SPECIAL ARTICLE
Policy Reforms in the Indian Pharmaceutical
Sector since 1994
Impact on Exports and Imports
Reji K Joseph
Liberalisation measures in the pharmaceutical sector
have brought about major changes in the industrial
licensing policy, import restrictions, foreign direct
investment and production controls. It was feared that
firms would shift from indigenous production to
imports, especially of bulk drugs, and this concern was
aggravated with the change in the patent law. This
paper finds that these apprehensions have only partly
come true. Exports of formulations have grown faster
while their imports have not registered any jump,
keeping the balance of trade positive. But there has been
a decline in domestic production of bulk drugs and a
growth in imports because the industry is moving away
from intermediates and is focusing on bulk drugs at the
high end of the value chain.
This article is based on my PhD thesis and I gratefully acknowledge
the direction provided by Jayati Ghosh and Biswajit Dhar in doing this
study. I also thank the anonymous reviewer who provided me with very
detailed and productive comments.
Reji K Joseph (rejikjoseph@ris.org.in) is at the Research and Information
System for Developing Countries, New Delhi.
62
Electronic copy available at: http://ssrn.com/abstract=2049286
1 Introduction
T
he debate on the implications of liberalising import
restrictions and production controls on pharmaceuti-
cal products in India was rekindled with the decision
to implement product patent rights. The removal of regu-
lations that insisted on local production, placing pharmaceu-
ticals in the open general licence (OGL) category and the abo-
lition of restrictions on foreign firms were all expected to
encourage imports of pharmaceutical products into India.
With the new patent regime, it was apprehended that growth
in exports would be limited due to restrictions on the scope
of operations of generic producers, particularly their ability
to export to preferred destinations, while imports would get
a boost because of the constraints on domestic producers
of patented medicines, thus causing the balance of trade to
deteriorate. This paper provides an analysis of the trends and
patterns in pharmaceutical exports and imports in the new
policy era.
2 The Context
The liberalisation measures in the Industrial Licensing Policy
Statement of July 1991 were implemented in the pharmaceutical
sector in 1994 through the Modification in Drug Policy 1986.
Key elements of the liberalisation measures were as follows:
(a) Abolition of industrial licensing for all bulk drugs and their
intermediaries and for all formulations except specific cell/
tissue-targeted ones; (b) Elimination of the ratio parameter
linking the production of formulations to that of indigenous
production of bulk drugs from the basic stages; (c) Abolition of
restrictions on import of drugs and pharmaceuticals and plac-
ing them in the OGL category; (d) Reduction in tariffs for the
import of pharmaceuticals; (e) Automatic approval of foreign
direct investment (FDI) up to 100%; and (f) Relaxation of the
drug price control mechanism.
These measures essentially came about as a result of the
endogenous policymaking process, but the most significant
policy change in the post-1994 period – the change in the patent
regime – came about as an outcome of India’s obligations under
the Trade-Related Aspects of Intellectual Property Rights
(TRIPS) Agreement. The concern that liberalisation would
result in an increased dependence on imports was aggravated
by the decision to implement product patent rights in the
pharmaceutical sector. Studies have established a positive
may 5, 2012 vol xlviI no 18 EPW Economic & Political Weekly

correlation between the strengthening of patent rights in
developing countries and increased exports to these countries
by companies based in developed countries. It was feared that
the Indian pharmaceutical industry would no longer be able
to export generics of on-patent drugs, which had been a thriv-
ing business in the past.
Maskus and Penubarti (1995) and Smith (1999) found a
strong positive correlation between exports and the level of
intellectual property protection in importing countries. Smith
(1999) observed that strengthening patent rights in countries
that pose a strong threat of imitation would expand exports,
whereas strong patent rights in countries where the threat of
imitation is weak would enhance market power. India was
classified as a country with weak patent rights and strong
imitative abilities where a strengthening of patent rights
would bring about market expansion. Following this reason-
ing, it was expected that imports to India would expand with
the implementation of product patent rights and this would
adversely affect the balance of trade. The other view, how-
ever, was that the rise in imports of formulations would be
offset by the growth in exports of bulk drugs (Lanjouw 1999).
Further, the expiry of blockbuster patents was expected
to provide Indian firms with new opportunities for exports.
It was also expected that the cost advantages of production
in India, compliance with good manufacturing practices
and the expertise in reverse engineering would make Indian
firms explore new opportunities in low-volume, high-price
regulated markets while retaining their traditional low-price,
high-volume markets in Asia, Africa and Latin America
(Grace 2004).
Chaudhuri (2005) showed that there has been a remarkable
growth in Indian pharmaceutical exports, particularly after
2000. The growth in exports to regulated markets, especially
the US, has been the major reason for the spurt. Exports to
regulated markets accounted for 39% of the exports in 2001-02.
Dhar and Gopakumar (2008) arrived at a similar conclusion.
Chaudhuri also pointed out that in 2001-02, formulations
constituted 52% of the exports with the remaining being bulk
drugs.1 However, there are no major studies providing detailed
analyses of imports of pharmaceuticals to India. This study
attempts to fill the gap and also endeavours to capture the
more recent trends in exports.
3 Methodology
The analysis is based on data accessed from COMTRADE.2 The
advantage of this data is that it enables cross-country compari-
sons as it is based on an international classification, the Standard
International Trade Classification (SITC). Major international
statistical publications, including the annual International
Trade Statistics brought out by the World Trade Organisation
(WTO), follow the SITC and use COMTRADE data to identify
major exporters and importers. As countries need not strictly
follow the SITC for domestic purposes, there may be differ-
ences in the figures reported by COMTRADE and government
sources. For example, while COMTRADE and International
Trade Statistics report that India’s exports in pharmaceuticals
Economic & Political Weekly EPW may 5, 2012 vol xlviI no 18
Electronic copy available at: http://ssrn.com/abstract=2049286
SPECIAL ARTICLE
in 2008 was $5.9 billion, the annual report of the union govern-
ment’s department of pharmaceuticals reports a figure of $8.4
billion for 2008-09.3
Pharmaceutical products are classified into formulations
(dosage forms) and bulk drugs (active pharmaceutical ingredi-
ents, or APIs). The European Medicines Agency (EMA) defines a
formulation as “the physical manifestation that contains the
active and/or inactive ingredients that deliver a dose of the
medicinal product. The key defining characteristics of the
dose form can be the state of matter, delivery method, release
characteristics and the administration site or route for which
the product is formulated. A pharmaceutical dose form is the
form in which a pharmaceutical product is presented in the
medicinal product package as supplied by the marketing
authorisation holder/manufacturer/distributor”.4 The US Food
and Drug Administration (FDA) defines a bulk drug as “any
substance or mixture of substances intended to be used in the
manufacture of a drug (medicinal) and that when used in its
production becomes an active ingredient of the drug product.
Such substances are intended to furnish pharmacological ac-
tivity or other direct effect in the diagnosis, cure, mitigation,
treatment, or prevention of disease or to affect the structure
and function of the body.”5 In India, these terms are defined in
the Drugs Price Control Order (DPCO). The DPCO defines a for-
mulation as “a medicine processed out of, or containing the
use of any one or more bulk drug or drugs with or without
pharmaceutical aids, for internal or external use for or in the
diagnosis, treatment, mitigation or prevention of disease”6
and a bulk drug as “any pharmaceutical, chemical, biological
or plant product including its salts, esters, stereo-isomers and
derivatives, conforming to pharmacopoeial or other standards
specified in the Second Schedule to the Drugs and Cosmetics
Act, 1940 (23 of 1940), and which is used as such or as an
ingredient in any formulation.”
The SITC does not explicitly use these terms (formulation
and bulk drug), but classifies pharmaceutical products into
two groups – code 541 “medicinal and pharmaceutical prod-
ucts, other than medicaments of group 542” representing
bulk drugs and code 542 “medicaments (including veteri-
nary medicaments)” representing formulations. Code 541
consists of selected products from harmonised system (HS)
chapters 26, 29 and 30. Code 542 consists of selected prod-
ucts from HS chapter 30 (3003 and 3004). HS chapter 30,
which is on pharmaceutical products, has six sub-chapters
(at four digits) and the term “‘medicaments” apply only to
sub-chapters 30037 and 3004,8 indicating these two are
distinct from the other four sub-chapters. For this study,
products coming under SITC code 541 (which in the HS clas-
sification are select products from chapters 26, 29 and the
products under chapters 3001, 3002, 3005 and 3006) are
considered bulk drugs and products coming under SITC code
542 (which in the HS classification are products under chap-
ters 3003 and 3004) are considered formulations. My inter-
action with officials of the Bulk Drug Manufacturers’ Asso-
ciation (India), Hyderabad confirmed that HS 3003 and 3004
are considered as formulations by the pharmaceutical
63
SPECIAL ARTICLE
Table 1: HS Codes for Bulk Drugs and Formulations (six-digit level) formulations, which accounted for 78% of the exports in 2009.
Bulk Drugs (SITC 541) Formulations (SITC 542) However, in bulk drugs, the country has had a negative trade
263623 293721 293941 294130 300620 300310
balance in many years.
293121 293722 293942 294140 300630 300320
Most of the leading exporters of pharmaceuticals are
293610 293723 293943 294150 300640 300331
domestic firms and they derive a substantial share of sales
293621 293729 293949 294190 300650 300339
from exports (Table 3).
293622 293731 293951 300110 300660 300340
293624 293739 293959 300120 300390 Table 3: Leading Exporters and Importers of Pharmaceuticals
(Excluding Raw Materials)
293625 293740 293961 300190 300410
Exporters in 2008-09 Importers in 2008-09
293626 293790 293962 300210 300420 Company Exports % Company Imports %
293627 293810 293963 300220 300431 ($ million) Sales ($ million) Sales
293628 293890 293969 300230 300432 Ranbaxy Laboratories (F) 666.4 67.5 Rajat Pharmachem (I) 59.9 45.6
293629 293911 293991 300290 300439 Dr Reddy’s Laboratories (I) 629.9 63.8 Aventis Pharma (F) 15.7 5.9
293690 293919 293999 300510 300440 Cipla (I) 597.3 51.7 Novartis India (F) 15.7 11.2
293711 293929 294110 300590 300450 Aurobindo Pharma (I) 380.4 60.5 GlaxosmithKline
Pharmaceuticals (F) 13.4 3.0
293712 293930 294120 300610 300490
Source: UNSD.9 Lupin (I) 344.6 52.8 Wyeth (F) 12.8 14.6
Matrix Laboratories (F) 266.6 81.4 Fulford (India) (F) 11.4 24.1
industry. Table 1 gives a detailed HS classification of bulk Divi’s Laboratories (I) 240.3 91.7 Organon (India) (F) 10.2 24.6
drugs and formulations (at six-digit level). Orchid Chemicals and Amol
The study also uses, wherever relevant, data from the Indian Pharmaceuticals (I) 203.0 77.5 Pharmaceuticals (I) 8.6 57.2
Drug Manufacturers’ Association (IDMA) and the Prowess Sun Pharmaceutical Cadila Healthcare (I) 6.0 1.5
Industries (I) 177.2 28.7
database of the Centre for Monitoring Indian Economy (CMIE). Serum Institute of India (I) 175.9 73.5 Abbott India (F) 5.9 3.3
Source: Prowess.
4 Trends in Pharmaceuticals Trade (I) = Indian, (F) = Foreign.

