major learnings - cluster observatory - a project of...

DRUGS & PHARMACEUTICAL CLUSTER OF AHMEDABAD

END OF PROJECT REPORT

Table of Contents

1. Executive Summary…………………………………………………………………………2

2. Evolution, Turning Point and Current Status……………………………………………3-4

3. Choice of Cluster…………………………………………………………………………….4

4. Key Cluster Actors and their Linkages…………………………………………………..5-6

5. Major Problems…………………………………………………………………………….7-8

6. Vision of the Cluster…………………………………………………………………………8

7. Implementation Strategy…………………………………………………………………….8

8. Major Activities……………………………………………………………………………….8

8.1 Quality up-gradation…………………………………………………………………8-11

8.2 Human resource development……………………………………………………11-13

8.3 Business Development…………………………………………………………….13-15

8.4 Strengthening of linkages…………………………………………………………15-17

9. Results…………………………………………………………………………………….…18

10. Sustainability…………………………………………………………………………….19-20

11. Future Directions………………………………………………………………………..20-21

Annex 1: Diagnostic Study…………………………………………………………………21-69

Annex 2: List of Acronyms……………………………………………………………………..70

Annex 3: List of Important Activities undertaken………………………………………...71-73

Annex 4: Cluster Map after Intervention……………………………………………………..74

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DRUGS & PHARMACEUTICAL CLUSTER OF AHMEDABAD – END OF PROJECT REPORT

1. Executive SummaryThe SME units of the drugs and pharmaceutical cluster of Ahmedabad/Vadodara face a major challenge in achieving the stricter quality norms increasingly demanded by the Indian regulatory authority as well as by large-scale units, which can be their potential clients. This is because, in order to attain quality certifications the small firms often lack the required information, appropriate technical training, knowledge of desired plant layout/machinery requirements and are not able to locate affordable BDS providers to organize such activities.

The programme addressed these challenges in a step-by-step approach by building awareness among firms, sustaining a group approach to purchase of business development service (BDS), creating institutional linkages and finally building the capacity of existing and newly created associations to ensure the sustainability of the process.

In these interventions associations played a special role in disseminating a new vision for the cluster, which initially contributed significantly to ice-breaking and later triggered multiplication of initiatives; technical institutions provided training inputs; private BDS providers propped up confidence by securing business orders; and financial institutions provided financial support to the various activities. All these initiative where coordinated by the UNIDO methodology that triggered a proactive mentality and a growing dialogue among the various cluster actors.

As a result of these initiatives 60 firms have embarked on quality up-gradation, 41 of which have made an estimated joint investment to the tune of Rs 76.6 million (USD 1.5 million). Twenty firms have gained export linkages or were exposed to new export destinations, generating an increase in export estimated at Rs 74.5 million (USD 1.5 million). Twenty-one firms have generated additional domestic business worth Rs 103.3 million (USD 2 million). Moreover, IDMA-GSB is setting up a sub-contracting exchange that will help in contract manufacturing. 70 firms made savings worth Rs 5 million (USD 100,000). An NTC in the name of Gujarat Pharma Techno Park has been formed to create a production facility for quality products. Ten new training programmes were introduced and a video film to train workers was created by IDMA-GSB. Ten new BDS providers have been introduced in the areas of quality, factory level training, contract business, export market and other support services. Associations have created or strengthened linkages with technical/developmental institutions like PERD, LMCP, MSU, SIDBI, GITCO, SIDBI, SISI, etc. International networking has been undertaken with development agencies like CBI and NMCP.

In the future, the associations should continue to play a proactive role towards the training programmes that have been launched in the cluster. Newly formed association such as CHI will need support before they can reach a more stable position. The first steps have been taken on a Pharma Techno Park: this will need to be followed up meticulously and rapidly. Awareness on a range of emerging issues, especially related to patents, MIS, etc. needs to be further investment. The finalisation of Government of Gujarat’s initiative for a Cluster Programme for the pharmaceutical clusters of Gujarat will be of immense use on all these fronts.

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2. Evolution, Turning Point and Current Status

The evolution of the drugs and pharmaceutical cluster at Ahmedabad1 started off with the establishment of the first unit – Alembic Chemical Works Ltd. at Vadodara way back in 1907. The first surge in demand was associated with the First World War (1914-18), which reduced imports, on which the medicinal supply line of the country was highly dependent. The growth of the textile industry at Ahmedabad that brought about a large labour inflow also sparked a strong local demand for medicines.

A series of regulatory driven quality enhancement measures followed. In 1931 the Drugs Enquiry Committee (DEC) recommended (a) the formulation of a central legislation on drugs, (b) the creation of an advisory board, (c) the establishment of a central testing laboratory and (d) the compilation of Indian pharmacopoeias (IP)2. Subsequently, in 1940, the Drugs and Cosmetics Act regulated import, manufacture, sales and distribution of drugs. The Central Drugs Laboratory was established in 1947 in Kolkata3 to carry out statutory testing. Good Manufacturing Practices (GMP) were included as a special schedule ‘M” in the Act in 1986.

This drive towards quality production at the National level had its effect at the State and cluster level too. The LM College of Pharmacy (LMCP), Ahmedabad was thus established in 1947 and rapidly became a constant source for creating pharmaceutical experts and many of LMCP graduates contributed significantly to the creation of a thriving SME pharma cluster at Ahmedabad and Vadodara. Labour uprisings in Maharashtra in 1970s also saw a significant shift of investment to Gujarat4. The new entrepreneurs drew tremendous confidence from the leadership of a proactive Commissioner5 of Food and Drug control Administration (FDCA). Finally, the establishment of a local machinery manufacturer (CADMACH, Ahmedabad) ensured a steady supply of machinery and spare parts.

With the ground conditions well in place for growth, the cluster experienced another structural shift with the enactment of the Indian Patents Act 1970. The Act provided the domestic industry scope for further growth by allowing process patents, which allowed any firm in India to supply products developed anywhere in the world provided it followed a different process than the one indicated in the patent. A phenomenal growth of small firms took place during the 1970s and 1980s. This phase of euphoria was further strengthened as a result of growing exports to Russian and African countries. During this growth process a few first generation entrepreneurs graduated from small to medium/large firms and some later entrants became sizable medium enterprises. This growth phase in turn saw further entry of new entrepreneur in the small scale sector.

With the industry on a growth path, there was a growing need for a Technical Training Centre. Thus the B.V Patel Pharmaceutical Education and Research Development (PERD)

1 The programme was implemented both at Ahmedabad and Vadodara (2 cities situated at a distance of 100 kms) as there was license based manufacturing linkages between the firms and more importantly they shared a common support structure. This issue has been dealt in section 4.

2 Indian Pharmacopeia is a book that spells out the ideal conditions of production of a drug/medicine as per Indian Laws.

3 Previously Calcutta4 Gujarat was created as a new State from Maharashtra in May 1960.5 Mr. B V Patel, the first Commissioner of FDCA, Gujarat

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Centre at Ahmedabad was born in 1989 as a result of a private sector initiative. Meanwhile a few more pharmacy colleges came up and the pharmacy divisions of the Vadodara and Gujarat Universities also joined hand in feeding the rising need for experts to these growing clusters.

At present, the pharma industry is undergoing a new phase of internationalisation. The process patent regime is being replaced by a product patent regime. This has injected uncertainty and is likely to impact the growth pattern of the cluster.

The major products manufactured in the cluster include (a) pharmaceuticals both allopathic and ayurvedic formulation, in different dosage forms (including tablets, liquid, capsules - also called orals; externals and injectables) and (b) medical disposable products like IV sets. There are around 450 drugs and pharmaceutical manufacturing units in Ahmedabad, Vadodara and nearby areas. Around 50 manufacturing units produce medical disposables and the rest are in formulations including ayurvedic products. Seven firms in the clusters are big, around 20-25 medium-sized and the rest are small. The total turnover of the cluster is estimated at Rs 40,000 million (approximately USD 800 million) as on 1999.

3. Choice of Cluster

The reasons behind choosing the pharmaceutical cluster of Ahmedabad were:

a) A critical sector: During the last 100 years, India has shifted from import to indigenous production of medicines. The heart of such production lies in Gujarat (around 50 % in 1997-98), within which the cluster of Ahmedabad and Vadodara house the bulk of formulation units. With this sector facing a major threat with the advent of the new product patent regime and a all round demand for ‘quality’ product from the market there was an urgent need to support quality focussed growth and to ensure a smooth transition from the old to the new regime.

b) Presence of similar clusters: A number of drugs and pharmaceutical clusters exist not only in India (eg. Hyderabad, Pune, Chennai, Mumbai, etc.), but also in various parts of Gujarat (e.g. at Ankaleshwar, Vapi, Surendranagar, etc.). It was felt that the lessons learnt could be useful for these clusters too.

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4. Key Cluster stakeholders and their Linkages

Firms producing allopathic and ayurvedic formulation and medical disposable products lie at the core of the cluster. Process-related backward linkages are absent in this industry as per regulations, with each manufacturer obtaining a license from the FDCA.

Outsourcing is however contemplated either through a loan license (manufacturing a product on behalf of the principal license holder which thereafter markets that product) or through contracts manufacturing (whereby a firm manufacturers a product through its own license and markets it though another firm). Some firms at Ahmedabad and Vadodara presented such linkages at the beginning of the intervention.

Moreover, the two clusters share a common support infrastructure in the form of various technical institutions like PERD Centre, LMCP, CIPET, MSU, SIDBI; regulatory bodies like FDCA, and industry interest promoting bodies like IDMA-GSB, etc. Hence the clusters of Ahmedabad and Vadodara were jointly chosen for intervention6.

Formulation units are members of the Indian Drug Manufacturers’ Association - Gujarat State Board (IDMA-GSB). At the beginning of the intervention IDMA-GSB was mostly focused on regulatory role and on the provision of generic quality-related services to the industry.

The Ayurvedic Drug Manufacturers Association (ADMA) was mainly involved in regulatory issues. The Medical Disposable Manufacturers’ Association (MDMA) was largely non-functional. Institutions like PERD Center, Central Institute of Plastics Engineering and Technology (CIPET), L M College of Pharmacy (LMCP), Dept. of Botony, M S University of Baroda (MSU) used to have limited interaction with small units.

6 For further details see Diagnostic Study Annex 1.

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Map 1: Cluster Map prior to intervention

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PERD FDCA SISI

IDMA (140)

L.F. (8)

M.F. (30)

RM (Pharma)

Packaging material supplier

RM (Ayur)

RM (Disp.)S.D. (50)

Exports Sales

Institutional Sales

Prescription Sales

S.F. (350)ADMA

AIOCD

L.F: Large Formulation Units

M.F: Medium Formulation Units

S.F: Small Formulation Units

S.D: Small Disposable Units

R.M (Pharma): Raw Material Supplier for Pharmaceuticals Units

R.M (Ayur): Raw Material Supplier for Ayurvedic Units

R.M (Disp.): Raw Material Supplier for Disposable Units

AIOCD: All India Organisation of Chemists & Druggists

MDMA (36)

5. Major Problems

The major problems faced by the cluster at the beginning of the intervention were:

i. Need for quality up-gradation

Right from the inception of this industry, quality up-gradation has been driven by the regulatory authorities. The revised Schedule M of FDCA Gujarat, which is going to be enacted from “2004-05” lays down stricter norms and it is almost equivalent to WHO-GMP7

standards. This will become mandatory for any manufacturer in Gujarat. Similar stricter norms (Revised Schedule T) are also going to be applicable for ayurvedic units. Many small units had little idea on these norms, let alone the capacity of achieving such certification.

Certifications like ISO, CE Mark, WHO-GMP had been made mandatory by importing nations and institutional buyers. Lack of such certification thus kept SMEs away from institutional sales and exports. A clear consensus emerged in the cluster that small firms that at that time posses a large number of (process) licenses, would soon need to specialize and become quality contract manufacturers of large/medium units on a ‘win-win’ basis.

However, to attain these higher quality certifications, small firms lacked information, appropriately trained workers, plant layout and machinery and were not able to locate affordable (economic and dependable) BDS providers to organize such activities.

ii. Need of manpower training

Small firms used to manage production with little qualified manpower. Better-qualified workers would leave small firms because of low salary and job insecurity. However, more stringent quality norms demanded constant updating on technical issues. Such training was at the time almost entirely missing in the cluster.

iii. Business linkage through new channels

Manpower training and quality up-gradation require large investment. Small firms involved in multi-product prescription sale through own marketing were unable to generate the capital for such investments through their existing marketing practices. In the absence of new market channels, the small firms were not confident to invest large amounts for quality up-gradation. Moreover, they also lacked the manpower to explore new areas of business.

iv. Strengthening of institutional linkages

IDMA-GSB was the only functional8 association at the start of intervention. ADMA was involved mainly in regulatory issues like handling the implications of revised schedule T9.

7 These are good manufacturing practice (GMP) standards laid down by the World Health Organisation (WHO)8 With respect to business development issues9 Revised Schedule T was a higher statutory quality standard for ayurvedic manufacturers of Gujarat and was

conditioned by FDCA, Gujarat

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MDMA was non-functional. The interaction of these associations with some technical institutions was at best weak and none of these associations were involved in any direct business development issue for the firms.

6. Vision of the ClusterThe long-run vision for the cluster was therefore agreed as: “To Attain specialization in quality manufacturing for production of formulations, ayurvedic and medical disposal products by 2005”.

7. Implementation StrategyThe above problems were addressed in a step-by-step approach by creating awareness among firms, building consensus on group approach, organizing institutional linkages and building capacity of existing and newly created associations.

Activities in 2000 focused mostly on awareness and consensus building among cluster stakeholders to realize the cluster vision through proactive networking. The year 2001 saw the launch of the first informal network-based activities in the field of quality up-gradation and marketing. As success was tested, more such activities picked up in 2002, while strengthening of the institutional framework of the cluster was ensured for continuation of such activities in the future. Activities in the year 2003 (Jan-June) concentrated on institutional networking to facilitate such growth, strengthening local institutional framework and BDS providing capacity and facilitating policy interventions for wider replication.

In these interventions associations played a special role in disseminating a new vision for the cluster, which initially contributed significantly to ice-breaking and later triggered multiplication of initiatives; technical institutions provided training inputs; private BDS providers propped up confidence by securing business orders; and financial institutions provided financial support to the various activities. All these initiative where coordinated through UNIDO methodology that triggered a proactive mentality and a growing dialogue among various cluster stakeholders.

8. Major Activities8.1 Quality Up-gradation8.1.1 ObjectiveThe objective of this intervention was to enhance the quality standards of firms and to promote them towards product specialisation.

8.1.2 Steps involved

The realization of such an objective was planned through awareness generation, identification of appropriate BDS providers, making BDS affordable through network formation, spreading the message of success across the cluster and thereby ensuring replication of similar efforts. Necessary infrastructure support was also created.

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8.1.3 Implementation

Quality up-gradation was a critical issue for the cluster. The immediate nature of the challenges to be faced was spread through several workshops on GMP, WHO-GMP, ISO and CE certification. The sources of this message were chosen not only from the regulatory bodies but also among successful and most forward-looking firms of the cluster. Potential technical BDS providers outlined possible solutions at those Workshops. Interestingly, such workshops continued throughout the life of the programme to reiterate such needs and involve more and more firms. A list of such activities is presented below in table 1.

Table 1: Workshops on Quality up-gradation

March 2000 Workshop on “Preparing SMEs for WHO-GMP and Pharmaceutical Globalisation”

April 2000 Workshop on cluster development and GMP for medical disposable firms

April 2001 Workshop on GMP issues for ayurvedic unitsAugust 2001 Workshop on Healthcare in IndiaSeptember 2001 Workshop on GMP issues for ayurvedic unitsSeptember 2001 Workshop on legal and mandatory issues for disposable unitsFebruary 2002 Workshop on transition from ISO 9002 to ISO 9001: 2001September 2002 Workshop on CE Mark

However, the firms that participated in such workshops were at different levels of maturity and readiness. The allopathic formulation units were the first to agree on the need to address such challenges. Their association (IDMA-GSB) took lead, established a list of qualified consultants and introduced a new service called ‘factory audit’ to assess the level of preparedness by firms. Among the firms that underwent such factory audit, six joined hands in a network and chose a common BDS provider from the list prepared by IDMA-GSB. The BDS provider took a step-by-step approach towards quality up-gradation, which consisted of group training of quality and production staff, guidance on documentation and actual implementation of quality standards at the factory level. Firms first went for ISO/GMP certification and thereafter for WHO-GMP/CE Mark Certification. A few more BDS providers soon adopted the same group approach. They followed a similar methodology of group formation and joint quality up-gradation. In the process the members of the group benefited through (a) discounted rates for BDS, (b) negotiated discounted charges by certification authorities and (c) joint learning benefits of staff.

Meanwhile the more hesitant disposable manufacturers first went through a confidence building exercise organized by EDII10. They restarted association activities by organising basic training programmes11. However the association did not gather enough momentum to introduce value added services. At that time, even some of the disposable manufacturers were not members of MDMA. Thus, direct group formation under the BDS provider was organized to increase reach in terms of firms. Once again a step-by-step approach was

10 Growth Programme organized in December 2000.11 See Sections 8.2 and 8.4 for further details.

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followed. The various training and quality up-gradation process introduced helped firms attain GMP and ISO. Some of them also went for further quality up-gradation such as the CE Mark.

ADMA took lead for ayurvedic units. The members were first sensitised, went for factory audit, then training and finally for quality certification as a group. The success achieved by the first group of six ayurvedic units led to the formation of the second group of such firms.

Box 1: ISO for Ayurvedic UnitsIt all started off with the organisation of two Workshops on GMP for Ayurvedic units in April and September 2001. Thereafter, at a training programme on Pharmacognosy and Phytochemistry of Medicinal plants by the MSU in association with ADMA, the issue of quality up-gradation was again discussed by 15 participating firms.

While participants from FDCA highlighted the need for quality up-gradation, a BDS provider apprised the firms on the newly created model of group up-gradation. Here the firms also got to know a number of BDS providers who could help them in this regard.

Soon ADMA decided to launch a quality up-gradation initiative and a number of firms expressed their interest. Ultimately, only six firms came together to form the first group. These included Prashant Pharmaceuticals, Mehta Herbal, UAP, Mehta Unani, Vasu and Vital Care. They decided to go for joint quality upgradation. These firms knew each other well and there was a strong leader among them who took charge of converting the dream into reality. They chose the same BDS provider that had delivered good results for the allopathic firms.

The firms first undertook a factory audit and subsequently regular joint training programmes including training of internal auditors. The joint training programmes were organised at the premises of the group leader. Within eight months all the firms achieved ISO 9001:2000 certification.

These being the first SME ayurvedic units to get ISO, the firms prepared a joint brochure and a CD: “Ayurveda – Glorious Past and Promising Future” that helped them in exports as well as institutional sales.

8.1.4 OutcomeAs a result of these initiatives, 32 firms have received higher quality certification and another 28 are also at different levels in the process of obtaining the same certification. The latter include firms who have already qualified for one certification process earlier. All together 60 firms have benefited through this process. Five BDS providers were introduced to the SMEs. Of them, one BDS provider now has 6 technical support staff.

8.1.5 ConclusionSuccess on quality interventions clearly resulted from the very immediate challenge faced by the cluster. Despite this, not all firms were equally sensitive to such requirements. Associations proved capable in building initial confidence among firms, but the process of quality certification could only be hastened by establishing direct linkage between private BDS providers and groups of firms. Group approach12 helps via cross learning, confidence building and cost savings on common buying of services.

12 The groups that went for quality up-gradation were temporary in nature due to the nature of objective, i.e. one time quality up-gradation.

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8.2 Human resource development

8.2.1 Objective

The objective of this intervention was to enhance knowledge and provide hands-on training to technicians and workers of small firms so that they could address the needs for strict product quality that will be the key issue for the survival of small firms.

8.2.2 Steps Involved

The steps involved for the realization of such an objective included identification of training needs, sensitisation of appropriate partners to organize training, linking up firms with technical institutions/BDS providers, identification of sources of financial support and creation of a sustainable mechanisms to provide such training on a continuous basis.


Preliminary interactions with the association in the cluster suggested that training would be an ideal platforms to enhance interaction between intermediaries13 and local firms if it involved the following: (i) general awareness workshops of owners and technocrats (ii) technical training of technocrats and (iii) technical training of shop-floor workers. When confronted with such intervention, once again different associations displayed different levels of maturity. Since the organizational strength of MDMA was relatively low14, one consultant had to be specifically involved to trigger the necessary momentum among the disposable units.

Several technical institutions were identified to impart training programmes. The availability of trained technicians as well as workshop facilities led to the identification of PERD Centre for (a) awareness workshops and (b) training of technicians for allopathic formulations and disposables. Moreover, since medical disposables are essentially plastic products, linkages were established with CIPET to provide training in plastics and moulds for disposable unit staff. MSU was linked to the Ayurvedic units for training in product and raw material testing.

While these technical training were under way, BDS providers were introduced to give detailed factory level training to technicians as well as workers in order to consolidate the classroom training at the factory level. Generally, the shop-floor training was undertaken while quality up-gradation initiatives were under way at the firms. In the case of disposable manufacturers, a specialized BDS provider was involved to provide training on biological aspects of disposable production. This is because certification training was premature given the level of preparedness of the firms in terms of finance and vision. This BDS provider has now established independent relationship with many firms.

