IN SEARCH OF THE MISSING HAND OF THE ‘STATE’?

THE CASE OF THE INDIAN MEDICAL

DEVICE INDUSTRY

Authors
Dinar Kale, Development Policy and Practice, The Open University, D.Kale@open.ac.uk

Abstract
In any healthcare sector, the medical device industry plays an important role in reducing overall healthcare
costs and ensuring universal access to healthcare. However, in developing countries such as India compared
to the success of the pharmaceutical and biotechnology industry, the medical device industry has not
witnessed similar growth. For example over the last decade the Indian pharmaceutical industry has emerged
as a leading supplier of generic drugs to both developing and developed countries, while the biotechnology
industry made the country self-sufficient in vaccine needs. In this context this paper studies factors that
supported growth of the pharmaceutical industry and issues that hampered development of the medical
device industry in India. It argues that disorganized public health system reduced opportunities of linkages
between manufacturers and practitioners affecting incremental device development while lack of clear
regulatory policy and support hampered development of R&D and manufacturing capabilities in the medical
device industry.

Key Words:
Innovation, regulation, medical device industry, India, healthcare,
Introduction
Medical devices are a pervasive part of modern medical care. They are in many cases associated with quality
of care. Similar to pharmaceuticals and vaccines, medical devices are essential for patient care in operating
theatres, at the bedside, and even before a patient is admitted into hospital, or after being discharged. The
importance is the same in resource-rich and resource-poor settings. Medical devices thus constitute a key
financial cost in the health sector for both developed and developing countries.
According to the World Health Organization “medical devices” includes everything from highly
sophisticated computerized medical equipment down to simple wooden tongue depressors. It includes a wide
range of products such as medical gloves, bandages, syringes, condoms, contact lenses, disinfectants, X-ray
equipment, surgical lasers, pacemakers, dialysis equipment, baby incubators and heart valves. The intended
primary mode of action of a medical device on the human body, in contrast with that of medicinal products,
is not metabolic, immunological or pharmacological. Medical device means any instrument, implant,
machine, intended to be used, alone or in combination, for human beings for one or more specific purposes
such as diagnosis, prevention, monitoring, treatment or alleviation of disease (Shah and Goyal, 2008).
Advances in medical devices have brought significant changes to the diagnosis and treatment of life-
threatening diseases, making an important contribution to healthcare delivery in advanced as well as
developing countries. High-technology medical care is both a ‘blessing’ and a ‘curse’ because of the
wonders it can work in the diagnosis and treatment of disease, as well as its capacity to consume an
increasing share of resources and cost (McClellan and Kessler, 1999). Most of the medical device
manufacturers are based in the US and Europe while medical device industries based in developing countries
are few and focused on the low-tech part of the sector. Insights from the vaccine and pharmaceutical
industries suggest that upgrading of technological capabilities in developing countries helps to reduce the
cost of health care in developing as well as developed countries (Srinivas, 2006). For example, the first
indigenously developed recombinant hepatitis B vaccine by Shantha Biotech, Hyderabad - drastically
brought down the cost from US$ 16 per dose to around 50 cents in India (BCIL, 2003). However, existing
evidence suggests that firms from developing countries struggle to develop and manufacture medical
devices. This is despite succeeding in developing technologies in other health care sectors, for example the
pharmaceutical and biotechnology industry. In the case of India, the country imports almost 70% of medical
devices from overseas whereas the Indian pharmaceutical industry is one of the main exporters of cheap
generic drugs and Indian biotech industries make the country self-sufficient in vaccine supply. Indian
pharmaceutical and biotechnology industries represent successful examples of self-reliant development while
the medical device industry is lagging behind. Kamath (2010) explains the state of the Indian medical device
industry,

“The words India and medical technology are seldom used in the same sentence. An
indigenous medical device industry has been virtually non-existent. Local players, with some
 exceptions, have struggled to shed the ‘low-tech, low quality’ tag. For instance doctors faulted
local pacemakers for being too bulky and difficult to implant with leads (that connect the
pacemaker to the heart muscle) fracturing easily”

Thus despite operating in the same innovation system, both industries have shown remarkable evolutionary
strategies albeit with different results; the Indian pharma/biotech sector is a remarkable success story while
the indigenous medical device industry (MDI) is struggling to imitate products. This contrasting
development raises questions for scholars of public policy and innovation studies regarding development of
high-tech industries in developing countries. Indeed, the literature suggests that the processes through which
new medical devices are generated and imitated have received much less attention than other key health care
industries in studies of capability development (Geljins et al., 2001). Based upon the innovation systems
framework this paper studies the institutional aspects involved in the development of technological
capabilities in the medical devices sector. This paper focuses on the role of institutional factors in
development of healthcare industries, using the Indian pharmaceutical, biotechnological and medical devices
as case studies. It further explores the role of regulation and investigates its impact on the effective diffusion
of technology in this important high-tech industry. Primary data was collected by conducting interviews with
industry association president, regulator, cardiac surgeon, biomedical engineers working in premier Indian
research institutes and managers from 3 Indian medical device firms. In total 10 interviews were conducted
and transcribed. Questionnaire focused on current status of medical device industry in India,
comparison of Indian medical device with pharmaceutical/biotech industry, regulatory framework
and various government initiatives to promote medical device research and manufacturing in India.
For the most part, open-ended questions and a relatively informal interview schedule were used to
encourage participants to speak in their own words about their experiences, observations,
opinions, and desires. Secondary data was collected from business journals, industry analyst reports and
the Indian newspapers.
A comparative analysis of the Indian pharmaceutical and biotechnology industries on one hand and the
medical devices industry on the other hand shows that the medical device industry lacked an active role of
the state that severely affected growth of technological capabilities in local institutions. Thus it shows the
important role of government policy and intervention in the development of high-tech industries in
developing countries. Significantly it reveals that the lack of regulation does hamper development of
technological capabilities in local firms as without proper regulation the ‘rules of the game’ can be blurred in
favour of MNCs or local counterfeit firms.
The paper proceeds as follows. Section two presents a background to the medical devices industry including
characteristics of innovation processes, key regulations and current status of the global medical devices
industry. Section three introduces the Indian medical devices industry and describes current status of the
industry. Section four discusses innovation systems literature as well as development literature on
technological capabilities. Section five discusses the case of the Indian pharmaceutical and biotechnology
industry focusing on the role of state intervention, regulation and private firms in their development, while
section six presents a comparative analysis of capability development processes in Indian pharmaceutical and
biotechnology industry against medical devices industry and points out key findings from comparative
analysis. Section seven concludes the paper with policy implications of the findings.