India ranks fifth in the world on the list of leading exporters of Ranbaxy and Matrix were flagship Indian pharmaceutical
pharmaceuticals in the International Trade Statistics report. companies until they were taken over by multinational corpo-
The 2009 report shows that India accounted for 1.4% of global rations (MNCs) a few years ago.11 There are a few more such
exports. This is remarkable given that India’s ranking was firms that have substantial exports in their sales turnover.12 For
sixth and its share in global pharmaceutical exports was 1% in this analysis, the taken-over companies are treated as a separate
Table 2: Export, Import and Balance of Trade in Pharmaceutical Products category. Figure 1 gives the export intensity, defined as the ex-
($ million) ports to sales ratio of MNCs, domestic firms and the taken-over
Bulk Drugs Formulations Total
Export Import BoT Export Import BoT Export Import BoT
firms. The taken-over firms are the most export-oriented and
MNCs are the least export-oriented. While the taken-over firms
1994 101.6 251.0 -149.4 484.2 47.5 436.7 585.8 298.5 287.3
1995 141.2 348.1 -206.9 582.9 56.9 526.0 724.2 405.1 319.1
had an exports-sales ratio of 71% in 2008-09, it was only 11% for
1996 174.3 269.3 -95.0 639.7 37.4 602.3 814.0 306.7 507.3 MNCs. That the MNCs operating in India do not have significant
1997 222.6 324.2 -101.6 724.6 64.6 660.0 947.2 388.9 558.3 exports is contrary to the general understanding that foreign
1998 250.5 303.5 -53.0 683.2 80.7 602.5 933.7 384.3 549.4 firms will be more export-oriented. Firms investing abroad are
1999 265.3 290.2 -24.9 802.9 82.6 720.3 1,068.2 372.8 695.4 expected to show greater export competitiveness as their pres-
2000 341.8 281.1 60.7 805.1 92.8 712.3 1,147.0 373.9 773.1 ence in foreign market ensures flexibility, reliability and time-
2001 363.3 303.0 60.3 959.1 97.6 861.5 1,322.4 400.5 921.9 liness in dealing with global buyers, which is crucial for export
2002 451.7 404.0 47.7 1,157.1 141.9 1,015.2 1,608.7 545.9 1,062.8 success (Kumar and Jayaprakash 2007). This expectation was
2003 516.5 468.8 47.7 1,455.4 141.2 1,314.2 1,971.9 609.9 1,362.0
explicitly mentioned in the Industrial Policy Statement of 1991,
2004 482.5 493.9 -11.4 1,789.1 186.4 1,602.7 2,271.6 680.3 1,591.3
which initiated liberalisation of FDI rules in the pharmaceuti-
2005 543.0 662.4 -119.4 2,218.8 275.3 1,943.5 2,761.8 937.8 1,824.0
cal sector. The statement read, “Foreign investment would
2006 644.5 789.3 -144.8 2,771.6 392.2 2,379.4 3,416.1 1,181.5 2,234.6
2007 900.8 1,101.2 -200.4 3,576.0 515.1 3,060.9 4,476.7 1,616.3 2,860.4
bring attendant advantages of technology transfer, marketing
2008 1,015.0 1,203.5 -188.5 4,807.7 666.0 4,141.7 5,822.7 1,869.6 3,953.1 expertise, introduction of modern managerial techniques and
2009 1,322.1 1,312.4 9.7 4,599.4 735.5 3,863.9 5,921.5 2,047.9 3,873.6 Figure 1: Exports-Sales Ratio
Source: COMTRADE. 80
the 2005 report. In the domestic export basket as well, the 70
share of the pharmaceutical sector has been increasing – from 60 Taken-over Firms
2.8% in 2005 to 3.3% in 2009.10 India does not have significant 50
Percentage

imports of pharmaceuticals and the country does not figure in

40
the list of leading importers in the WTO report. Table 2 shows
30
trends in the export and import of pharmaceutical products Domestic Firms
20
since 1994. MNCs
10
The Indian pharmaceutical sector shows a steadily growing
0
positive trade balance. The surplus has been contributed by 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09