In the process, the local associations came to know of the various norms and areas of support by ready introduced supporting financial institutions and linkages were established between associations and institutions like SIDBI, SISI, NSIC, etc. IDMA-GSB, which already

13 BDS providers/institutions/associations14 As it was non-functional at the time of intervention initiation

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had a formal structure, generated the greatest benefits in terms of institutional support. In general, the financial institutions preferred to support conventional training work with more established associations and focussed on milestones such as number of people trained.

On the other hand, there seems to be little support available for preparatory activities required by the associations as well as for firms to consolidate their classroom learning with technical up-gradation.

Box 2: Industrial Pharmaceutical Analyst Training At AhmedabadThe quest for quality up-gradation requires small firms to upgrade their machinery and human resources. While equipment was available with the cluster at relatively easy terms, the small firms were struggling to cope up with a shortage of skilled manpower at all levels. Generally, such firms were unable to hire highly qualified technicians on a long-term basis and wherever it happened, there was a high turnover of such qualified manpower. Thus they needed to spend a lot of time in training fresh and less qualified chemists to the emerging needs of industrial production. These issues were raised by IDMA-GSB on many occasions and ultimately led to the launch of a tailor-made training programme.

IDMA-GSB chose LMCP as the implementing agency. The then president of IDMA-GSB was an alumnus of LMCP and posed lot of faith in its capabilities. A core team within the association was constituted to chalk out the syllabus on the following issues: quality control, physico chemical testings, instrumentation training and sophisticated instruments demonstration. To accommodate the requirements of the working trainees, the programme was spread over 16 weeks and held on Sundays. DST was roped in to partially support this programme. It took six months of persistent effort to formalise the logistics.

The programme provided participants with a wealth of information concerning the value of quality production, Good Manufacturing Practices (GMP), GMP documentation and quality assurance mechanisms. Two such programmes were organized and 35 people have been trained. The FDCA Commissioner was invited to inaugurate the event. The interactions that followed and the lessons learnt helped IDMA-GSB to organize a higher-level WHO-GMP training programme with PERD Centre within a span of three months. Four FDCA officers also participated in this programme.

8.2.4 Outcome

416 people from over 100 firms were trained though various training programmes and ten new training modules were started. These include four one-day training modules for medical disposable firms by PERD, a sixteen-day training module for industrial chemists by LMCP, two one-day training module by CIPET for medical plastics, six-day training module for testing of end products of ayurvedic units by MSU, six day Advanced Training Programme on GMP by PERD, and two-day training module on “ISO Internal Auditor” by private consultant. The courses initiated by BDS providers have generally become self-sustainable.

MSU has created a specialized consultancy cell to advise ayurvedic firms and has submitted a large project for the creation of a Research and Development Centre of Medicinal to National Medicinal Plants Board (NMPB), New Delhi.

The process of technical training was topped up with training related to pro-activity for the FDCA officers. Five such training programmes were organized and 180 officers were trained.

8.2.5 Conclusion

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Human resource development is a step-by-step process involving (a) creation of interest, (b) class room training and (c) factory level demonstration. Associations are very good at generating interest, coordination and roping in support from development institutions. Technical institutions have their strength in classroom training. However, it is the task of BDS providers to provide factory-level hands-on training and to operationalise the knowledge gained. Development institutions can support pure training. While factory-level training can be private sector funded, there is need to support the interest creation phase led by associations.

8.3. Business Development

8.3.1 Objective

The objective of this intervention was to promote products from certified firms through contract manufacturing and export promotion.

8.3.2 Steps involved

Identification of potential SMEs, provision of back-end support for technical up-gradation, identification of BDS providers and linkage with firms through appropriate intermediaries achieved this objective.


Prior to intervention, many small firms used to do business through prescription sales or occasionally as manufacturers of large loan licensees. Business through regular contract manufacturing, exports, or institutional sales was low as the firms lacked the required technical qualification. Large firms used to go for production inspection to ascertain quality, while institutional sales required GMP or ISO and at times WHO-GMP. WHO-GMP, CE Mark and at times ISO were required for exports. To face these challenges the small firms were provided various back-end supports15 to upgrade quality through a group approach. Some of the groups thus created used the opportunity to undertake into joint business exploration through the very same quality experts. This led to significant business generation.

The local associations played an important role in export promotion, where stakes were high returns were not immediate. IDMA-GSB focused on the organization of an exporters’ delegation to Brazil. For this purpose, it first organised a workshop on the potential of the Brazilian market. A private export consultant specialising in the Brazilian market addressed the participants. A technical (pharma) specialist who also did business with Brazilian firms was also roped in by the export consultant. During the workshop, opportunities and eligibility for participation were discussed in details. As advised by the export consultant, IDMA-GSB also played an important role in pre-selecting firms so as to maintain an optimum product mix of the delegation. The association hired a consultant to handle this specialized activity and obtained financial support from developmental institution for this exploratory mission.

15 See Section 8.1

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MDMA organized joint participation of six firms to the Hospimedica fair in Mumbai. Success of this fair motivated the members to participate in the international Medica Fair held in Dusseldorf (Germany). For this purpose, MDMA guaranteed a stall in the fair and paid the necessary fees on behalf of its members. Towards the end, however, members grew sceptical on their own capacity to provide quality products as per the standards expected in an international fair. At that time none of the firms had made any effort in the field of quality up-gradation as required at the international level. As a result, their confidence gave way and participation was cancelled. However, they realized the technical implications of quality production.

Later the newly created Council for Healthcare Industry (CHI) liaisoned with the Centre for Promotion of Imports from Developing Countries (CBI), Netherlands to create export possibilities for eligible CHI members towards the European market. This effort was beyond the capacity of individual firms. CHI thus initiated dialogue with CBI on behalf of its members. This led to two expert visits who chose a group of potential firms and advised them on how to upgrade quality. In the next stage these firms will participate in the specialized Medica fair for product promotion.

Box 3: The Riches of a Pharma Network

Activities are not always easier when undertaken in big groups. Often, the smaller the group, the greater the chance to focus and smaller the needs for support. Moreover, specialized consultants can best identify areas of co-operation in smaller cohesive groups. The experience of a group of six pharmaceutical firms spearheaded by a local consultant clearly spells out how co-operation can lead to additional sub-contracting business as a result of quality up-gradation. In October 2000, six pharmaceutical firms including Axar Medicare, Comed Chemical, Divine Laboratories, Harson Laboratories, Moxy Laboratories and Dolphin Laboratories jointly struck a deal for a common consultant to support them in the critical areas of marketing, purchase pooling and quality up gradation.

This joint effort was an offshoot of the UNIDO Cluster Development Programme and was catalysed by a local consultant. The consultant himself was confident about the prospect of this resource-sharing approach. Since then, Dolphin has obtained ISO 9002 certification and renewed its WHO-GMP (World Health Organisation - Good Manufacturing Practices) certification. Harson too has received WHO-GMP certification while three other firms received ISO certification in September 2002. One firm has received GMP. The firms mutually defined the product range each of them would manufacture from the orders received by the consultant.

The firms made additional business worth Rs 20 million. This entire initiative was private-sector-led, with UNIDO support being as low as fifteen percent of total cost of the BDS provider.

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8.3.4. Outcome

As a result of this initiative, 21 firms have generated additional business worth Rs 103.3 million (USD 2 million), twelve of which are nowadays connected to 13 large Pharma manufactures for contract manufacturing. Twenty firms have been facilitated for export linkages. An estimated additional export has been generated to the tune of Rs 74.5 million (USD 1.5 million).

8.3.5 Conclusion

In order to convince firms to undertake long-term investments, it is crucial to provide a credible prospect for new business generation, which in turn can be more readily achieved by small and motivated groups. The involvement of BDS providers is a must in this process if activities are to be adequately up-scaled. In relatively new areas such as business generation, the involvement of reliable associations to play the role of the mediator is preferable. At times, these associations can help with the initial confidence building between the different and previously unknown business partners.

8.4. Strengthening of Linkages

8.4.1. Objective

The objective of this intervention was to create empowered institutions in the cluster, which can plan and execute joint activities in the future on behalf of the cluster stakeholders.

8.4.2. Steps Involved

The steps involved included the creation and/or strengthening of institutions, their linkage with support agencies, provision of hands-on advice on joint activities and capacity building in the field of services delivery. While some of these issues have been dealt with in sections 8.1, 8.2 and 8.3, here we will mainly look into capacity-building aspect of the initiatives undertaken.


The identification of the associations in need of support was initially done on a product basis: IDMA-GSB for the allopathic formulation manufacturers; ADMA for the ayurvedic formulation units and MDMA for the disposable manufacturers. Through the project, IDMA-GSB was helped to link up with SIDBI by availing of the latter’s scheme for computer based communication. This initial ice breaking was followed by a visit of a SIDBI official to the IDMA-GSB office with the aim of understanding needs and presenting other support schemes available at SIDBI. Visits by DST, EXIM, SISI, and NSIC staff were similarly organised to facilitate interaction. Regular interactions were organised with technical institutions like PERD Centre, LMCP, etc. As a result of these initiatives, several training programmes were organised for the benefit of IDMA-GSB members. The first departure of IDMA-GSB from its traditional activities occurred with the introduction of factory audit services. The idea came from IDMA-GSB members themselves and it was operationalised by a Cluster Development Programme Committee set up by IDMA-GSB. Later, several other value-added services were introduced by the same committee. Over time, the complexity of

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the activities increased as the confidence level of the association matured with successful implementations.

At the start of intervention, MDMA was largely non-functional. Hence, it was first revitalised with the active support of its members and registered. A step-by-step approach as described for IDMA-GSB was followed, whereby bilateral meetings were organised with various technical and support institutions. Again, this led to organisation of training programmes and also joint participation in trade fair described above. So far as ADMA is concerned, the project similarly focused initially with the organisation of training programmes, which was gradually followed by factory audit and quality up-gradation for ADMA members.

As time progressed, it clearly emerged that the awareness implementation capacity of the smaller associations was being limited by the absence of a suitably professional secretariat. For this reason, the idea was tested to create the Council of Healthcare Industries (CHI) as a service provider for the associations of the cluster. To create a role clarity of this new association, as against that existing association; the founder members agreed that CHI would deal exclusively with the development of new activities but it would strive to get those implemented through service providers and its member associations. The key task of CHI was to explore new ideas through continuous interaction between industry, technical organisations and final beneficiaries to decide on (a) the future agenda and (b) sharing of responsibilities on its implementation for the growth of the cluster.

Box 4: Joint purchase of Equipment

The Medical Disposable Manufacturers Association was largely dormant before UNIDO’s intervention. During the implementation of the project, MDMA had started providing a number of non-conventional services to its members. One such area was joint negotiation on behalf of its members with suppliers of laboratory equipment. This had been the case for the purchase of spectrophotometers, which are a necessity for disposables manufacturers. The association entered into negotiation with three different suppliers to strike a deal on behalf of its members.

Previously, the price of each machine alone would be Rs 146,000 (USD 3,000) but the association reached an agreement with a Vadodara-based supplier to purchase the machine and as well as a printer for Rs 107,000- (little over USD 2,000). This resulted in a price reduction of more than 30 %. 13 firms purchased the equipment in the first lot.

Similar efforts are being made by IDMA-GSB to purchase HPLC for pharmaceuticals firms.

Box 5: Pharma Techno ParkA major hindrance to quality up-gradation is factory space as many small pharma units simply lack enough space to meet the statutory requirements. It is for this reason that IDMA-GSB first voiced the need for a Pharma Techno Park. At the beginning of the intervention, IDMA-GSB however proved vocal but unwilling to invest its resources on such a large-scale project. With time, it gained confidence in its delivering capacity and, after a number of meetings among the members, it was decided that a non-trading corporation (NTC) would be created for this purpose.

Meetings were also organised with the relevant government departments and several plots were surveyed for this purpose. Gujarat Pharma Techno Park was then created as a Non Trading Corporation. Thereafter the Government of Gujarat appointed a Nodal Officer for this project. 45 firms have already deposited Rs 10,000 each as booking amount for this purpose, with another five firms have been kept in the waiting list.

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8.4.5 Outcome

As a result of these initiatives IDMA-GSB introduced a number of value added services including a monthly bulletin, trade delegation to Brazil, creation of a video for training of workers, promotion of Pharma Techno Park, and sub-contracting exchange scheme funded by Government of India, which will enable its members to keep an online directory of production capacity. This will be of immense use to firms, as contractual manufacturing is becoming their principal source of business. Similarly, MDMA members have got additional business and made savings in equipment procurement.

All the major associations – IDMA-GSB, MDMA, ADMA and technical institutions like PERD Centre, LMCP, etc. have become members of CHI. CHI, with its office, infrastructure and a permanent secretariat could already initiate various activities, including interaction with CBI and possible EU business as well as up-scaling the training programmes introduced by MDMA. CHI is taking a lead in developmental activities, which has so far meant 17 training programmes/workshops including 8 quality up-gradation programmes and 2 trade delegations.

8.4.6 Conclusion

In this technocrat-driven cluster, stakeholders seem to have achieves a sufficiently large number of ideas. The speed of their implementation depends on the level of maturity of the associations. It is therefore important to continuously monitor their proactivity. If an association fails to respond proactively, new association may be created to support them.

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9. ResultsThe result of UNIDO intervention may be summarized as follows:9.1 Firm level Impact Indicators1. 60 firms have gone for quality up-gradation. Of these, 32 firms have received one or

more quality certifications, 6 firms who have already received one certification are now pursuing higher quality certifications. 28 firms are perusing one or more quality certifications.

2. 41 firms that have gone for quality up-gradation made an estimated additional investment of Rs 76.6 million (USD 1.5 million).

3. 20 firms have got export linkages or got exposed to new export destinations. Estimated additional export was generated for Rs 74.5 million (USD 1.5 million).

4. 21 firms have generated additional business worth Rs 103.3 million (USD 2 million). Of these 12 firms have got connected to 13 large pharmaceutical manufactures for contract manufacturing.

5. 416 persons belonging to over 100 firms were trained though training programmes. 10 new training programmes were introduced.

6. 70 firms made savings worth Rs 5 million (USD 100,000) through joint purchase of equipment, common BDS providers, common training, common brochure, joint participation in fairs, etc.

9.2 Cluster level impact indicators1. A Pharma Techno Park is being created at Ahmedabad; an NTC has been formed to

undertake this activity.2. A video film for training of workers has been created by IDMA-GSB.3. The Central Ministry of SSI has sanctioned a sub-contracting exchange to IDMA-GSB.

This will help in contract manufacturing.4. Linkages have been developed with development agencies like CBI and NMCP.9.3. Sustainability Indicators1. Ten new BDS providers have been introduced to the cluster in the areas of quality,

factory level training, contract business, export market and other support services.2. IDMA-GSB has introduced new services for the members and undertaking significant

developmental activities.3. CHI – an umbrella organisation of different associations and support institutions have been

created.4. Associations have created vibrant linkages with technical/developmental institutions like

PERD, LMCP, MSU, SIDBI, GITCO, SIDBI, SISI, etc.5. FDCA Gujarat is on its own promoting “Quality Circles” in Gujarat. Quality circle has

been initiated at three places in Gujarat. 6. PERD Centre with the support of IDMA-GSB and CHI is proposing to Government of

Gujarat for quality up-gradation of units in all pharmaceutical clusters of Gujarat.

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10. Sustainability The sustainability index of the Ahmedabad cluster at the beginning and end of programme implementation are given in the table below:

Table 2: Sustainability IndexWeight Score Weighted

ScoreScore Weighted

ScoreJuly 99 July 99 June 03 June 03

ENTERPRISES' REPRESENTATIVES (60%)IDMA-GSB 35 4 8.4 7 14.7CHI 25 0 0 6 9MDMA 15 1 0.9 5 4.52nd Business Network of Pharma 4 0 0 5 0.93rd Business Network of Pharma 4 0 0 5 0.92nd Technical Network of Pharma 3 0 0 5 0.61st Techno-commercial Network of Ayurveda 5 0 0 8 2.42nd Technical Network of Ayurveda 3 0 0 4 0.481st Technical Network of disposables 3 0 0 5 0.6Possible future networks 8 0 0 0 0Sub-total (A) 100 9.3 34.08BDS PROVIDERS (30%) PERD Centre 20 3 1.8 7 4.20MS University (1 department) 5 1 0.15 7 1.05CIPET 5 3 0.45 6 0.90LMCP 5 1 0.15 6 0.90FDCA 5 2 0.3 7 1.053 old consultancy organizations 9 0 0 8 2.163 relatively new consultancy organizations 6 0 0 8 1.44SIDBI 15 0 0 7.5 3.38DST 5 0 0 5 0.75SISI 5 3 0.15 7 1.05EXIM 5 0 0 2 0.30CBI 5 0 0 7 1.05Potential BDS 10 0 0 0 0.00Sub total (B) 100 3.0 18.23BROKERING INSTITUTIONS (10%)CHI 50 0 0 6 3IDMA-GSB 25 5 1.25 8 2MDMA 15 0 0 5 0.75NBES 10 0 0 6 0.6Sub total (C) 100 1.25 6.35Grand total (A+B+C) 13.55 58.66

The overall sustainability index of the cluster has improved from 13.55 in October 1999 to 58.66 in June 2003. This was made possible due to the growth of activities by the IDMA-GSB and the formation of small networks as well as the creation of CHI. The range of activities by the networks and the associations have also undergone a shift from mainly regulatory negotiations to purely developmental as well as business development activities.

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The growth of BDS providers and the range of new services initiated by the various technical institutions also contributed to the enhanced performance.

During the last three and a half years, the cluster has moved from a situation whereby only one association was functional but had few interactions with some technical institutions to a situation where three associations are active, new networks are emerging, 10 BDS providers are linked to small units and around 10 technical/financial institutions have enhanced linkages with small units.

Chart 1: Pie Chart of Contributions to the Project

Chart2: Year wise patter of Contributions

11. Future Directions

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The shift towards quality awareness and up-gradation is fully under way in the cluster. The local associations and BDS providers are playing proactive role. A new chapter has been initiated in the active usage of BDS by small firms. However, movement towards this direction needs to continue.

For that matter the associations should continue to play a proactive role towards organising training programmes. In particular, CHI needs continued support from its promoting organisations like PERD, IDMA, MDMA, ADMA, etc. before it reaches a stable position in the next two to three years. IDMA needs to make optimum usage of the sub-contracting exchange and should popularise the database for benefits of its members. A move has been made towards the creation of a Pharma Techno Park. This needs to be followed meticulously for fast realisation. Once created, the Pharma Techno Park can become a brand of quality for formulation units in the cluster.

Various other dimensions, especially those related to patents, MIS, etc. needs to be further worked upon. Here the finalisation of the Government of Gujarat’s initiative for a Cluster Programme for the pharmaceutical clusters of Gujarat will be of immense use.

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Annex 1Diagnostic Study of Ahmedabad and Badodara

1. SCOPE, OBJECTIVE AND APPROACH

The potential of small and medium enterprises (SMEs) in contributing to the development process at local, national and global levels has received substantial recognition the world over, during the last quarter of a century or so. Notable achievements in the spheres of technological dynamism, market expansion and regional economic regeneration have been noted in a number of SME clusters across the globe, particularly in the industrialised West, mainly in Europe. As SME promotion has often been linked to the on-going process of globalisation, it has been observed that such a strategy of industrialisation, assigning key role to SMEs, would be largely relevant to the developing countries, where, typically, SMEs dominate the industrial scene.

There, however, is no pre-given set of policy instruments for SME promotion that would be applicable across either regions and/or sectors. In fact, international comparative analysis suggests that SMEs are an extremely heterogeneous category and a predetermined relation between size, behaviours, performances and policy needs cannot be assumed. Hence, any intervention at a policy level needs to take into consideration the specificities of the SMEs, both with respect to production and marketing relations. A meaningful appreciation of the pattern of emergence and functional dynamics of SMEs is an essential prerequisite, not only for the immediate promotion of the cluster, but also for delineating possible channels of networking. Fostering networks is a critical requirement towards accrual of greater benefits to SMEs through collective action. Highlighting the value of networks or resourceful linkages in cluster promotion, Porter (1998:) argues that "Cluster boundaries should encompass all firms, industries and institutions with strong linkages, whether vertical, horizontal or institutional; those with weak or non-existent linkages can safely be left out."

For over four years now, the Cluster Development Programme of the UNIDO, New Delhi, has been undertaking both exploration of potential business linkages and strategic intervention in a few sectors across the country. The basic purpose is to experiment and exemplify cluster promotion for the benefit of the sector chosen as also for other clusters to learn and practise in accordance with sectoral and regional specificities. The present study on the drugs and pharmaceutical clusters (also referred to as the pharma cluster) in Ahmedabad and Vadodara in the West Indian state of Gujarat forms part of the aforesaid national level action programme.

The drugs and pharmaceutical industry is part of the mother healthcare industry, that substantially contributes to the development of the economy. The industry includes, inter alia, drugs and pharmaceuticals and medical devices – durables and disposables. The medical durables sector is mainly import dependent. But medical disposables are largely produced indigenously. Medical disposables play a critical role as a conduit between the patient and parenteral dosage form16. Ahmedabad is the principal source for supply of medical disposables through out India. Medical disposables come under the regulatory compliance by the Food and Drug Control Administration (FDCA). Many of the problems faced by the medical disposable industry are similar to the drugs and pharmaceutical sector, especially those related to quality, testing, etc. Thus the scope of this study and subsequent intervention cover both drugs and pharmaceuticals and medical disposables.