2. Key characteristics of medical device industry

Similar to pharmaceuticals and biotechnology industries, MDI has emerged as the key sector for all
countries due to its role in achieving affordable healthcare. However it is important to understand to key
characteristics of the MDI and its differences with pharmaceutical industry.

2.1 Key differences between pharmaceutical and medical device innovation processes Pharmaceuticals
and medical devices are similar in certain aspects: both are health technologies, can be used to treat, alleviate
and cure diseases. Both require regulatory set-up to monitor pre and post marketing impact, need an effective
supply chain and are key part of modern health care. However key differences also exist between medical
devices and pharmaceuticals in terms of who does the research and development (R&D), the nature of that
R&D, and the public policies that affect it (Kahn, 1991).
Table 2 shows that there are significant differences in nature of innovative processes between the
pharmaceutical and medical device industries.

Table 1 Key differences in pharmaceutical and medical device sector (Kale, 2010)

Pharmaceutical sector Medical device sector

Linear model of innovation Highly incremental, user driven innovation

Still predominantly ‘integrated R&D model’ , Distributed R&D model requiring close
however emergence of biotechnology led interaction with hospitals technicians, surgeons,
industry towards networked model of R&D research institutes and engineering firms

Important role of intellectual property rights Non-significant role of intellectual property rights

A well-defined market divided in two categories: Devices include healthcare items other than
generics and patented products. drugs; such as diagnostics machines, complicated
surgical tools and products that affect structure or
 function of the body

Long product life; from minimum of 5 years to Short product life; maximum 2-3 years
maximum 15-20 years and in some cases 50
years

2.1 a Innovation processes in Medical device industry

In the case of the MDI innovation process is user driven and highly incremental. Innovation in medical
devices results primarily from clinicians’ insights rather than laboratory exploration. Medical devices
undergo incremental improvements with a relatively shorter commercial life cycle of about 18 months on
average. For example, typically, a physician and/or engineer inventor conceives of a device solution to an
unmet clinical challenge, initiates the patent process, and builds preliminary device prototypes. As a result
usually the development of new medical devices originates in small entrepreneurial companies. Once
introduction is made, larger firms tend to buy them and then modify these devices to introduce their own
version. A small percentage of device ideas are conceived in academic medical centres using federal or other
grant funding. Few academic centres have the intrinsic capabilities to develop the device beyond the early
prototype stage. Intellectual property is typically out-licensed to an existing company or start-up for further
development.
An important difference in drugs and devices lies in the ability and propensity to make changes to devices
during clinical evaluation and after it has been marketed. A drug product is usually in its completed form
prior to marketing and is described by its chemical formula, and dosage form remains stable for most of the
life of the product. In contrast medical devices are constantly modified and customised to improve
performance and add new features. In medical device industry ‘users’ innovate to solve their own particular
need as they possess sticky local information regarding particular usage of product (Hipple, 1995). Gelijns
and Rosenberg (1994) explains the development of medical devices is especially dependent on a number of
technological competencies that are not core to medical sciences and can be understood only in association
with the surgical practice in which they are utilised. Thus users such as anaesthetist or cardiac/orthopaedic
surgeon are lead innovators in particular product sector and gains that position through accumulating tacit
knowledge regarding product through frequent usage of a given product or involvement in their professional
community. The medical device sector R&D involves integration of different knowledge bases such as
material, electrical and electronic engineering and from sciences such as medicinal chemistry, biology and
finally medical knowledge from surgeon and doctors. Thus any product development in this field requires
close collaborative relationships between research hospitals, research institutes and private firms.

2.1 b Market dynamics

A key aspect of medical innovation is the role and dynamics of demand. A variety of factors at the adopters’
end of the spectrum is crucial to creation of markets for new technologies. In case of MDI markets for a new
device is not always well defined. For example, when cardiac pacemaker was introduced in the market,
research revealed market size of 1000 patients around the world. A small company – Medtronic,
incorporated – market this product for this small market. However later it emerged that pacemaker has
market of more than 200000 units per year in USA itself (Kahn, 1991). Thus in MDI it is difficult to
evaluate correct market size before a device is diffused into clinical practises.
Medical devices have short product life cycle as products are improved continuously with the inputs from
users as a result products have faster turnover rate. Once a drug is introduced in the market it has product life
of minimum 5 years and some drugs have been around for more than 50 years. However medical devices
continuous and incremental product changes makes original device obsolete often within 2 years or less.
Over the years entrepreneurship in MDI is becoming more difficult as the regulatory environment is
becoming more demanding and venture capital firms less enthusiastic.

2.1c Significance of intellectual property rights in medical devices

The significance of patents as incentives to innovation is influenced by the different natures of drug and
device R&D. Drug patents tend to be more useful, for it is very difficult to design a drug that simulates all
the efficacies and side effects of another drug. A further difference between patents in the two industries lies
in which aspects of the innovation lead to patentable claims. An example in the drug industry is the use of
antihistamines to treat allergies. The basic principle of using antihistamines is not patentable, but the specific
drugs are. In the device industry it is often just the opposite. The basic principle can be patentable, but
specific devices usually are not. Generally speaking, it is possible to design a medical device for a specific
application in a number of different ways. The innovation often lies in the underlying principle being used in
the particular application. For example, the concept of pulse oximetry was patentable, although specific
implementations of the idea were simply design exercises and did not provide patentable material. In
instrumentation products, patenting the design of the instrument itself is a futile exercise because it is not
difficult to design another instrument in a different way that performs in exactly the same manner.

