How To India's Pharmaceutical Of Success?

                          

 

The Indian economy is largely a  service-based one. And the past few   years has only seen that trend intensify.  With one big exception: Pharmaceuticals. India has the third largest pharmaceutical  industry by volume and the 11th largest by value - as of 2020. And it is growing  extremely fast. India is the world's largest provider of generic drugs. The United  States relies on India for 40% of its generics. In 2020, they exported $16 billion more  of pharmaceuticals than they imported. These exports meet the strict  standards and regulations of many countries around the world. India's  pharmaceutical industry is legit. The story of how this industry came about  is an interesting one. In this video, we look at how the Indian pharmaceutical  industry started out as mere copycats, but then evolved throughout the value  chain to become a global leader. Our story begins in 1947  with India's independence. At this time, millions of Indians  had no access to basic drugs. The country's drug industry was almost  completely controlled by foreigners.

 

                                                                                 

Eight of the top ten firms were multinationals  from the West - mostly the UK, France and Germany - and they held 90% market share. Domestic  Indian companies spent most of their resources marketing and distributing other people's  drugs rather than actually creating their own. Indians had to import almost  every drug they took. Domestic drug prices were among the  highest in the world - since 99% of those drugs were locked up in patents. So  only the rich had access to any drugs at all Obviously, this situation cannot  hold. And the Indian government a few times attempted to deal with this  over-reliance on foreign drug imports. In 1954, the government established  a public-sector pharmaceutical firm called Hindustan Antibiotics Limited, or  HAL. A few years later, they founded a second one - Indian Drugs and Pharmaceuticals Limited  - this time in cooperation with the Soviets.

Then in the 1960s, the British pharmaceutical company ICI Pharmaceuticals developed  a high blood pressure medication called propranolol. It is a beta-blocker that helps  with anxiety and also prevents migraines. The drug was too expensive to be  used in India. An Indian company called Cipla began manufacturing a generic  version of the drug for the Indian market. ICI complained to the Indian  government about this. Cipla's R&D head, Yusuf Hamied, justified  his actions to India's prime minister at the time - Indira Gandhi. Gandhi  saw the merits of the argument  and urged Parliament to modify  the laws governing drug patents. This led to the passing of the Patent Act of 1970, which sparked the revitalization of  the Indian pharmaceutical industry.The Patent Act of 1970 had two goals: The first  was to guarantee low-cost access to drugs. The second was to foster the development of  an indigenous Indian pharmaceutical industry and encourage import substitution.

 

                                                                           

India's prior patent laws, last updated in 1872,  were rooted in British IP law. Specifically, they protected products. For instance,  the aforementioned chemical compound. This was the pharma industry's  favored IP protection regime.The 1970 Act replaced this with a  new system that protected the process  rather than the product. In other words,  if the old laws protected the treasure, then the new ones protected only  the treasure map that leads to it. In addition, the Act set time limits on those  process patents - about 5-7 years after filing rather than the 15 years afforded by the old  law. Furthermore, if the Indian Patent Office determined the patents were not being used  in a socially beneficial way, the Office had the leeway to force patent holders to license  those patents to others at a reasonable rate. You can see how this new system opened up massive new opportunities for the  Indian pharmaceutical industry.

  

 

It was now possible to backwards engineer every  popular drug import for the Indian market. Let's stop here for a little bit so that  we can briefly review the pharmaceutical production value chain. There are  four major activities: Discovery, clinical trials, production,  and marketing/distribution. Discovery refers to the  process of finding new drugs. As with everything relating to the human  body, it is a messy, complicated process. First, scientists generate potential molecules  - sometimes referred to as leads - and then test the efficacy of those leads in petri dishes.  These are referred to as "in vitro" tests. If the petri dish tests show promise, then you  move to live animal tests - "in vivo" tests. These tests can take years to administer  and only a very small percentage of them make it through to the next stage. After Discovery, we have the Clinical Trial stage. Clinical trials for humans have considerably  tighter standards, procedures, and oversight. Thus, they are also extremely expensive to  hold and multinationals choose them carefully.

Even with all their efforts, failures  happen. My favorite failure is that of the super-hyped startup Stemcentrx,  a cancer drug startup that had been backed by Peter Thiel's Founders  Fund. In 2016, they sold to AbbVie for $5.8 billion - with additional cash-out  options as high as $4 billion more. But the company's cancer stem cell drugs failed to  distinguish themselves in clinical trials. AbbVie had to take a $5 billion write-off. Stemcentrx  was closed down and its employees laid off. Founders Fund made a $1.4 billion profit  on their investment though, so that’s nice. After the Clinical Trial approval by  the relevant regulating authority, the drug company has to produce its new  drug. There are two types of production: Bulk drug manufacturing - where you produce the  actual active compounds at an industrial scale; And formulation manufacturing - where  you package those active ingredients into pills, tablets, capsules,  liquids, injectables and so on. Bulk drug manufacturing is more technically  sophisticated than the formulation.  