64 may 5, 2012 vol xlviI no 18 EPW Economic & Political Weekly


new possibilities for promotion of exports.” From 2001, the
year in which 100% FDI was permitted in the pharmaceutical
sector, the exports-sales ratio of MNCs has grown only margin-
ally – from 7% to 11% between 2000-01 and 2008-09.
The drying up of the pipeline of new drugs and the empha-
sis placed on generic drugs by a number of countries has forced
MNCs to get into the generic business as well.13 They have
opted for taking over leading players in the generic segment
instead of doing it the organic way. This is precisely why
the taken-over firms in India are the most export-oriented.
Daiichi took over Ranbaxy when the government of Japan
decided to take measures that would help increase the share of
generic drugs from 17% to 30% by 2012. Daiichi now has its
nose in front in the expanding generic market because it is get-
ting Ranbaxy’s cheap, high-quality manufacturing facilities
(Joseph 2008). MNCs taking over generic firms have not been
limited to India. They have taken over domestic drug compa-
nies in other countries as well, such as Sanofi Aventis taking
over Medley in Brazil and Zantiva in the Czech Republic and
GSK taking over BMS in Egypt and Pakistan.14 A survey of 50
top industry executives quoted in the Financial Times reported
that 65% of the executives considered that their sector was
facing a “strategic crisis” and 67% saw diversification as a
potential solution.15 Sanofi Aventis has been the leading com-
pany in diversification over the last few years, boosting non-
patented drug sales from 5% to 12% between 2004 and 2009.
In imports of pharmaceutical goods (excluding raw materi-
als), the leading players are foreign firms (Table 3). When
firms in the Prowess database are categorised on the basis of
their ownership, it is found that foreign firms have an imports-
sales ratio of 40% whereas the ratio for domestic firms is only
5% (in 2009). The taken-over firms do not have any imports.
There was a jump in the imports-sales ratio of MNCs in 1995-96
(from 13% in 1994-95 to 24% in the next year) after the restric-
tions on imports were eliminated. In 1994, the Modification to
the Drug Policy 1986 removed all the restrictions on the use of
imported bulk drugs. Over the years, the import duty also
came down drastically.16
Major changes have taken place in the destinations of exports
and the sources of imports. In 1991, the Soviet Union was the
single largest export destination. However, with the disinteg-
ration of the Soviet Union and the growing competence of Indian
firms, the focus gradually shifted to the highly rewarding (low-
volume, high-margin) regulated markets, especially the US
(Table 4). In imports, India used to source the bulk of its
Table 4: Top Five Destinations of Exports and Sources of Imports in 2009
(bulk drugs and formulations combined)
Destinations Exports
$ Million % Total Sources
Exports
USA 1,320.7 22.3 China
Russian Federation 266.0 4.5 Switzerland
United Kingdom 251.4 4.2 USA
South Africa 193.5 3.3 Germany
Nigeria 180.6 3.0 Denmark
Others 3,709.3 62.6 Others
Source: COMTRADE.
Economic & Political Weekly EPW may 5, 2012 vol xlviI no 18
SPECIAL ARTICLE
requirements from the US, Italy and Germany, but, over the
years, China has replaced these countries as the major supplier.
5 Exports of Bulk Drugs and Formulations
India’s pharmaceutical industry has increasingly become
export-oriented and the share of exports in sales has steadily
grown from 15% in 1993-94 to 41% in 2009-10.17 The rates of
growth of exports of both bulk drugs and formulations suggest
that the industry is doing better in the post-TRIPS period (after
2005). Figure 2 gives the annual rate of growth of bulk drugs
and formulations during different time periods.
Figure 2: Annual Rate of Growth in Exports during Different Periods (CAGR)
25
Bulk Drugs
20
Rate of Growth (%)
Formulations
15
10
5
0
1991-94 1995-2000 2001-05 2006-09
Source: COMTRADE.
Two major changes in trends are seen in Figure 2. One, the
rate of growth of exports of bulk drugs was higher than that of
formulations during the 1990s, but the opposite is true in the
current decade. Two, bulk drugs which showed a steady decline
in the growth of exports between 2001 and 2005, reversed the
trend in the post-2005 period. Formulations, on the other
hand, exhibited a steady growth in exports throughout. On the
whole, it may be concluded that exports of bulk drugs and
formulations have been growing at higher rates in the post-
2005 period than in the 10 years of the post-1994 period.
An important factor contributing to the growth in exports of
bulk drugs in the last few years has been the outsourcing of
API production by MNCs. Table 5 (p 66) shows selected cases of
outsourcing by MNCs.
Foreign companies are keen to outsource their production
for containing costs. India has become a favourable destina-
tion as it has the largest number of FDA-approved plants out-
side the US. In 2005, India had 60 FDA-approved plants
whereas its competitor China had only 22 (Pricewaterhouse-
Coopers 2005). We do not have information on how many of
the outsourced APIs are under patent protection to warrant
reaching conclusions on the impact of new intellectual prop-
erty rules on outsourcing.
However, the composition of exports shows that formu-
Imports lations account for more than four-fifths of pharmaceutical
$ Million % Total exports. While bulk drugs have shown an increase in rate
Imports
of growth of exports in the post-2005 period, their share in
708.2 34.6
exports has consistently declined since 2000 (30% in 2000
345.0 16.8
to 17% 2008). This raises the question whether the accelera-
225.1 11.0
117.9 5.8
tion in the growth of exports of bulk drugs in the recent past
89.6 4.4 has had any significance for the pharmaceutical industry.
562.1 27.4 Table 6 (p 66) gives the top 10 export destinations for bulk
drugs and formulations.
65
SPECIAL ARTICLE
Table 5: Outsourcing by MNCs skin medicine Valtrex under 180-day mar-
Indian Partner MNC Outsourced Products ket exclusivity, which enabled the com-
Cadila Healthcare Altana (Germany) Two intermediates for Altana’s under-patent pany to secure 74% of the $1,400 million
molecule Protonix (pantoprazole)
Boehringer Ingelheim (Germany) Gastrointestinal and cardiovascular products
market before the expiry of exclusivity.19
Mayne (Australia) Intermediates for oncology products The launch of generic Aricept (an Alzhe-
Hikal Degussa (Germany) Pharmaceutical intermediates and APIs imer’s drug, patent held by Eisai Co) after
Nicholas Piramal Advanced Medical Optics (USA) Neutralising tablets and sterile FFS packs its patent expired on 25 November 2010 is
(product name not disclosed) expected to earn Ranbaxy about $200 mil-
Allergan (USA) APIs For Levobunolol (Betagen) and lion.20 Similarly, Atorvastatin, the generic
Brimonidine (Alphagan and Alphagan-D)
AstraZenica (Sweden) APIs
version of Lipitor, the single largest selling
Pfizer (USA) APIs prescription drug in the world, is expected
Dishman Pharma Solvay (Belgium) Six projects. Main one being for starting to fetch Ranbaxy more than $2 billion in
material and advanced intermediate for the coming five years. Table 7 (p 67) gives
Tevetan (eprosartan maleate)
some recent cases in which Indian compa-
AstraZeneca (UK) Intermediate for Nexium (esomeprazole)
nies have obtained 180-day exclusivity in
GSK (UK) Intermediates and APIs
Merck (USA) Intermediate for Losartan (to be supplied
the US.
to its contract manufacturer in Japan) Only a few companies, particularly Ran-
Shasun Chemicals GSK (UK) API for Ranitidine baxy and Dr Reddy’s, had ANDAs in their
Eli Lilly (USA) APIs for Nizatidine, Metohexital and names till recently. Companies like Cipla
Cycloserine had ANDAs in the names of their marketing
Reliant Pharma (USA) APIs
partners in the US. This situation has
Alpharma (USA) APIs and generics
changed dramatically in recent years and
Boots (South Africa) APIs
Lupin Fujisawa (Japan) Cefixime more companies are engaged in securing
Apotex (Canada) Cefuroxime Axetil, Lisinopril ANDAs. From 161 ANDAs filed by four com-
DMS (USA) APIs for cephalosporings panies – Ranbaxy, Dr Reddy’s, Wockhardt
Ipca Merck (USA) APIs and Lupin – in the last quarter of 2003, the
Tillomed (UK) Atenelol number went up to 701 ANDAs filed by 17
Biocon Bristol Myers Squibb (USA) APIs companies in the second quarter of 2007
Source: KPMG (2006) and Linton and Nicholas (2007).
(Chaudhuri 2007). ANDA approvals held by
The US has become the most desired export destination for Indian firms as a percentage of total approvals went up sharply
both bulk drugs and formulations. However, formulations from 7% in 2001 to 21% in 2006 and 30% in 2008.21
account for the lion’s share of exports to the US – 87% in 2009. To Companies also work on developing a non-infringing pro-
market a generic drug in the US, a company needs to file an ab- cess for ANDA filing. Matrix Laboratories was the first Indian
breviated new drug application (ANDA). When filing an ANDA, company to develop a non-infringing process for manufactur-
the company has to certify that its product is not infringing ing citalopram. The company was able to reap huge benefits
any patent rights or that a patent is invalid (para IV certifica- with its sales of the product amounting to Rs 5,600 million till
tion). If it successfully proves that a patent is invalid or if it is 2005-06. Another commercially successful example is the
the first to get approval for the generic version, it gets market cefotaxime process developed by Lupin (Chaudhuri 2007).
exclusivity for 180 days during which no other generic com- ANDAs and drug master files (DMFs) data from the FDA give
pany is permitted to enter the market. This exclusivity is avail- indications of the extent to which Indian firms are seeking
able under the Hatch-Waxman Act. A successful first ANDA can opportunities in the US market. The leading 10 firms in India
bring immense profits to a company. For example, Dr Reddy’s, got 537 ANDA approvals in the last decade, of which one-fourth
the first Indian company to market fluoxetine 40 mg in August carried 180-day market exclusivity. Details of ANDA s and DMFs
2001 under 180-day exclusivity saw its sale of generics increase Table 6: Leading Export Destinations in 2009
from Rs 304 million in 2000-01 to Rs 4,066 million in 2001-02. Bulk Drugs Formulations
Sale of fluoxetine was 81% of its total generic sales and Country $ Mn % Exports Country $ Mn % Exports
about half of its operating profit in 2001-02 (Chaudhuri 2007). US 167.4 12.7 US 1,153.3 25.1
Ranbaxy was the first to obtain 180 days exclusivity for this Brazil 74.5 5.6 Russian Federation 259.9 5.7
drug, but could not launch the product on time as the patent Turkey 43.8 3.3 UK 227.3 4.9
holder managed to obtain an injunction against it.18 Patent liti- China 42.2 3.2 South Africa 186.9 4.1
Bangladesh 40.9 3.1 Nigeria 146.7 3.2
gation under para IV is highly risky as failure would mean a
Egypt 39.3 3.0 Ukraine 105.7 2.3
loss of several years of hard work and huge legal expenses.
Thailand 35.9 2.7 Germany 97.5 2.1
Encouraged by the success of Dr Reddy’s, a number of firms
Congo 35.3 2.7 Vietnam 92.8 2.0
have taken steps to register themselves as first movers in generics, Spain 34.5 2.6 Sri Lanka 86.7 1.9
often gaining a huge market share. Ranbaxy, in November Nigeria 33.9 2.6 Kenya 83.4 1.8
2009, introduced the generic version of GlaxoSmithKline’s Source: COMTRADE.
66 may 5, 2012 vol xlviI no 18 EPW Economic & Political Weekly
 SPECIAL ARTICLE
Table 7: Selected Drugs for Which Indian Companies Have 180-Day Market for bulk drugs is below unity, indicating a lack of comparative
Exclusivity in the US
advantage. We saw that the share of bulk drugs in pharma-
Indian Company Year of Launch Brand Innovator Innovator
Sales/Year ($ Mn) ceutical exports began to decline after 2000. Two, the RCA
Sun and Glenmark 2007 Trileptal Novartis 700 index for formulations shows a decline until 2005 and a
Dr Reddy’s 2008 Imitrex GlaxoSmithKline 1,000 gradual acceleration from 2006. And the index never fell
Sun 2008 Protonix Altana 2,300 below one.24 It is really startling that the comparative
Lupin 2008 Ramipril Bayer 800
advantage indicator for formulations showed an upward
Sun 2009 Effexor XR Wyeth 2,300
movement in the post-2005 period. This is contrary to what
Ranbaxy 2009 Flomax Boehringer Ingelhiem 1,300
Ranbaxy 2010 Lipitor Pfizer 8,000 had been anticipated by many. In global rankings of RCA for
Ranbaxy 2010/11 Aricept Eisai 1,600 formulations, India ranks second after Switzerland among
Glenmark 2010/11 Zetia Schering-Plough/Merck 1,200 the top five pharmaceutical exporting countries. India’s rank-
Glenmark 2010/11 Tarka Abbot/Sanofi Aventis 72 ing has consistently been second to Switzerland since 1994.
Glenmark 2010/11 Cutivate Nycomed 37 The RCA index for formulations showed a sudden decline in
Source: Compiled from company reports and media reports.
2009. This may have been because of a decline in the export
filed in the US by the top 10 Indian pharmaceutical companies of formulations in 2009 primarily because of the seizure of
are given in Table 8 (p 68). Indian generics in European ports while in transit for alleged
The bulk of these activities were carried out by three firms, infringement of patent rights.25 The seizures have added to
Aurobindo, Ranbaxy and Dr Reddy’s. Ranbaxy and Dr Reddy’s the cost of exporters as they have had to look for alternative
stand out for their aggressive approach to challenging patents trade routes to avoid European ports.
and obtaining market exclusivity. A large Figure 3: RCA of Pharmaceuticals
3.5
percentage of Ranbaxy’s (57%) and Dr Reddy’s
(37%) ANDA approvals had market exclusi-
3.0
vity against the average of 23% for all the
leading firms. Para IV filings involving patent 2.5
litigations are a high-risk, high-return strat-
egy. A failure could result in huge losses and
RCA Indices