Thus patents appear to be of relatively less importance in many segments of the device industry. However,
patents play other roles in the process of innovation. Potential investors usually are concerned with whether
the new development is covered by one or more patents. Thus patent tends to be crucial for attracting
investment in the medical device industry.

2.1 d Regulatory environment

Pharmaceutical industry and MDI are regulated differently as these two sectors differ on multiple factors
such as mechanism of action, different technologies involved in product development and ability to make
changes after product introduced to market. Pharmaceuticals drugs are biological and get metabolised in
body while medical devices acts on physical side and has no chemical action on body. Thus most medical
devices do not have potential to profoundly influencing body processes and generating damaging short term
and long term side effects. It has implications for various regulatory requirements. For example, concept
sterility differs in pharmaceutical products and medical devices. A drug has to be manufacture in ‘clean room
conditions’ requiring certain kind flooring, air-flow and energy requirement to minimize impurities.
However in case of medical devices can be sterilised at the point of use and doesn’t require same production
conditions such as pharmaceutical products. For instance orthopaedic surgeon orders different sizes of
implants from the company and at the time of surgery sterilises only those which fits patients

Unlike pharmaceutical products devices are based on wide variety of technologies such as biomaterials,
electronics, optics, mechanics, fluidities and other. This factor makes it difficult to assess and regulate
medical devices.

This section shows that medical device industries involve smaller companies in the lead, a more fluid and
incremental innovation process, and less stringent regulations than pharmaceutical industry.

2.2 Industry structure and key issues for developing countries

Medical device industry has evolved by leaps and bounds from early days of use of scalpel and crutches to
modern times of heart valve and artificial heart transplant. The global medical device market is currently
valued at USD 210 billion in 2008 and has grown at a CAGR of 6% post 2000 (WHO, 2010). The USA is
largest consumer of medical devices and leads the world in the production of medical devices. The USA has
a medical device market valued at more than $100 billion in 2008, roughly 41% of the world’s total. It is
followed by Japan (10%), Germany (8%) and France (4%).

Fig 1 Medical device markets by region, 2009 (Source: WHO,2010)

The medical device industry is comprised of over 27000 companies spread all over world but dominated in
advance regions such as US, Europe and Japan. According to global statistics, 85% medical devices are
manufactured in the USA, in Japan and in European Union countries while the same regions also account as
major market for medical device. Table 2 lists the top ten countries by sales revenue in 2009.

Table 2 Top ten countries by sales (Source: WHO, 2010)

No Country Sales Revenue US$ (millions) % of world market

1 United States 91316 40.7

2 Japan 22721 10.1

3 Germany 18147 8.1

4 France 8625 3.8

5 Italy 8004 3.6

6 United Kingdom 7628 3.4

7 China 6161 2.7

8 Spain 4887 2.2

9 Canada 4757 2.1

10 Switzerland 4063 1.8

Sub total 176309 78.6

World total (67 countries) 224103 100

Based on strong economic growth and large population China and India is increasingly emerging as an
important medical device market. China’s overall market for medical devices is estimated to reach $5 billion
in 2010 while Indian market is valued at $3billion. China and India are focussing on developing its medical
device regulatory regimes and domestic market devices sector. The private healthcare sector in India is
expanding significantly to meet the needs of India’s growing middle class, population of 300 million with
disposable income and increasing medical expectations.
Table 3 shows top ten medical device companies by sales in 2009 and out of top ten seven firms have head
quarter in the USA. According to WHO report (2009) out of top 30 companies all but 11 have headquarters
in the United States. These top 30 firms account for 89% of all global revenue while rest of 11% of sales
revenue is shared by 27000 companies in the world.

Table 3 Top ten companies in the world in 2009 (WHO, 2009)

No Company Head quarters Sales (US $ millions)

1 Johnson & Johnson USA 23225

2 GE Healthcare USA 17392

3 Siemens Healthcare Germany 15526

4 Medtronic USA 13515

5 Baxter international USA 12400

6 Covidien Ireland 9910

7 Philips Healthcare Netherland 9227

8 Boston Scientific USA 8050

9 Becon Dickinson USA 7156

10 Stryker USA 6718

This industry and market structure gives rise to three key issues of affordability, accessibility, and
appropriately. Lack of medical device industries in developing countries main concern and in pharmaceutical
it is shown that emergence of the Indian pharmaceutical industry as a supplier of cheap generic drugs helped
to reduce issues of affordability and appropriability. However no such solution is on the horizon in the
context of medical device industry and therefore this paper analyses factors and barriers affecting growth of
medical device industries in the India.

3. The Indian medical device industry

According to the NIPER report (2010) the Indian medical device market is estimated at US $ 2750 mn in
2008 and the import of high-end technology products has increased during 2001-07 (fig.1). Imports of
healthcare products into Indi grew tenfold in 1990s and increased by CAGR of 12% from 2000-2008. There
are about 14000 medical devices marketed in the India and the country is heavily dependent on imports from
countries like the US, Japan, the UK, France, Finland and Germany. USA is leading supplier to India with
more than 28% products valued $400 mn coming from USA to the India in 2008.
There are approximately 700 domestic medical devices makers however the market is dominated by MNCs
and local manufacturers are relatively minor players. Indian domestic manufacturers have a strong presence
in the low value medical supplies and the disposables market while MNCs dominate the high-cost and high-
tech device market. Due to lack of availability of trained bioengineers and support industries MNCs prefer to
import than manufacturer locally. Most of imported medical devices such as medical equipments like cancer
diagnostic, medical imaging, ultrasonic scanning, plastic surgery equipment and polymerase chain reaction
(PCR) technologies specifically at high-tech end have high gross margins. The NIPER (2010) report suggests
that (Fig. 2)

Fig. 2 Import of medical device products (Source: NIPER, 2010)

Thus local Indian manufacturers are absent in most medical device segments and in cases where they are
present Indian companies struggle to find acceptance for their products. Gradually Indian firms are entering
into the medical device sector; from diagnostics instruments like X-rays to implants such as heart valve and
pacemakers. However, the Indian domestic market is dominated by MNCs such as GE Healthcare, Siemens,
Philips and Medtronic. Diagnostic equipment accounts for the largest portion of the medical device market in
India (Fig. 2)

Fig 2 Market distribution of Indian medical device industry for 2008 (NIPER, 2010)
Post independence Indian medical device industry has witnessed some significant developments such as
development of indigenous heart valve by Sri Chitra Research institute or development of cheap ECG
monitor by GE’s R&D based in Bangalore. However these developments either struggled to find market
acceptability or in some cases failed to provide any serious appropriate and affordable healthcare. In this
scenario this paper investigates barriers to development of the Indian medical device industry specifically
focusing on the role of government policy, markets and regulations.

