, the Indian

pharmaceutical company renowned for the manufacture of low cost anti

AIDS drug, Nicholas Piramal, the second largest pharmaceutical

healthcare company in India, GlaxoSmithKline(GSK), a UK based world’s

second largest pharmaceutical company, and Zydus Cadila. The drugs

and pharmaceuticals sector including those involving use of recombinant

technology (Department of Indiustrial Policy and Promotion).

The drugs and pharmaceuticals sector has attracted FDI worth US$

1707.52 million between April 2000 and April 2010, according to data

published by the Department of Industrial Policy and Promotion (DIPP) in

April 2010.The Government plans to set up a US$ 639.56 million venture

capital (VC) fund to give a boost to drug discovery and strengthen the

pharmaceutical infrastructure in the country.

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4.11 INDIAN PHARMACEUTICAL INDUSTRY- A SWOT ANALYSIS:

The domestic pharmaceutical industry has so far enjoyed an edge over

international peers due to the absence of product patent in the country.

However, with the product patent regime coming in, the Indian pharma

majors felt a threat of severe competition and shrinkage in margin. Thus,

to strengthen their footing in the competitive product patent era and to

grab a potential market share in the global generic market, at a time

when and over 75 per cent of the global drugs are going off patent in

2005, many pharma companies have increased R&D investments

significantly. For instance, the R&D expense of Lupin increased by 222

per cent to Rs 17.29 crore in the quarter ended 4 June. During the

period, the R&D expenses of Nicholas Piramal, Dr Reddy’s lab and

Ranbaxy also increased by 71, 50 and 16 per cent to Rs 9.36 crore, Rs

48.62 crore and Rs 56.5 crore, respectively. This is an indication of

increasing importance of Intellectual Capital (IC) in these firms, therefore,

in the emerging scenario; it further necessitates the need for Intellectual

Capital (IC) measurement and reporting. The SWOT analysis of the

Indian pharmaceutical industry is given below:

a. Strengths

• Cost competitiveness

• Well developed industry with strong manufacturing base

• Access to pool of highly trained scientists, both in India and abroad

• Strong marketing and distribution network

• Rich biodiversity

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• Competencies in chemistry and process development

b. Weaknesses

• Low investments in innovative R&D

• Lack of strong linkages between industry and academia

• Low medical expenditure and healthcare spend in the country

• Production of spurious and low quality drugs tarnishes the image of

industry at home and abroad

• Shortage of medicines containing psychotropic substances

c. Opportunities

• Significant export potential

• Licensing deals with MNCs for NCEs and NDDS

• Marketing alliances to sell MNC products in domestic market

• Contract manufacturing arrangements with MNCs

• Potential for developing India as a centre for international clinical trials

• Niche player in global pharmaceutical R&D

• Supply of generic drugs to developed markets

d. Threats

• Product patent regime poses serious challenge to domestic industry

unless it invests in research and development

• R&D efforts of Indian pharmaceutical companies hampered by lack of

enabling regulatory requirement

• Drug price control order puts unrealistic ceilings on product prices

and profitability and prevents pharmaceutical companies from

generating invest able surplus

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• Lowering of tariff protection

• The new MRP-based excise duty regime threatens the existence of

many small scale pharma units (Sudarshan Maity, 2010)

4.12 Brief Profile of the Select-FDI Based Companies in the Indian Pharmaceutical Sector:

The list of select FDI-based companies considered for analysis in this

study are as follows:

i. Abbott India Ltd.

ii. Astrazeneca Pharma India Ltd.

iii. Aventis Pharma Ltd.

iv. Biocon Ltd.

v. Fresenius Kabi Oncology Ltd.

vi. Fulford (India) Ltd.

vii. Glaxosmithkline Pharmaceuticals Ltd.

viii. Kerala Ayurveda Ltd.

ix. K D L Biotech Ltd.

x. Matrix Laboratories Ltd.

xi. Merck Ltd.

xii. Novartis India Ltd.

xiii. Pfizer Ltd.

