PHM-Exch> MNCs Poised to Take Over Indian Drug Industry

Tue Oct 19 07:19:35 PDT 2010

When the Indian Parliament was discussing amendments to the Indian
Patents Act in 2005, demonstration were organised all over the world
demanding that India law makers take into consideration the fact that
Indian medicines are the lifeline for poor patients residing in most
poor countries in the world. The Indian pharmaceutical sector can take
pride from the fact that India supplies affordable medicines to so
many countries in the world. In volume, India is the 4th largest
producer of drugs in the world and exports medicines to over 200
countries. This situation, however, is in sharp contrast to the
situation as regards access to medicines within the country. The World
Health Organisation (WHO) reports that the largest number of people
without access to the medicines that they require, live in India. An
estimated 68 crore people, i.e. 65% of the Indian people are not able
to access the medicines that they need.

The Success Story of India’s Drug Industry

This is a cause for concern and raises questions regarding the
trajectory that the Indian Drug Industry has chosen to traverse. We
can take credit for the first major initiative in a developing country
to attempt to achieve self reliance in the medicines manufacture. It
is possible to identify three major reasons why this was made
possible.

The first relates to the Indian Patents Act of 1970. The Act
superseded the colonial Act of 1911 and allowed Indian companies to
produce drugs in India that were patented by foreign companies. In a
decade the effects were clearly visible and India came to be known as
the “pharmacy of the South”. Indian companies were able to produce
patented medicines, within 2-3 years of their being introduced into
the global market, and that too at one-tenth to one-hundredth of the
price at which the patented drugs were being marketed. Thus a huge
dent could be made in the monopoly enjoyed by European and American
pharmaceutical companies.

The second relates to initiation of manufacture of drugs from the
basic stage by Indian public sector companies. Hindustan Antibiotics
Limited (HAL) and Indian Drugs and Pharmaceuticals Limited (IDPL) were
responsible for starting drug production in India in the late 1950s
and early 1960s. It was the pioneering effort by Indian scientists and
technologists in these two countries that forced Foreign companies to
also start production in India and paved the way for a slew of private
Indian companies to follow suit.

The third reason was the implementation of the recommendations of the
Parliamentary Committee on Drugs and Pharmaceuticals (known as the
Hathi Committee), through the Drug Policy of 1978. The 1978 Drug
Policy imposed several restrictions on the operations of foreign
companies and provided preferential treatment to Indian companies –
both in the public sector and the private sector. The policy also
imposed price control on 374 medicines, accounting for over 85% of all
medicines in the market. The result of these measures was dramatic –
the share of the Indian market enjoyed by Multinational Corporation
fell from over 75% to less than 25% within a span of a decade.

Reversals in Public Policy

Unfortunately, all these three initiatives have been reversed in the
last two decades. HAL and IDPL were systematically undermined as a
result of inept management and withdrawal of preferential treatment.
As a consequence the public sector in the medicines sector has all but
been wound up. The 1978 policy’s major thrusts were diluted and
reversed in successive policies in 1986, 1994 and 2002. Price control
on medicines have been reduced so that less than 20% of the medicines
in the market are under price control. The entire range of protection
that was provided to Indian companies, vis-à-vis multinational
companies, have been withdrawn. And finally, the 1970 Patent Act was
amended in 2005, because of India’s annexation to the World Trade
Organisation (WTO) in 1995 which compelled it to sign the Agreements
on Trade Related Intellectual Property Rights (TRIPS). As a result,
Indian companies do no have the right to produce medicines whose
patents are held by foreign multinationals.