4. Theoretical framework
The questions raised in this research are embedded in various contextual elements lying inside as well as
outside of firms, and in the dynamic interplay between those elements. It is evident from a review of medical
innovation literature that techniques and technologies co-evolve in the development of medical science
(Gelijns and Rosenberg, 1994). The process entails an interaction among many different types of knowledge
which is embodied in a number of key stakeholders. These range from internal factors such as ‘hard’
scientists working in research laboratories to the managers who overview the production, the distribution of
devices, and every other agent operating throughout the value chain to external factors like state policies and
regulations.

Role of state policy and institutions in shaping healthcare industries

According to Forbes and Wield, (2002) much of the difference between countries that developed rapidly and
those that have developed more slowly is a difference in how indigenous technology capability is developed
and used. The main incentives that affect the investments in technological capabilities arise from macro-
economic issues such as trade regime, industrial policies and domestic demand along with factor markets
like availability of skills, finance and the nature of the supportive institutional base (Lall, 2000).
Pharmaceuticals and biotechnology industries are perceived as research focused and supply driven to a much
greater degree than other manufacturing sectors. There is significantly higher spending on R&D than in
many other sectors and the progression of science and basic technologies impacts in a fundamental ways on
the evolution of products and processes in the sector (Henderson and Cockburn, 1996). To some degree this
is obviously the case. For example, in 1930s synthetic organic chemistry and soil microbiology generated
significant opportunities for pharmaceutical innovation while in the 1940s and 1950s, advances in virology
provided another set of new opportunities for entrepreneurship, followed shortly by a new wave of
breakthroughs in microbial biochemistry and enzymology breakthrough provided the basis for a new style of
targeted pharmaceutical research and development (Galambos and Sturchio, 1998). However, the extent to
which the sector is influenced by factors other than science and technology is often underestimated.
Secondly, the rate and direction of capability development and innovation in healthcare industries is very far
from being determined only by scientific and technological or market factors. Regulation and industrial
policy forms an important third dimension to two pillars (science and technology) of healthcare industries.
For example, the ruling in a landmark case of the 1980s, Diamond vs Chakarvarty has been credited with the
rise of the biotechnology industry. That case involved a patent claim on a genetically modified, oil eating
bacterium. USPTO rejected the claim on the basis subject matter was living organism and ineligible for
patent protection. In cognizance of that pharmaceutical firms till that time patent methods of production and
not produced ‘strains’. In 1981 the US Supreme Court granted extension of patentability to genetically
engineered bacteria which gave birth to the current biotechnology industry (Eisenberg, 2006). As a result a
new type of industry player appeared in the 1980s – small biotechnology start-ups backed by venture capital
to exploit the myriad opportunities opened up by molecular biology and genetic engineering. Other
significant regulation that influences evolution of the healthcare industries was the Bayh-Dole Act. Prior to
Bayh-Dole, ownership of all scientific inventions and findings arising from publically-funded research
typically stayed in the government, reflecting the popular rationale that research funded by the public
belonged to the public. To increase public access to scientific innovations The Bayh-Dole Act made
provision for the transfer of intellectual property to grant holders scientists as well as institutions and
universities. By its nature, this transformed academia-industry relationships from the traditional collaborative
partners into commercial partners and that led to significant increase in pharmaceutical R&D and costs of the
final product for consumers.
In 1990 the dynamics of the US healthcare market was transformed due to introduction of the Hatch-
Waxman Act. It allowed entry of generics medicines by eliminating the clinical testing aspect. Firms could
file for generic market entry on the basis of bioequivalence studies and that significantly reduce entry
barriers for firms operating in generics area. Moreover, the first firm to file an application for making a
generic equivalent to a branded drug receives a 180-day period of exclusivity, while manufacturers of
branded drugs are allowed to request a 30-month postponement of the FDA's approval of generic drugs that
arrive before their patents expire. This change gave a tremendous boost to Indian firms and led to
transformation of their business models (Kale and Wield, 2008). One example of the way in which policy
and regulation have impacted on the evolution of the sector in developing countries is provided by rise of
Indian pharmaceutical industry as a main source of cheap generic medicines all over the world. The Indian
government intervened through industrial and regulatory policies and created an industry with required
credentials to better serve the needs of its people (Chataway et al, 2007). Shifts in policy and investment
encouraged the growth of an industry focused on the healthcare needs of poor people with producing
medicines at an affordable prices being the main concern.
In case of medical device sector Foote (1991) argues that public policies such as federal regulation, product
liability statutes, reimbursement rules, and government funding for basic research have had a significant
impact on the production and diffusion of new medical devices. For example, in the USA the National
Institutes of Health (NIH) funds intramural and extramural projects that deeply affect the quality and
quantity of biomedical scientific research. Product development and marketing strategies inevitably weigh
the legal product liability environment, and government's actual or proposed interest in technology
assessment may affect adoption and diffusion in the marketplace.

5. Case studies of the Indian pharmaceutical and biotechnology industry

The Indian pharmaceutical and biotechnology industry has shown remarkable success in post independence
India. These industries started with weak base in science and production capabilities, these two industries
evolved into significant providers of affordable healthcare. This section briefly presents role of industrial and
regulatory policies that catalysed growth of Indian pharmaceutical and biotechnological industries.