2.0

legal expenses. The leading firms also have

a large number of DMF filings, an indication 1.5

of their interest in the US market. These 10

1.0
firms account for nearly half of all DMF fil-
ings made by all pharmaceutical firms from
0.5
India.23
An analysis of revealed comparative ad- 0.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
vantage (RCA) suggests that India’s advan- Bulk Drugs 0.5 0.5 0.6 0.7 0.8 1.0 1.2 1.4 1.3 1.6 1.4 1.4 1.3 1.0 0.8 0.9 0.9 0.8 0.7
tage lies in formulations (Figure 3). The RCA Formulations 3.1 2.1 2.1 2.0 2.0 2.0 2.0 1.7 1.6 1.6 1.4 1.2 1.2 1.1 1.1 1.1 1.2 1.3 1.0

is an index of the export performance of a Source: COMTRADE.

country with respect to a particular commodity which cap- The change in export dynamics has had a direct bearing on
tures the comparative advantage of that commodity. The RCA the production dynamics of the pharmaceutical industry.
of a particular commodity is measured by the share of that in- Figure 4 shows that there has been a decline in the growth of
dustry in the country’s total exports relative to the country’s bulk drugs production in the post-2005 period – it declined from
share in total world exports. The RCA index may take values around 15% during the pre-2005 period to 9% in the post-
from zero to infinity, with values greater than unity indicating 2005 period. The formulations segment shows an acceleration
the existence of an RCA. in production during the post-2005 period compared to the
The RCA index for ith product for jth country in year t is defined as, previous periods.
RCA ij (t) = [(XijW(t)/XioW(t))/(XojW(t)/XooW(t))]
Figure 4: Growth (CAGR) in the Production (at Current Prices)
Xijw (t) = Export of ith product by the jth country to the world in 16
Bulk Drugs
the year t. 14
(t) th Formulations
Xiow = Total export of the i product by all countries in the 12
world in the year t. 10
Xojw (t) = Total export of the country j to the world in the year t.
Percentage