xiv. Ranbaxy Laboratories Ltd.

xv. Sandu Pharmaceuticals Ltd.

xvi. Solvay Pharma India Ltd.

xvii. Wanbury Ltd.

xviii. Wyeth Ltd

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4.12.1 Abbott India Ltd:

Abbott India Ltd. was incorporated on 22nd August, 1944 under the

Companies Act, 1913 as Boots Pure Drug Company (India) Limited. On

1st November, 1971, its name was changed to The Boots Company (India)

Limited. On 1st January, 1991 it was again changed to Boots

Pharmaceuticals Limited. On 31st October, 1995 the name was changed

to Knoll Pharmaceuticals Limited, thereafter to Abbott India Limited on

1st July, 2002.

Abbott India Ltd has a strong brand equity and high esteem in the

market. To provide service to the customers, Abbott India has a network

of 18 distribution points, which cater to 11,000 stockists and 70,000

retailers.

4.12.2 Astrazeneca Pharma India Ltd:

Astrazeneca Pharma India Ltd was incorporated on 11th July,1979

and got the Certificate of Commencement of Business on 6th November,

1979. It was promoted jointly by Astra Pharmaceuticals AB, Sweden

(Astra) and IDL Chemicals Ltd., Hyderabad (IDL).In the year 1980, the

Company entered into a technical collaboration with Astra

Pharmaceuticals AB, Sweden for the supply of information and know-

how, manufacturing process and technical data for the manufacture of

basic drugs, formulations, fine chemicals and industrial chemicals.

AstraZeneca India is the only multinational pharmaceutical firm in India

that offers an integrated approach to the discovery, development and

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marketing of medicines. It is involved in both the manufacturing and

marketing of medicines.

4.12.3 Aventis Pharma Ltd:

Aventis Pharma Limited was incorporated in May 1956 under the

name Hoechst Fedco Pharma Private Limited. Over the years, its name

was changed to Hoechst Pharmaceuticals Private Limited, Hoechst India

Limited and Hoechst Marion Roussel Limited. Sanofi-aventis, one of the

world's leading pharmaceutical companies, and its 100%

subsidiary, Hoechst GmbH, are the major shareholders of Aventis

Pharma Limited and together hold 60.4% of its paid-up share capital.

Aventis Pharma Limited has two state-of-the-art manufacturing

facilities, one at at Ankleshwar, Gujarat (chemistry and pharmaceuticals)

and the other at Verna, Goa (pharmaceuticals), incorporating the latest

designs and processes in manufacturing. Both the sites have been

identified as global sourcing units.

4.12.4 Biocon Ltd:

Biocon is India's first biotechnology company, established

in 1978. It is India's first biotechnology company to export

microbial enzymes to USA and Europe. It is the first biotechnology

company to receive ISO - 9001 certification in India. Syngene, a Biocon

subsidiary, is India's first custom research company in drug discovery. It

is the first Indian company to be approved by US FDA for the

manufacture of lovastatin, a cholesterol-lowering molecule and the first

company, globally to manufacture human insulin, INSUGEN. It

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acquired 78% of stake in a German pharmaceutical company i.e.

AxiCorp GmbH for a consideration of €30 million in 2008. It is ranked

among the top 20 biotechnology companies and 7th largest biotech

employer in the world

4.12.5 Fresenius Kabi Oncology Ltd:

Fresenius Kabi Oncology Limited is one of the leading companies for

cancer research and anti-cancer products. Leveraging the global outreach

through integration with Fresenius Kabi, Fresenius Kabi Oncology

Limited is benchmarking the oncology excellence with world class

production, state-of-the-art manufacturing and research & development

facilities.

In the year 2003, Dabur India Ltd., spins off the Pharmaceutical

Business into Dabur Pharma Ltd and in 2008, the Bruman family,

promoters of the Dabur Pharma Group divested its entire stake in Dabur

Pharma Ltd to Fresenius Kabi, a business segment of Fresenius SE, a

German multinational company with business interests across the globe.

