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.