The effects of these reversals in public policy are clearly visible
today. While India continues to be a major producer of medicines, many
emerging trends are a cause for extreme concern. The first and
critical challenge to universal access to medicines in India is the
price of medicines. With almost complete decontrol of medicine prices,
access is severely compromised for people who are economically
deprived. A World Bank Study suggests that out-of-pocket medical costs
alone may push 2.2% of the population below the poverty line in one
year (India - Raising the Sights: Better Health Systems for India’s
Poor, World Bank, May, 2001). The situation is compounded by the fact
that the proportion of private expenditure, of the total expenditure
on health is one of the highest in the world – 84% as compared to just
16% public expenditure. Today, medicines costs is the key reason for
the huge burden of health care costs that people face in the country.
Between 70-80% of all health care costs that are borne by patients are
accounted for by medicines. Further, it is the poorest among whom the
proportion of medicines costs to total health care costs is the
highest (see Table below).

Table: Pattern of Per Capita Monthly Out of Pocket Expenses on Medicine and

Health Care in 1999-2000

  Health Exp. (Rs.) Exp. on Medicine (Rs.) Medicine % Health
Quintiles Rural Urban Rural Urban Rural Urban
First (Lowest) 7.72 11.71 6.68 9.91 86.47 84.60
Second 13.79 21.66 11.71 17.49 84.89 80.71
Third 19.61 29.73 16.46 22.72 83.94 76.44
Fourth 29.98 47.00 24.44 34.34 81.53 73.05
Fifth 77.47 105.67 55.46 65.90 71.59 62.36
Total 29.58 43.27 22.85 30.14 77.24 69.66

      Source: Computed from NSS Report 461, 55th Round

Another consequence of liberalisation in the drug industry has been a
distortion in the pattern of drug production. In the absence of a
clear cut policy to ensure and channelise production of essential
drugs, a major share of the production is being diverted into non
essential areas. This has led to a huge rise in production of
irrational and useless medicines (estimated to be at least 50% of the
total drug consumption in the country) – supported by unethical
promotion by drug companies and an unholy nexus between a section of
the medical profession, chemists and drug manufacturers.

De-indutrialisation in the Industry

Possibly the most disturbing trend in the drug industry is that
de-industrialisation has increased at a frightening pace and many
companies are dependant on imported bulk drugs. Over the years many
large companies have cut down Bulk Drug production (i.e. drugs
produced from the basic stage) and are increasingly acting as mere
traders. In many therapeutic groups, major production is accounted for
by the Small Scale sector. In many cases the latter depends heavily on
imported bulk drugs, i.e. they function as suppliers of imported bulk
drugs to large companies. This tendency has been fuelled by
liberalisation in the Industry -- making imports easier. It has also
been helped along by the scrapping of ‘ratio parameters’ which had
made it mandatory that a certain percent of a company’s turnover be
made up of by drug production from the basic stage. The shift in
interest of large companies, from manufacturing to trading, has also
been a consequence of the massive decontrol of drug prices. Price
decontrol has led to a spiraling rise in the prices of finished
products (also called formulations) and has reduced the incentive to
produce bulk drugs (that is the raw materials for finished products
that are manufactured from the basic stage).

The unraveling of the Indian industry in the post liberalisation phase
is now being played out. Many large Indian private sector companies,
having embraced the notion of a strong Patent regime, see their future
in tie-ups with MNCs. The ball was set rolling by the Ranbaxy – Glaxo
Smith Kline tie up. This was subsequently followed by the takeover of
Ranbaxy (then the largest Indian company) by a Japanese company –
Dacha.

Increasingly, domestic companies are looking for such tie-ups where
domestic facilities will be used for outsourcing of both R&D and
manufacture. Indian companies seek to leverage upon the advantages of
cheap manufacturing and R&D costs to build such linkages with MNCs. In
return they would expect accelerated entry into the large Northern
markets. The catch here is, that they would function as “junior
partners” and would be subservient to the interests of big Pharma (in
other words – if you cannot beat them, join them!). The thrust then is
not of Indian generics reaching underserved markets but of Indian
generics making a place for themselves in the lucrative Northern
markets.

Acquisition of Indian Companies

Recently the DIPP (Department of Industrial Policy and Promotion) has
circulated a paper that highlights many of these trends and concerns.
The paper reports that turnover in the drug industry has increased
from Rs. 14,200 crore in 1994-95 to Rs. 75,500 crore in 2008-09. What
is of note is that this growth has been accompanied by a more than
proportionate growth in exports. Exports have risen from Rs. 2512
crore in 94-95 to Rs. 39,538 crore in 2008-09 (Table blow).