 

 

                                                                               

But this part of the value chain is in general  less valuable than the rest. Scale and cost control are essential here, which make  it harder for small companies to compete. The final part of the industry is marketing  and distribution. Large pharmaceutical companies employ large sales forces to build  relationships with doctors and their patients. The goal of course, is to sell a  lot of prescriptions and earn back a good return on what was spent  on the other three stages. Managers and scientists working in India's  public sector laboratories recognized the sudden weakness in the patent law  and leapt to take advantage of it. The number of firms in India's pharmaceutical  industry more than doubled from 1970 to 1980. At this early stage, domestic Indian companies  did little more than reverse engineer existing drugs. They studied the sequential steps towards  making the drug and made slight modifications. Here is what that roughly means.  Let's say we have a drug, made up of 3 ingredients - A + a combo of B and D + C -  cooked together at temperature X and pressure Y. To reverse engineer the molecule,  a company might take A + B + E, cooked together at temperature X and  pressure Y. This is a new process.  

Except in this case, E is a combo of C and D.  Same ingredients, different steps, new patent. As a former planning director from that area  once said: "Earlier there was no R&D as such, it was simply reverse engineering; whatever (the)  patent said you would reproduce and optimise it". This sounds cheap and derivative, but it  helped domestic companies gain real competency in pharmaceuticals. By the end of the 1980s, Indian pharmaceutical companies could  manufacture practically any new molecule without needing any access to the  original innovator company’s recipes. The time gap between the original innovation's  introduction and the Indian generic's introduction steadily narrowed over the  years. And this demonstrated domestic firms' steadily improving  reverse engineering capabilities. For instance, ibuprofen.  Ibuprofen hit the world markets in 1967. India's first generic  came 6 years later in 1973. In 1986, Bayer introduced the antibiotic  Ciprofloxacin to the world market. I remember Cipro because back in 2001, tens  of thousands of people took it for no reason  other than because they were worried about  anthrax. Reminds me of the horse drug fiasco.

Anyway, Indian domestic firms had a generic  version of Ciprofloxacin in just 3 years - cutting the time lag in half. For some other  molecules, the gap was even shorter. By 2006, Indian companies supplied 95% of the country's  drugs. The import substitution had been a success. However, as with any policy the 1970  patent change had its drawbacks. For one thing, the Indian pharmaceutical industry  it created was high in volume but low in value. A drug firm has low barriers to entry,  with little capital needed to start one. By 1990, there were around 16,000 pharmaceutical  companies in the industry. The companies that survived focused on making as many molecules  as they could as cheaply as possible. This resulted in extremely low  margins and vast overcapacity, because the only way to make a profit  would be to produce at massive scale. The industry got extremely fragmented, with  up to 100 brands for a single molecule. The industry had grown to have too many small  players and too little profit for all of them.  

 

                                                                             

Without resources, incentive or protections  for it, the domestic Indian pharmaceutical industry did not invest meaningful amounts  of R&D and did not produce many new drugs. Some companies turned to the export market. By  the 1990s, some 40% of Indian drug production was for export. This might seem like a success,  but again most of these were of low value. Indian companies were locked  out of more valuable markets. In 1992, India signed the Agreement on  Trade-Related Aspects of Intellectual  Property Rights or TRIPS. This would be a  major milestone in the history of the Indian pharmaceutical industry - a good one when  it comes to fostering indigenous innovation. It required the Indian government to amend  its prior patent policies to more conform to international trade standards.  The government will now - among other  things - recognize product patents and grant  exclusive marketing rights to new products. Signing this agreement had been extremely  controversial. The domestic industry split into two camps - one favoring more stringent  IP protections and the other opposing it.

The opposition camp made some  compelling points. For instance, the lack of knowledge transfers and that strong  IP rights had not done good for the Indian people in the past. In the end, though, the first group  won out - encouraged by a stay in the regulations. The international trade community gave  India until 2005 to first prepare its drug industry. The government thus started gradually  implementing the necessary changes. For instance, the Exclusive Marketing Rights amendment  to the 1970 Patent Law - enacted in 1999. From 1992 to 2005, the industry underwent  a monumental shift - leaving behind what had made it so successful for decades  towards a new, more profitable model. The Indian industry adapted to these encroaching  changes in different ways. A few firms decided to invest in R&D, climb the value chain,  and enter the drug discovery business. For instance, Ranbaxy, DRL, and Wockhardt. Their announcements garnered a lot of  attention with some promise. From 1956 to 1987, the Indian pharmaceutical  industry discovered and developed just 13 new drug compounds. From  1991 to 2005, that number was 7. Prior to 1992, the industry grew  its R&D spend by just 4.9% annually.  

