Asia Times On-line - August 29, 2002
Dinkar Ayilavarapu

The Indian drug company earlier that year had stunned the world by offering to supply three ingredients of the AIDS cocktail at US$600 per patient per year to African governments and at $350 to Medicins Sans Frontiers, a non governmental organization. Pit this against the $10,000 to $12,000 per patient per year doses sold by the international drug majors such as Merck, Bristol Myers and Boehringer-Ingelheim GMBH. Predictably, the African governments lapped up Cipla's offer. Cipla received instant international recognition, and India's long journey to becoming the pill factory of the world was recognized.

The 1990s have been the decade of the brain in India. This is borne out by the fact that two of three hottest sets of scrip in Indian bourses have been information technology and pharmaceuticals. The third one, telecommunications, was also technology intensive. The IT boom started it. Chauffeurs began to become millionaires at Infosys, and expectedly the millionaire rush began. The message was clear - in the 21st century it wasn't the size of your factory but the size of your brain that mattered. Dolly the sheep came and began the business of biotechnology and cloning, and even in this field it was India which captured pride of place, with two strands of the human genome project being investigated in India. Pharmaceuticals just had to happen.

What makes India click?

Soon after independence in 1947, India faced famine and food shortages. America supplied the country with food gratis, with a rider that the money saved in purchasing food should be used for setting up educational institutions. The agreement is called PL 480. As a result, institutes of technology and the institutes of management sprung up across the country. Then the brain drain began. For long the criticism of these premier institutions of higher learning was that they helped the American economy by using the subsidies in education provided by the Indian government to produce excellent scholars who were snapped by US businesses. But now these institutes of higher education have come into their own and they are churning out doctorates by the barrel load to power Indian knowledge-based industries. In India, a chemist with a PhD can be hired for a salary of $15,000 a year, against maybe $100,000 in the US. The immense intellectual capital created in the country is now being harnessed for making drugs, where the cost of development of drugs is 60 percent below that of average international costs.

The revolution began in 1970 when, as happened to most sectors of economy and life in India, the government set the tone. The government stopped recognizing product patents, but respected patents on processes. In a nation of poor public heath and where insurance was unheard of, it made eminent political sense to do so. Effectively, the government gave its drug makers the license to reverse engineer Western drugs, without paying the license fees to the patent holder. Instantly, the prices of drugs in India crashed, and with it the share of Western drug makers in the Indian market. In 1970, 75 percent of the drug market in India was Western, in 1990 their share stood at 30 percent. Drugs sell at 3 to 15 percent of their Western prices in India. GlaxoSmithKline, the national market leader, estimates that the country accounts for 35 percent to 40 percent of the drug giant's global sales by volume, but only 1 percent by value. Cipla's copy of Bayer's anthrax-fighting Cipro, fabricated by more than 100 Indian drug manufacturers, retails for 12 cents a pill in India, versus $5.50 in Manhattan. With reverse engineering, Cipla (fiscal 2001 revenues, $226 million) makes and sells more than 400 of the world's top 500 branded drugs.

The other big benefit to flow of the events of 1970 was the increase in competition within the Indian drug industry. Indian industry in general didn't know the meaning of competition until 1991, when the economy was liberalized, and hence was uncompetitive internationally. But this wasn't true in the pharmaceutical industry. The legislation of 1970 spawned 20,000 drug makers and 60,000 brands in India. Analysts point out that the reason for the competitiveness of Indian drug makers was the competition they faced within the country. As competition with Nissan and Honda made Toyota all the more competitive; competition among Indian drug makers made them more competent and competitive. Today they account for 8 percent of the world drug production volume and 1.5 percent by value, ranking fourth in the world.

But the modern day heroes of the industry aren't apologetic about their origins. Anji Reddy, who founded Dr Reddy's in 1984 with $40,000 cash and a bank loan of $120,000, makes no apologies for his country's history. "We [Dr Reddy's Labs] are products of that [1970 law]. But for that, we wouldn't be here. It was good for the people of India, and it was good for this company." The Reddy family's 26 percent in Dr Reddy's is now valued at $430 million.

What the government giveth, it taketh away

The law in India would have had to catch up with that in the West at some time or the other. This began to happen after India entered the General Agreement of Tariffs and Trade (GATT). The salient feature of GATT is TRIPS (Trade Related Intellectual Property Rights), which provided the patent the grant of EMR (exclusive marketing rights) in any given country. Suddenly, the Indian drug industry couldn't just rely on patent busting, it had to invest in some sound research and development as well. The government did its bit to encourage research by announcing a 100 percent tax exemption on R&D expenditure. Indian industry had to look for new means of earning its bread. In 1999, parliament passed new patent legislation and completed the process in the next year.

With one gate closing, another was discovered by the Indians. Few developing countries in Africa, if any, have a pharmaceutical industry worth the name. Indian drug manufacturers hope that developing countries will exploit clauses in TRIPS that allow governments to grant compulsory licenses for products not otherwise readily available. There are a few examples of such licensing, but India's commerce ministry - which has launched an export drive called Focus Africa - hopes for more. In 2001, Indian ministers and officials met in Johannesburg, South Africa, with representatives from southern and eastern Africa and in Algiers with envoys from western Africa to find ways to improve economic cooperation, particularly with regard to information technology and pharmaceuticals.

The opportunity is immense. In January 2001, the first batch of Indian drugs landed in the Philippines, to be used in the public heath system there. Philippine health secretary Alberto Romualdez Jr says that other products could be added to additional batches of parallel imports. The practice, he says, will continue until the multinational manufacturers cut their prices. The Namibian health minister visited India last year to find partners to manufacture drugs in India. Indian officials are also encouraging their companies to bid against big pharmaceuticals for contracts that don't involve compulsory licensing. There is life beyond patent busting.