16 Dosage form is the nature of end-product of-the medicine, that a patient consumes. The principal dosage forms are tablets, capsules and liquids also known as oral dosage form and injectables, also known as parenteral dosage form.

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The drugs and pharmaceutical cluster of Ahmedabad and Vadodara was chosen for intervention based on a Rapid Survey. It was felt during the Rapid Survey that as a step towards smoother and effective implementation, an R and D or technical or educational institution could play a critical role (in the implementation phase), in this knowledge intensive sector. Eventually, the B. V. Patel Pharmaceutical Education Research and Development (PERD)17 Centre was chosen in concurrence with the representative industry organisation [Indian Drug Manufacturers Association-Gujarat State Board (IDMA-GSB18)] to carry out the “Diagnostic Study”.

This study attempts to present and analyse the current position of the industry and also to understand its functional dynamics. The central concern of the study, however, relates to two important issues: (a) the nature and strength of current business and organizational linkages between the various cluster actors and (b) areas of intervention for development of the industry.

In order to obtain a comprehensive picture of the status and dynamics of the industry in Gujarat and also to capture the regional specificities we had to take recourse to a number of approaches. The principal basis of information and perspectives detailed in this study derives from primary sources, mainly, structured surveys of pharma enterprises and detailed issue based discussions/interviews with a number of individuals directly or indirectly concerned with the industry in the state. At various stages of the study, we had interactions with pharma manufacturers, disposables producers, pharma machine (including for packaging) manufacturers, loan licensees, office bearers and members of industry associations, bankers, officials of the concerned state departments, R and D specialists, academics, policy makers and other knowledgeable and experienced persons in the field. A selective list of persons consulted/interviewed as part of this study appears as below:

Table 1: Profile of Survey Respondents Category Persons/Organisations InterviewedLarge pharmaceutical units 4Medium pharmaceutical units 2Small pharmaceutical units 12Medical disposables units 20R and D institutions 3Machinery manufacturers 4Loan licensees 4Financial institutions/ laboratories 3Persons knowledgeable about the industry 6Policy making and regulatory bodies 4Industry associations 6

Special mention may be made of the structured instruments of data collection, i.e., the survey schedules for the pharma units. Two types of schedules were used for the purpose, the one dealing with firm level basic information and the other issues and views as expressed/underscored by the chief or any responsible functionary of the firm. Whereas the former was meant to collect information mainly on the product range, performance and organisational structure, the latter was so designed as to elicit opinion on and understand the processes and factors influencing the industry in the local place. These included queries on turning points of the industry's growth path, nature of industrial organisation, business linkages, sources of finance, technological dynamism, problems with current policies and, especially, the characteristics of cooperation and competition and the potential areas of joint intervention and collective action.

17 Details about PERD appear in Chapter 4.18 Details about IDMA-GSB appear in Chapter 4.

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Besides, useful insights and directions into actual conducting of the study and 0analysing issues were obtained through the field experiences of UNIDO's Cluster Development Programme as being undertaken in other sectors and regions in India.

However, in addition to the aforesaid primary sources, information on the important performance variables and policy directions of the industry, both at the regional and national levels, was collected through detailed literature scanning, including a variety of sources of statistical database. These included government publications and also document, papers and research reports of industry associations, research institutions and the press.

In what follows, Chapter 2 describes the structure and performance of the industry: the international scenario in brief and in a more comprehensive manner the national scenario. Chapter 3 details the status of the industry in Ahmedabad and Vadodara and identifies the turning points of the industry. Chapter 4 captures the business and organizational linkages and outlines the cluster map. Chapter 5 highlights the problems and opportunities and suggests an action plan for UNIDO’s intervention.

2. PHARMACEUTICAL INDUSTRY: STRUCTURE AND PERFORMANCE

2.0 IntroductionThe pharmaceutical industry is one of the critical sectors of any economy. The governments of both developed and developing countries, hence, closely overview the production and distribution of this industry, though the degree and nature of this mediation vary. For instance, all countries have adopted controls over the introduction of new products. In many countries, including India, there are measures to control drug prices too. Given the complex nature of production, marketing and regulatory framework, a variety of actors play different roles from the pre-production stage to the point where the products reach the final consumer.

The industry is also substantially dependent on research and development (R&D) on a continuous basis. Pharma industry is a typical case where R&D and profitability are closely interrelated. Increasingly, R&D has come to “dictate profitability” and the profitability, in turn, will govern the scale and scope of R and D expenditure. The need for firms to recoup the huge and growing costs of research and drug development has made protection of intellectual property rights an impending issue in the nineties. During the present decade of the 21st century, the challenge is likely to intensify once much of the differences/ doubts over the issue of intellectual property rights (IPRs) are ironed out or clarified. The manifold widespread value chain and emerging possibilities in the spheres of production, marketing, distribution and R and D are opening up opportunities for firms to become specialized and focus on specific segments, molecules19, dosage forms and areas of operation.

2.1 International ScenarioThe pharma industry the world over is fragmented given the vast array of therapeutic groups20, spatially segmented markets, and alternative configurations of value chain for various dosage forms21. The structure of market is oligopolistic at the level of therapeutics and highly competitive for OTC22 and generic23 categories. The pharmaceutical industry worldwide is expected to grow between 6 and 8 per cent per annum during this decade or

19 Molecules are the bulk drugs, which are the active component in any pharma product.20 For details regarding various therapeutic groups, see, Annex 4.21 For an understanding of the value chain of various dosage forms of formulations see Annex 5.22 OTC (over the counter) products are sold without prescription23 Generics products are those that have run out of patent. It is an important item for firms in developing

countries, which do not require much basic R and D related to development and patenting of new molecules.

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so. While price increases are responsible for nearly 60 per cent of this growth, while volume increases explain 25 per cent and sale of new drugs (sold at higher prices) result in 15 per cent of the growth. The generic component of the world pharma market is expected to experience a boom in the current decade, which could substantially increase the export prospects of developing countries like India.

2.1.1 ProductionThe production of pharmaceuticals reached US$ 296.4 billion in 1996. Of this, the OTC market accounted for US$ 48 billion and generics US $ 13.8 billion. The world market for pharmaceuticals in the year 2000 is estimated at US$ 350 billion and that for bulk pharmaceutical chemicals at US$ 3.5 billion. The dominance of the developed countries, especially, the USA and Japan, and large multi national companies (MNCs) is quite striking in the global pharmaceutical production and trade. The USA is the largest producer of pharmaceuticals, accounting for nearly 28 per cent of the world pharmaceutical production. Japan accounts for about 18 per cent, Germany 8 per cent, France 7 per cent, the UK 3 per cent and Canada 2 per cent of the global production. India’s share in world production is estimated at around one per cent.

The current value of world market for generics is estimated at US$ 30 billion. Of this, the USA accounts for US$ 12.3 billion, Western Europe US$ 7.13 billion and Japan US$ 5.1 billion. The remaining is accounted for by a large number of Asian and African countries. By 2003, the generic market is expected to reach US$ 43 billion with Japan, Europe and USA being the major markets. Among the world’s largest 200 odd pharma firms, 50 are Japanese and 33 are of US origin. Further, the largest 50 companies produce 60 per cent of world output of drugs and pharmaceuticals, as also cater to about half of the drug needs of the developing world. Interestingly, over the past two years, mergers and acquisitions worth more than US$ 1000 billion involving over 15 major companies have taken place worldwide.

2.1.2 TradeThe world exports of pharmaceuticals have been growing at a compound rate of about 13 per cent per annum from US $ 14.4 billion in 1983 to US $ 35 billion in 1993 and to about US $ 50 billion currently. Developed countries account for over 90 per cent of the world exports and 70 per cent of imports. The share of developing countries in world exports is about 5 to 7 per cent. China, Hong Kong, Singapore, Republic of Korea and India are the major exporters among developing countries.

2.1.3 Research and DevelopmentThe pharmaceutical industry is a highly research and knowledge intensive industry mainly because of the need to sustain a pipeline of new drugs to replace old ones. On an average, large global companies in drugs and pharmaceuticals spend 12-15 per cent of their annual sales turnover on R and D. In the US, the ratio of R and D cost to sales turnover is estimated at 11.2 per cent, compared to 5 per cent for telecom, 4.2 per cent for automotive and an all industry composite of 3.8 per cent.

There has been a phenomenal increase in the cost of developing a new drug. In 1976 a new drug could be developed at the cost of about US$ 54 million (including capital and other indirect costs). By the beginning of the nineties this had escalated to US$ 359 million. From the concept to market a new drug has to go through a series of pre-clinical and clinical trials. It has been estimated that of the 5000 to 10000 substances screened, only 250 enter pre-clinical testing. From among these, approximately five enter the clinical testing phase and finally one drug gets approved. In order for the whole process to complete, it takes about 10 to 15 years.

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The high investment and high risk involved in developing and commercialising a drug has posed major challenges to the pharmaceutical manufacturers who engage in basic research. This has led to the demand for strengthening intellectual property laws.

2.2 The National Scenario The Indian pharmaceutical industry today is in the front rank of India’s science-based industries with wide ranging capabilities in the complex field of drug manufacturing and technology. It is a front-runner in the third world in terms of technology, quality and range of medicines manufactured. Almost all types of medicines - ranging from simple pain relieving pills to sophisticated antibiotics and complex cardiac compounds - are now made in the country. These have made India fairly self-sufficient in this field. A large domestic market and relatively inexpensive trained manpower have also enabled the country to emerge as a low cost production centre.

The Indian pharma industry has registered significant rise in capital investment over the years. It has also been a net export earner and a major source of employment. The sector, however, has faired poorly in attracting foreign investment following the opening up of the economy in the early nineties. Some Indian companies have opened their offices abroad. There is also a noticeable trend towards mergers and acquisitions in the domestic front.

2.2.1 ProductionBeginning in a humble way a century ago, in 1901, and with a total sales value of only Rs.10 million in 1948, the industry has come a long way to become one of the leading sectors in the country. It is estimated that the industry is capable of meeting about 70 per cent of the domestic requirement of bulk drugs and almost the entire demand for formulations. The growth in production of bulk drugs and formulations in the country has been quite impressive. Between 1965-66 and 1997-98 the production of formulations rose from Rs.1500 million to Rs.120680 million and that of bulk drugs from Rs.180 million to Rs.26230 million (Table 2.1).

Table 2.1: Production of Bulk Drugs and Formulations in India (Rs. Million)

Year Bulk Drugs Formulations Total 1980-81 2400 12000 144001984-85 3770 18270 220401989-90 6400 34200 406001990-91 7300 38400 457001991-92 9000 48000 570001992-93 11500 60000 715001993-94 13200 69000 822001994-95 15180 79350 945301995-96 18220 91250 1094701996-97 21860 104940 1268001997-98 26230 120680 146910Source24

Significant growth in the industry can also be seen through the fact that in 1998-99 as many as 20053 units were engaged in direct and indirect production of drugs pharmaceuticals in 1998-99 as against 5156 in 1979-80 and 2257 in 1960-70. Of this, it is estimated that there

24 Indian Pharmaceutical Guide, 1998, New Delhi: Pamposh Publications; and Department of Chemicals and Petrochemicals, Ministry of Chemicals and Fertilizers, Govt. of India, Annual Report (1999-2000).

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are around 8000 to 9000 direct manufacturers and the remaining, loan licensees25. The Indian pharmaceutical sector is also heavily skewed in terms of its ownership structure. The large and medium scale firms comprise well-established MNCs and the organized sector of the Indian drug manufacturers. There are around 50 pharma MNCs operating in India. Majority of the pharma units are located in Gujarat, Andhra Pradesh, Maharashtra, Tamil Nadu, Punjab, Haryana and West Bengal.

2.2.2 Price and ProfitabilityThe profitability (i.e., profit before tax as a percentage of sales) of the industry has steadily increased form 1 per cent in 1991-92 to 8 per cent in 1997-98 (Table 2.2).

Table 2.2: Trend in Profitability

Year Profitability1991-92 1.01992-93 2.61993-94 4.41994-95 6.11995-96 6.51996-97 7.01997-98 8.0

Source: OPPI Surveys for 1991-92 to 1994-95 and OPPI estimates for the rest of the years.

Interestingly, the increase in the Wholesale Price Index (WPI) of drugs and medicines has been much less compared to that for all commodities or the all India Consumer Price Index (CPI) (Table 2.3).

Table 2.3: Movement in Prices of Drugs and Medicines

Year WPI for all commodities(1981-82=100)

WPI for drugs and medicines(1981-82=100)

All India CPI(1982=100)

1991-92 209 160 2191992-93 229 170 2401993-94 248 187 2581994-95 275 221 2791995-96 296 235 3131996-97 315 242 3421997-98 330 262 366

Source: OPPI, 33rd Annual Report 1998-99.

2.2.3 Nature of the MarketIndia is one of the largest pharmaceutical markets in the world by volume and ranks amongst the top 15 by value. The size of the Indian drugs and pharma products, in terms of its value, is estimated at Rs. 142000 million (US$ 3.2 billion) in 1998-99. The Indian pharmaceutical industry is essentially volume driven rather than value driven. Even a slight variation in volume sales has a direct bearing on the overall growth of the market. For 25 Direct manufacturers, or own licensees, manufacture products in their own units for direct distribution in their

own brand names. Indirect manufacturers are loan licensees who get products manufactured in some other units and then market it under their own brand names. Both own and loan licensees need to obtain licenses from the FDCA.

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instance, when unit sales of pharmaceutical packs rose by 10 per cent in 1998 from their level in 1997, the corresponding increase in sales value was 14.1 per cent. In the first six months of 1999, unit sales decreased by 4.2 per cent compared to 1998, the corresponding growth in rupee terms dropped to 5.4 per cent. Hence, despite its large size, India’s share in the global market is insignificant due to low product prices. The prices are low because of low level of affordability, fragmented market with severe price competition, and administrative control of prices.

The Indian pharmaceutical market is very fragmented. The top 400 produce 80 per cent of the drug requirements of the country and all other manufacturers, which include the small and tiny scale manufacturers, meet the remaining 20 per cent of the requirement. Twenty per cent of the drugs produced by the small and tiny scale manufacturers are supplied to 70 per cent of the population, as these manufacturers largely depend upon the supplies to the government agencies. This is mainly due to the provision that the government purchases on rate contract basis.

The market is dominated by low-end pharma products – antibiotics constitute 24 per cent of the drugs sold in the country as compared to 13 per cent in the developed world. Cardiovasculars, the largest selling therapeutic category in the developed market (16 per cent of annual drug sales) consists only 6 per cent of the Indian market.

2.2.4 InvestmentOver the period between mid-sixties and mid-nineties there was phenomenal increase in capital investment in the sector - from Rs.1600 million in 1965 to Rs.21500 million in 1998 (Table 2.4).

Table 2.4: Investment in the Pharmaceutical Industry: Selected Years (Rs. Million)

Year Investment1965 16001973 22501979 50001985 65001988 106001994 120001996 165001998 21500

Source: Same as Table 2.3

There are three distinct phases discernible during this period. Between 1965 and 1973 the growth rate (point to point) in investment (at current prices) was only 41 per cent. It grew by 188 per cent over the period 1973 to 1985. The rate of growth came down to 102 per cent in the subsequent period from 1986 to 1998. However, foreign investment in this sector is almost negligible. For the period August 1991 to December 1999, the total approved foreign investment in drugs and pharmaceutical sector was a meagre Rs. 8818 million, as against the total estimated cumulative internal investment of Rs. 92300 million for the years 1993 to 1998.

2.2.5 TradeOver the years the drugs and pharmaceuticals sector has emerged as a net foreign exchange earner, a status it has maintained since 1988-89. The average annual growth rate of exports between 1980-81 and 1998-99 was about 33 per cent as against 22 per cent in

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the case of imports (Table 2.5). The ratio of exports to imports rose from 0.61 to 2.15 between the early 1980s and the end of 1990s. Finished formulations dominate the export kitty, while bulk drugs and chemicals dominate the import basket.

Table 2.5: Export and Import of Formulations and Bulk Drugs(Rs. Million)

Exports Imports Year Formulations Bulk Drugs Total Bulk Drugs Formulations Total1980-81 351 113 464 872 96 9691984-85 995 293 1288 1784 102 18861989-90 3142 3505 6647 4256 551 48071990-91 3714 4134 7848 3226 849 40751991-92 5586 7226 12812 4585 961 55461992-93 9655 4095 13750 5084 1195 62791993-94 13108 5308 18416 6127 1383 75111994-95 15055 7601 22656 8114 1730 98451995-96 20448 11329 31777 16300 2700 190001996-97 25092 15811 40903 17050 3450 205001997-98 33432 17379 50811 18270 4300 225701998-99 30385 23277 53662 19180 5400 24580

Source: Same as Table 2.3.

Notably, there has been a progressive decline in the share of bulk drugs in total imports and a corresponding increase in its share in overall exports of drugs and pharmaceuticals. The reverse has been the case with formulations. The trend in rising relative importance of exports in India’s pharmaceutical trade has been more striking during the late eighties and the early nineties than before (Table 2.6).

Table 2.6: Share of Exports and Imports of Formulations and Bulk DrugsYear Share in Total Exports Share in Total Imports

Formulations Bulk Drugs Bulk Drugs Formulations1980-81 75.7 24.3 90.1 9.91984-85 77.3 22.7 94.6 5.41989-90 47.3 52.7 88.5 11.51990-91 47.3 52.7 79.2 20.81991-92 43.6 56.4 82.7 17.31992-93 70.2 29.8 81.0 19.01993-94 71.2 28.8 81.6 18.41994-95 66.5 33.5 82.4 17.61995-96 64.3 35.7 85.8 14.21996-97 61.3 38.7 83.2 16.81997-98 65.8 34.2 80.9 19.11998-99 56.6 43.4 78.0 22.0


India exported drugs and pharmaceuticals to more than 200 countries in 1998-99. The share of Indian exports to the USA remained 11 per cent over the years 1994-95 to 1998-99. Exports to Germany and Hong Kong increased by nearly 2 percentage points, whereas that to Russia came down by 7 percentage points. In 1998-99, drugs and pharmaceuticals

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constituted 28 per cent of India’s exports to Vietnam, 21 per cent to Nepal and 20 per cent to Nigeria. As far as the major trade blocs are concerned, in 1998-99Latin American Integration Association had the largest combined share (14.7 per cent), followed by ASEAN (8.1 per cent), CIS (7.6 per cent) and SAARC (6.1per cent) countries in that order.

In 1998-99 India imported medicinal and pharmaceutical products worth Rs.2529 million from China, the largest exporter of these products to India. In fact, pharma products formed 5.7 per cent of all imports from China into India. In terms of absolute value, Switzerland (Rs. 1243 million), USA (Rs. 1164 million) and Germany (Rs. 1044 million) were the major exporters to India.

2.2.6 Employment

The pharmaceutical industry provides employment to approximately 28.6 lakh people (Table 2.7). About 84 per cent of this employment is generated in the distribution trade and ancillary indorse, and only 16 per cent in the organised and small scale sectors (OPPI, 1998-99).

Table 2.7: Employment (Estimated) in the Indian Pharma IndustryDirect:

Organised SectorSmall Scale Units

Total

290,000170,000460,000

IndirectDistribution TradeAncillary Industry

Total

1,650,000 750,000

2,400,000Direct and Indirect 2,860,000


2.3 Major Legislations

There are various legislations that govern the manufacture and sale of drugs and pharmaceuticals in India. There are also rules framed under the provisions of these laws. The following are the laws that are currently in operation in the country:

1. The Poisons Act, 19192. The Drugs and Cosmetics Act, 1940 (this was amended various by Drugs (Amendment)

Acts in 1955, 1960, 1962, 1964, 1972, 1982 and 1986)3. The Drugs and Cosmetics Rules, 19454. The Pharmacy Act, 19485. The Drugs and Magic Remedies (Objectionable Advertisement) Act, 19546. The Medicinal and Toilet Preparations (Excise Duties) Act, 19567. The Narcotic Drugs and Psychotropic Substances Act, 19858. The Drugs (Prices Control) Order, 1995

General legislations that have a significant bearing on pharma industry in the country.

1. The Industries (Development and Regulation) Act, 19512. The Trade and Merchandise Mark Act, 19583. The Indian Patents and Design Act, 1970.

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From among these the aforesaid legislations the following four play a critical role26 in the development of the industry. These are:

(a) Schedule ‘M’ of the Drugs and Cosmetic Act 1940(b) The Indian Patents and Designs Act, 1970 (c) Patents (Amendment) Act, 1999(d) The Drugs (Price Control) order (DPCO), 1995

We shall briefly describe the major aspects of these legislations so as to appreciate their likely impact on and response from the manufacturers and others concerned.

(a) Schedule `M’ of the Drugs and Cosmetics Act (1940)The Schedule ‘M’ classifies the various statutory requirements mandatory for all drugs, pharmaceuticals and medical disposable industry relevant as per current good manufacturing practices (CGMP). Schedule ‘M’ was last revised in 1986, when the concept of GMP was first introduced. The Central Government is now revising the Schedule ‘M’ to get it “harmonized with that of the various developed and developing countries and also to the level of the well established international organizations such as the World Health Organisation (WHO)”27.