Table: Growth in Drug Industry in India

Rs. crore

Indicator 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Exports Value 15213.2 17857.8 22115.7 26895.2 30759.6 39537.7
Imports Value 2958 3169.3 4550.9 5851.6 6712.9 8617.6
Sales Value 40800 42500 49500 61000 70000 75500
Market Size (Value) 43758 45669.3 54050.9 66851.6 76712.9 84117.6
Domestic Consumption (Value) 28544.8 27811.5 31935.1 39956.5 45953.3 44579.9
Domestic Consumption Growth   -3% 15% 25% 15% -3%

Source: CMIE data Base

The DIPP paper also notes that the emphasis on exports has resulted in
a significantly lower growth of domestic consumption when compared to
exports. In fact, during 2008-09, domestic consumption in value terms
fell from Rs. 45,953 crore to Rs. 44,579 crore – possibly the first
time in recent memory. In other words, while 68 crore Indians do not
have access to all drugs they need, drug consumption in the country is
actually going down!

The DIPP paper also notes that there is a move towards acquisition of
major Indian companies by foreign multinationals (Table below). Six
such acquisitions have taken place in the last 4 years and more are on
the anvil. Further, there have been several other tie-ups between MNCs
and domestic companies – viz. GSK with Dr Reddys; Pfizer with three
companies - Aurobindo, Strides Arcolab  and Claris Life Sciences;
Abbot with Cadilla Health Care and  Astra Zeneca  with Torrent .

Table: Acquisition of Indian Drug Companies

Year  Indian Co taken over   Foreign Company which took over  Country
of origin  Take over amount US$ mill
Aug 2006 Matrix Lab  Mylan Inc  USA 736
April 2008 Dabur Pharma  Fresenius Kabi  Singapore  219
June 2008 Ranbaxy Laboratories  Daiichi Sankyo  Japan  4600
July 2008 Shanta Biotech  Sanofi Aventis  France  783
Dec 2009 Orchid Chemicals  Hospira  US  400
May 2010 Piramal Health Care  Abbot Laboratories  US  3720

      Source: Press Reports.

The DIPP paper further argues that: “There is a concern that their
takeover by multinationals will further orient them away from the
Indian market, thus reducing domestic availability of the drugs being
produced by them.   This may weaken competition leading to headroom
for increase in domestic drug prices. Data Base from the Centre for
monitoring Indian Economy indicates that while the rate of growth of
sales of the pharmaceutical companies declined during 2001-2009 (14.2
per cent annual) compared to their growth during 1988-2000 (19.5 per
cent annual), their ratio of profit after tax to total income
increased to 9.7 per cent (average of 2001-2009) from 4.9 per cent
(average of 1988-2000). This may point to the worsening in both the
availability and affordability of pharmaceutical products”.

The reversal of production trends in the drug market is also pointed
out in the DIPP paper. It reports that of the 10 largest drug
companies in India in 1998-99, only one (Glaxo Smith Kline) was a
foreign company. Today three of the top ten companies are foreign
owned (Ranbaxy, Glaxo Smith Kline and Piramal).

Clearly, there is compelling evidence that we stand to fritter away
all the gains of the 1970s and 1980s. The Indian drug industry, built
by diligent application of public policy that sought to achieve self
reliance in the pharmaceutical sector, is poised to be handed over to
Foreign Multinational corporations. The Government of the day, in
pursuit of neoliberal reforms at any cost, is a willing accomplice.
The Indian industry is faced with the twin danger of a resurgent
Foreign Sector poised to strike, armed with a strong Patent regime,
and an Indian Sector that is increasingly dependant on imported Bulk
Drugs. A possible safeguard against such threats -- the Public Sector
-- has all but been wound up. The implications for self reliance and
health security are obvious.