8
Xoow (t) = Total export of all products by all countries in the
6
world in the year t.
4
Figure 3 gives two indications of the changing dynamics of
2
the Indian pharmaceutical industry. One, the RCA index for
0
bulk drugs shows an upward movement until 2000 and a 1990-91/1994-95 1995-96/1999-2000 2000-01/2004-05 2005-06/2008-09
decline since 2001. Since 2004, the value of the RCA index Source: IDMA.
Economic & Political Weekly EPW may 5, 2012 vol xlviI no 18 67
SPECIAL ARTICLE
Table 8: ANDA Approvals, First-Time Generic Approvals (180-Day Exclusivity) and DMF Filings in the US by Leading to concentrate on the produc-
Indian Firms
tion and export of formulations
Company 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total DMF#
while engaging in imports to
Aurobindo 0 0 0 0 0 0 2 1 7 2 9 1 27 1 19 3 18 3 17 0 99 11 144
source cheap raw materials.
Dr Reddy’s 5 1 4 2 3 0 3 3 6 2 14 4 13 2 13 1 17 4 11 6 83 31 153
Ranbaxy 3 1 11 3 15 9 14 5 15 5 6 2 14 6 3 1 7 3 3 1 81 46 101 It appears that bulk drugs
Sun 0 0 0 0 0 0 0 0 0 0 7 0 10 3 21 2 17 5 12 0 67 10 70 are no more a major area of
Wockhardt 0 0 0 0 4 0 0 0 4 1 6 0 13 1 18 0 14 1 5 0 64 3 43 focus of the Indian pharma-
Glenmark 0 0 0 0 0 0 0 0 0 0 4 0 9 2 5 0 9 1 19 3 46 6 45 ceutical industry and it has
Lupin 0 0 0 0 3 0 2 2 5 0 6 3 7 2 4 1 1 0 12 3 40 11 100 adopted a different strategy
Orchid 0 0 0 0 0 0 0 0 9 0 9 0 4 1 3 0 3 2 2 0 30 3 77 in the bulk drugs segment
Matrix 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2 1 3 1 10 1 17 3 139 in the post-TRIPS era. Bulk
Cipla 0 0 0 0 0 0 0 0 0 0 0 0 2 0 4 0 3 1 1 0 10 1 90 drugs as an export category do
Total 8 2 15 5 25 9 22 11 46 10 61 10 100 18 92 9 92 21 92 14 537 125 962
not enjoy a comparative ad-
Figures in the shaded columns indicate first-time generic approvals; # Type II DMF.
Source: US FDA.22 vantage anymore though the
An expansion in exports of bulk drugs and a decline in pro- rate of growth of exports has accelerated in recent years.
duction indicate more imports. Firms are increasingly import- Production for companies in foreign countries has been an
ing bulk drugs, their intermediates and fine chemicals against important factor that has maintained the pace of exports.
relying on indigenous production as they used to do. Data on The growth in indigenous production of bulk drugs has de-
the import of raw materials from the Prowess database shows clined in the post-2005 period and the industry is increas-
that the share of raw materials imported in sales turnover ingly meeting its requirements of bulk drugs, intermediates
grew from 9% in 1990-91 to 11% in 2000-01 and 14% in 2008-09. and other raw materials through imports.
There are different levels of value addition in bulk drugs The destinations of exports of formulations (region-
manufacturing and the Indian bulk drugs industry seems to wise) have changed in a major way in the last two decades
focus on the higher end of the value chain. The abolition of the (Table 9). The share of Europe drastically declined from
ratio parameter linking the production of formulations to indi- about two-thirds in 1991 to a quarter in 2009. On the other
genously produced bulk drugs from basic stages and reduc- hand, Africa and America are increasingly becoming major
tions in import duty have eased constraints on imports of bulk export destinations. More than 80% of the exports to
drugs and other raw materials. The import duty on organic America are destined for North America, especially the US.
chemicals, including bulk drugs, was reduced from 120% in Tables 9 and 10 show that exports to Asia and its subregions
1990-91 to 7.5% in 2007-08.26 Another important factor con- have fallen in this decade. Exports to IBSA partners (Brazil
tributing to the decline in domestic production has been the and South Africa) have shown a growing trend. Overall,
implementation of Schedule M (good manufacturing prac- the drivers of pharmaceutical exports have been North
tices) of the Drugs and Cosmetics Act since July 2005. As a America, Africa and the IBSA partners. South America and
consequence, a number of small and medium enterprises Asia, including the subregions and regional arrangements
(SMEs) manufacturing bulk drugs have had to shut down oper- within Asia, seem to be relatively less significant to pharma-
Table 9: Region-wise Share in Exports of ations. The SME sector has ceutical exports.
Formulations been a major producer of Table 10: Share in Exports (Formulations) – Selected Regions and Groupings
Year Europe Africa America Asia Oceania
bulk drugs in India. Year N America S America W Asia SAARC BIMSTEC ASEAN IBSA
1991 63.8 8.0 7.1 20.6 0.6 The bulk drugs seg- 1991 6.6 2.5 7.4 7.3 7.4 4.5 0.1
1992 51.3 16.7 7.3 23.7 1.0
ment is highly competi- 1993 6.9 5.3 8.6 8.0 8.6 5.3 1.6
1993 48.6 15.8 8.4 26.2 1.1 1995 8.4 6.0 8.0 7.4 8.0 8.7 1.2
tive with a large number
1994 45.8 15.1 8.9 29.6 0.7 1997 6.8 6.1 8.3 8.0 8.3 8.0 2.3
1995 41.1 16.2 10.8 31.2 0.6
of players, making returns
1999 6.9 6.8 9.3 7.9 9.3 10.6 2.5
1996 41.5 15.5 10.8 31.5 0.8 very low. The Hathi Com-
2001 14.2 5.1 8.6 7.4 8.6 8.6 3.7
1997 39.8 17.4 10.2 31.9 0.8 mittee (1975) had worked 2003 22.2 4.6 7.5 7.6 7.5 6.8 3.4
1998 28.2 21.3 12.4 37.0 1.1 out the capital invested- 2005 13.2 6.4 6.7 6.7 6.7 6.6 4.7
1999 31.8 19.3 11.3 36.1 1.5 turnover ratio for bulk 2007 25.1 3.9 5.6 5.2 5.6 5.8 5.3
2000 31.2 22.6 12.3 32.4 1.5 drugs and formulations 2009 26.2 4.0 5.2 4.5 5.2 6.4 5.9
2001 28.2 21.1 20.3 29.1 1.3 manufacturing. It esti- Source: COMTRADE.
2002 28.5 22.3 22.2 25.6 1.1 mated 1:1 for bulk drugs The renewed vigour worldwide to enforce intellectual prop-
2003 27.7 19.1 27.1 24.8 1.0 at its best and 1:2.6 for erty rights will have implications for the Indian pharmaceuti-
2004 30.8 20.1 25.1 22.8 1.0
formulations on an aver- cal industry given that Africa is a major export focus. Recent
2005 33.2 20.8 20.3 24.1 1.5
age, which in some cases anti-counterfeit initiatives at various levels – the World Health
2006 29.6 23.1 25.5 20.6 1.2
2007 27.7 21.5 31.4 18.2 1.2
would be as high as 1:7.2. Organisation (WHO), the Anti-Counterfeiting Trade Agree-
2008 31.5 23.3 27.7 16.3 1.3 Due to this, with the ratio ment (ACTA) and some free trade agreements (FTAs) with the
2009 24.6 23.5 31.8 18.0 2.0 parameter no more in European Union (EU) – attempt to eliminate the distinction
Source: COMTRADE. force, firms in India tend between substandard (quality issue), counterfeit (trademark
68 may 5, 2012 vol xlviI no 18 EPW Economic & Political Weekly