The WHO guidelines on GMP for pharmaceutical products urge that:

all manufacturing processes are clearly defined, systematically reviewed, and shown to be capable of consistently manufacturing pharma products of the required quality that comply with their specifications;

all necessary facilities are provided including qualified trained personnel, adequate premises and space, suitable equipment and services, correct materials, containers and labels, approved procedures and instructions, suitable storage and transport and adequate personnel, laboratories and equipments for in process controls;

instructions and procedures are written in clear and unambiguous language; operators are trained to carry out procedures correctly; records are made (manually and/or by recording instruments) during manufacture to

show that all the steps required by the defined procedures and instructions have actually been taken and that the quantity and quality of the product are as expected and any significant deviation fully recorded and investigated;

records covering manufacture and distribution are retained in a comprehensive and accessible form;

a system is available to recall any batch of product from sale or supply; and complaints about marketed products are examined, the causes of quality defect

investigated, and appropriate measures taken.

A special sub committee constituted by the Government of India has proposed revamping of the Schedule M, covering specifications such as general requirements in case of buildings and premises, personal sanitation and hygiene, training, production and operation controls, quality control and assurance, stability and validation studies, documentation, complaints and self-inspections; and special requirements for individual formulation categories. Among other things, the amendment calls for the following:

26 The criticality of these four legislations is based on the importance assigned by the interviewees.27 “An overview of the Proposed Revision of Schedule M to the Drugs and Cosmetics Act”, Keynote Address by

Dr. M. Venkateshwarlu, Deputy Drugs Controller (India), West Zone, Mumbai; March 11, 2000, Seminar held at PERD Centre, Ahmedabad organised by IDMA and UNIDO.

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to maintain a ratio of 1:2 between the constructed area and surrounding premises to prevent environmental pollution;

to install a validated water system to aid monitoring and control of bio-burden levels; to have a good disposal system, in the absence of which to have arrangements to recycle

rejects; to have proper environmental control, with emphasis on buildings, till the primary packaging

is complete; to ensure supply of filtered air in all production areas to prevent environmental pollution; to have specifically designed areas for production, quality control, storage and ancillary

areas; to take adequate precautions to segregate the manufacture of highly potent drugs to avoid

cross contamination; to design adequate operational and process controls to ensure reproducible quality of

drugs; to ensure total quality control from raw materials procurement till the retail counter; to undertake detailed stability studies to establish the quality of drugs in different climatic

and storing conditions; and To evolve clear and realistic documentation procedures.

(b) The Indian Patents and Designs Act, 1970This Act aims at protecting inventions. The term of patent granted is in respect of an invention claiming the method of process of manufacture of a substance. For a medicine or drug the protection is given for a period of five years from the sealing of the patent or seven years from the date of patent, whichever period is shorter. The Controller of Patents, Designs, and Trade Marks appointed under the Trade and Merchandise Act, 1958 is the Controller of Patents.

(c) Patents (Amendment) Act, 1999After signing the GATT agreement, India needed to change its patent law from process patent regime to a product patent regime. Developing countries are given time till 2005 to change their patent legislation. Since January 1, 1995, India has begun to accept applications for product patents, which go into a black box. This box is to be opened in 2005 to establish right of priority before granting patent. From January 1, 1995 to October 31, 1999, 2994 product patents have been filed for pharmaceutical products. Meanwhile for each such patent application that has been accepted, exclusive marketing rights (EMR) have to be granted for a period of five years.

The Controller of Patents examines the applications to ascertain whether there is a violation of the relevant provisions of Patent Act. The government can not only fix the price of the product covered under EMR, but also reserve the rights to grant compulsory license or revocation of patent. Provision is made to ensure that EMRs are not granted for substances based on Indian System of Medicines where the products are already in public domain.

(d) The Drugs (Prices Control) Order (DPCO), 1995The DPCO provides for ceiling prices for medicines, the lists of which are reviewed periodically. Over the years substantial changes have been made in the DPCO in terms of reduction in the number of drugs under price control and simplification of application procedures. The DPCO, 1995 allows for exemption from price control for new bulk drugs which have not been produced elsewhere and which are developed through indigenous R&D. On the recommendation of the Hathi Committee (1973), the Government of India created a Drug Price Equalisation Account (DPEA) under the DPCO. This equalisation is done on the

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basis of a weighted price average determined by the government. Any company that sells the product at higher margins on account of cheaper sourcing of inputs is held liable to pay up the overcharged amount to the government.

2.4. The Indian System of MedicinesIn recent years, there has been a growing recognition of the importance of drugs in the Indian System of Medicines (ISM), namely, ayurveda, unani and siddha in recent years as substitutes for modern drugs. Also there has been a notable rise in the sales of large volumes of ayurvedic ‘nutraceuticals’ in the market as drugs to make them eligible for excise duty concessions. Though ayurvedic products are subject to standards prescribed in Schedule 1 of Drugs and Cosmetics Act, there is lack of clarity about the existing norms. It calls for a revamped ayurvedic pharmacopoeia and GMP standards. The GMP norms are radically different for the ISM due to, (1) practical difficulties to quantitatively assess plant-based source materials; and (2) preponderance of tiny units which are unable to follow equipment standards requiring huge investments. In the light of these concerns there is a need to have a comprehensive legislation on the lines of the Drugs and Cosmetics Act for exclusively regulating the manufacturing and marketing. Such a legislation is now under the consideration of the government.

2.5. Distribution Channel28

In a geographically diverse and extremely competitive market where sales volumes are high, distribution plays a crucial role. Further, the common incidence of brand substitutions makes it imperative for a company to make available its brands at all times and at various levels of distribution.

The distribution channel for pharmaceutical products is given below:

Channels of Distribution

It is estimated that there are 60,000 stockists and more than 550,000 retailers in the country, plus the population of dispensing doctors. These doctors account for roughly 10 per cent of the pharma market. During the seventies and early eighties, there were few but large distributors. As the pharma companies expanded their marketing operations, these distributors faced logistic problems while attempting to cater to emerging markets. As a result of this, many small players became stockists and wholesalers, making the sector fragmented, and hence, more localized. According to the Retail Druggists and Chemists Association, there were roughly 10,000 distributors and 125,000 retail chemists in India in

28 Source: Pharma Business, Vol.1.no.2, June 2, 2000

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Manufacturer

C & F/Depot/Super

Stockist

Wholesaler

Retailer/Chemist

Hospital

Patient

Hospital

1978. The number of distributors has increased six-fold, and retail outlets five-fold during the last two decades.

Distribution margins in India are fixed as per provisions of the Drug Price Control Order. For controlled drugs, the stockists’ margin is fixed at 8 per cent of the maximum retail price and for decontrolled drugs DPCO allows 10 per cent. For retail chemists, the margins offered are 16 per cent in the case of controlled formulations and 20 per cent for decontrolled formulations. Manufacturers also offer cash discounts of 5-10 per cent to stockists by issuing free packs. Stockists, in turn, provide a two per cent cash discount to retailers.

Drug distribution in India has been undergoing changes following liberalization. The changes have been initiated by pharma companies, which are increasingly replacing company owned depots and warehouses with clearing and forwarding (C and F) agents. The aim is to curtail overheads. The C & F agents operate under contract on companies’ behalf. An agent is paid a fee that depends on the turnover of products, and ranges from 4 per cent on a high turnover product to 10 per cent on a low turnover product. Because of extended transit time, companies can move seasonal product well in advance to C and F agents without incurring ex-factory excise costs.

Usually a stockist handles the business of six to eight companies. A few of them handle more than 50 companies. Traditionally, stockists have been non-competitive, with each handling a select group of retailers, and vice versa. However, the recent spate of mergers and acquisitions in the drug industry has put stockists in a quandary. When two companies merge, the number of stockists almost doubles. This creates complications for the stockists.

Competition at the stockist level is proving to be a bonanza for retailers, at least for the time being. But this section has also begun to have its own share of worries as the retail sector is opened up for foreign investment and the concept of retail chain outlets is beginning to get tested in India for the first time. The first retail pharmacy chain was started by the Subiksha Retail Services Pvt. Ltd., which operates 19 retail outlets in Chennai. Similarly, The Medicine Shoppe, one of the largest retail drug store in the US, opened two retail outlets in Mumbai and has franchised three more in Mumbai, Calcutta and Vadodara. It is planning 100 such outlets in India. The drug retail market is very competitive and crowded. Together, they account for 80 per cent of the pharma market.

As far as public hospital supplies are concerned the tender procedures are compulsory for contracts. These contracts have to be published in the official newspapers/periodicals. Here, the supply is done directly without any intermediary.

2.6. Research and DevelopmentR and D in Indian pharmaceutical industry has mainly been in applied research for developing process technology for production, especially of synthetic bulk drugs. This was facilitated by the Indian Patent Act of 1970. In a number of cases there was no need to discover a new process as the inventor might not have filed an application in India, and even if they did, the patents would have expired in view of the short duration of validity under the 1970 Act.

It has been observed by some that countries with weak patent protection systems spend much less on innovation. In India, for instance, the pharmaceutical industry’s investment in the late 1990s was about Rs. 2,200 million, i.e., approximately 2 per cent of its total turnover of Rs. 110,000 million (Table 2.8).

Table 2.8: Trend in R and D Expenditure in India

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(Rs. Million)Year Expenditure 1976-77 1051981-82 2931985-86 4801993-94 12501994-95 14001995-96 16001996-97 18501997-98 22001998-99 2600

Source: Same as Table 2.3. 2.7 Medical Devices and EquipmentsSignificant technological advances in the health care sector, during the last three decades or so, have led to the rise of the medical devices and equipments industry. The utility of this industry, both for diagnosis and treatment purposes, has been recognised as being on the rise. The medical devices and equipments include both durables and disposable products.

Though the data on growth of medical devices (durables and disposables) industry are not adequately available, it is definite that the industry will have a rapid growth. Few facts regarding state of health and health care services in India would be interesting in this respect.

“It is understood that addition of each bed on an average in hospital need investment of Rs. 1 lakh in medical devices. Similarly for every 2½ bottles of intravenous fluid 1 IV sets is required. Blood bags are required at the rate of 1 bag per bed. Every day 10 lakh no. of operations are being performed in the country. The demand for diagnostic equipment is increasing at a faster rate with increasing no. of charity hospitals and increase in paying capacity of rural areas”.29

There exists further evidence to prove the rapid growth of the industry. According to an OPPI estimate, in India, pharmaceutical industry is growing at a rate of more than 12 per cent. The production of intravenous (I.V.) fluids is increasing at 15 per cent per annum. The use of diagnostic equipment has increased at 35 per cent per annum and disposables at 20 per cent per annum during 1990s.

The medical durables industry in India has not been able to make significant progress. The demand for durables (i.e., mainly sophisticated electronic diagnostic apparatus, dental appliances, endoscopes, transfusion and anaesthetic apparatus and a range of surgical instruments) is met through imports to a large extent. The major producers are Western Europe, the USA and Japan.

Broadly, the common disposables are: (i) I.V. administration sets, (ii) blood administration sets, (iii) scalp vein sets, (iv) urine collection bags, (v) I.V. cannulas, and (v) syringes. Further, under the disposable catheters category, the following products are included: i) Ryle's tubes, ii) infant feeding tubes, iii) suction catheters, and iv) urethral catheters. It is important to note that most of these products are manufactured in the small scale sector in India, and much of the domestic demand is met through it30.

29 Source: website <mediasourceasia.com>30 For a detailed schematic presentation of stages and process of production, see, Annex 6.

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There are about 100 units in the organised sector as well as in small scale sector producing I.V. sets, tubes, etc. The share of the organised sector is 60 per cent while that of small sector is 40 per cent. The total production capacity is understood to be around 300-350 million tubes per annum. The average capacity utilisation is estimated at 60 per cent. Disposable Syringes is also a popular item among Indian manufacturer. The cumulative production capacity is about 600 million (nos.) per annum. Disposable blood bags are essentially being produced by small units and the total production capacity is estimated around 25 million (nos.) per annum. The production of surgical gloves is again concentrated in the small-scale sector. The current production is estimated at 3000 million (nos.) per annum.

In terms of value the medical disposable industry is around Rs. 8000-10000 million which is divided among different products as presented in Table 2.9. Currently, as imports of disposables are very small there seems to be good prospects for the industry in the domestic market. Moreover, some exports have also been taking place; particularly to south east Asia and African countries. This underscores the possibility for an expanding export market also.

Table 2.9: Four Levels of the Disposables MarketItems Market Share GrowthSyringes, Scalp vein sets, Needles, Urine bags 60% 37%Stopcocks, Nebulising chambers, I.V . cannula extension tubes 15% 37%Blood bags, Endotracheal tubes, Arterial catheters 15% 35%Heart valves, Dialysers 10% 10%

Medical devices and medical disposables can be sold in any manner companies want, i.e., by means of direct or indirect distribution. The sale of medical devices and medical disposables can be effected by means of several trade channels. The manufacturers can offer their products directly to wholesalers/regional dealers, buying co-operatives or even the end user. Direct distribution without the intermediary service of importers/agents, however, is not very common. The only companies able to operate this way are the subsidiaries of transitional operating enterprises, which can afford to manage their own distribution channel. The importers/agents, who have specific market expertise, are, therefore, in most cases the link between the producers and buying department/unit and wholesalers/regional dealers.

2.8. Opportunities for Indian Pharma Firms

2.8.1 Research and DevelopmentThe amended patent laws will have far reaching impact not only on the Indian pharmaceutical industry but also on international R and D based companies, especially, in the USA, Western Europe and Japan. The major aspects/areas those will be affected by such changes include new product introduction, R and D, pricing policies, exports, competition and investment decisions. It is estimated that in the area of total drug discovery and development the existing Indian capabilities are adequate for almost 60 to 70 per cent of activities involved. The industry is well equipped to carry out drug development including pilot production of new drugs for clinical trials in a cost effective manner (at about one fifteenth of the cost in the US). Usually, research constitutes one third and development two thirds of the cost of R&D. Many international pharma firms as well as contract research organisations (CROs) would be willing to work with partners across the R&D value chain so that they can focus on distinct segments and minimise the risk involved. India could emerge as a world class R&D centre given its large manufacturing base for active ingredients and

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other intermediaries, in addition to a large pool of talented and inexpensive technical manpower and low cost of research.

2.8.2 Market for GenericsGenerics represent a sound business opportunity for Indian manufacturers as in any given year their number is more than new molecules that hit the market. Another opportunity is in the field of patent expired therapeutic equivalents of patented products. Another area where India has a distinct comparative advantage is export of bulk drugs. This market is growing rapidly in the US and Western Europe. A number of factors like availability of raw materials and new plants, emerging trend of green field export oriented projects, local enterprise, strong track record of generics etc. could act as strong facilitators.

However, many other crucial bottlenecks are to be overcome before India could exploit these opportunities. Some are mentioned below:

Availability of finances at global rates of interest for fresh investments in production plants; access to international funds markets as also venture capital and equity financing markets;

Creation of a ‘quality image’ in international markets; Use of state of the art and eco-friendly technologies; Encouraging international firms to bring Global Clinical Practices to India and initiate

collaborative projects with Indian companies and institutes; Enhanced investments in R and D; and Development of superior marketing strengths. 2.8.3 Niche MarketingNiche products have fewer competitors and hence margins tend to be higher and product life cycles longer. Some examples of niche products are advanced drug delivery systems, biotechnology, complex bulk chemistry and manufacturing of difficult formulations like sterile

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Pharma Y2KThe number of new drug registrations went up substantially in the early 1980s. After the mandatory patent period of 20-years, all of them are going off-patent now. If in 1998 drugs worth only $ 1.1 million went the generic way, drugs worth more than $ 7.5 million will go off patent in the coming couple of years. In the US alone the generics market is expected to reach $ 18 billion (almost 5 times the Indian pharma industries) by the year 2003. The US accounts for more than 40 per cent of the world generics market, and imports about 60 per cent of the generics sold in the country. Once the patented drugs go generic their prices will drop to less than 20 per cent of their patented prices. But, it will be profitable for Indian companies to manufacture and export them to the US or European markets as, their OTC prices will be 4 to 6 times their prices in India. It is also to be noted that according to a study conducted by Mc Kinsey & Cie the Indian drug industry’s manufacturing costs are 45 per cent lower than generics market in the West, mainly due to lower labour and infrastructure costs.

The three areas in which some of the biggest drugs are going off patent are infections, ulcers and hypertension. Indian firms have maximum research expertise in these areas. But to win the generic game a company has to be out in the market immediately after the drug goes off patent, as the prices start to nosedive after that. Of the seven front-ranking Indian firms in the race for the US market, six are in for formulation generics and only one for bulk drug generics. To get an entry into formulation generics, for every dosage and delivery mechanism, a firm has to apply for an Abbreviated New Drug Application (ANDA) clearance. It is called abbreviated because unlike the innovator, the generic player can see permission only for a fewer number of processes. It takes about 5 years to get ANDA and costs between US $ 300,000 to US $ 500,000 of one includes all expenses from research costs to the final certification from the US Food and Drug Administration. It is thus estimated that these 7 firms might end up paying US $ 80 million to obtain the necessary clearances (“Drug Rush”, Business World, April 10, 2000).

antibiotics and anti cancer drugs. Potential for specialising on these and many more such products needs to be explored.

2.8.4 Alliance with Global Majors There is an increasing trend towards alliances as the small firms are under the threat of extinction mainly due to an increase in research and marketing costs. Western pharma majors would be keen to partner with companies in countries like India, Poland, Italy or China which are low cost manufacturing centres. Small companies and research institutions can focus on drug discovery and clinical trials, which are expensive functions for global majors. Their strength lies in distribution, marketing and development, handling the regulatory and development procedures etc. Smaller units better handle the skill and focus required for discovery.

3. PHARMACEUTICAL INDUSTRY IN AHMEDABAD AND VADODARA: THE TURNING POINTS AND CURRENT STATUS

3.0 IntroductionHistorical landmarks of an industry, or turning points, not only provide a road map to its growth trajectory, but also highlight the critical points of deflection and the adjustment mechanism that influenced the trajectory. More importantly, they provide us with valuable insights as to which mechanisms can be adapted to suit the current requirements. In what follows we try to identify such turning points - experienced so far31 and anticipated in the near future - that had played or are likely to influence substantially the growth of the drugs and pharmaceutical industry in Ahmedabad and Vadodara32. Interestingly these include local (State level), national as well as international happenings that significantly influenced the industry.

31 In Gujarat or relevant for Gujarat 32 The cities of Ahmedabad and Vadodara are situated at a distance of around 100 kms.

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3.1 Turning Points

Table 3.1: Major Turning Points in the Growth of Pharma and Medical Disposables Units in Gujarat

Year Turning Point Nature of Conditions Influencing the change

Early 1900s

1. First pharma unit, Alembic Chemicals, was established in Vadodara, paving the way for the growth of indigenous industry

Local

1914-1918 Spurt in firms producing drugs to meet the demands of the World War I

Discouraging attitude of the British government towards native manufacturers

National

1930s A central legislation for production and quality control was passed following the recommendations of the Drug Enquiry Committee in 1930

The Indian Pharmaceutical Association was founded in 1939

National

1940s Drugs and Cosmetics Act came into being in 1940 The LM College of Pharmacy was established Mr. B.V. Patel became instrumental in founding the

Food and Drug Lab in Vadodara in 1947

NationalLocalLocal

1967 2. CADMACH Machinery (for pharmaceuticals) was set up

Local

1971 3. The Indian Patent Act was passed in 1971 National1986 Schedule M of the Drugs and Cosmetics Act was

amended to include GMP33National

1989 Medical disposables units were brought under Schedule M

Local

1989 The PERD Centre was founded Local1993 The Dunkel draft proposals on Trade Related

Intellectual Property Rights led the government to take steps to amend the patent laws to introduce product patents

International

2005 The product patent regime came into operation International

3.1.1 Indigenous Units Provided the LeadThe history of emergence and progress of the pharmaceutical industry in Gujarat is inextricably linked to that at the national level, and, in more than one way, reflects the responses of the local industry to changes in market and policy signals. A century ago, in 1901, when the first indigenous pharmaceutical unit (Bengal Chemical and Pharmaceutical Works) was established in Calcutta, barely six years later another unit came up in Vadodara. This unit, the well known Alembic Chemical Works Co. Ltd., and later, Sarabhai Chemicals, not only stands testimony to the pragmatism and vision of local enterprising culture, but has continued to inspire numerous entrepreneurs who built up a significant pharmaceutical industry base in Gujarat, especially in Ahmedabad and Vadodara.A mention may be made here of a pioneering unit, namely, Sri Krishna Keshav Laboratory in the much younger medical disposable manufacturing sector. In 1970, this firm formed a joint venture with a US based Company, McGaw Private Limited. The new company was named 33 Explained in Section 2.3

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McGaw Ravindra Laboratories India Ltd. This firm was in the production of medical disposables and I. V. fluids, and by now, this firm has created many entrepreneurs in the field, including the founder of Core Parenterals, the largest firms in the sector now.