4.12.6 Fulford (India) Ltd:

Fulford was incorporated in the year 1948. It was then registered

under the name C E Fulford and was 100% owned by C E Fulford

Limited of UK. Until 1968, the company was engaged in the business of

manufacturing and marketing pharmaceutical consumer products,

including cough tablets and herbal ointments, marketed under the

trademarks – PEPS and ZAMBUK respectively. On July 1, 1968,

Schering-Corporation, USA, an international research-based

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pharmaceutical company acquired 100% ownership of C. E. Fulford

Limited, UK. Subsequently, a manufacturing plant was set up at Andheri

for the manufacture of pharmaceutical products. The company’s

operations commenced with the introduction of an antibiotic injection

under the brand name GARAMYCIN and an antifungal skin solution

under the brand name TINADERM. In 1971, Schering Corporation

merged with Plough Inc., a mass merchandiser of popular consumer

products and Schering-Plough Corporation was formed. Schering-Plough

has its headquarters and executive offices at New Jersey, USA. In

August 1981, the company changed its status from a private company to

a public company and from January 1, 1982 diluted the foreign

shareholding from 100% to 40%, to fall in line with the prevailing

government policy. It is a subsidiary of Schering-Plough Corporation,

USA, a leading research-based company, engaged primarily in the

discovery, development, manufacturing and marketing of pharmaceutical

and health care products worldwide.

4.12.7 Glaxosmithkline Pharmaceuticals Ltd:

It was established in the year 1924 in India. GlaxoSmithKline

Pharmaceuticals Ltd. (GSK Rx India) is one of the oldest pharmaceuticals

company in India and employs over 3500 people. Globally, it is a USD 45

billion, leading, research-based healthcare and pharmaceutical company.

In India, it is one of the market leaders with a turnover of Rs. 2003 crore

and a share of 5.0%. The mission of GSK is to improve the quality of life

by enabling people to do more, feel better and live longer.

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4.12.8 K D L Biotech Ltd:

The Company was incorporated under the name of Kopran Drugs

Private Limited, on 12th August 1986 as a private limited company under

the Companies Act, 1956 with Registrar of Companies, Maharashtra. The

Target Company was converted into a public limited company on 2nd

July 1998, pursuant to which the name was changed to Kopran Drugs

Limited. The name of the company was again changed from Kopran

Drugs Limited to KDL Biotech Limited on 18th July 2000.

4.12.9 Kerala Ayurveda Ltd:

One of the Largest manufacturer of Ayurvedic medicine in compliance

with Good Manufacturing Practice (GMP). It has wide product range of

350, for various ailments. Kerala Ayurveda was founded in Aluva, Kerala

in 1945 by Late Vaidiyan KGK Panicker, the renowned Ayurvedacharya.

Now, more than half a century later, his inspired creation epitomizes all

that is modern and state-of-the-art in Ayurveda. Kerala Ayurveda has

over 75+ Ayurvedic doctors, graduates and post-graduate medical staff,

with several years of experience under its network. Kerala Ayurveda

operates a chain of 27 clinics and 3 Ayurveda Hospitals located across

India, and a wellness resort in Bangalore, “Ayurvedagram”.

KAL's manufacturing facility at Athani, Kerala, produces a range of

350 classical and proprietary Ayurvedic medicines, including therapeutic

formulations. Their clinics, resorts and wellness centers offer a full range

of Ayurvedic lifestyle products, including health supplements, skin and

beauty care products, specialty foods, teas, spices, books and CDs.

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The products manufactured in KAL are classified into two categories:

a. Classical Medicines: These are formulations manufactured based on

the Ayurvedic Formulatory of India. This is developed from 3000 years

old scriptures. In KAL, they follow the traditional method for

manufacturing these products.

b. Proprietary Medicines: These medicines are manufactured based on

the formulas developed by KAL R & D division. The products are clinically

tested by Clinical Trial, Animal trial etc before launching in market.