After 1992, that accelerated to 6.6%. A number of Indian firms started putting molecules  into the drug discovery pipeline. Pharmaceutical drug patents in India by Indian institutions grew  from just 9 from the 1990-1994 period to 48 in the 1995-1998 period. That number further expanded  to 227 in the years after from 1999 to 2002. The government encouraged this R&D  spend with a number of schemes. In 1995 they founded various government bodies  to coordinate the academic and commercial areas. They also created a Pharmaceutical  R&D Support Fund that disbursed money. But going the drug discovery path, though hyped, was rare. Most Indian pharmaceutical firms  correctly considered it out of their grasp, especially before 2005. Drug discovery is  an expensive and time consuming process. Multinationals in the West have been doing it  for decades, and it is still hard for them.

 

                                                                           

It would be unrealistic to expect many  Indian companies - most of them small  or medium sized - to match up to this right away. Few can afford it. Even by 2005, smaller firms  spent 1% or less of their revenue on R&D.  So many of them have looked to other ways  to strengthen or diversify their revenues. Some companies started R&D  into drug adjacent fields  like drug delivery. Less technical than  drug discovery, but still very difficult. Others expanded or strengthened  other parts of the value chain. For instance, marketing and production. Other companies struck strategic  collaboration deals with multinationals. For instance, Zydus Cadila did such  deals with companies in France, Cuba, Switzerland, and the United  States throughout the 1990s into today. Biocon, a biopharmaceutical  company based in Bangalore, did the same. Deals have been signed  with big companies like Novartis. Their joint venture with the Cuban  Center of Molecular Immunology helped them gain the competency and  knowledge to develop Itolizumab, the first new mono-clonal antibody  treatment by an Indian pharmaceutical. Yet others decided that they needed to scale up  to match the size of the western multinationals.  

This means mergers and acquisitions with other companies operating in other  parts of the value chain. Different paths towards the same goal - surviving  a new, more challenging business environment. India's pharmaceutical companies have long  signaled a shift towards the export market. But TRIPS really helped push that along. Once the  industry met its IP regulation responsibilities, the global market opened up to them. Today, India's generics industry is very  internationally competitive. Helped along by its lower costs as well as the expertise honed  from competing in the brutal domestic market. A favorable generic drug regulatory environment  helped too, with the US passing the Hatch-Waxman  Act in 1984 which allowed the FDA to  more easily approve generic drugs. Dr. Reddy's Laboratories grew the export  ratio of their overall revenue from 53% in the 2000-2005 time period  to 74% in the 2012-2017 period. Marksans Pharma went from 21.2% back in the  2000-2005 period to 97.5% in the 2012-2017 period. The whole industry grew its export intensity  an average rate of over 13% in the years after the 2005 implementation of TRIPs. It  is nearly 8 times its size since then, with sales to North America,  Africa, and Asia alike.

One concerning issue to be  had with this export success is the Indian pharmaceutical industry's  concurrent dependence on China for its active ingredients. These are the most important  raw materials for the making of the finished drug. For instance, Tylenol's active  ingredient is Acetaminophen. India relies on China for 70% of its Active  Pharmaceutical Ingredients. Imports of Chinese  Active Pharmaceutical Ingredients, antibiotics  in particular, have tripled since 2005. India used to make these domestically,  but lost the market in the 1990s when the Chinese entered with products 40%  cheaper than what Indians can make. Even today, with Chinese labor costs higher than what they  were back then, the price gap remains about 20%. In 2020, this industrial weakness became  especially pronounced when China locked down. Chinese vendors ran out of stock to send to India, and restricted the export of certain  ingredients for making virus medicines.

 

                                                                             

Furthermore, geopolitical tensions  between China and India are a real thing. So the Indian industry should work  in tandem with the government to close those shortcomings with new import substitution  policies for these active ingredients. India's pharmaceutical success has not gone unnoticed. Other countries saw  how the Indian Patent Act of 1970 helped lower drug costs and break the hold  the multinationals had on the domestic market. So ironically about the same time the Indians  were moving away from process-based patents, other countries started moving towards them. The Indian pharmaceutical industry would not  be where it is today without the removal and  re-application of these IP rights. It is  a perfect example of market-driven reform,  sparked by a change in the environment. I also admire that they made these changes  based on the notion of what was right for them rather than sticking to an ideology that  wasn't working for them. As Deng Xiaoping popularized, they crossed the  river by touching the stones. While there remain a few concerns going  forward, India's pharmaceutical industry has a huge role to play in helping to address  the world's health issues in the future.