The pharmaceutical sector’s development is a consequence of India’s history. Sixty years ago, India was almost entirely dependent on imported drugs, a situation that successive governments tried to remedy — first, by trying to encourage foreign manufacturers to set up production in India; second, when this failed, by establishing drug companies in India, with help from communist countries. That was not much more successful. The range of drugs those countries had to offer was limited and the new state-owned firms were not good at production, adaptation or innovation.
In 1970, the government passed a new Patents Act, which abolished product patents in drugs and food products. This made it possible for anyone to read foreign patent descriptions, copy the products and sell them. They could also reproduce drugs whose patents had expired. These opportunities brought into existence a large number of firms that broke foreign patents or reproduced patent-expired drugs.
As the technologies became familiar and equipment began to be produced in India, more firms emerged that produced generic drugs. The exodus of chemists from state-owned and foreign firms provided entrepreneurs. Those firms that reproduced expensive in-patent drugs were highly profitable and grew rapidly.
Patent protection by Western governments for new drugs has led to the emergence of a few large Western firms that spend heavily on research and development. As the rate of success in finding new, effective chemicals has declined, the cost of finding them has increased; hence it has become more important to make good profits out of drugs while under patent.
The number of firms that produce generic drugs is much larger. And then there are firms that buy drugs — patented as well as out-of-patent — in bulk and package them in combinations and dosages appropriate for treatment, called formulations. Thus, the industry consists of three often-overlapping layers of firms producing patented drugs, generics and formulations.
After trying for years to make India reintroduce drug patents, industrial countries made a deal in the Uruguay Round: if India reintroduced patents, they would dismantle their import restrictions on textiles. India amended its Patents Act and reintroduced drug patents in 2005. The larger Indian firms stopped breaking patents but expanded their generics production, and spent more on R&D to try to discover patentable products. Another rapidly expanding activity is clinical trials. In 2005, India permitted clinical trials in India of drugs under development abroad. The new dispensation has led foreign firms such as Pfizer to outsource clinical trials to India; many local firms such as Biocon and Matrix perform contract research for foreign firms. This new stream of business is probably in the range of $1 billion a year.
There are still challenges, however. The Indian Patent Office has been slow to grant patents to drugs patented abroad that qualified for Indian patents; Indian firms continue to produce and export such drugs. The judicial system works slowly, and has hitherto provided little protection against patent breaking. Only one case — Novartis’ cancer drug, Gleevex — has progressed to any extent through the judicial system; and Novartis has lost at four stages from the patent office up to the Intellectual Property Appellate Board.
As a result, multinational firms have been slow in returning to India. Foreign inward investment in pharmaceuticals between April 2000 and April 2009 stood at $1.5 billion. But sub-contracting of drugs manufacture for Indian firms (Ranbaxy, for example, produced drugs for German firms Hexal and Ratiopharm) and of clinical trials has made India’s pharmaceutical sector tied in to the global supply chain.
The market structure that developed in the patent-free years persists; the industry consists of about 200 firms producing basic drugs and some 2,000-3,000 firms producing formulations.
The industry produces 70,000 products but their composition, however, is different from that in industrial countries. A quarter of the products are anti-infective drugs; painkillers, cold remedies and cardiovascular drugs account for about 10 percent each. Medicines against asthma, obesity and diabetes as well as beauty preparations that predominate in rich countries are less significant in India.
The large Indian firms sell to the retail market, where margins are high and branding matters. They often outsource manufacture to small firms. Exports in 2008-09 were $10.5 billion, and imports $2 billion, while output was somewhere in the range of $25 billion-$40 billion. While this is small compared to the individual sales of the world’s largest drug companies (Pfizer’s 2008 sales, for example, were $71 billion), Indian drugs are five to 10 times cheaper than those made in the West. Thus, in volume terms, the Indian pharmaceutical sector is highly significant.
These figures refer only to allopathic drugs. In addition, there are two professions of medical treatment, Ayurvedic and Yunani, and corresponding drug industries, of whose size there are no estimates.
India’s pharmaceutical industry has been a net exporter since 1987. As firms’ markets extended beyond India, they were tempted to invest abroad. There were 11 Greenfield foreign investments until 1990; in the following 10 years, the number rose to 127, of which 63 were wholly-owned subsidiaries, and 61 involved manufacturing.
Marketing subsidiaries were mostly in industrial countries, and manufacturing subsidiaries in developing countries. In the past 10 years, the focus has shifted to developed countries and to acquisitions aimed at gaining a foothold in their generics markets. Thus, the 35 years without patents enabled India to build up a pharmaceutical industry that was independent of multinationals and highly competitive — and to avoid the cartelization the industry had undergone in industrialized countries because of patents, drug controls and official medical care systems.
The tension from that period between Indian firms and multinationals has slowly dissipated, and more cooperative relationships, such as in clinical trials, have begun to emerge.