5.1 Indian pharmaceutical and biotechnology industry

The existing pharmaceutical and biotechnology industry in India is in many ways a product of micro
economic environment directed by state regulations and interventions. The different industrial policy regimes
influenced firm level learning processes and shaped the technological capability accumulation in the Indian
pharmaceutical and automobile industry.

5.1 Indian pharmaceutical industry

The Indian pharmaceutical industry is the 14th largest in terms of value (1.5%) and 3rd largest in terms of
volume in the world (10%). It represents a successful high technology based industry, which has witnessed
self-reliant consistent growth aided by weak regulatory framework. The Indian pharmaceutical industry has
developed sufficient capability to ensure the country is self-sufficient in addressing health care needs. The
Indian pharmaceutical industry is characterised by a low degree of concentration; a large number of firms
with similar market shares, a low level of R&D intensity ratios with a high level of brand proliferation. Kale
et al., (2008) suggests that the value of its production is estimated to be approximately $4.5 billion and it
employs about 5 million workers directly and 24 million workers indirectly. There are two types of firms in
the Indian pharmaceutical industry: organized sector firms and informal sector firms.
The changed policy regime in the decade of 90s transformed the Indian pharmaceutical industry’s ‘ways of
working’ and saw the strongest performance of the industry on several fronts. Fig. 3 shows evolution of
government policies that shaped the modern Indian pharmaceutical industry.

Fig. 3 Evolution of Indian industrial policies and pharmaceutical industry (Kale, 2010)

Since independence in 1947, the Indian government has taken public policy initiatives to develop local
pharmaceutical industry base with the ultimate aim of making drugs available to poor populations at
affordable prices. The most significant initiative, however, was the policy change to non-recognition of
pharmaceutical product patents. The 1970s Patents Act propelled Indian firms onto a reverse engineering
path and laid the foundation for a strong domestic industry. The resulting ‘imitative’ follower trajectory,
facilitated by the lack of intellectual property rights, differed greatly from the technological trajectories
followed by firms in the US and Europe (Kale and Little, 2007).
The pharmaceutical industry in India has mainly evolved through three different phases, each characterized
by different policy regimes and industry’s response to those policies. The first period was prior to 1970,
when the industry was relatively small in terms of its production capabilities. The second period is the
decade and a half phase spanning from the 1970s to the beginning of the 1990s, a period during which the
output of the industry grew remarkably. In the third phase of expansion, from 1990s onwards, the
pharmaceutical industry grew more than three times faster than it did during the 1980s (Kale and Little,
2007).
In 1960, close to 90% of market share was with multi-national corporations (MNCs) and 10% with Indian
companies. In the pre-independence era and up to World War II, Indian domestic production only accounted
for a fraction of the market for medicine. There were fewer than 10 registered producers of Western-type
pharmaceutical products in 1915 and 30 in 1947; many of them were producers of non-pharmaceutical
chemicals. The Indian population was largely dependent on imports from foreign firms based in the UK,
France and Germany for the supply of medicines. The cost of these medicines was largely out of reach for
the majority of the Indian population. Therefore after independence, the Indian government focused on
pharmaceuticals as a priority area and both, private and public investments were sought under the industry
policy resolution. Several foreign multinational firms invested in India throughout the 1950s and 60s and
until the 1970s these firms dominated the Indian market. Some multinational companies only set up
marketing and distribution facilities, importing bulk drugs from their manufacturing facilities. When the
Indian government increased pressure against the import of finished products, MNCs set up formulation
units and restricted imports to bulk drugs.
The Indian government set up research institutes such as Central Drug Research Institutes and National
Chemical Laboratory under the umbrella of CSIR (Central Scientific and Industry Research) laboratories and
invested in public sector enterprises to establish the domestic pharmaceutical industry. The first priority for
the government was to become independent of imports as India was importing almost 90% of its bulk drugs
requirement. Therefore in 1954, the Indian government set up a public sector pharmaceutical firm; Hindustan
Antibiotics Limited (HAL) for the production of penicillin and sulfa drugs and in 1961 with Russian
cooperation the Indian government set up another pharmaceutical firm; Indian Drugs and Pharmaceuticals
Limited (IDPL). The public sector units along with the research institutes and MNC firms who started
manufacturing in India developed the basic knowledge-base required for the industry and emerged as the
main source of industrial entrepreneurs a decade later. Until 1970 Indian pharmaceutical industry was
regulated through strict patent regime compliant with British law and unlike other sectors Indian government
encouraged foreign and Indian firms to invest in pharmaceutical sector.
However due to failure of these policies to meet healthcare requirements Indian government made strategic
industrial and regulatory policy changes in 1970s to infused life in the Indian pharmaceutical industry. The
weakening of patent act in 1970 and the 1978 Drug policy provided incentives to Indian firms and strict
regime to MNC firms. Another key legislation was Drug Price Control order, 1979 which empowered
government to fix maximum sale price of 347 indigenous manufactured drugs to make drugs accessible to
Indian population. In post 1990 Indian government liberalised economy and open pharmaceutical sector to
MNC firms. Post 1990 India emerged as a cheap and efficient supplier of bulk drugs and formulations to
countries from the developing and developed world (Fig. 4). The pharma industry started to really take
notice of the Indian pharmaceutical industry’s generic and manufacturing capabilities when in 2001 Cipla,
one of the largest Indian emerging manufacturers, announced a major price reduction for HIV therapy. Large
pharmaceutical firms threatened to fight Cipla, but due to international pressure, they cut the price of their
own drugs - by up to 90 per cent making them also affordable to developing country governments (Chataway
et al, 2010).