3.1.2 War Provided the Impetus, But There were Constraints During the early decades of the twentieth century, there were hardly any manufacturing facilities within India and there was near total dependence on imports. Even importation of drugs was jeopardised as the World War I (1914-1918) broke out. The Indian entrepreneurs rose to the occasion. They were also encouraged by the colonial government to produce drugs to meet the eventualities caused by the War. Following the War, the Indian pharma manufacturers, however, found the going tough. The incidence of adulteration went unchecked, as a result of which the market was flooded with spurious drugs. The tropical climate and storage of drugs for inordinate periods contributed further to the deterioration of drugs. The absence of adequately qualified pharmaceutical personnel compounded the already complex situation. Moreover, the British government was biased in favour of foreign producers in awarding licenses. There were inadequate statutory controls, and no legal action could be taken against those involved in unscrupulous practices.

3.1.3 A Formal Sector is Born The persistent efforts by a few enthusiasts and also the pressure of popular demand for quality drugs for the Indians, did effect a series of developments, especially during the momentous decades of 1930s and 1940s, that substantially transformed the Indian pharmaceutical industry from a state of ailing infancy. The Government of India appointed a Drugs Enquiry Committee (DEC) in 1930 under the Chairmanship of Lt. Col. Ram Nath Chopra, the then Professor of Pharmacology at the School of Tropical Medicine and Hygiene, Calcutta. The recommendations in the Report of the DEC, submitted in 1931, paved the way for formulating central legislation for production as well as quality control of drugs in India. The DEC also recommended the creation of an advisory board to make rules to carry out the provisions in the Act, establishment of a central laboratory and compilation of Indian Pharmacopoeia. Later, in 1937, the findings and recommendations of the DEC were corroborated by Dr. G.C. Anderson in his report.

It was only in 1940 that the Government of India introduced a comprehensive bill regulating the import, manufacture, distribution and sale of drugs. Thus was born the Drugs Act of 1940. The process of drafting the Drug Rules under the Act started in 1942, and the Rules were published in 1945. The Bio-Chemical Standardisation Laboratory established in 1937 in Calcutta was converted into the Central Drugs Laboratory in 1947 to carry out the statutory functions under the Drugs Act. The stage was finally set for controlling the industry, mainly, its sale, distribution and import.

3.1.4 Supportive Local Environment It was during these trying times for the Indian pharmaceutical industry, marked by efforts at establishing popular confidence in the products in the face of impending competition from abroad, that the working together of entrepreneurs, local state apparatus and committed individuals turned out to be the most effective. Certainly, such was the case in Vadodara, where the promoters of the industry received tremendous support from the head of the Princely State.

3.1.5 A Visionary Makes the DifferenceAgain, during the formative years of the pharmaceutical industry, a special mention needs to be made of one individual whose contribution and commitment to the promotion of the local industry was phenomenal. Mr. B.V. Patel, an internationally acclaimed authority on pharmacy legislation and a Drugs Controller par excellence, was instrumental in the survival

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and growth of the Drugs Laboratory in Vadodara. Soon after Independence, it was to be decided as to the laboratory, then "a small link in a chain of State Laboratories and a one-room one-bench-affair with two technicians", be shifted or be merged with the State of Bombay. Mr. Patel, the then Drugs Controller of Bombay, not only favoured its existence but also advised developing it as a nodal facility for future development of the north of Bombay area. "This very instance shows his visionary capacity...but for the preservation of that nucleus, the Gujarat State would not have a laboratory of the dimension it has now34." Mr. Patel continued his support and made notable efforts in promoting a healthy atmosphere for the industry, whereby entrepreneurs, policy makers, technicians and a host of support service providers could interact and build up a remarkably advanced pharma industry in Gujarat.

3.1.6 Birth of CADMACH MachineryAnother instance of the entrepreneurial farsightedness is the founding of CADMACH Machinery, the pharma machine manufacturing unit at Vatva in Ahmedabad in 1967, by Mr. Ramanbhai B. Patel. CADMACH started as an R and D outlet in 1966. He, along with Mr. I. A. Modi and Mr. Khambatta, was instrumental in starting this vital link in the pharma industry and free the growth path from import dependence of such a critical sector. CADMACH makes about two or three new machineries every year. The unit specialises in tablet making machinery and stated to have been instrumental in the high intensity of tablet making units in this region. Incidentally tablet making is the least investment sector among various dosage forms and this, eventually, facilitated the growth of small enterprises in Ahmedabad.

Further, particularly in Ahmedabad, the substantial presence and vitality of CADMACH and other similar units encouraged diversification towards manufacturing packaging machines also. Even the later development of the medical disposables industry, a highly related sector, in Ahmedabad may be linked to the early emergence of a strong pharma machinery base in the region. This also refers to the advantages of industrial clustering, whereby setting up of related industries in the locality becomes a viable and cost effective proposition.

3.1.7 The Indian Patent Act, 1970 An important turning point in the growth of the industry can clearly be linked to the Indian Patent Act of 1970. As explained earlier, the Act provided the domestic industry with the much needed stimulus by opting for a process patents system and specifying a short duration of seven years for patents. It also provided for automatic compulsory licensing without the patent holder being heard. The innovative entrepreneurs took utmost advantage of the process patent and there was phenomenal growth of small firms during the 1970s and 1980s. This phase of euphoria was also sustained due to heightened exports to many countries, mainly Russia and African countries.

3.1.8. Joint Action Pays: Birth of the B. V. Patel PERD CentreThere was a strong and long standing need by both the pharma units as also other concerned intelligentsia for having a technical cum training centre in Gujarat State. Thus, the B. V. Patel Education Trust, Ahmedabad and the Gujarat Branch of Indian Pharmaceutical Association (IPA) established the B. V. Patel Pharmaceutical Education and Research Development (PERD) Centre in Ahmedabad in 1989. The Gujarat Institute of Chemical Technology allocated the land. The surplus fund available following the Indian Pharmaceutical Congress held in 1986 in Ahmedabad, was donated by the local organising committee for construction of the building. Initial funds for infrastructure development were provided through donation by a number of pharmaceutical enterprises across the country. This amounted to over Rs. 20 million donated by 30 firms – large and medium. Some seed money also came from the Government of Gujarat and B. V. Patel Education Trust. The 34 Source: M R Shastri (undated), “B V Patel – The Man”. (Mimeo).

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centre received a generous gift of laboratory instruments and books from Prof. Wegmann, Director of the Institute of Histochimie, France. Boots Research Laboratory, Mumbai gave its complete content at the minimum cost to the centre. The centre has also received interest free loan from the World Bank through ICICI Bank.

3.1.9 The New Patent Regulation: An Imminent Turning PointThe pharma industry is at the threshold of another major turning point in its recent history. Certain fundamental changes are envisaged in the Indian Patent Act 1970 if the provisions of the World Trade Organisation (WTO) are to be met and to make it TRIPs compliant. These are to be put in place before 2004. These changes can be summarised as follows.

Table 3.2: Comparing the Indian Patent Law with Proposed Changes

Indian Patent Law Proposed ChangesProvides only process patents Provides product patentsDuration of patents is 7 years Duration of 20 years of all patentsProvides for automatic compulsory licensing without the patent holder being heard

Permits compulsory licensing on the merits of each case, but the patent holder will have to be heard

No system for protection of plant varieties in India

Sui generis for the protection of plant varieties

Does not allow patenting of life forms Requires micro-organisms to be patentedImportation does not amount to working of the patent

Does not permit discrimination between imported and domestic products

The burden of proof is on the plaintiff The burden of proof is on the alleged infringe

Source: Gandhi, A. S, `Revision of Indian Patent Act 1970 and its Impact on Availability and Cost of New Pharmaceuticals’, Essay Competition, (1999), Shri B. V. Patel Education Trust, Ahmedabad

The Government of India has already taken the first step towards incorporating the proposed changes by notifying the Patents (Amendment) Rules 1999. This would enable granting of exclusive marketing rights (EMR) for items which qualify under the eligibility criteria set out in the proposed Act. The operationalisation of the new patent regime in 2005 will bring in fundamental changes in the composition of the industry. It has been estimated that for many Indian firms more than 20 per cent sales come from products that are less than two years old. The reintroduction of product patent would mean that companies will not be able to manufacture drugs patented after 1995. In other words, many Indian companies will face a serious decline in market opportunities after 2005 in this area.

The booming generic market will be a major solace for pharma companies in this situation. But as explained earlier, the generic market game is going to be tough even for the most accomplished of Indian pharma majors because of the complexities involved in getting clearances and the enormous costs that are involved. Moreover, the product patents, more often than not include additional process patents, patents for improving processes or methods of arriving at intermediaries. In most cases these patents are filed after the product patent and some of them exist long after the product patent expires. If an Indian company wants to sell a particular molecule in the US, it will have to evolve a strategy to manufacture it and file the necessary applications that will not infringe any of the numerous patents of the innovator and will still be commercially viable. This can be difficult, as the innovator usually patents the most obvious and economical ways of producing a chemical. Also setting up a

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US FDA approved plant (for sale of generics in US market) costs at least five times as much as putting up similar capacity conforming to Indian standards35

Under these circumstances, the small firms will find it difficult to survive as they lack the financial might to deal with complex legal hurdles as also to set up facilities in conformity with the specifications of the developed world. All these may eventually force the small players in a difficult spot.

3.2 Growth of Pharma Industry in Gujarat: Recent TrendsGujarat has been playing a major role not only in the sphere of production of drugs and pharmaceuticals, thus catering to the growing domestic demand, but also in earning valuable foreign exchange. At present, the state accounts for about 46 per cent of the total national production and 17 per cent of exports. As explained above, the industry has grown substantially over the last two decades deriving inspiration from the splendid performance of units such as Alembic and Sarabhai Chemicals in the pre-Independence period, and cashing in on the policies and facilities available. A number of young entrepreneurs of Gujarat have taken to this industry in the subsequent years.

A major factor that helped the industry in the state is an early development of certain crucial linkages. Thus, technical training institutions like LMCP since 1947 and the Bombay College since 1960s groomed pharmacists with a professional approach. Machinery manufacturers like CADMACH took care of the industry’s need for crucial capital goods.

Apart from such specific factors, the overall industrial scenario of Gujarat continues to provide impetus to the pharma industry. The Bombay-Ahmedabad route is well endowed with excellent physical infrastructure. Ahmedabad and Vadodara are fairly well developed; the two cities are connected by both state and national highways that link both Gandhinagar (the state capital) and Mumbai. The railways passing through Ahmedabad, Vadodara, Ankleshwar, Vapi, Valsad and Mumbai have historically been regarded as the catalyst for the urban-industrial growth and vibrancy of the so-called `golden corridor' that extends between Ahmedabad and Mumbai. Further, Gujarat already has a well developed chemicals and fertiliser industry, which has partly helped the pharma industry to stabilise. The industrial labour here is not aggressive and, hence, the wage cost is not a constraint to the producer. After the decline of the textile mills in Ahmedabad, quite a few entrepreneurs have diversified in to chemicals and pharma products. The state policies have been overtly pro-industry, and SSIs, particularly, received considerable state support in the 1960s and 1970s. All these factors have contributed to the growth of pharmaceutical industry in the state.

3.2.1 Number of Units It is estimated that there are around 75-100 bulk drug producers and 1000 manufacturing units mostly in formulations and other areas including excipients, disposables, homeopathic, ISM and miscellaneous products under the purview of FDCA. Of these ten are large, 100 are medium and the rest are small units36.

Every pharmaceutical unit is required to hold a license from the Food and Drugs Control Administration (FDCA), Government of Gujarat. The licensees could be actual producers with own manufacturing facilities or loan licensees with a permit to manufacture, but not in possession of the facility. They use the facilities available with the actual units on a rate contract basis and produce and market drugs under their own brand name. Actual (own)

35 Source: ‘Drug Rush’, Business World, April 10, 2000.36 For size classification, firms with turnover of Rs. 1000 million or more have been termed large, those with

turnover range of Rs. 100 to Rs. 500 million has been termed medium and turnover range of less than Rs. 10 million is termed small.

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licensees too can be loan licensees for those products for which they do not have any manufacturing facility. The distribution of units in terms of nature of license forms are given in Table 3.3.

Table 3.3: Number of Units (As on December 1999)

Location Total Own Licensee Loan Licensee Own and LoanAhmedabad 597 121 346 130Vadodara 287 108 106 73Gujarat 1792 581 677 534

Source: Food and Drug Control Administration, Gujarat State, Gandhinagar.

It is estimated that there are 7-8 big firms (Cadila Pharma, Zydus Cadila, Sun Pharma, Torrent, Core, Alembic, Sarabhai, etc.), 30 medium sized units and the rest are small units in Ahmedabad and Vadodara. The distribution of units in terms of dosage forms is given in Table 3.4.

Table 3.4: The Distribution of units in terms of Dosage Form (% of units)

Location Orals Orals and Parenterals ParenteralsAhmedabad 60 30 10Vadodara 75 20 5Source: Through interviews

3.2.2 Investment The structural characteristics of the pharma sector in the state have undergone significant changes over the three decades between the 1970s and 1990s. The statistics published in the Annual Survey of Industries (hereafter ASI) relating to the organised sector pharma units in Gujarat shows an increase in the capital output ratio by about three times between 1980-81 and 1994-95. The ratio of invested capital to labour increased during the same period nearly six times indicating a significant rise in capital intensity in this sector.

But a large number of units are outside the purview of ASI. According to the data provided by the FDCA, the capital investment in the state’s pharma sector, in real terms, went up dramatically over the 1980s and 1990s (Table 3.5).

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Table 3.5: Growth of Pharma Industry in Gujarat(Rs. Million)

Year Investment Production Exports1979-80 1594 1463 251980-81 1721 3157 2431981-82 2075 3723 1871982-83 2420 4579 1881983-84 3576 5653 2491984-85 4213 7573 5281985-86 4006 9492 4491986-87 4104 10846 6621987-88 4356 11922 13961988-89 4130 13994 13941989-90 5261 17753 25111990-91 5810 24820 46731992-93 6954 27083 37831993-94 10727 32729 41001994-95 13319 41180 54301995-96 14067 47008 68511996-97 14873 63135 77461997-98 13036 66862 7906

Source: Food and Drugs Control Administration, Gujarat State, Gandhinagar

3.2.3 Production, Trade and MarketThere was a commensurate rise in pharma production too. During the period between 1979-80 and 1997-98, the share of the state’s production in that of all India has increased from around 26 per cent to close to 46 per cent.

Despite fluctuations, there has been a secular increase in the state’s exports. It may be observed that exports as a proportion of turnover was much higher in the nineties as compared to that in the previous decade. The state’s share in all India exports was 16 per cent in 1997-98. This clearly substantiates the relative dominance of Gujarat in the Indian market. It commanded around 50 per cent of the total domestic market in 1997-98.

3.2.4 EmploymentOver the period between 1979-80 and 1997-98, employment in the sector more than doubled. Interestingly, it is the category of technical employees that registered a faster growth in overall employment. This corroborates the earlier observation about rising in capital intensity in the sector over the years.

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Table 3.6: Employment in the Pharma Sector in Gujarat

Year Number of Persons Employed Indices Technical Non-technical All Technical Non- technical All

1979-80 6715 19405 26120 100 100 1001980-81 8146 19349 27495 121 100 1051981-82 8265 20766 29031 123 107 1111982-83 8394 20969 29363 125 108 1121983-84 8782 21705 30487 131 112 1171984-85 9127 21981 31108 136 113 1191985-86 11289 28281 39570 168 146 1511986-87 11332 28987 40319 169 149 1541987-88 12552 32350 44902 187 167 1721988-89 12742 32656 45398 190 168 1741989-90 15099 38260 53359 225 197 2041990-91 16062 38843 54905 239 200 2101992-93 17552 41561 59113 261 214 2261993-94 19034 42197 61231 283 217 2341994-95 20529 42948 63477 306 221 2431995-96 21788 44081 65869 324 227 2521996-97 22275 44367 66642 332 229 2551997-98 22784 47825 70609 339 246 270Source: Same as Table 3.6.

3.3 Medical Disposables in AhmedabadAs mentioned earlier, the medical disposables industry originated in Gujarat with the establishment of the I. V. fluid manufacturing industry in the 1970s, particularly, Shree Krishna Keshav Laboratories (formerly Macgaw Ravindra Laboratories) followed by some more I. V. fluid manufacturers. The growth of this industry was supported by the easy availability of plastics raw materials and also plastics processing capacities and skills available in Gujarat.

Till 1989, the medical disposables were not covered under the Drugs and Cosmetics Act. In March 1989, the Ministry of Health and Family Welfare, Government of India, by a notification made it mandatory to manufacture the following three products only after obtaining license under the Drugs and Cosmetics Act, 1948.

1. Disposable perfusion sets2. Disposable syringes3. Disposable hypodermic needless

By this time, a number of units had already been installed in the small-scale sector for the manufacture of I. V. sets and other medical disposables. However, since the units were mostly promoted by either skilled workers or traders directly or indirectly working in the industry with limited investments, most of the units needed improvements to meet the requirements of Drug Control regulations. Since almost three decades, the units in Gujarat have been contributing more than 70 per cent requirements of the country. A number of units are exporting their products.

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4. BUSINESS LINKAGES OF PHARMA CLUSTERS IN AHMEDABAD AND VADODARA

4.0. IntroductionIn simple terms, an industrial cluster represents the spatio-sectoral concentration of manufacturing activities and services, in similar and related spheres. The accrual of benefits of scale and scope, even when such clusters are dominated by small firms, bears testimony to the potential of collective action. A significant advantage of industrial clustering is its potential to remarkably reduce the transaction costs, which directly benefits the units and, in turn the consumers. Whereas the nature of market, i.e., the demand for products, largely determines the growth of a certain industrial cluster, there are a number of supportive structures and policy factors that also contribute to the process. Additionally, clusters do not function in isolation. The growth of a cluster induces related industries and other service providers to come closer and grow in tandem.

4.1 Mapping the Pharma Cluster: Identifying the Linkages The pharma industry has grown over the years in Ahmedabad and Vadodara by developing linkages along its supply and distribution chains as also with a variety of support service providers. We will list out and describe the major elements in the pharma cluster including agencies, institutions, and associations. The inclusion of an element does not imply that its linkage with the industry is strong. In fact, the industry’s linkages with many of the elements are rather weak.

4.1.1 Pharma Manufactures: The Core of the ClusterAt the core of the cluster there are the drug manufacturers, who fall broadly under two categories - bulk drug producers and formulators. Formulators manufacture the end product that is finally consumed, whereas bulk drug manufacturers produce the inputs for formulators. In Ahmedabad and Vadodara there are hardly any bulk drug manufacturer. Most of the own and own-cum-loan licensees deal in formulations. Some of the firms are run by second generation entrepreneurs. They have done well during the early period, i.e., mid-seventies to early-nineties and are cushioned. The first generation units that came into existence during the late eighties to early nineties are comparatively small and are struggling. Besides, as stated earlier, there are also manufacturers of medical disposables.

4.1.2 Backward Industry LinkagesThe suppliers of raw material and capital goods form the most prominent backward linkages. It is important to note that the links between the industry and these suppliers spread beyond the geographical limits of the cluster. However, the industry is in no way dependent on import of either raw materials or machinery. The major input suppliers are as follows:

a. Bulk drugs: Bulk drugs are not generally available locally, i.e. in Ahmedabad and Vadodara. It is generally sourced through commission agents from Vapi and Ankaleshwar in Gujarat and also from other pharma units situated in Maharashtra, Tamil Nadu, Andhra Pradesh and North India. However, some big units in Ahmedabad and Vadodara do produce bulk drugs for their own consumption and also for sales to local formulation units. Bulk drugs are also sourced internationally through regular as well as exclusive agents.

b. Excipients: Majority of excipients are starch-based products. Production of excipients is covered under FDCA. Two local suppliers - Maize Products and Anil Starch cater to around 80 per cent of total requirements of Indian firms.

c. Coating material: Ready-made coating material are available locally.d. Empty capsules: It is also available locally. However, with mechanization of capsule filling

techniques, two distinct levels of producers - those whose products cater to the high precision requirement of automatic capsule filling machines and those whose products can only cater to manual or semi-automatic capsule filling machines.

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e. Preservatives: Preservatives like (benzoic acid) are available locally and also sourced from the Hyderabad region.

f. Ampules: These are basically supplied by SSI units and are available locally.g. Glass bials: This is a high-tech sector and has local organised sector suppliers.h. Printing and packaging: There are specialised vendors for pharma printing and packaging.

In view of the intricacies involved (because of regulatory requirements), many pharma majors have set up their own in-house printing and packaging material units. However, specialised vendors for printing and packaging are also available in abundance.

i. Machinery: Machinery for pharma manufacturers are available locally and are also available at Mumbai.

j. Human resources: This industry is basically run by technocrats. There is hardly any firm which is not owned and/or managed by a Pharmacy graduate or post-graduate or, a Chemical Engineer. This is true even for the small units. Most of the units are located in the industrial estates around Ahmedabad and Vadodara. Thus, the availability of technical personnel is ensured by the steady supply of graduates/post-graduates in Pharmacy by the local pharmacy college. The villages around the industrial estates ensure supply of non-technical labour. There is a comparatively higher presence of women labour, especially in the quality control and packaging sections.