Old school R&D

Dr K Anji Reddy, the founder and chairman of Dr Reddy's Laboratories, has made his name internationally. Among India's 20,000 or so drug makers, Reddy is the most visionary. He decided long ago that Indian pharmaceutical firms could not prosper forever by copying patented foreign inventions and selling them to India and the rest of the poor world. So Dr Reddy's started coming up with inventions of its own. That makes it the leader in the vaunted conversion of Indian drug firms from copycats to innovators.

Reddy is lobbying the Indian government to adopt and enforce the international drug-patent regime. Reddy aspires to build his enterprise into a research-based drug major. His goal: to hit the Western drug majors by developing drugs at lower costs. Dr Reddy's invests 6.5 percent of its $276 million sales in research, a habit it began in 1994. The results are impressive; the firm has discovered three molecules that it has licensed for diabetes drugs, two to Novo Nordisk and one to Novartis. The Danish firm is testing them on human subjects. For the three diabetes licenses, Dr Reddy's should gross $72 million during the drug-development stage. As of today, Dr Reddy's is the proud owner of about 175 patents.

Ranbaxy, the largest of the Indian drug makers, aims to more than double its sales, to $1 billion, by 2004. Ranbaxy plans to increase North America sales to 20 percent of the total by 2004, compared to 9 percent last year. This will involve a shift from the company's traditional generics focus to become a developer of patented drugs. From being a multinational manufacturer of chemical actives and intermediaries, Ranbaxy wants to leverage its immense international network to get into hardcore drug making. "India is the best place in the world to manufacture pharmaceuticals," declares Brian Tempest, president of Ranbaxy. Ranbaxy's new patented drug discovery research focuses on anti-infectives, cardiovascular and oncology drugs. It has three products in various approval stages: a compound to treat benign prostate hyperplasia, now in phase II; an asthma treatment awaiting phase I approval; and an antifungal in final stages of preclinical work.

India has always had an image of shoddiness. In the drug business, that might mean death. You don't trust your health to shoddy drug makers. That has prompted big Indian drug firms not only to invent new drugs, but increasingly to adopt developed country standards for making existing ones. Lupin Laboratories, a Mumbai firm, claimed to have the only factory in Asia that is certified sterile (for injectable drugs) by America's Food and Drug Administration (FDA). A year later, more than 25 of the country's drug plants are US FDA-inspected and approved. The country's chemists are innovative and haven't lost their edge in imitating either.

Generic genius

The other opportunity that emerged was in the large generic drug market. Generics are drugs whose patents have expired. Almost all of the Indian drug makers derive their revenue from this segment. In effect, drug makers want to extend their traditional business of reinventing drugs, minus the legalized piracy, to the rich home markets of their inventors. Indian firms can capture a quarter of the world market for generics, which is set to grow enticingly: drugs with sales of $40 billion are likely to lose patent protection by 2003. Indian companies are pouncing on expiring patents and filing abbreviated new drug applications (ANDAS) - the sort needed to sell off-patent drugs in America - at a furious pace. Two Indian companies, Ranbaxy (off course) and Wockhardt, were among the 10 firms approved to sell Enalapril, a medicine for high blood pressure that has American sales of over $900 million.

Generics have their own problems, though. Every patent expiry triggers a scramble among generics makers that sends prices crashing (that of Enalapril fell 95 percent). The scramblers generally have bigger portfolios and better ties to wholesalers abroad than Indian firms. But the Indian companies are no strangers to competition. Ranitidine, an anti-ulcer drug, sells in 40 brand names in India. What can be tougher than selling Ranitidine in India? They are used to making money by selling drugs at rock bottom prices. The smarter ones among the Indian generic drug makers are using several imaginative strategies to go one up. One is to fill under populated niches rather than to copy bestsellers. Lupin "has not gone after every product going off patent", says the head of its American operations, Vinita Gupta. It concentrates instead on those, such as fancy antibiotics, to which entry is restricted by "high technology barriers". Another strategy is to give generics a novel twist, which could be as simple as masking the taste of a bitter pill or as complex as finding new ways of delivering familiar drugs. Cipla, for example, has worked out how to deliver an anti-incontinence drug via a skin patch.

Besides these are the less novel and older ways of doing business. The commonest is to piggyback on an American generics company, either as a supplier or as a revenue-sharing partner. Cheminor, the part of the Dr Reddy's group that specializes in selling generics to the rich world, has formed a series of alliances with American generics firms. Wockhardt has a joint venture with New Jersey-based Sidmak Laboratories, which markets two of its formulations; the two firms split the profits evenly. Ranbaxy went a step further and bought companies in the West. In 1995 they acquired Ohm Laboratories in New Brunswick, New Jersey. Then the next year it was an Irish firm, a German firm, a Chinese firm and so on. Ranbaxy's generic drugs pipeline is valued at $250 million-$300 million and focuses mainly on drug delivery systems such as one a-day versions of major drugs. Ranbaxy recently scored a success by licensing to Bayer a once-daily version of Bayer's leading drug, the anti-infective Ciprobay. Bayer will sell the product in Germany and in the US under terms of the deal.

Sankar Krishnan, a consultant for McKinsey & Co in Mumbai, projects that India's exports of drugs will more than quadruple to $6.5 billion by 2010, increasingly in legal generics for patent-protecting markets such as the US and Europe.

Where the mind matters, India matters. The IT industry cleared all doubts about that. Of all the things that carry the "Made in India" tag, it is the drugs that are the cause of most optimism. This is one industry where Indians do it best and cheapest. If things continue to flourish for the pharmaceutical guys, drugs might well be the opiate of the Indians masses. Otherwise, Indians might just have to rise out of their drugged stupor.

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