Fig. 4 Growth in the Indian pharmaceutical industry (OPPI, 2007)

In 1995 Indian government adopted strong patent regime in compliance with TRIPS (Trade Related
Intellectual Property Rights) compliant strong patent regime. Recognising the imperative to take proactive
measures to give a necessary fillip to R&D, the Government had set up various schemes to encourage
collaboration between research institutes and industry. In 1995 under the Department of Science and
Technology, the Indian government launched a programme called the New Millennium Leadership
Technology Initiative (NMLTI) to bring industry and academia together. The basic objective is to synergise
the facilities and competencies of publicly funded R&D institutions, academia and private industry for
developing technologies for Indian industry. The NMLTI programme is focused on developing public-
private partnerships and is not restricted to pharmaceutical research. With a financial outlay of Rs. 800
million, DST has sanctioned 49 pharmaceutical industry/institutions collaborations so far. In this programme
50% of funding comes from the government and 50% from industry.
The Indian government also took major initiatives to increase interactions between industry and public R&D
institutions in areas of innovative pharmaceutical R&D. In 2000, the Indian government created a
Pharmaceutical Research & Development Support Fund (PRDSF) with an initial allocation of Rs.1500
million as a plan fund for promotion of R&D in the pharmaceutical industry. Recently the Department of
Science and Technology cleared five industry-institution research proposals to be funded through the PRDSF
programme.
In case of Indian pharmaceutical industry government intervention and changes in regulation along with the
dynamic response of Indian firms made a serious contribution to improving the supply and access of
medicine to poor populations in developing countries.

5.2 Indian biotechnology industry

India is among the top 12 countries in terms of number of biotechnology companies in the world (Arora,
2005). The Indian biotechnology industry, like its global counterparts, is dominated by the healthcare
sector10. The healthcare sector accounts for 60%, industrial application 25% and agricultural biotechnology
15% (Arora, 2005). The Indian biosimilars market in 2008 was estimated to be worth around US $200mn
and only 7-10 companies are involved in the manufacture of recombinant products. Prominent among India’s
notable achievements in modern biotechnology in the recent years is the development of a recombinant
hepatitis B vaccine, human insulin, erythropoietin, granulocyte colony-stimulating factor, interferon and
streptokinase. Over 40 biologics are marketed in India, of which around 25 are biosimilars that are
manufactured locally. Another 25 biosimilar products are in the final stages of development. The total cost to
develop a biosimilar in India can therefore range from $10 – 20 million, which helps Indian companies to
offer their products at a 25-40% cheaper price than the original biologics (Ariyanchira, 2011).
According Ernst and Young (2010) report India has commendable domestic expertise in gene manipulation
and fermentation. However, bioprocess development and cell-line development are still in nascent stages. Of
the limited number of biosimilar companies involved in recombinant product manufacturing, only two have
generated their own clones and cell lines.
Indian biopharmaceutical players have developed strong capabilities in the high-potential biosimilar space
and have presence in almost all the biologics coming off patent. Companies such as Reliance Life Sciences,
Biocon, Wockhardt, Shantha Biotech, Panacea Biotech and Intas Pharmaceuticals have been developing
strong capabilities in this area. Biocon expects to bring its oral insulin to the US market by 2011 and has
other biologics such as G-CSF and various monoclonal antibodies in its pipeline. Reliance Life Sciences
recently launched its fourth biosimilar product, TPA Reteplase, in the domestic market and plans to launch
three more products in 2010. Dr. Reddy’s, which has filgrastim (G-CSF) and rituximab in the market, claims
to have a pipeline of eight generic biopharmaceuticals in various stages of development, including two in
clinical development.

Evolution of Indian biotechnology sector

 Indian government identified biotechnology as a tool to advance growth of agriculture and healthcare in late
1970s and started planning for growth of the sector in the country. India’s Sixth Five Year Plan (1980-85)
was the first policy document to cover Biotechnology development in the country (Chaturvedi, 2005). In
1982 Indian government set up an apex official agency National Technology Board (NBTB) to lead the
biotechnology initiative. No. of initiatives were proposed in the 6th (1981-1985) and 7th (1986-1990) five
year plans. In 1986 NBTB was dissolved and under aegis of Ministry of Science and Technology,
Department of Biotechnology (DBT) was established. Ramani (2001) suggests that it was done to establish a
nodal agency that can coordinate development of different competencies in a variety of scientific disciplines.
In next decade DBT participated in creation of new institutions such as the National Institute of
Immunology, Centre for Cellular and Molecular Biology and International Centre for Genetic Engineering.
DBT was provided research funding for various institutes such as the Indian Institute of Sciences, Indian
Institute of Technology and All India Institute of Medical Sciences to undertake biotechnology related
research.

Fig. 5 Evolution of industrial policies and biotechnology industry

Growth Phase

a. Government initiates process to

set up regulatory body

Development Phase
b. Indian firms starts developing
a. Government set up the biotech products for Indian
Biotechnology Consortium of markets; example in 1997, Shantha
India as a public company in 1990 developed and commercialised
to provide funds and India’s first r- DNA Hepatitis-B
complementary competencies to vaccine, in 2002 Wockhardt
Initiation Phase launches Human Insulin
scientist entrepreneurs
a. Setting up National
Biotechnology Board in 1982
b. Large Indian pharmaceutical
firms enter biotechnology field
b. DBT established new research
institutes and provided funding to

1975-85 1985 - 95 Post -1995

State supported R&D funding
Indian government realised that there is a void of funding as traditional financial institutes were sceptical of
funding in uncertain new technology and decided to set up a company to fill the role of venture capital.
In 1994 the Department of Biotechnology in collaboration with the Industrial Bank of India (IDBI)
established the Biotech Consortium India Limited (BCIL), as a public limited company. BCIL’s mandate
was to function similar to venture capital firms; promote creation of new firms not just by providing funding
but also complementary competencies required to run top research based firms (Ramani, 2001). Thus BCIL
was tasked with guide start-ups, find adequate financial avenues and arrange technology transfers.
Chaturvedi (2005) explains that prominent state agencies such as the Department of Scientific and Industrial
Research (DSIR), the Department of Science and Technology (DST), the Department of Biotechnology
(DBT), the Indian Council of Agricultural Research (ICAR) and the Indian Council of Medical research
(ICMR) have all established programmes to support biotechnology. As fig. 6 shows post 1990 these agencies
have emerged as key investors in biotechnology sector in India and have increased their investment over the
years.