4.3 Nature of Business LinkagesThere is hardly any backward integration for the industry excepting for cases where the bulk drug is produced by the same formulation unit or where the production of packaging material and printing are done in-house. This is the case only partially for some large firms. The production process does not involve subcontracting, excepting for certain areas related to sustained release. Neither does there is legal permission nor does the industry feels a need for subcontracting production. The only form of linkages between the units is through the loan licensee phenomenon. Here some units which are both loan and own license holders manufacture some of their products in some other units which has excess capacity. The pure loan licenses are basically trading/marketing unit utilising the excess production capacity of manufacturing units. The end products either pass through normal distribution channel (as explained in Chapter 2) or are exported or go for institutional sales. In the absence of brand names, small firms depend to a large extent also on institutional sales. Export is restricted to a handfull of firms directly, since there are lot of costly and time consuming procedures and stricter eligibility criterion in the importing country for exports.

4.4 Linkages in Medical Disposables ManufacturingIn the medical disposables sub sector, currently, the incidence of subcontracting is limited. However, there is industrial sense in specialisation whereby some units can manufacture only I.V. fluid cannulas, others only regulators etc. A mother unit can only assemble and market the products.

Unlike pharma, the factory owners and manager of disposable units have mostly come from a trading background, either from plastics or from textile (after the textiles mill debacles). The labour again is available locally from the villages around the industrial zones where these units are settled.

Raw materials for medical disposables are also available locally. These include tubes, needles, plastic moulds, etc. Imported needles and moulds are also used, but mostly by large manufacturers.

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4.5 Current level of Cooperation and Competition at the firm level

4.5.1 Competitive Strategies at the Firm LevelThe basis of survival and growth in a market situation crucially depends upon the nature and level of competition. The information, as collected through the survey, on the potential immediate competitors as perceived by the entrepreneurs, though limited, does indicate existence of potential competitors across all scales of enterprises, namely, small, medium and large, and across locations, i.e., local, within the state of Gujarat, in India and abroad. These responses depended upon the nature of immediate market and the market that needed exploring, as perceived by the individual firms. With the industry globalising, the effective base of competition is most likely to be widened further.

Table 4.1: Major Issues in Inter-firm CompetitionIssues ResponsesLow price 9 (64.3)Extensive sales network 7 (50.0)Brand name/company's image 6 (42.9)Sales promotion (publicity, packaging, concessional offers) 6 (42.9)Product quality (reflecting technology standards) 5 (35.7)Cost of retaining skilled personnel 4 (28.6)Volume of output 3 (21.4)Prompt delivery 2 (14.3)Locational advantages 2 (14.3)Others 1 (7.1)N = 14Source: Field Survey. Notes: Multiple responses. Bracketed figures are percentages.

Table 4 .2 Firm Level Competitive Practices

Practices ResponsesWooing customers (by undesirable means) 6 (42.9)Copying competitor’s products 5 (35.7)Obtaining information on competitor's firm through its employees

5 (35.7)

Misinforming customers, traders, suppliers about competitor's products

4 (28.6)

Imitating competitor's trade mark 3 (21.4)Others 1 (7.1)N = 14Source: Field Survey. Notes: Multiple responses. Bracketed figures are percentages.

As regards the main elements of competition as are present and perceived by the entrepreneurs, Table 4.1 lists the first two as low price and extensive sales network as providing the competitive edge in the business. Similarly, the popularity of the brand name, extent of publicity and technology standards were also considered important determinants of good performance by the firms. The intensity of competition could also be reflected in inter-firm rivalry whereby discrete tactics to out-do the immediate local competitor are followed. Table 4.2 presents a few such practices as prevailing in the local industry. Wooing customers by undesirable means, copying competitors products and eliciting information on competitors products and business through employees were reported to be various means of coping with local competitive pressures.

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4.5.2. Nature and Scope of CooperationEven in a situation of steep competition to capture as much market share as possible or, even to retain the current position, firms, especially the SMEs, do attribute significant value to the need to cooperate, both at the industry as well as local firm level. The nature of the pharma industry is such, being knowledge based and also dependent upon dynamic regulative environment, that there remains an increasing premise of mutual support and collective action. At a certain level, the very existence of a symbiotic reliance of the loan licensees up on the actual/own licensees, especially in terms of access to capital equipment, suggests the importance of cooperation in this industry.

Table 4.3: Membership of Pharma Manufacturers in Business AssociationsAssociation Membership

Indian Drug Manufacturers Association 13 (92.8)Gujarat Chamber of Commerce and Industry 5 (35.7)Chemexil 4 (28.6)Indian Pharmaceutical Association 3 (21.4)Vatva Industrial Association 2 (14.3)Others 3 (28.6)N = 14Source: Field Survey. Notes: Multiple responses. Bracketed figures are percentages.

In all probability, as emerged through the survey, it was the case that at the firm level the practice of either sharing input procurement or lending machinery, or even extending a financial loan was not much in vogue. However, there remained ample interest for cooperation in a formal manner as it found expression through membership in relevant business associations. As may be seen in Table 4.3 a very high proportion of units surveyed had been members of the Indian Drug Manufacturers Association. Some units also had additional membership in other useful business bodies, including the Gujarat Chamber of Commerce and Industry and Chemexil. In response to a query on whether the entrepreneurs felt discussing with fellow producers in the locality regarding their problems useful, as high as two-thirds of respondents replied in the affirmative. A higher proportion (above 70 per cent) of respondents also held that linking business with other firms in the locality engaged in manufacturing similar products would be mutually advantageous. An idea about the nature of support or benefit the entrepreneurs stated to have obtained, by dint of their membership in formal business associations, can be formed from Table 4.4. The two most important supportive roles associations had performed concerned assisting member firms in legal difficulties and also dealing with often cumbersome and exacting government policy instruments and procedureal hurdles. Providing access to technological and market information on latest products through making available trade magazines and bulletins was also stated as an important facility members derived from business associations.

Table 4.4: Nature of Support Received through Business AssociationsForms of Support ResponsesAssisting in legal matters 11 (78.6)Helping in dealing with government policies and procedures 11 (78.6)Providing information on products (by procuring trade magazines, bulletins, etc) 6 (42.9)Sales promotion (by organising trade fairs, exhibitions, group publicity) 3 (21.4)Helping in procuring inputs and services 2 (14.3)Making available information on other related units elsewhere 1 (7.1)Arranging for training workers 1 (7.1)N = 14Source: Field Survey. Notes: Multiple responses. Bracketed figures are percentages.

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Table 4.5: Entrepreneurs' Perception about Effect of Networks on Long Term Competitiveness

Likely Effect FrequencyImportant Very

ImportantImprove management skills 5 (35.7) 3 (21.4)Improve product quality 4 (28.6) 4 (28.6)Induce investments in new equipments/methods of production 1 (7.1) 5 (35.7)Improve strategic planning 5 (35.7) 1 (7.1)Change organisation of production/work 1 (7.1) 4 (28.6)Investing in training workforce 2 (14.3) 1 (7.1)Source: Field Survey. Notes: Multiple responses. Bracketed figures are percentages.

The entrepreneurs as also others directly or indirectly concerned with the industry emphasised the critical role networking would play in the emerging eventuality of globalisation of business and markets. In Table 4.5 a glimpse into the perception of pharma entrepreneurs regarding the likely effects that networking would have on long term competitiveness of firms may be had. The major responses highlight a potential improvement in both management practices and the quality of the product; these are the crucial requirements in a highly competitive global market. By recognising the importance of networks being catalystic in the firms' quest for acquiring higher levels of technology and also benefiting through strategic planning, the local manufacturers did point to the substantial scope for collective efforts.

4.6 InstitutionsA number of institutions/bodies, both public and private, have been playing a major role in the growth of the industry. These include:

1. Central level institutions2. State level institutions3. Global regulatory mechanisms4. Private sector networks5. Other support institutions

4.6.1 Central Level institutionsAt the central level the Drug Control Authority of India under the Ministry of Health and Family Welfare controls the area of introduction of new drugs in India. The department also handles subjects related to GMP and its upgradation. The office of the Deputy Drug Controller (Western Zone) controls the issuance of the WHO-GMP certification.

The Department of Chemicals and Petrochemicals under the Ministry of Chemicals and Fertilizers also performs both regulatory as well as developmental roles. The Drug Price Equalization Account (DPEA) of this department regulates matters related to excess drug prices charged by firms. An export promotion cell in the pharmaceutical division of the department has been created with the objective of boosting pharmaceutical exports and to act as a nodal centre for consultation and providing support on various aspects concerning pharmaceutical exports. The cell also undertakes promotional activities for accelerating pharmaceutical exports and considers suggestions for modifications in EXIM Policy from the industry. The cell has also been entrusted with the organisation of seminars and workshops on standards, quality control requirements etc. of important countries so as to prepare the domestic companies for exporting their products.

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The National Pharmaceutical Pricing Authority (NPPA), constituted in 1997, implements the drug policy of the government through the Drugs Prices Control Order (DPCO). The NPPA also advises the Central Government on changes/revisions on the Drug Policy. The chairman of NPPA, in his capacity as the member secretary to the Pharmaceutical Research and Development Committee, Government of India, advises the Central Government regarding the support required by Indian pharma companies to undertake domestic R and D.

4.6.2 State Level

4.6.2.1 The Commissionerate of Industries, Government of GujaratThe Commissionerate of Industries, Government of Gujarat plays the key role for the development of Industries in Gujarat. The Industrial Extension Bureau (iNDEXTb) is a specially designed cell under the Commissionerate of Industries for the promotion of industries in Gujarat. The office of the Commissionerate of Industries also through its District Industries Centre plays a very important role for the development of industries in Gujarat. Moreover the Government of Gujarat through its recently announced Industrial Policy has also given substantial importance on the development of clusters and also technical upgradation. Some relevant sections as given in the “Gujarat Industrial Policy 2000” is given in the box below:

Interest Subsidy to Small Scale Industry: The State Government has accorded priority for development of small-scale industries. A new scheme has been introduced to provide interest subsidy at the rate of 5% per annum for 5 years period upto a maximum of Rs. 25 lakhs to all industrial units coming up in the State. Existing units carrying out expansion, diversification will be offered interest subsidy at a rate of 3% per annum upto a maximum of Rs. 10 lakhs.

Cluster Approach: The State Government intends to strengthen the industrial clusters developed at different locations with the involvement of Industries Associations of the area and R&D institutions. Assistance will be provided for establishing common facilities covering quality improvement, technology upgradation, market promotion and technical skill. Financial assistance upto Rs. 5 crores will be considered per cluster.

Assistance for Quality Certification: The State Government accords high priority for quality improvement. Assistance will be provided to industrial units obtaining Quality Certification from approved institutions/research laboratories, at the rate of 50% of the expenditure upto a maximum of Rs. 2 lakhs.

Market Promotion: Market promotion activities like Buyer Seller Meets, Trade Fair etc. will be encouraged. Common purchase policy will be introduced for purchase of items manufactured by small-scale units of the State. A booklet incorporating items required by State Government Corporations/Boards and large companies will be published for the benefit of small-scale industries.

Technology Upgradation: The State Government has accorded high priority for upgradation of technology and modernisation by industrial units. The Research and Development Institutions set up in the State will be strengthened and will be encouraged for taking up technology upgradation programme in specific industrial clusters. Encouragement will be given to get accreditation with International Quality Testing Agencies in order to make them internationally reputed. Innovations from small enterprises and individuals will be encouraged. The institutions set up in this regard will be supported. The Technology Cell (TBIIP) set up in iNDEXTb with the help of UNIDO will be strengthened.

Assistance for Patent Registration: A Facilitation Cell will be opened to assist entrepreneurs for Patent and Intellectual Property Right (IPR) provisions. The industries as well as R&D institutions will be encouraged for filing patent on their research. Assistance will be provided at the rate of 50% of expenses in this regard upto a maximum of Rs. 5 lakhs.

Promotion of Specific Industrial Sectors: The State Government will encourage development of specific industrial sectors like agro and food processing industries, mineral based industries, electronics and information technology, engineering ancillary industries, textile including garments, gems and jewellery, pharmaceuticals and petrochemical downstream and plastic processing industries. Assistance will be provided for creating necessary infrastructure facilities as well as research and development activities.

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4.6.2.2. Gujarat Industrial Development cooperation

Gujarat Industrial Development Corporation (GIDC) was established in 1962, to encourage rapid and systematic development of industries in Gujarat. GIDC has played a crucial role of being the Growth Catalyst in the phase of transition from dependence on agriculture and textiles to an industry leader in the field of chemicals, fertilizers, pharmaceuticals, engineering, petrochemicals, etc.

GIDC has been dedicated to develop the industrial infrastructure in the state of Gujarat. Over 168 industrial estates have been developed and sustained by GIDC, which are spread all over Gujarat. These industrial estates house more then 17,000 large, medium and small-scale industries. Mega industrial estates are under development at Vilayat (Vagra), Jhagadia, and Dahej in Bharuch district for chemical industries and Savli in Vadodara district for non-polluting units.

Over a span of 35 years, GIDC has been the growth catalyst in developing industrial infrastructure, offering entrepreneurs a solid base to prosper and stimulating industrialisation in backward areas of the Gujarat State. The pharmaceutical industry in mostly set up in these industrial estate.

4.6.2.3. Gujarat Cleaner Production Centre (GCPC)Gujarat Cleaner Production Centre (GCPC) has been established since August 1998 at GIDC to create an awarness for Cleaner Production among industries in Gujarat. Technical support for GCPC is provided by the National Cleaner Production Centre (NCPC) and UNIDO, while the financial support is provided by GIDC. GCPC conducts orientation programmes, workshops and demonstrations at industrial estates and engineering institutes to promote Cleaner Production.

4.6.2.4 The Food and Drugs Control Administration (FDCA)The Food and Drugs Control Administration (FDCA) under the Ministry of Health and Family Welfare, Government of Gujarat based in the state capital, Gandhinagar also plays a critical and pivoted role for this cluster. This body issues drug licenses, monitors quality control, issues State GMP certificate, undertakes periodic inspection of units, and, overall, keeps a close watch over the industry, especially with respect to quality. The FDCA has a wide network of activities all over the state. At the level of officers, it has a commissioner, two joint commissioners, 20 assistant commissioners, 16 senior drug inspectors and 24 drug inspectors. The Gujarat FDCA office also plays a promotional role. Its major strength is that it can convince and motivate both the government and the industry leaders to dialogue. This office is also taking the lead to create an optimum proactive workforce to champion the cause of Gujarat as a leader in the Indian pharma industry.

4.6.3 Global Regulatory MechanismsIn the emerging business scenario that would result from the complete operationalisation of WTO norms and conditions, the regulatory environment and institutional mechanisms will undergo dramatic changes. Though the domestic administrative set up may continue to be the same, the industry will have to face a greater degree of trade regulation when it is exposed to the possibility of being subjected to the imposition of non-tariff and technical barriers to trade. In short, the hub of the regulatory measures is slowly being shifted from local institutional set up towards global bodies. This shift will have significant impact on the conduct and performance of pharma industry in the coming years. How capable are the indigenous units in understanding and coping with the changes in the business environment and establishing and maintaining effective linkages with the changed institutional forms is what would determine the future course of growth of the industry.

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4.6.4 Linkages with Technical and Business Support Providers Pharmaceutical production being a knowledge intensive industry, it needs to have organic links with educational institutions and R and D centres for the supply of up-to-date and viable processes and trained manpower. This is all the more true for the units in the small and medium category, as they lack the financial capability to do basic research activities in-house. It may also be noted that educational and research institutions serve as major sources of supply of pharma entrepreneurs for the local industry. Another crucial linkage is the one with testing laboratories due to regulatory requirements.

LM College of Pharmacy (LMCP)The oldest and the most prestigious institution in the area of pharmacy education in the region, LMCP, was founded in 1947 by the Ahmedabad Education Society. Incidentally, it was the first full fledged pharmacy college to have been established in India. The College was set up with the aim to train students, encourage and direct R and D in pharma science, and act as a catalyst for the growth of the industry. In addition to Bachelor’s, Master’s and doctoral programmes in pharmacy science, it offers diploma programmes for retail pharmacists. It has research programmes on medicinal chemistry, pharmacology, and pharmaceutical technology. The alumni of LMCP are serving in drug industry, community pharmacy and hospital pharmacy, regulatory agencies, R and D laboratories, government policy making bodies and academic institutions, both within and outside the country.

PERD Centre, AhmedabadAmong R and D centres, the B.V. Patel PERD Centre in Ahmedabad has a significant place. In fact, it is a unique institution in that it has the government, industry and academia as its stakeholders. The PERD Centre was established in 1989 as a trust and society. The B.V. Patel Education Trust of Ahmedabad and the Gujarat Branch of the Indian Pharmaceutical Association have promoted it. It is the first and only private multi-disciplinary postgraduate research and service institution in India to promote advanced research, services and training in the pharmaceutical sciences and industry.

There are four major divisions in PERD: (1) Contract and consultation on all aspects of basic and applied industrial research projects; (2) drug discovery research centre; (3) drug quality testing facilities; and (4) advanced training, research and educational centre. It has well equipped labs and trained technical staff. Research facilities are available in analytical instrumentation, cellular and molecular biology, clinical testing, biostatistics, formulations, pharma technology, pharmacokinetics and biopharmaceutics, pharmacology and toxicology, phytochemistry and pharmacognosy, radiation and radioisotope, synthetic and medical chemistry etc. The centre also has an array of analytical equipments and machineries. The PERD Centre has so far developed about 15 formulations for commercialisation. It offers a range of services to the industry including toxicological evaluation, development of animal models for evaluation of pharmacological evaluation of drugs, phyto-chemical evaluation and standardisation of medicinal plants used in traditional medicines, development of synthetic process for bulk drugs and intermediates etc.

The Food and Drug Control Laboratory (FDCL), VadodaraThe FDCL was established as early as in 1947 in the erstwhile princely state of Baroda. When Gujarat became a separate state in 1959, the FDCL became the testing laboratory for Gujarat State Drug Control Administration. The FDCL is capable of analysing all categories of drugs (except sera and vaccines) with a capacity to test 8000 drug samples. There are divisional laboratories in pharmaceutical chemistry, immunology, pharmacology, pharmacognosy and ayurveda. The staff is drawn from various disciplines like pharmacy, chemistry, microbiology and botany.

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Private LaboratoriesThere are 11 approved testing laboratories in the state approved by the office of FDCA, Gujarat. These do various statutory tests for bulk drugs and formulations as per law. Only one firm does bio-equivalence and bio-availability test. The industry has direct commercial linkages with these laboratories.

Central Institute of Plastic Engineering and Technology (CIPET)

The CIPET is a Government of India organisation working under Ministry of Chemicals and Fertilizers. CIPET is having diversified activities in the field of plastics like mould design, product testing, plastic processing and mould manufacturing. In Ahmedabad, CIPET is also having a plastic testing equipment fabrication cell where various types of testing equipments to control the quality of plastic materials and products are being developed. These equipments are as per various national and international standards. The price of the equipments has been kept very competitive in comparison to the many global suppliers of testing equipments so that the plastic units, which are in small sector, can afford to procure these equipments.

The equipments have already been supplied to reputed industries, training institutes, various central and state government organisations and some of the equipments have been exported also. CIPET does manpower training (managerial and supervisory) through structured as well as tailor-made courses. It also provides technical services in the following areas:

Consultancy and advisory services to plastic industries Testing and standardisation Application development Design and development of moulds and dies Material selection for new product substitution Machinery and equipment selection Setting up of testing laboratories

4.6.5 Linkages with Industry and Business NetworksPeer networks like business associations are an important part of the industry environment. In the pharma sector there are three prominent entrepreneurial networks – Indian Drug Manufacturers Association, Indian Pharmaceutical Association and the organisation of Pharmaceutical Producers of India (OPPI), Bulk Drug Manufacturers Association (BDMA), besides there is a separate organisation of medical disposable units called the Medical Disposable Manufacturers Association (MDMA). Besides there are also small local associations of pharma manufacturers like Rakanpur Santhej Pharma Manufacturers Association. A new lobby of large firms has also been formed. There is also very powerful lobby of chemists and druggists that control the prescription distribution channel - All India Organisation for Chemists and Druggists (AIOCD). Being a technocrat dominated industry there is also an association of technocrats called Indian Pharmaceutical Association (IPA).

Indian Drug Manufacturers Association (IDMA)

Founded in 1961, IDMA describes itself as the voice of the national sector of the pharma industry as its members represent the Indian manufacturers only. It has 513 members (as in 1998) - 90 per cent of them being small firms. IDMA has been in the forefront analysing and disseminating the likely impact of a product patent system on domestic industry.

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IDMA organises and takes part in national and international seminars/ workshops relating to key issues of the pharma and health care industries. It plays a very active role in policy consultations and dissemination of information to its members. It brings out two publications - one general and the other technical.

IDMA has three state level bodies in Tamil Nadu, West Bengal and Ahmedabad. The Gujarat chapter called the IDMA-Gujarat State Board (IDMA-GSB) has 150 member firms, 80 per cent of whom are in the small scale sector. IDMA-GSB plays a crucial role with respect to government liaison and enhancing the industry’s knowledge base. Among the 17 major workshops/seminars/consultations organised by the IDMA-GSB during the last four years, issues concerning quality, information technology and fiscal issues has received prominence.