4.12.10 Matrix Laboratories Ltd:

Matrix Laboratories Limited, a subsidiary of Mylan Inc., is one of the

world’s largest manufacturers and suppliers of Active Pharmaceutical

Ingredients (APIs). It has a wide range of therapeutic categories, including

antibacterials, central nervous system agents, antihistamine/anti-

asthmatics, cardiovasculars, antivirals, antidiabetics, antifungals, proton

pump inhibitors and pain management drugs.

Based in Hyderabad, India, Matrix laboratories also maintains an

impressive portfolio of finished dosage forms of generic antiretroviral

(ARV) products, which treat people living with HIV/AIDS, including

pediatric therapies. The hallmark of Mylan and Matrix’s ARV franchise is

affordability, as it has continually and significantly reduced drug costs.

As a result, the company’s ARV products are helping nearly one-third of

people receiving treatment today for HIV/AIDS in the developing world.

During 2009, Mylan received the World Health Organization’s

approval of the heat-stable ARV tablet, Lopinavir/Ritonavir, which the

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company formulated before any other company – brand or generic. Mylan

and Matrix intend to build on this achievement by introducing

innovations that expand people’s access to ARV medications and related

resources.

4.12.11 Merck Ltd:

Merck is the world’s oldest pharmaceutical company established in

the year 1668. Merck Limited (formerly E. Merck Limited) was set up in

India in the year1967. Merck Limited went public in 1981 as the first

Merck Group company to do so. The Merck Group now holds 51% of the

share capital of Merck Limited, while the remaining 49% is publicly

traded on the Bombay Stock Exchange Ltd. and the National Stock

Exchange of India Ltd. The company has both Pharmaceuticals and

Chemicals operations.

Merck Ltd is a global pharmaceutical and chemical enterprise with

around 40,000 employees in 67 countries. With the acquisition of

Millipore in July 2010, a global leader in the life science tools market,

revenues totaled around EUR 9.3 billion in 2010. Around 30% of the

company’s total capital is publicly traded, while the Merck family owns

an interest of about 70% via the general partner E. Merck KG.

4.12.12 Novartis India Ltd:

Novartis India (NIL) was incorporated in the year 1947. It is a

subsidiary of Swiss giant Novartis - the world's second largest

pharmaceutical company. The company finds its origin from three

separate entities namely Geigy, Ciba, and Sandoz. Geigy was founded in

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1758; Ciba was founded around 1860 and Sandoz was founded in 1886.

In the year 1970 Ciba and Geigy merged and formed Ciba-Geigy. Much

later in 1996 Sandoz was merged with Ciba-Geigy. Together these three

entities became one to form Novartis. Today, Novartis has 100,000

associates working across 140 countries.

4.12.13 Pfizer Ltd:

Pfizer was founded in the year1848 by Charles Pfizer and his cousin

Charles Erhant in Brooklyn, New York. Santonin was its first preparation

and was used to fight parasitic worms. During the Second World War,

Pfizer became the first company to manufacture penicillin in large volume

using its expertise in fermentation. Today Pfizer has around 3 million

compounds in its medicine library and has about 122,000 employees

worldwide. Its revenues for the year 2003 were about US$ 45.2 billion.

Pfizer came to India through Dumex Limited in 1950. It had a record

turnover of about US$ 172 million by November 2006. It invested about

US$ 15.75 million in clinical research in India. In Indian it has

headquarters in Mumbai. It has about 2000 employees.

4.12.14 Ranbaxy Laboratories Ltd:

Ranbaxy Laboratories Limited (Ranbaxy) is one of the India's largest

pharmaceutical company. It is an integrated, research based,

international pharmaceutical company, producing a wide range of

quality, affordable generic medicines, trusted by healthcare professionals

and patients across regions. Ranbaxy today has a presence in 23 of the

top 25 pharmaceutical markets of the world. It was incorporated in 1961

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and went public in 1973. The Company has a global footprint in 46

countries, world-class manufacturing facilities in 7 countries and serves

customers in over 125 countries. In June 2008, Ranbaxy entered into an

alliance with one of the largest Japanese innovator companies, Daiichi

Sankyo Company Ltd., to create an innovator and generic

pharmaceutical powerhouse. The combined entity now ranks among the

top 20 pharmaceutical companies, globally. The Company has a pool of

over 1,200 R&D personnel engaged in path-breaking research.