Fig.6 Budgetary allocations to the Department of Biotechnology (millions of USD) (Chaturvedi, 2005)

In post 1995 with active state intervention with BCIL and other initiates started generating interest among
scientists and this period witness emergence of dedicated biotechnology firms (DBFs) such as Shantha
Biotech, Bharat Biotech, Xycton Diagnostics, Strand Genomics, Syngene International among others.
Gradually pharmaceutical such as Wockhardt, Dr. Reddy’s Laboratories and Panacea Biotech enter the
biotechnology arena.

Regulatory framework
In the context of biotechnology Indian government has established strict guidelines and regulatory structures
in two important areas; biosafety and bioethics (Chaturvedi, 2005). India is a semi-regulated market with
respect to biosimilars. Phase I-II trials are typically not required for biosimilar approval in India unless it is
found necessary in special cases. Phase III trials with a minimum of 100 patients are mandatory for
establishing bioequivalence. Ernst and Young (2010) report suggests that India is moving towards a
standardised approval system for products based on biotechnology. A bill to establish a centralized National
Biotechnology Regulatory Authority (NBRA) to approve the majority of biotech products was drafted in
2008 and is currently undergoing final approval process. It also suggests that the Indian Government is
proposing to set up a separate vaccine regulatory authority. The proposal — currently being drafted by the
Ministry of Health and the Indian Council of Medical Research (ICMR) — aims to streamline production
and boost the viability and affordability of essential vaccines, particularly for the national immunization
program.

6. Analysis and discussion

Table 1 presents key issues that played a role in development of pharmaceutical industry and biotechnology
industry and compares it with the Indian medical device industry. It clearly shows that Indian
pharmaceutical and biotechnology industries have been richly rewarded with state interventions, supportive
infrastructure and other incentives but medical device industry has yet to get a proper regulatory set up, let
alone the range of policy initiatives needed if Indian firms are to develop technological capabilities. This
section discusses each of those issues in detail.

Table 4 Comparative analysis of Indian pharmaceutical and medical device industry (Kale, 2010)

Indian pharma/biotech industry Indian medical device industry

Active government support and intervention via No evidence of active efforts on part of
industrial policy; regulation and infrastructure government till 2005

Collaboration between research institutes and Lack of collaborative web of

pharmaceutical firms industry/hospitals/academic linkages
Entrepreneurship shown by pharmaceutical Difficulty in initiation and MNC dominated
distributors, scientists and managers domestic market proved disincentive for
entrepreneurs

Effective imitation strategy and reverse Due to complexities involved in product

engineering to develop capabilities in sequential development in medical device industry imitation
manner strategy proved challenging

Acceptance of product from large and protected Indian firms struggled to find acceptance in
domestic provided incentive to entrepreneurship domestic market

The Indian healthcare system severely suffered from this neglect of the government; it handicapped local
manufacturers, allowed unrestricted import of sub-standard products, swamped markets with counterfeit
products and created market skewed in favour of MNCs and spurious local traders.
Dr Valiathan comments on neglect of the industry,
”Devices suffered from neglect by the medical profession, technologists, industry and Government”

There are three key salient issues that describe the current status of the Indian medical device industry and
they relate to flawed industrial policy, lack of governance and absence of strong public health system and its
linkages with other stakeholders.

6.1 Flawed industrial policy

In the case of the pharmaceutical industry, the Indian government set up a web of research institutes,
established two public sector units and restricted MNC activities through use of a pro-active pharmaceutical
industrial policy. In case of biotechnology industry Indian government provided funding to set biotechnology
firms and initiated collaborations with overseas institutes to initiate inward technology transfer. However in
the case of Indian medical device industry with the exception of a few examples, such active government
role was totally absent.
The flawed industrial policy also affected growth of industry through its impact on entrepreneurship and in
creating an ideal business environment. Indian laws indirectly reward trading by charging higher duties on
raw materials than on finished goods. The Indian government provides import duty exemption for equipment
and technologies that are not available in the India but that in turn encourages import rather than investment
in domestic R&D and manufacturing. Thus it is cheaper to import final products rather than to import
subparts and assemble in India. A leading local device manufacturer comments,
“We have to import the raw materials after paying duty and the finished products are imported duty free”

Local manufacturer struggled to sell their products in competitively in the market and often fare poorly
against MNC products which are approved by stringent western regulators and backed by huge amounts of
clinical trials data. Murthy (2004) points out that from 1994 till 2004 there were more than 11000 valve
procedures were done per year in India, only 1000 valves developed Sri Chitra Research Institute (a leading
Indian research institute) were used even though it costs less than 50% of the average of all the imported
valves. The Indian clinical community is averse to using devices of the Indian manufacture because of
uncertain standards and lack of quality assurance.

6.2 Lack of regulation

In case of Indian pharmaceutical industry the Indian government actively intervened to change the rules of
the game. Indian government adopted weak patent laws in 1970s that gave rise to the modern pharmaceutical
industry in India. The Indian medical device sector operated without any law till 2008 and thus makers of
bone plates, heart valves and stent had no law to govern them till 2008. Despite of high percentage of
imports and consumption till 2005 India did not regulate any of the medical devices; local and foreign. In
this environment MNCs with their superior products dominated over local manufacturers with quite high
profit margins while local authentic firms struggle at the lower end of the market with counterfeit producers.
So, weak standards weaken those local producers who may wish to increase capabilities.
Without any regulation market was populated by spurious manufacturers and counterfeit traders who used
scrap material as raw material or import goods of uneven quality. Many small trading companies
mushroomed in the country which imported products from China, Korea and Taiwan at a very low rate, even
lower than Indian firms’ production cost. The market is flooded with non-standard look-like counterfeit
products, which are sold at very low prices.