Organisation of Pharmaceutical Producers of India (OPPI)

OPPI is an organisation of pharma manufacturers established in 1965, four years after IDMA was launched. Currently, it has a membership of about 67. This includes 59 members from the drugs and pharmaceutical sector. Around 66 per cent of them are companies of foreign origin. Only a couple of Ahmedabad and Vadodara based firms are members of both OPPI and IDMA.

The Organisation takes initiative in organising seminars and workshops to discuss the key issues in the area. It brings out technical publications including Quality Assurance Guide and Safety, Health and Environmental Guide. OPPI is an active member of International Federation of Pharmaceutical Manufacturers (IFPMA) and has developed operational guidelines for interpretation and implementation of IFPMA code of Ethical Marketing Practices.

OPPI has been lobbying vigorously for the amendment of the Indian Patent Law to make it TRIPs compliant. It has been actively advocating rationalisation of duty structure and a revision of drug pricing policy. Efforts have been made by this body to make suppliers (of bulk drugs, excipients, packaging materials, equipments that go in for manufacturing these etc.) more responsive to the needs of the pharmaceutical industry in terms of quality, price stability and delivery schedules.

Indian Pharmaceutical Alliance

The Indian Pharmaceutical Alliance represents research based national pharmaceutical companies. It consists of the following members:Alembic Limited Nicholas Piramal India LimitedCipla Limited Ranbaxy Laboratories LimitedDr. Reddy’s Laboratories Ltd. Sun Pharmaceutical Industries LimitedLupin Laboratories Limited Wockhardt Limited

These companies’ annual R & D spend at Rs. 250 crore account for 90 per cent of total private sector spending in pharmaceutical research & development. These companies contribute one-fourth of the country’s exports of drugs and pharmaceuticals and share over 23 per cent of the domestic market.

The main aims of the Indian Pharmaceutical Alliance are:4. Partnering the government in the evolution of a patent regime that will on the one hand

meet the TRIPs obligations and on the other serve national interest;5. Engaging the government in constructive dialogue to move to price management from price

control regime for the benefit of the consumer; and 6. Working with the government in progressively upgrading regulatory provisions, procedures

and standards for harmonisation with those of the developed markets

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The Indian Pharmaceutical Alliance, working closely with Government on policy related matters, will seek to imbibe the experiences of the generic pharmaceutical industry internationally. It will seek affliation with the International Generic Pharmaceutical Association (IGPA) located at Brussels, which represents Generic Pharmaceutical Industry of Europe, Canada and US. This association of more than 500 International Companies collectively represents a significant cross-section of the global pharmaceutical industry. The main objective of IGPA is to promote international pharmaceutical harmonisation and regulatory decisions in a way that will benefit the public and strengthen the industry.

All India Organisation of Chemists and Druggists (AIOCD)

AIOCD was formed in 1975 with the aim to bring together chemists, distributors and stockists and bring them under one association. The association has a three-tier system, with taluka, district and state level associations. The current membership strength of AIOCD is 550,000, that control an estimated business of Rs. 260,000 million.

About a decade back, agreements were made between the AIOCD, IDMA and OPPI, where by the all India margins for retailers and wholesalers for non-scheduled category drugs was fixed at 20 per cent and 10 per cent respectively, and 16 per cent and 8 per cent for scheduled category drugs respectively. The association offers protection to the trade fraternity. In case of breakage, leakage and expired products, cent per cent replacement of the product is guaranteed. The change over from 50 per cent to 100 per cent replacement of defective goods was accomplished only recently. The AIOCD has one or more offices in every state. The AIOCD bulletins are published regularly to increase awareness. Pharma manufacturers generally publish their formulations through AIOCD bulletins.

At least two to three times a year, workshops are held at state, district and zonal level to increase awareness among the trade. Topics relating to new rules and regulations, introduction of new products, new trading policy, banking, finance and various other aspects relating to the trade and pharma industry are discussed. A convention is held every two years, where greater exchange of information is facilitated. AIOCD does not agree with the government's move for opening up of retail sector to foreign investment.

Indian Pharmaceutical Association (IPA)

IPA was established in 1939. It is the national professional body of pharmasists. Many industrialists and government officers with pharmacy background are members of IPA. The major areas of activity of IPA are training, research, publications, organisation of workshops and changes in legislation. IPA has created specialised divisions to impart training, disseminate information and education related to various professional aspects of pharmacy including industrial pharmacy, education, regulatory affairs, community, hospital and clinical pharmacy.

Medical Disposables Manufacturers Association (MDMA)

MDMA was formed in 1991 with a view to work together for the emerging technical and commercial needs of the member units. At present, there are 36 member units of the MDMA. The annual turnover of these units ranges from Rs. 3 million to Rs. 20 million. The major activities include:

Exchange of information regarding changing government regulations Undertaking common interest development programmes Representing the requirements of the industry to the government and other regulatory

bodies.

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With the globalisation and other challenges being faced by the industry, the association has now been activated and is working for the growth of the member units, which have the state-of-the-art technology in manufacturing of medical disposables.

4.6.6 Other Support Agencies

Manufacturers of Pharma MachineryIt needs to be noted that though there is a fairly important base of pharma machine manufacturing in Ahmedabad, there does not exist any formal effective body of entrepreneurs. During the interviews, some expressed keen interest to form an association of machine manufacturers. Even if the total number of entrepreneurs is around 40-50, an association could be of much use in a variety of ways , especially, in terms of liaison with government, consulting on procedural matters concerning exports and sector specific policies, and organising/ participating in state/ national level technical exhibitions. As a number of problems faced by this industry are not the same as those encountering drugs and pharma enterprises, the role of association was envisaged to be vital in furthering the interests of the industry. This specific instance highlights the need for collective action.

National Productivity Council (NPC)One prospective specialised support institution in this linkage is the National Productivity Council (NPC). NPC is a national level organisation to promote productivity culture in India. NPC offers consultancy and training services in various fields with a focus on shopfloor improvement. It has Post Graduate Engineers who offer services in industrial engineering, quality management, maintenance management, environment management and human resource development. It has significant experience in consulting services in most industry sectors including pharmaceuticals. NPC can offer the following specific services to the pharma units: ISO 9002 Consultancy Service Productivity Improvement: (Waste Reduction, Good House Keeping and Manpower

Productivity) Cleaner Production Solid Waste Management Energy Audits Training (for Workers, Supervisors and Executives)

Apart from the above, there are significant service providers like banks and financial institutions, consultants and training institutes, who are linked to the industry all along its supply and distribution chains. SIDBI is the major term-lending and development oriented financial institution for the small and medium enterprises. Banks and Gujarat State Financial Corporation help them with short-term working capital. Industrial Extension Bureau (iNDEXTb) also plays a major promotional role. The Indian Institute of Management (IIMA) and the Entrepreneurship Development Institute of India (EDII) are prominent training institutes in the area of management . They conduct both general and industry-specific training programmes periodically. They also carry out in-house tailor made programmes for firms. Gujarat Industrial and Technical Consultancy Organisation Ltd. (GITCO) is a potential technical consultancy service provider.

5. ISSUES OF CONCERN AND SUGGESTED ACTION PLAN

5.0 IntroductionThe rapid growth in the pharma sector the world over, technologically and market wise, its increasing integration with global market, and the strengthening of national and international regulatory norms have put the pharma industry, especially the small firms in Gujarat, at a

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difficult juncture. They have to make definite choices in relation to quality standards, prices production marketing and organisation - many of these being outside their current frame of commercial reference so far. In this situation, the survival of small firms would depend on how well and quickly they adapt to the new business scenario and evolve appropriate strategies. Even the relatively larger firms are also not free from these compulsions. They are also anticipating problems, especially those related to R and D. The small firms of medical disposables also face a separate yet related set of problems. Section 5.1 describes the issues that have been highlighted during the interviews with entrepreneurs and others connected with the industry. Section 5.2 suggests the plausible “Action Plan” for UNIDO’s intervention in the cluster.

5.1 Critical Issues before the Pharma IndustryThe regulatory environment of the pharma industry is being overhauled rapidly to make its TRIPs and GMP complaint. In the highly protected, pre-liberalisation era price was the major competitive weapon in the hands of small-scale pharma units. The production and marketing set up has been geared towards meeting requirements within the local boundaries or doing business with governments. Though small units in Gujarat have started selling their products in north, east and central India, very few have gone for their own brand names. The overemphasis on price has resulted in a total neglect of quality in these segments. Due to the sheer smallness of the units they have not been able to plough back the profits to upgrade quality or carry out basic research.

Further, it has been pointed out in many fora that there has been a proliferation of spurious drugs in the market. According to OPPI estimates, 20 per cent of sales of several popular medications are spurious or counterfeit drugs. They originate mainly from Uttar Pradesh, Bihar, Delhi, Rajasthan and Gujarat. Given the fact that a large number of drugs go off patent in the coming two to three years, many multinationals and large Indian companies are likely to enter the generic markets in the hinterlands to reap profits driven by high volume sales. Their major targets, apart from the scores of rural customers, would be the small and medium sized hospitals, health institutions and medical practitioners. It must be remembered that generic sales do not require massive promotional expenses, which can bring the prices down to competitive levels.

The emerging business environment demands strict maintenance of quality standards – not in terms of a simple analysis of the final product for compliance to their labelled claims, but in terms of total over their procedural parameters.

5.1.1 TRIPs related issuesThe TRIPs issue has received mention in the previous chapters. There, however, exists lack of clarity and, hence, unanimity regarding the implications of TRIPs. The views and stance taken by the industry and various industry associations have varied as much as their perception about the actual modus operandi of implementation of the regulation.

AS for the government, it has definitely initiated a movement effected through the Patents Amendment Act, 1999 and the foreign firms have started registering patents. The ‘D – day’ is a few years down the road. The big firms have understood its implications and so do the government. There is already a serious more on ‘R & D’ issues of both front – R & D fund and proposed by the government for Pharma and birth of a new association of big firms with ‘R & D’ as the chief agenda etc. But the small firms are practically unmoved as yet. This may be due to lack of full information, the lesser probability of affecting their business prospects (sine most of them operate in the generic off-patent drugs) and may be also due to the different positions taken by the various interest groups.

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The two leading associations of phrama manufacturers, OPPI and IDMA, are divided in their positions with respect to the implication of the proposed patent law for drug prices. IDMA has been arguing that while TRIPs compliance is inevitable, it can be done with specific minimum requirements. It feels that it is important that India makes full use of the positive aspects of TRIPs like, for instance, the scope for transfer and dissemination of technology, strict enforcement of rules to prevent misuse of IPR or imposition of barriers to trade. At the same time, the country should proceed cautiously in phases, given its lack of experience in the area of IPRs and its commitment to alleviate poverty and ensure social justice to all. According to IDMA, medicines need special consideration in the absence of a national health care scheme and the tendency of MNCs to resort to high prices. It thinks that the new law should allow conditionally for compulsory licensing or issue of license of right.

OPPI’s position is that a strong system of protection of intellectual property rights and innovation is essential for the Indian pharma industry to survive and develop its scientific and technological capabilities. It is, hence, against the demands of compulsory licensing and reversal of the burden of proof. The Organisation argues that the apprehension that a TRIP compliant patent law will result in a price hike or harm local entrepreneurship is not grounded in facts. As regards prices, it argues that in a country like India the international manufacturers base their pricing strategies on the criterion of affordability. The local industry will not be damaged as it will be able to exploit the opportunities in the booming generic market.

Thus, IDMA, the voice of domestic firms, apprehends an onslaught of mighty MNCs and a spiralling of drug prices once product patents are introduced. OPPI, the association of large Indian firms and MNCs, on the other hand, think product patents are not going to affect prices significantly as the MNCs can afford to charge lower prices in a third world market.

5.1.2 WHO-GMP and other quality and related issuesIssues relating to WHO-GMP compliance have been a relatively major area of concern for the industry as a whole. Here the primary affected group are the small firms. The large firms and majority of the medium firms have already graduated to the “desired” level of quality. The emerging regulatory trend is a movement towards a more stricter quality norms as described in previous chapter. Briefly (as given in Chapter 2), the WHO-GMP guidelines cover comprehensively the entire process of manufacturing right from the entry of raw material till the exit of final products into the supply chain, involving areas like documentation, personnel, material, infrastructure and management.

In order to build up quality in the end product, adequate precautions are to be taken to prevent contamination in mix-up. In addition to chemical purity, bio-availability and microbiological purity of drugs are to be ensured. Two main objectives of WHO-GMP are to prevent contamination and ensure the reproducible quality of drugs, by controlling all variables. The WHO guidelines on Good Manufacturing Practices for pharmaceutical products urge that all manufacturing processes are clearly defined, systematically reviewed, and shown to

be capable of consistently manufacturing pharma products of the required quality that comply with their specifications;

all necessary facilities are provided including qualified trained personnel, adequate premises and space, suitable equipment and services, correct materials, containers and labels, approved procedures and instructions, suitable storage and transport and adequate personnel, laboratories and equipments for in process controls;

instructions and procedures are written in clear and unambiguous language; operators are trained to carry out procedures correctly; records are made (manually and /or by recording instruments) during manufacture to

show that all the steps required by the defined procedures and instructions have actually

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been taken and that the quantity and quality of the product are as expected and any significant deviation fully recorded and investigated;

records covering manufacture and distribution are retained in a comprehensive and accessible form;

a system is available to recall any batch of product from sale or supply complaints about marketed products are examined, the causes of quality defect

investigated, and appropriate measures taken.

In short the GMP guidelines cover comprehensively the entire process right from manufacturing till the product reaches the final consumer.

In the light of the above, the DCC subcommittee has proposed revamping of the Schedule M, covering specifications such as general requirements, buildings and premises, personal sanitation, hygiene and training, production and operation controls, quality control and assurance, stability and validation studies, documentation, complaints and self-inspections and special requirements for individual formulation categories. Among other things, the amendment calls for the following: To maintain a ratio of 1:2 between the constructed area and surrounding premises to environmental pollution; To install a validated water system to aid monitoring and control of bio-burden levels; To have a good disposal system, in the absence of which arrangements to recycle

rejects; To have proper environmental control, with emphasis on buildings, till the primary

packaging is complete. To ensure supply of filtered air in all production areas to prevent environmental pollution; To have specifically designed areas for production, quality control and storage and

ancillary areas; To take adequate precautions to segregate the manufacture of highly potent drugs to

avoid cross contamination; To design adequate operational and process controls to ensure reproducible quality of

drugs; To ensure total quality control from raw materials procurement till the retail counter; To undertake detailed stability studies to establish the quality of drugs in different climatic

and storing conditions; and To evolve clear and realistic documentation procedures.

Further, tighter FDA regulations and the move to global standardisation have created a need to prove compliance with environmental standards for each production batch.

Interestingly, apart from regulatory compliance, the industry feels that this is also gradually becoming a demand from the market. Many bulk purchasers, some State Governments and importers are demanding such stricter quality compliance. It is also believed that there will be a movement towards specialization: marketing (by big firms who have established brand names) and manufacturing (by small and medium firms). Here, among others the issue of quality may be a critical choice factor by the marketing firms. Many multinationals and large Indian companies are likely to enter the generic markets in the hinterlands to reap profits driven by high volume sales. Their major targets, apart from the scores of rural customers, would be the small and medium sized hospitals, health institutions and medical practitioners. It must be remembered that generic sales do not require massive promotional expenses, which can bring the prices down to competitive levels and provide further challenges not only on the price front, but also on the quality aspect, as the large firms can have smoother entry because of their higher level of quality certification.

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Not the least, there is an emerging trend of some of the big firms going for making their units US-FDA equivalent in quality standards. This requires investment to the tune of millions of dollars. The question is how for to go, what should be the goal?

But then there is another side of the story. Despite the ancitipated needs the small and medium sized firms are finding it difficult, especially because of their unpreparedness to invest huge amounts. WHO GMP requirement would demand an investment to the tune of Rs. 2 million to Rs. 4 million per unit in adjusting premises or installing sophisticated quality control measures. At present, the entrepreneurs are weighing the costs and benefits of undertaking such huge additional investment. Most old units have plant designs unsuitable for WHO-GMP specifications and have no alternative but to go for entirely new plants. Considering that the profit margins of small firms have gone down over the past few years, such additional investments may put them under tremendous pressure. Thus a significant support is envisaged in this front in the form of subsidized loan and other management support.

Moreover, at the current level, the feeling is that there is no guarantee that as soon as a firm qualifies for WHO-GMP, business will be guaranteed. The firms are also not in a position to visualize a scenario where there will be relatively visible specialization in marketing and production in pharma products.

However, there is a radical shift in thinking due to some consistent efforts by leading visionaries and an understanding that has developed in small and medium firms by taking lead from the current industrial scenario. It is probably being seen that attaining the highest standard is a gradual and a step-by-step procedure. It is felt that initiation and motivation can be done through activities like quality audits, training of workers in groups to upgrade their knowledge base and update them with information related to quality.

The international quality norms especially those related to exports is also a major area of concern. This has four related dimensions (a) Importing nations and bulk purchasers are gradually demanding higher quality standards, e.g. WHO-GMP. (b) Secondly, importing nations have different registration procedure and documenting norms for import. (c) Thirdly the quantity of imports is not always manageable by a single small firm. (d) Fourthly, the small firms individually cannot afford to offer a basket of different formulations and or dosage forms at internationally competitive prices.

All these however provides good scope for co-operation within a group of firms, since:(a) The documentation procedure through varies for countries and products, but a majority of

it is almost a repetition for a country. Thus joining hands can reduce cost.(b) Joint exploration of markets can reduce cost(c) Joining hands can also help to specialize in products(d) Jointly big orders can also be executed

5.1.3. Market ScenarioThe market scenario for the pharma industry the world over is fast changing due to a variety of reasons. In the pre-liberalization era price was the major competitive factor for the small and medium units. Accordingly, production and marketing had been accordingly geared towards meeting requirements within India, with the exception of big and medium firms who are exporting directly or some small firms who are exporting indirectly through big and medium firms. Very few small firms have established brand names. The over emphasis on price has eaten into the profit margin and has seriously eroded the potential to plough back profit to upgrade quality. The emerging trends in marketing are:

(a) The post-GATT environment has compelled manufacturers to place "quality" at the centre of all business planning and strategy formulation exercise.

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(b) The generics market in the US and Europe is likely to witness a boom as large number of molecules are going off patent in a couple of years.

(c) The generics market in the Indian countryside lies open to competition from MNCs and large Indian companies.

(d) With the amendment of the patent law, the pharma firms will have to commit massive investments to develop new drugs and to put in place an adequate and efficient sales force to successfully market them.

(e) Other developing countries, especially China, will mount tough competition for Indian manufacturers in the coming years through its huge production capacities and an inherent strength to deliver large quantities at short notice. Of late, the Chinese manufacturers have also been rapidly upgrading their technology base.

(f) Internationally, the pharma industry is facing sluggish growth in sales and increasing R and D costs. The choice in front of pharma leaders are only two: (I) make R and D more productive, or (ii) make each of the drug, a blockbuster. The industry forecast states that the pharma industry structure would change dramatically by 2005 with only few producers reigning the market.

The scenario described above clearly suggests the challenges that the Indian pharmaceutical SMEs have to face in the years to come. At the same time, there are some potentially positive aspects on the market front. These include:

(a) Expected boom in the generics market, which would open up both export opportunities and unexplored domestic segments for Indian firms. Generics market is a volume driven one, with promotion costs contained to a minimum.

(b) Export destinations like the Philippines and the CIS countries have good potential. A few big companies have already received sizeable export orders from the latter and are expecting to have at least 70 per cent appreciation annually in their trade with these countries.

(c) Another significant area for intervention and co-operation is in institutional sales. Small firms feel that they are not adequately conversant with the various formalities and working modalities of institutional sales. Moreover, huge orders by volume are also not possible for small firms to execute. A correct knowledge profile and co-operation between small firms are envisaged in this area.

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Observations of a major unitA major unit (a public limited company) holding own licence to produce pharmaceutical formulations, started with 135 formulations and now produces 282 formulations. It has a blood bank, a clinincal research organisation and an export house under its umbrella. Its turnover has risen from Rs. 25 crore in 1994-95 to over Rs. 100 crore in 1998-99. From 2000 onwards it has started contracting in MNCs and large firms. According to the principal decision maker of the firm, quality is the most important issue for competitiveness before the pharma firms now. The future of small pharma firms seem to be in generics and exports. Institutions like PERD Centre could be of great help to firms in terms of providing technology services, R & D, technical knowhow, testing as also equipping them to comply with WHO-GMP standards, especially in a cluster. In its view networks may help in gaining information, building economic strength, learning from others and addressing the environmental question collectively.

5.1.4 R and D Scenario The major criticism against process patents has been that it has “harmed” India's basic research capabilities, bred a culture of complacence, and rendered a knowledge-driven indigenous industry like pharmaceuticals globally non-competitive, technologically and quality wise. Also, the investment in R and D in India has been very low – only two per cent of sales. Polemics apart, it is true that a shift-over to a product patent regime would demand that basic capabilities of indigenous research be developed. The large firms have already begun thinking in the direction of upgrading their R and D capabilities, or tying up with leaders in the field. There have also been ideas to upgrade of a successful molecule developed by a firm into a related but a chemically variant molecule. The focus of R and D by large Indian firms also needs to be sharpened.