issue) and generic (patent issue) drugs. In the process, legitimate
generics (for which no patent exists in the exporting country
or importing country) have been targeted under the counter-
feit label. Such initiatives, supported by pharmaceutical lob-
bies and the EU, have found takers in developing countries,
especially in east Africa. The east African region has recently
seen a few policies and legislations coming up to address the
counterfeit drug problem. Kenya adopted the Kenya Anti-
Counterfeit Act in 200827 and Tanzania and Uganda propose
to enact similar laws. The culmination of all these initiatives
has been a regional anti-counterfeit policy and law – the East
African Community Policy on Anti-Counterfeiting, Anti-
Piracy and Other Intellectual Property Rights Violations28
and the East African Community Anti-Counterfeit Bill, 2010
(Musungu 2010).
The Kenyan law raised considerable public debate on how
such laws might affect access to generic drugs. It states that
copies or generic versions of all products having patent protec-
tion in Kenya or elsewhere can be considered “counterfeit” in
case of an intellectual property dispute with the patent holder.
This may classify a genuine drug exported from India to Kenya
as a counterfeit drug if a company that does not hold a patent
for that particular drug either in India or Kenya but in some
third country raises a dispute over it. The Kenyan law, how-
ever, was challenged in the country’s high court29 by three
people living with HIV/AIDS on the grounds that it would
adversely affect their access to affordable generic HIV drugs.
The petitioners held that the Act confused quality and intel-
lectual property rights issues, thereby defining legitimate
generic drugs as counterfeits. Satisfied with the petition,
Justice Mwendoh issued interlocutory orders on 23 April 2010
suspending the powers of the anti-counterfeit agency to inter-
fere with the import and distribution of generic medicines in
Kenya.30 Indian pharmaceutical exporters have expressed
concern that legislations like that of Kenya could seriously
affect the country’s exports.31
6 Imports of Bulk Drugs and Formulations
The import substitution policy adopted by the pharmaceuti-
cal sector successfully eliminated a heavy dependence on
imports. Currently, the dependence is around 11% of the
production (Table 11). However, in the bulk drugs segment,
the industry still has a high Table 11: Imports-Production Ratio
dependence on imports, Year Bulk Drugs Formulations Total
which account for 40% of 1991 32 5 9
32 1995 72 2 13
the production. The high
2000 32 3 8
import-production ratio is
2005 32 4 10
because of the increase in
2006 33 5 11
the value of imports as well 2007 41 5 13
as the decline in the growth 2008 35 5 11
of domestic production. In 2009 40 5 11
contrast, in formulations, Source: COMTRADE and IDMA.
imports account for only 5% of the production. Unlike in the
case of exports where formulations had a major share (78%
in 2009), bulk drugs account for the lion’s share in imports,
often exceeding two-thirds of the total (Table 2).
Economic & Political Weekly EPW may 5, 2012 vol xlviI no 18
SPECIAL ARTICLE
The increasing dependence on imports of bulk drugs, which
prima facie seems to be undesirable, needs to be seen in the
context of the changing dynamics of the industry. Import
dependence of the pharmaceutical industry five decades ago
was because of the lack of manufacturing capabilities. The sit-
uation has changed and the increasing dependence of the
present time is not due to lack of capabilities, but due to the
availability of cheaper intermediates and bulk drugs in foreign
countries. The increasing export-orientation of the industry
has forced firms to look for cheaper inputs to maintain their
competitive advantage in the international market. The in-
creasing dependence on bulk drugs, intermediates and other
raw materials is an outcome of the shift in the orientation of
the export composition of the industry – it is becoming more
and more formulations-oriented, and that too with the brand
India image (good quality at a low price).33
When firms are oriented towards the domestic market,
there are few incentives to reduce the cost of production be-
cause about 50% of the drugs in the retail market in India are
under a cost-based price control system (100% of the drugs
were under price control in 1970, which came down to 90% in
1979, 70% in 1987 and 50% in 1995) that assures companies a
predefined rate of return. The incentives go to promoting
products rather than innovating to reduce cost, which explains
why high amounts are spent on advertising and marketing in-
stead of research and development (R&D) by both MNCs and
Indian firms. The Indian pharmaceutical industry spent 4.8%
of its sales turnover on R&D in 2008-09 whereas its spending
on advertisements and marketing was 6%.34 As firms increas-
ingly enter foreign markets, cost becomes a critical factor and
they import cheaper raw materials to curtail the cost of pro-
duction. As the industry gradually sheds its focus on bulk
drugs in its external orientation, there is little to gain from the
brand India image in the case of formulations and therefore no
compulsions for production within India.
Figure 5: Ratio of Exports to Imports of Raw Materials
500
Taken-over Firms
400
300
Percentage
Indian Firms
200
MNCs
100
0
1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09
Source: Prowess.
The view that the increasing emphasis being placed on the
export of formulations is resulting in increased imports of bulk
drugs, intermediates and other raw materials is further
strengthened by the observation that there is a positive asso-
ciation between exports and imports of raw materials. The
ratio of exports to imports of raw materials shows that the
taken-over firms, the most export-oriented firms, have the
highest ratio (Figure 5). And the MNCs, which are the least
export-oriented, have the lowest ratio.
69
SPECIAL ARTICLE