In July 2010, Ranbaxy’s New Drug Discovery Research (NDDR) was

transferred to Daiichi Sankyo India Pharma Private Limited as part of the

strategy to strengthen the global Research and Development structure of

the Daiichi Sankyo Group.

4.12.15 Sandu Pharmaceuticals Ltd:

Sandu Pharmaceuticals Ltd was established in the year 1899 as

M/s.Sandu Brothers Pvt. Ltd. has acquired a unique position and

reputation as a leading enterprise in the field of Ayurveda. 'Sandu' is an

ISO 9001:2000 certified group of Companies specializing in manufacture

and marketing of Ayurvedic medicines with a rich heritage of more than

100 years. The company manufactures quality Ayurvedic products and

has a distribution network in Indian and also across the globe.

4.12.16 Solvay Pharma India Ltd:

Solvay is an international chemical and pharmaceutical group with

headquarters in Brussels. In India, Solvay has its presence in the

Pharmaceutical sector through its group company Solvay Pharma India

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Ltd. It has has a wide range of products in the field of Womens Health,

Gastroenterology , Mental Health and influenza vaccines. It ranks 41

amongst the Indian Pharmaceutical companies as per the latest ORG IMS

Oct 2009 report with a turnover of Rs.1844 million Indian rupees and a

growth of 17.4%. It is head quartered at Mumbai and employs more than

450 people throughout India. It operates through two sales divisions and

reaches out its customers across the country through more than 1100

distributors. Currently the company structures itself into two divisions.

Both divisions put together offer a product mix for different therapy areas

in Gastroenterology, Women's Health, Mental Health, Vaccines & ENT

segment.

4.12.17 Wanbury Ltd:

Wanbury Limited the fastest growing pharma company amongst top

100 companies in India as per ORG-IMS has strong presence in domestic

branded formulations. In the year 1990, it was incorporated as Pearl

Distributors Pvt. Limited. In 1991, Pearl Distributors Pvt. Limited went

public and was renamed as Pearl Organics Limited. In 2004, Wander

Limited merged with Pearl Organics Limited and Pearl Organics Limited

renamed as Wanbury Limited. It is the fastest growing company amongst

top 100 companies in the domestic market as per ORG-IMS (2008). It is

ranks 47th as per ORG-IMS (Jan-2009).

Cpink, one of the key brands of Wanbury was awarded "Best Brand

Launch" by ORG-IMS in India in 06-07. Rabiplus, another key brand

of Wanbury, was awarded “Best Brand Launch” by ORG-IMS in India in

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2007-08. It is the world’s largest manufacturer of Metformin. Exports to

over 50 countries, 65% of which is to the regulated markets

4.12.18 Wyeth Ltd:

Wyeth Limited is a subsidiary of Wyeth, USA; a global leader in

pharmaceuticals, consumer healthcare and animal health products. It

was incorporated on September 20, 1947 as a private limited company

under the name Lederle Laboratories (India) Ltd. The name was changed

to Cyanamid India Limited on October 31, 1962. The company became a

public enterprise in November 1965. On January 1, 1998, three

companies - Wyeth Laboratories Limited, John Wyeth (India) Limited and

Wyeth (India) Private Limited - were amalgamated with Cyanamid India

Limited and the combined entity was named Wyeth Lederle Limited. On

April 1, 2003, Geoffrey Manners & Co. Limited was merged with Wyeth

Lederle Limited and the name of the company was changed to Wyeth

Limited. Wyeth Limited is a market leader in oral contraceptives, folic

acid and depilatory cream. It was the first to launch hormone therapy. In

the field of vaccines, Wyeth introduced vaccines against H1B and

invasive pneumococcal disease in the country. It is among India's leading

multinational companies. The company has a state-of-the-art

manufacturing facility in Goa