The small units take a detached view on R and D because of their lack of financial resources, trained manpower, lack of affordable and accessible testing facilities etc. Co-operation on R and D is a very common phenomenon in the international scenario, where relatively small firm tie up with big ones to specialise in developing new molecules up to a certain stage and then transfer it to the mother firms. The past few years have also witnessed a spurt in number of Contract Research Organisations (CROs) in the State. Besides, there are also opinion for boosting a much tested (for example, in Brazil and China among developing countries) incubator practices for supporting the small firms.

5.1.5 Trained PersonnelAnother related aspect is the unmet demand for trained personnel at a reasonable cost. This problem is in fact acute for small firms since they cannot afford highly qualified persons. Even larger units find it difficult to get people who are well trained in regulatory and technical aspects. It is expected that job opportunities in the shop floor would be reduced with automation, whereas those in marketing, product management, formulation development, production planning and inventory control, quality control and quality audit will expand. The current education policy needs to contribute more in the new environment. The pharmacy institutions,

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Success story of a growing unitA group of firm founded and managed by a professional and his wife (another professional) thought otherwise. A few months of training at the unit of a fellow professional friend - a dormant vision got rekindled: from nothingness 17 years age to a Rs. 140 million thriving presence at the dawn of the new century. It has a fairly diversified portfolio of products with 81 tablets, 11 capsules, 10 liquids and six injectables. It contracts in for both large units and loan licensees.

It has traced an illustrious growth record during the last 5 years. Investments have been made in the areas of capacity expansion, machinery and equipment procurement, product diversification, testing and quality upgradation, sales promotion, labour welfare etc. Marketing is through sales representatives and market executives as also franchisees. It has local, national and also international (export) business. Raw materials, machines and components are procured from nation-wide sources. Notable, services like packaging, labelling, transporting, repairs etc. are located within the firms.

The decision makers of the group feel that problems and strategies are often discussed with other producers in the locality. The associations are particularly helpful for entrepreneurs in getting information on products (through magazines, bulletins, and other media). They also help in dealing with legal issues and government policies & procedures. As a matter of fact, cooperation between units has so far been limited to helping each others with ideas. They also feel that networks should be developed to influence long-term competitiveness of firms by helping them improve management skills, product quality and strategic planning. Cooperation between entrepreneurs as a part of a cluster is essential for this purpose.

especially the government funded ones desire more administrative co-operation and long term planning for such results, especially for those related to industry- academia cooperation.

5.1.6. Access to Information Small firms are finding it difficult to avail right information, technological as well as regulatory. This problem is accentuated by the fact that local market pressure can dampen improvement in the technological sphere. It is essential to make available correct and relevant information to the small firms. Similarly, there is also a need to provide them with sources of proven technologies.

5.1.7.SpecialisationUnlike entrepreneurs in the past who had a huge market to explore from, those of the present generation are finding it difficult to stay in business, be it due to rising quality expectations or shrinking profitability criterion. In their effort to maximise profit and stay in business (the profit margin being low), many units have adopted the `me-too’ approach in business. Rather than developing competitive advantage through specialisation, they get into the trap of making hundreds of products - as many types of drugs as demanded in the local market or at least as indicated by the temporary market needs. Interestingly the product profile (hundreds of products) changes with changing market demand. With such diverse product profile, it is not easy to go for WHO-GMP or have a good resource management.

It is found that, unlike entrepreneurs in the past who wanted to “do something worthwhile”, those of the present generation want to “make a quick buck” even if they have to compromise on quality. The resultant problem is lack of regulatory compliance. The burden of documentation, testing and preparing dossiers for a large number of diverse products turns out to be heavy and cumbersome for the small and, often inadequately equipped, firms.

5.1.8.Management PracticesThe small firms are known for their disinclination to invest in upgrading the managerial skills. This has especially affected areas like financial management and budgeting. Often, working capital is used for investing in capital equipment. Or, although cent per cent depreciation is available, ETP facility is rarely used. Similar is the problem with inventory management. The disinterest of small firms arises from both a general lack of knowledge about modern concepts and practices of management and also due to lack of resources. But in the emerging situation where MNCs and large domestic companies would make a significant presence, even at the local level, the small firms need to put emphasis on strengthening management. Further, the customer profile is also changing fast. The buyer now demands timely delivery, proper communication, etc, and the movement of business depends crucially on meeting these.

5.1.9. Reference StandardsThe pharma industry needs reference standards (RS) to ensure chemical/biological purity as also to check for known impurity profiles. The Indian pharmacopoeia specifies 400 to 500 such reference standards. But there exists a wide disparity between the demand for and supply of reference standards. The Central Drug Laboratory (CDL) in Calcutta is able to meet only 30 per cent of this requirement. The Indian Foundation for Pharmaceutical Reference Substances (IFPRS), Mumbai has been authorised to prepare and distribute RS tested by CDL and certified by the government at subsidised prices to manufacturers. The other option is to buy standards from the UK or US at very high prices. There is a need for more organisation like IFPRS to overcome the shortcomings in this area.

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5.1.10. Policy Aspects An enabling policy framework is a necessary prerequisite for the growth of any industry. The policy regime significantly impacts areas like pricing and taxation, quality (already discussed) exports and imports, research and development etc.

5.1.10.1. Taxation and PricingThe total indirect tax burden on the consumer by way of customs and excise duty, sales tax, octroi etc. works out to be 37 per cent. The industry feels that increase in these or other taxes (like those on export earnings) will restrict subsidisation of the domestic market. Associations of pharmaceutical manufacturers like OPPI and IDMA have been demanding a reduction in indirect taxes on medicines. Some of the specific demands are:

Reduction in duty on vaccines to the lowest possible level; Same treatment to products that are subjected to state and central excise duties; Exemption of up to 50 per cent of income tax on foreign remittances received for clinical

trials on behalf of foreign or parent company; Full exemption on royalties received from certain foreign enterprises on account of R&D.

5.1.10.2 Export-Import PolicyWhile ensuring the highest quality standards of drugs produced in India, it is also important that the norms that govern imports into the country are strengthened and internationally comparable so that the domestic industry is not harmed in the post –product patent era. A set of such norms are under active consideration by the government. These include a fee structure and a new registration system for exports in to India. The major highlights of the proposed norms are:

The exporting firms have to pay Rs.75000 as fees for registration with Indian licensing authority and an additional Rs. 5000 for each product. The maximum registration fee for a single firm is Rs. 100000. The registration certificate is valid for five years.

The foreign manufacturers are required to bear the expenses for the licensing authority’s inspection of manufacturing facilities as well as the testing fee to be paid to Indian laboratories.

Drugs prohibited in the country of origin would not be allowed to be imported into India. The regulating firm has to furnish manufacturing license, lists of drugs and formulations approved for marketing in the country of origin, GMP certificate conforming to WHO-GMP pattern and a warranty certificate stating that the manufacturer would adhere to Indian regulatory norms.

Another important proposal is for the establishment of an export promotion council of pharmaceuticals.

5.1.10.3 R and DAs mentioned earlier the R and D investment in the country never exceeded 2 per cent of the sales. The industry estimates that this share has to be increased to 5 per cent by 2005. This means that by that year the annual R and D outlay should be Rs. 15000 million as against the current outlay of Rs. 3200 million. There should also be an increasing presence of research while development has to be further built on. The government has recently taken some important positive steps in the direction of promoting pharmaceutical R and D. These include a decision to exempt R and D expenditure from tax for ten years and a proposal to create a R and D fund of about Rs. 1500 million. The Government has invited expert opinions and ideas from various research institutions and has set up a group to formulate guidelines for the proposed Drug Development Promotion Foundation. Debates are now on regarding the modus operandi of this proposed fund.

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5.1.11 Other Issues and ConcernsAs in many other sectors, pharmaceutical firms, especially the smaller ones, find it an obstacle to deal with the Government bureaucracy. It is said that “frequent trips to Gandhinagar and Delhi” restrict them (one-man shows) from giving due attention to production and promotion related matters. Difficulties arise among others from lack of exposure of entrepreneurs to the rules and regulations that govern pharma production and sale and a pro-active vision of regulators down the line.

5.1.12 A Proactive FDCAThe challenges ahead for the pharma as well as the medical disposable unit are highly dependent on the support of the FDCA which is interwoven with the growth and development of the industry. This requires among others a more proactive and supportive role and superior communication by the officers of FDCA down the ladder. It also requires updated quality related training of officials. The current dynamic leadership of FDCA has created an optimum base for such initiatives. A professional FDCA can help the industry with accurate information and guidance to excel in the upcoming era of enhanced competition.

5.1.13 Problems related to medical disposablesProblems related to medical disposables units, which are mostly headed by traditional trading community of Gujarat, also have problems related to quality, training, testing of end products, GMP, quality of raw material, mould making etc. The need for a common testing laboratory has been strongly felt by the medical disposable manufacturers. As required under the revised Schedule M, strict norms have to be followed in undertaking both physico-chemical testing and also biological testing. Also, the high cost of manufacturing moulds at the unit level is a matter of concern for this industry as the gains of economies of scale is lost in the process. Even the use of excellent mould making facility at the CIPET by the individual units turns out to be expensive. A survey carried out for a cross section of 20 units

5.2 Focussed Activities for DevelopmentThe cluster development programme envisages horizontal and for vertical cooperation between related units to either solve common problems or explore common opportunities to enhance business. It is a participatory developmental programme with varying financial management and time contribution by the cluster actors. The programme also aims towards sustainable development that can lead towards continuity of such business development services. Areas of common problems and opportunities have been identified above in section 5. The prospects for sustainable development and continuity in business development services lie necessarily in the empowerment of organisations and strengthening linkages between the various complementary organisational forces. The business linkages provides the clues to groupings and the necessary trust level for joint action. Based on the above parameter this section suggests an action plan (issue wise) that may be taken up during programme implementation.

5.2.1 Quality Organising workshops for macro understanding of the various dimensions of upgradation of

facilities to WHO-GMP. Organising separate workshops/training programmes on each dimension of WHO-GMP. Introducing services such as factory audit. Small firms need to be trained in the use of properly designed quality audit system to

monitor and control sub contractors, offices, departments, factories, depots, warehouses and service departments to verify compliance with the requirements specified in the documented system.

Support groups of firms going for quality upgradation, technical upgradation (even at a level lower than WHO-GMP).

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Empower organisation to facilitate cooperation of other support agencies for soft loan, hire purchase of equipment, etc.

Organise sensation training programme of workers on quality aspects through seminars, video films.

Enhancing capacity of established and holistic educational-cum-technical centres like PERD, CIPET to establish linkages with private sector to organise such programmes.

Encourage local BDS providers for supporting joint action for enhancing business.

5.2.2 TrainingTraining programmes are to be conducted on a continuous basis. The specific topics for training can be the following:

Technical Issues Technology upgradation Stability testing Sustained release Physico-chemical testing Mould making Testing of raw materials for disposables

Management Raw material management Equipment management Processes management Personnel management Financial management Time management Record keeping/documentation

Marketing Advertising and sales promotion Market development Export

5.2.3 Support collaboration in areas like: Joint vendor development Export promotion Testing (bio-equivalance and bio-availability) for introduction of new products37

Preparation of dossiers for export Tender participation for bulk sales Software development for resource management

Here firms who have some business linkages through the loan licence route or those who are having complementary products or with complementary marketing strengths can group.5.2.4 Knowledge of markets and market entry

Institutional purchase DGQA registration Export potential

37 Whenever a new drug is introduced in India the first three firms have to go for phase II clinical trials. The next 7 firms who plan to introduce the drug have to go for bioavailability and bio-equivalence study. The next 15 firms have to only produce the basic drug data for getting permission to introduce such products. Firms can reduce their cost if they go for registration jointly as part of the 3 or 7 firms.

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Trade delegation Marketing techniques for small firms

5.2.5 Others Orientation programmes for pharmacy teachers, consultants and FDCA and other

government officials need to be designed. There is a need for an information centre, which can provide units with right and timely

information on all aspects of techno-commercial matters concerning markets, tenders, government procedures as well as technical information.

The units may be encouraged to consider the value of specialising in dosage forms. Specific sectoral studies need to be carried out by industry specialist consultants

regarding the cost benefit analysis of specialisation. Specific workshops on IPR and its effects on: Current and future R & D; Production of

generics; Production of patented products. Availability of Reference Standards

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Annex 2

List of Acronyms

ADMA - Ayurvedic Drug Manufacturers Association, Gujarat RegionAIOCD - All India Organisations of Chemists and DruggistsCBI - Centre for Promotion of Imports from Developing Countries, NetherlandsCHI - Council for Healthcare IndustryCIPET - Central Institute Of Plastic Engineering And TechnologyDST - Department of Science and TechnologyEXIM - Export Import Bank of IndiaFDCA - Food and Drug Control Administration, Govt. of GujaratGITCO - A consultancy organisationGMP - Good Manufacturing PracticesIDMA - GSB- Indian drug Manufacturers Association - Gujarat State BoardLMCP - L.M College of PharmacyMDMA - Medical Disposable Manufactures Association Min. of SSI - Ministry of Small Scale Industries, Govt. of IndiaMSU - Department of Botany, M S University, VadodaraNMCP - Netherlands Management Consultant ProgrammeNSIC - National Small Industries CorporationPERD - BV Patel Pharmaceutical Education and Research Development CentreSIDBI - Small Industries Bank of IndiaSISI -Small Industries Service InstituteWHO - World Health Organisation

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Annex 3

List of Important Activities Undertaken (October 1999- December 2002)

Month/ Year

Activity Activity Nature Objectives Achieved

1. Cluster as a whole1. Oct. 1999 Seminar on cluster development

AwarenessProblem identification, interest generation and linkage creation

2. Aug. 2000 Diagnostic study completed Diagnostic study Formed the basis of the action plan3. Sept. 2000 Training of FDCA officials Capacity building Linkage creation and orientation4. Oct. 2000 Training of FDCA officials Capacity building Linkage creation and orientation5. June 2001 Training of FDCA officials Capacity building Linkage creation and orientation6. Oct. 2001 Training of FDCA officials Capacity building Linkage creation and orientation7. Oct. 2001 Brainstorming on creation of CHI Network Building Towards sustainability of efforts8. Aug 2002 Training of FDCA officials Capacity Building Linkage creation and orientation9. Feb.-Aug.

2002 Training of FDCA officials Capacity Building Linkage creation and orientation

10. Feb 2002 Workshop on transition from ISO 9002 to ISO 9001: 2001

Training for quality up gradation

Representatives from around 50 firms & hospitals participated

11. Jan 2002 Creation or Council for Healthcare Industry

Network building Towards sustainability of efforts

2. Pharmaceutical firms12. March 2000 Workshop on “WHO-GMP and

Pharma Globalisation”Trust building Interest generation and linkage

creation13. July 2000 Cluster Development Programme

Committee (CDPC) Trust building Creation of social capital

14. Aug. 2000 Empanelling of consultants Trust building Institutionalising BDS15. Oct. 2000 Creation of the first group of 6

firms Business networking

Business generation through quality up-gradation

16. Sept. – Nov. 2000

Factory audit Usage of BDS Usage of BDS providers

17. Nov. 2000 Workshop on Marketing Market search Understanding new marketing channels by successful firms

18. 2001 Factory audit of Firms Usage of BDS Usage of BDS providers19. June 2001 Training of internal auditors in

ISO 9002Training Step towards quality up-gradation

20. May 2001 Institutional marketing Capacity Building New marketing channels21. May 2001 Coordinator for CDPC of IDMA-

GSBSustainability Strengthening of network

22. Sept. 2001 Workshop on “Patent and Trademarks”

Technical capacity building

Discussion on unexplored areas

23. Sept. – Dec. 2001

Networks for Quality up-gradation Quality up-gradation

Usage of BDS for quality up-gradation in groups

24. October 2001

Training of industrial chemists Technical Training Training and institutional linkage

25. 2002 Group marketing Network building Usage of BDS linkage for business

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generation26. May 2002 Delegation to Latin America International

MarketingNew marketing channel through specialised BDS

27. May 2002 Training for Internal Auditor for ISO

Technical training Joint training and usage of BDS

28. Feb.-Aug. 2002

Higher level training on “GMP and Quality Assurance

Technical training Quality up-gradation and institutional linkage

29. 2002 Creation of video for workers Capacity building Quality up-gradation and institutional linkage

30. Aug 2002 Training of industrial chemists Technical training Quality up-gradation and institutional linkage

31. Oct 2002 Workshop on Water and Air Handling System

Capacity building Quality up-gradation and institutional linkage

32. 2003 (Jan-June)

Quality Circles Network formation Creation of Quality Circles by FDCA

33. March 2003 Workshop on Packaging Capacity building Problem identification, interest generation and linkage creation

34. May 2003 Pharma Techno Park Infrastructure creation

Quality up-gradation and linkage generation

35. June 2003 Video for Workers Capacity building Training of workers and institutional linkage

36. July 2003 Vision Workshop Future Vision Future Vision of Pharma Clusters were discussed

3. Disposable firms37. April 2000 Workshop on cluster development

and GMPTrust building Interest generation and linkage

creation38. Aug. 2000 MDMA revived Trust building Institutional linkage and

sustainability39. Aug. 2000 MDMA draws up action plan Action plan Creation of action plan40. Aug. 2000 Training on “Physico-Chemical

Testing”Technical training Training for quality up-gradation

41. Aug. 2000 Workshop on “Healthcare in India”

Trust building Market search and move towards quality up-gradation

42. Sept. 2000 Training on “E.T.O. Sterilization, Sterility Testing and Validation”

Technical training Training for quality up-gradation

43. Oct. 2000 Training on “Toxicity and Pyrogen Testing”

Technical training Training for quality up-gradation

44. Oct. 2000 Participation in “Hospi-Medica 2001”

Marketing New marketing channel

45. Nov. 2000 Visit of technical expert to Italy Cluster to cluster co-operation

Linkage generation

46. Dec. 2000 Growth programme Confidence creation

Move towards new marketing channels and quality up-gradation

47. Feb 2001 Workshop on medical devices at Mumbai

Capacity Building New marketing channels

48. Feb 2001 Participation in Hospi Medica 2001

Marketing Creation of new marketing channel

49. May 2001 Institutional marketing Marketing Creation of new marketing channel50. June-Oct. 2 trainings on testing of raw Technical training Quality up-gradation and

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2001 materials and components institutional linkage51. September

2001Workshop on legal and mandatory requirements

Capacity building Quality up-gradation and institutional linkage

52. September 2001

Market survey Capacity building New marketing channels

53. September 2001

Training on clean room requirements & hygiene


54. Jan 2002 Training on processing of PVC for medical devices


55. 2002 Networks for Quality up-gradation Quality up-gradation

Usage of BDS for quality up-gradation in groups

56. 2002 Common consultant led training in laboratory practices & sterilization

Capacity building Usage of BDS for quality up-gradation

57. Sept 2002 Workshop on international linkage and linkage to European market

Marketing Creation of new marketing channel

58. 2002 Group formation for quality up-gradation

Capacity building Linkage of groups to BDS providers for quality up-gradation

59. 2002 Development of equipment Strategic Institutional linkage60. Sept 2002 Participation in Hospi Medica

2002 at SingaporeMarketing New marketing channel

61. June 2002 Training on ETO sterilisation Technical training Quality up-gradation and institutional linkage

62. Oct 2002 Training on clean room requirements & hygiene


4. Ayurvedic firms63. April &

Sept.2001Workshop on GMP issues for ayurvedic units

Trust building Interest generation and linkage creation

64. Oct 2001 Factory audit Usage of BDS Usage of BDS providers65. October

2001Training of internal auditors for ISO 9002

Usage of BDS Usage of BDS providers

66. Oct 2001 Network for quality upgradation Quality upgradation

Quality up-gradation and usage of BDS providers

67. 2002 Network for quality up gradation Quality up gradation

Quality up-gradation and usage of BDS providers

68. Sept. 2002

Creation of consultancy cell at MSU

Capacity building

Sustainability and institutional linkage

69. Oct 2002 Factory audit Usage of BDS Usage of BDS providers70. Oct 2002 Network for quality upgradation Quality

upgradationQuality up-gradation and usage of BDS providers

71. Oct 2002 Training of internal auditors for ISO 9002

Technical training

Usage of BDS providers

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Annex 4Map 2: Cluster Map After Intervention

IDMA-GSB

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PERD FDCA SISI

L.F. (8)

M.F. (30)

RM (Pharma)

Packaging

RM (Ayur)

RM (Disp.)S.D. (50)

Exports

Institution

Prescription

S.F. (350) ADMA

AIOCD

LMCP CIPET DST SIDBI MSU

BDS4 BDS5 BDS6

MDMA

BDS1 BDS2 BDS3

CHI

L.F: Large Formulation Units M.F: Medium Formulation Units S.F: Small Formulation Units R.M (Pharma): Raw Material Supplier for Pharmaceuticals Units R.M (Ayur): Raw Material Supplier for Ayurvedic Units R.M (Disp.): Raw Material Supplier for Disposable Units BDS: Business Development Service Provider

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United Nations Industrial Development OrganisationFocal Point, Cluster Development Programme

USO House, Off Shaheed Jeet Singh Marg6, Special Institutional AreaNew Delhi – 110 067, India

Tel: +91-11-26602885, Fax: +91-11-51688589/90Email: [email protected]

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