Leading producers of bulk drugs have recently entered the units have been shut down while others have cut down manu-
formulations business in partnership with foreign firms. facturing of loss-making drug categories.37 India’s dependence
Aurobindo Pharma, a major producer of bulk drugs, entered into on China is such that it does not have adequate domestic
agreements with AstraZenica in 2010 and Pfizer in 2009 for manufacturing capacity to meet the demand for intermediates
the supply of a number of formulations, which are expected to and bulk drugs if supplies from the neighbour cease for
fetch it $350-$500 million in the coming years.35 To meet the unforeseen reasons.
demand, the company is increasingly engaged in the import of Cost advantage is the factor driving Indian manufacturers
raw materials. The share of imports of raw materials in the to shun indigenous production and engage in imports. For ex-
company’s sales turnover increased from Table 12: Largest Importers of Raw Materials in 2008-09 ample, theophiline from China is 10%
31% in 2000-01 to 42% in 2008-09. Company Imports % cheaper compared to the cost of indig-
Table 12 lists the leading importers of $ Mn in Sales enous production. Chinese firms are
raw materials in the pharmaceuticals Aurobindo Pharma 260.8 41.5 able to sell bulk drugs at lower prices
sector in India. Most of the top exporters Cipla 209.9 18.2 not only due to subsidies (for exam-
Ranbaxy Laboratories 152.8 15.5
of pharmaceuticals (finished goods; ple, power subsidies), but also due to
Dr Reddy’s Laboratories 120.6 12.2
Table 3) figure in the list of top 10 im- better technologies. For example, in
Lupin 108.2 16.6
porters of raw materials. Panacea Biotec 99.6 58.6
fermentation (an essential process in
Though we do not have precise data Matrix Laboratories 74.0 22.6 the production of bulk drugs), Indian
to back this view, the available indica- Nectar Lifesciences 67.4 39.5 firms still use sugar whereas the tech-
tions suggest that the industry is fo- Orchid Chemicals and Pharmaceuticals 61.5 23.5 nology in China enables its firms to
cusing on the higher end of the value Hetero Drugs 59.8 23.1 use cauliflower, which is much
chain in the production of bulk drugs. Source: Prowess. cheaper.38
There are no data available separately on the production of To revive the domestic production of bulk drugs, concerted
final bulk drugs and their intermediates. But the increase in efforts need to be undertaken on various fronts. A task force of
imports of pharmaceutical raw materials and the fast growth the Department of Commerce (2008) on the strategy for in-
of exports of APIs in recent years, especially to the US, indicate creasing exports of pharmaceutical products suggested that
that imported raw materials and intermediates are processed India create a policy environment that enables its small and
in FDA-approved plants into final APIs and then exported to cli- medium chemical industry to position itself to address the
ents in the US and other countries. This strategy makes eco- back-end needs of the pharmaceutical industry. Reviving the
nomic sense, but it may place the industry in trouble if an ade- production of bulk drugs also needs new environment-friendly
quate supply of raw materials cannot be guaranteed in the technologies. Basic drugs and pharmaceuticals are among the
long term. The threat becomes more serious when 17 high-polluting industries identified by the Central Pollution
Figure 6: Import of bulk drugs - Leading sources in 2009
imports are sourced from a Figure 6: Import of Bulk Drugs – Control Board. Technologies such as biocatalysts reduce the
single country – an inter- Leading Sources in 2009 number of chemical processes and hence the amount of pollu-
China
ruption in the supply from a Others (52.2%) tion. Although this technology is in use in food production and
single country can put the (26.4%) environmental management in developed countries, it hardly
whole industry in jeopardy. exists in drug production. Since the developed countries have
India’s dependence on im- systematically outsourced bulk drug production to developing
ports (for bulk drugs and countries such as India and China, we need not expect they
other raw materials) is in- are going to pass on such technologies as well (Department of
creasingly shifting to a sin- Commerce 2008).
gle country – China. In In formulations, however, the country did not face any
Germany
2009, imports from China (3%) spurt in imports with the change in the patent law. Imports of
accounted for 52% ($686 Denmark United States formulations continue to account for 5% of its production
(3.4%) Switzerland
million) of the total imports (3.9%) (11%) and this ratio was the same even before the TRIPS provisions
of bulk drugs (Figure 6). Source: COMTRADE. were fully implemented. MNCs have been the major importers
The report of the task force on the strategy for enhancing and Switzerland is the major source of supply, accounting for
exports of pharmaceutical products36 has pointed out that the 39% in 2009. Though it may take some more time to know
Indian pharmaceutical sector has been sourcing its require- how exactly the new intellectual property rights regime is
ment of chemical intermediates and bulk drugs in large quan- going to affect imports of formulations, our patent law has
tities from China for some time; at times almost 60% to 70% of sufficient safeguards to prevent frivolous patents and ever-
our requirement of intermediates. A recent crackdown on the greening, which has been a major reason for the restricted
chemical industry in China to enforce environmental legisla- operability of generic firms in countries such as the US. To the
tion resulted in a shortage of supply and a hike in prices, extent that India is able to prevent frivolous patents and
affecting not only the bottom lines of Indian companies but also Indian firms are able to produce generics, the threat of
the very existence of many firms. Due to shortage of raw mate- increased imports of formulations is diluted. Importing generic
rials and their rising prices, about 50 bulk drug manufacturing formulations will not be a viable strategy for MNCs to compete
70 may 5, 2012 vol xlviI no 18 EPW Economic & Political Weekly
 SPECIAL ARTICLE

with producers of generics in India. The FDA approved 305
new medical entities (NMEs) between 1995 and 2004. Of
these, patents for 298 had expired before 1995 and Indian
firms will be able to produce them. Of the remaining seven
NMEs, Indian firms had obtained marketing approval in
India for three before 2005.39 The Indian Patents Act provides
that those drugs for which significant investment has gone
into production and marketing will continue to be produced
and marketed with payment of royalties in case they (applica-
tion in the mail-box) get patents after 2005. In 2010, there
were only four NMEs that were candidates for patent protec-
tion in India. If India continues to apply a high threshold
for patents, there will not be too many patented drugs for
which domestic production cannot provide generic substi-
tutes. If generic substitutes are available, it is less likely that
MNCs will import the drugs from their parent firms. There-
fore, the threat of a spurt in imports of formulations may not
be a real in the near future.
7 Conclusions
The export orientation of the Indian pharmaceutical industry
has undergone a change with the amendment in the intellec-
tual property rights regime. There are two aspects to this.
First, it has become more export-oriented in order to counter
the threat of reduced domestic operability and to remain in
business. Second, of the two export categories – bulk drugs
and formulations – the focus has shifted to formulations. The
acceleration in the export of formulations has mostly been
driven by the US, Africa and IBSA partners and the growth in
exports to neighbouring countries and to Latin America
remains at a relatively lower level. Africa being a major desti-
nation of exports, an overzealous drive to enforce intellectual
property rights under the guise of an anti-counterfeit initiative
in the region, especially in east Africa, is a cause of concern for
the Indian pharmaceutical industry.
The change in the export orientation has resulted in a
change in the production structure. To maintain their price
competitiveness in the international market, Indian firms have
had to look at options for reducing cost, a compulsion they did
not face when they were mainly focused on the domestic mar-
ket. The drug price control system that covered a substantial
part of the retail medicine market assured them a predefined
rate of profits. Hence the incentive was not directed towards
reducing costs but promoting products. As a result, imports
from cheaper sources of bulk drugs, their intermediates and
other raw materials began to increase, while domestic produc-
tion from basic stages began to decline. More than 50% of bulk
drugs and other raw materials are now imported from China. A
heavy dependence on a single country for raw materials puts
the industry at risk. As imports of bulk drugs and other raw
materials continue to grow, the industry continues to have a
negative trade balance in the bulk drugs category. However, in
formulations, the industry has a substantial surplus, which off-
sets the deficit of the bulk drugs segment. Overall the industry
thus has a trade surplus. In formulations, imports have not
surged because adequate safeguards have been built into the
Patents Act. These protections limit the number of patented
drugs in the country and also provide space for generic compe-
tition. Imports of formulations, though very limited, are done
mostly by the MNCs.

Notes
1 He used the data provided by the Directorate
General of Commercial Intelligence and Statis-
tics (DGCI&S) using the harmonised system
(HS) of commodity classification. HS chapter
30 was used to classify formulations and a list
of 359 products (at eight-digit level) consisting
of items from HS chapters 15, 17, 28 and 29 was
used to classify bulk drugs.
2 COMTRADE is the trade database managed by
United Nations Statistics Division (SIDC). All
member countries of the UN report export and
import values to the UNSD based on the Stand-
ard International Trade Classification (SITC).
In India, the DGCI&S is the nodal agency
reporting data on exports and imports.
3 This variation is due to the differences in year
endings as well as the differences in products
included in the classification. For COMTRADE/
SITC, pharmaceutical products consist of prod-
ucts from HS chapters 26, 29 and 30 whereas
for the department of pharmaceuticals it con-
sists of products from HS chapters 15, 17, 28, 29,
30, 35, 38, 56 and 96.
4 European Medicines Agency (2005), “Note for
Guidance on Data Elements and Standards for
Drug Dictionaries”, (EMEA/CHM)/ICH/168535/
2005).
5 USFDA (2001), “Guidance for Industry: Q7A
Good Manufacturing Practice Guidance for
Active Pharmaceutical Ingredients”, Centre for
Drug Evaluation and Research and Centre for
Biologics Evaluation and Research.
6 As the DPCO is aimed at price control of essential
medicines, medicines for the treatment of
animas and those coming under the ayurveda,
sidha, unani and homeo systems have been
excluded from its purview.
7 “Medicaments (excluding goods of heading 3002,
3005 or 3006) consisting of two or more constitu-
ents which have been mixed together for thera-
peutic or prophylactic uses, not put up in meas-
ured doses or in forms or packings for retail sale.”
8 “Medicaments (excluding goods of heading 3002,
3005 or 3006) consisting of mixed or unmixed
products for therapeutic or prophylactic uses,
put up in measured doses (including those in the
form of transdermal administration systems)
or in forms or packings for retail sale.”
9 The correspondence between SITC Rev 3 and
HS 2002.
10 Based on COMTRADE data.
11 Matrix was taken over by Mylan Inc (USA) in
August 2006 and Ranbaxy by Daiichi (Japan)
in July 2008.
12 Dabur was taken over by Fresenius Kabi
(Singapore) in April 2008 and Shanta Biotech
by Sanofi Aventis (France) in July 2008.
13 Leading global pharmaceutical firms are expected
to suffer substantial erosion in their sales from the
competition they will face from generic pro-
ducers. Industry estimates indicate that in 2010,
68% of the sales of market leader Pfizer included
products whose patents will expire in the next
three years. For Eli Lilly, the risk from generic
competition in the next three years will be as
high as 66% of total sales in 2010 (Dhar 2011).
14 Department of Industrial Promotion and Policy
discussion paper on “Compulsory Licensing”,
2010.
15 “Drugs Groups Diversify Away From Patents”,
Financial Times, 21 October 2010.
16 Import duty of organic chemicals, including
bulk drugs, was reduced from 120% in 1990-91
to 7.5% in 2007-08 (Jha 2007).
17 Based on Prowess data.
18 Ranbaxy was successful in challenging GSK’s
patent on Ceftin (antibiotic). GSK filed a suit in
the district court of New Jersey in October
2000 and the court issued a preliminary in-
junction that prevented Ranbaxy from market-
ing its generic version. However, in 2001, Ran-
baxy commercially launched its product after
the Court of Appeals for the Federal Circuit va-
cated the preliminary injunction. After a full
trial, the district court ruled that Ranbaxy’s
product did not infringe GSK’s patent and that
Ranbaxy was not required to pay any damages.
19 “Innovation Has Helped Drug Firms Take on
Big Pharma”, Mint, 9 September 2010.
20 “Ranbaxy Gets Nod to Sell Popular Generic in
US”, Economic Times, 22 September 2010.
21 See Chaudhuri (2007) and “USFDA Door Wide
Open for Indian Pharma Cos”, Business Standard,
6 March 2009.
22 http://www.fda.gov/Drugs/DevelopmentAp-
provalProcess/HowDrugsareDevelopedand
Approved/Drug andBiologicApprovalReports/
ANDAGenericDrugApprovals/ucm050527.htm;
data for ANDA approvals (not first-time generics)
since 2007 was accessed from http://www.ac-
cessdata.fda.gov/scripts/cder/drugsatfda/index.
cfm?fuseaction=Reports.ReportsMenu; and the
DMF data was downloaded from http://www.
fda.gov/Drugs/DevelopmentApprovalProcess/