MNC benefited most because of this lack of regulation and absence of governance. These premier global
companies charged high prices with significant profit margins for their devices. MNCs sold their products in
the Indian market with significant profit margins as there were no local competitor to compete with low
prices and no regulation to monitor their profit margins. Most of imported medical devices such as cancer
diagnostic, medical imaging, ultrasonic scanning, plastic surgery equipment and polymerase chain reaction
(PCR) technologies specifically at high-tech end were sold with high gross margins. Thus total lack of
regulation created skewed market in favour of MNCs and as a result these companies could charge
‘monopoly rent’.
In 2005 taking cognisance of JJ Hospital case and Mumbai high court order, the Indian government listed 10
medical devices under the Drugs and Cosmetics (D&C) Act. These products (including cardiac stents, drug
eluting stents, catheters, intra ocular lenses, IV cannulae, bone cements, heart valves, scalp vein sets,
orthopaedic implants, and internal prosthetic replacements. These products were mandated to get licenses for
their manufacture, sale and distribution. However there was serious problem with medical devices under
Drugs and Comestics (D&C) Act. In Europe and US separate laws that govern medical devices and implants
while pre-independence D&C Act is meant for drugs and cosmetic only. This was followed by a widespread
debate on the legal status of medical devices. Several experts excluded medical devices from the drug list as
the Drugs & Cosmetics Act does not cover medical devices. It was clearly evident that the regulatory
framework and infrastructure designed to govern pharmaceutical and cosmetic products is totally inadequate
for governing medical devices due to the nature of difference in products, their action in human body and
packaging.

Other problem was adoption of D&C Act for medical devices was not implemented properly. It was not
accompanied by implementing guidelines and that created some confusion in early stages. It left many
companies to speculate how the regulations would be carried out. Shortly after notifications customs
authorities in Mumbai, however, began holding up shipments of medical devices prompting complaints from
industry. It created shortfall of devices in the market exposing lack of clarity in regulation and lack of
capacity to review and approve increasing number of applications on government’s part.
By 2011 it became apparent that the D&C Act is not ideal for devices and rather than helping local authentic
manufacturers, it endangers their survival. Similar US FDA and European CE regulation Indian medical
device industry needs a specific device industry focused regulation. However, lack of communication
between various government departments, limited understanding of the issue on hand and severe
infrastructural problems are major hurdles in creating any effective regulation.
Indian government is still working toward establishing a medical regulatory regime but struggling to set up
governance structure that can distinguish between medical devices and pharmaceuticals.

6.3 Lack of well-established health system

Innovation in the medical device sector is based on interactive ecosystem of institutions and requires firms
and institutions working closely with practitioners and users. It needs a chain of well established research
hospitals working with research institutes to develop solutions to local healthcare problems. India lacked web
of research hospitals and the government neglected setting up a strong public health system. Over the years
some private hospitals have emerged and filling up the gap however their contribution to medical device
R&D is minimum.

7. Conclusions
This paper analyses the lack of growth of the Indian medical device industry especially in comparison with
other healthcare industries in India such as the pharmaceutical and biotechnology industries. It shows that in
pharma-biotech government intervention and public policy played a significant role by developing public
research facilities, setting up a regulatory framework and encouraging entrepreneurship that created the base
for future growth of the pharmaceutical industry. Research reveals that in post-independent India,
government set up CSIR and other research institutes that created a basic ecosystem which supported first,
imitation and then innovation in the Indian pharmaceutical industry. Analysis presented in this paper
suggests that such active support was totally lacking in the medical device industry with consequent
hampering of growth of the sector. For example, the Indian government failed to set up an eco-system of
institutions and webs of interactions between users and developers required for development of a medical
device industry. Indian government introduced price control for medicines in the pharmaceutical industry
making them affordable to poor populations of the country but in the case of the medical device industry
government left it up to market and manufacture to set up the pricing. This led to higher profit margins for
firms and high cost for poor people.
Thus in pharmaceutical and biotechnology industry government covered three important aspects of
technology capability development; public research infrastructure, regulatory framework and regulated final
market. However in medical device sector it is clear that government didn’t make any effort to create this
linkages and resultantly Indian capabilities have stagnant at low tech segment of market. It clearly highlights
that in developing countries, especially in high-tech sectors ‘state policies’ can play important role in joining
‘missing link’ between technology, entrepreneurship and market.
Analysis shows that lack of regulations has certainly hampered development of local authenticate
manufacturers as well as regulated market. The Indian medical device was totally ungoverned from 1947 till
2005 and this was the period where local industry witnessed no growth, and domestic market was swamped
by unaffordable devices by MNC and counterfeit products from spurious local traders. Authentic Indian
device developers and manufacturers suffered the most as they struggle to again acceptability of their
products due to lack of any regulation and regulating authority. MNC enjoyed most benefit of the situation
through monopoly rents severely restricting access of affordable healthcare to poor populations of India.
Different healthcare industries such as pharmaceutical, biotechnology and medical device require different
regulatory frameworks and thus a proper rules and regulations are needed to encourage the efficient growth
of device industry. Looking at scope, cost and requirement of medical devices, India needs to develop R&D
and manufacturing capability to produce their own devices and hence, a proper and stringent rules and
regulations need to be put forth in the practice. This will not only create trust among people about device
manufactured by Indian firms but also it will provide manufacturers a detailed, accurate, information of
standards expected of the products, generating more information and hints for further improvements.
Innovation processes in the medical device sector requires interactive ecosystem of institutions compared to
development of innovations in pharmaceutical industry. Further innovative product development in medical
device industry is associated to firms and institutions working closely with practitioners and users unlike
pharmaceutical product development where collaboration involves firms working with R&D institute and
universities. Thus public policymakers should also take note that the nature of processes involved in
development of innovation can create important barriers to imitation than regulatory tools such as IPRs.
The findings have implications for innovation systems literature as well as public policies in both the
developing and developed world. The ecosystem that shapes innovation processes in healthcare industries
differs from each other and each requires a different support system. Similarly provision of healthcare for
poor people government policy should focus on all industries associated with healthcare than focusing only
on supply of drugs and vaccines. Thus government needs integrated and comprehensive healthcare policy
that should start with diagnostics, should include delivery and end with cure. In light of these observations a
closer look at the nature of innovative technology and local contexts as well as micro- and macro-economic
systems is important to create a deeper understanding of the manner in which technology development
occurs differently in countries with different regulatory, clinical and economic conditions.

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