Economic & Political Weekly EPW may 5, 2012 vol xlviI no 18 71

SPECIAL ARTICLE
FormsSubmissionRequirements/DrugMaster-
FilesDMFs/default.htm#download on 21 Feb-
ruary 2011.
23 According to FDA reports, firms from India had
1,735 DMF filings as of 2008. The top 10 Indian
firms had 831 DMF filings as of March 2009.
24 Owing to developments outside India, 2009
was an exceptional year.
25 Since 2008, more than 20 seizures of Indian
shipments of medicines (formulations) have been
reported at European ports while they were in
transit on the grounds of counterfeiting/infring-
ing patent rights. The seizures took place when
EU customs authorities enforced a 2003 European
Commission directive that allows the seizure
of goods suspected of infringing intellectual
property rights even when they are in transit.
The Indian shipments were of authorised ge-
nerics that did not have valid patents either in
India or in the importing countries.
26 Jha (2007).
27 The law is available at http://www.kenyalaw.
org/Downloads/Bills/2008/The_Anti-Counter-
feit_Bill_2008.pdf.
28 Came out in September 2009.
29 Petition No 409/2009, Patricia Asero Ochieng’,
Maurine Atieno and Joseph Munyi versus The
Attorney General and the Anti-Counterfeit
Agency.
30 See http://www.managingip.com/Article/
2633026/East-African-anti-counterfeiting.html.
31 See http://www.eac.int/customs/component/
content/article/56/56.html.
32 This analysis has been based on COMTRADE
data on imports and IDMA data on production.
Though these data are not strictly comparable
because they have different year endings, the
analysis provides us with a broad indication of
how the industry is moving.
33 India launched a massive brand India cam-
paign in African countries to gain their confi-
dence in the wake of MNC initiatives to equate
Indian generics with counterfeits.
34 Based on the Prowess database.
35 “Aurobindo Inks Pact with AstraZenica for
Generics”, Economic Times, 7 September 2010.
36 See Department of Commerce (2008).
37 “Sick Bulk Drug Cos May Get Life Support”,
Economic Times, 15 August 2008.
38 These points came out during an interaction
with the IDMA, New Delhi.
39 Based on Gopakumar (2010).
References
Chaudhuri, Sudip (2005): The WTO and India’s
Pharmaceuticals Industry (New Delhi: Oxford
University Press).
– (2007): “Is Product Patent Protection Neces-
sary in Developing Countries for Innovation?
R&D by Indian Pharmaceutical Companies
A fter TRIPS”, Working Paper 614, Indian Insti-
tute of Management, Kolkota.
Department of Commerce (2008): “Strategy for En-
hancing Exports of Pharmaceutical Products”,
Government of India, New Delhi.
Dhar, Biswajit and K M Gopakumar (2008): “Effect
of Product Patents on Indian Pharmaceutical
Industry”, http://wtocentre.iift.ac.in/Papers/
3.pdf, accessed on 2 May 2011.
Dhar, Biswajit (2011): “A Pill for Generic Trouble”,
Live Mint, 29 March.
Gopakumar, K M (2010): “The Landscape of Phar-
maceutical Patent Applications in India and
Implications for Access to Medicines” in Five
Years into the Product Patent Regime: India’s
Response, UNDP, New York.
Grace, Chery (2004): The Effect of Changing Intel-
lectual Property on Pharmaeutical Industry
Prospects in India and China, DFID Health Sys-
tems Resources Centre, London.
Hathi Committee (1975): “Report of the Committee in
Drugs and Pharmaceutical Industry”, Ministry
of Petroleum and Chemicals, New Delhi.
Jha, Ravinder (2007): “Indian Pharmaceutical
Industry: Growth, Innovation and Prices”, PhD
thesis submitted to Jawaharlal Nehru Univer-
sity, New Delhi.
Joseph, Reji K (2008): “The Ranbaxy Model and
Consolidation in Pharma Sector”, Economic
Times, 24 June.
KPMG (2006): The Indian Pharmaceuticals Indus-
try: Collaboration for Growth, KPMG, Delhi.
Kumar, Nagesh and Jayaprakash Pradhan (2007):
“Knowledge-based Exports from India: Recent
Trends, Patterns and Implications” in Nagesh
Kumar and K J Joseph (ed.), International
Competitiveness and Knowledge-based Indus-
tries in India (New Delhi: Oxford University
Press).
Lanjouw, Jean O (1999): “Introduction of Pharma-
ceutical Product Patents in India: Heartless
E xploitation of the Poor and Suffering”,
NBER Working Paper No 6366, National
Bureau of Economic Research, Cambridge,
Massachusetts.
Linton, Katherine Connor and Corrado Nicholas
(2007): “A Calibrated Approach: Pharmaceuti-
cal FDI and the Evolution of Indian Patent
Law”, Journal of International Commerce and
Economics, United States International Trade
Commission, Washington DC, August.
Maskus, Keith E and Mohan Penubarti (1995):
“How Trade-Related Are Intellectual Property
Rights?”, Journal of International Economics,
Vol 39, pp 227-48.
Musungu, Sisule F (2010): “The Potential Impact of
the Proposed East African Community (EAC)
Anti-Counterfeiting Policy and Bill on Access to
Essential Medicines”, Discussion Paper, UNDP-
BDP HIV/AIDS Practice/March.
PricewaterhouseCoopers (2005): “India: Prescrip-
tion for Growth”, PwC, New Delhi.
Smith, Pamela J (1999): “Are Weak Patent Rights a
Barrier to US Exports?”, Journal of International
Economics, 48, pp 151-77.

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72 may 5, 2012 vol xlviI no 18 EPW Economic & Political Weekly