1. India Pharma Inc.
Enhancing value
through alliances and
partnerships

2. Contents
03 Foreword
04 Executive summary
06 Growing through alliances and partnerships
14 Bringing cost efficiencies
24 Newer growth trends
28 Conclusions

3. Foreword
The social, demographic and economic context in which the global pharmaceutical
industry operates is rapidly changing. Globally, pharma companies are facing pressure from
governments and taxpayers alike for reducing prices of drugs and initiating outcome-based
pricing. Simultaneously, there is a vast decline in R&D productivity, diminished pipeline for
new drugs, increased drug discovery costs as well as increased regulatory measures that
companies need to contend with.
The Indian pharma industry is showing signs of robust growth. The domestic pharma market
is expected to grow at a CAGR of 15% to 20% to reach a value anywhere between US$ 50
billion and US$74 billion by 2020.1
Foreign multinational companies along with Indian pharma companies are partnering
together to tap opportunities in the fast growing emerging economies(BRIC nations) and
the larger established markets in the West and Far East (Japan). Acquisitions, alliances and
partnerships are some of the tools used to penetrate and capture a larger share of the potential
opportunity in these markets.
We are also seeing companies collaborating outside the realm of manufacturing and R&D
with players in health insurance, medical technology, Information Technology and mobile
technology to deliver superior sustainable healthcare services. These developments bode well
for the pharma industry and society as a whole who stand to benefit from such alliances and
partnerships through reduced costs and streamlined supply chains.
Some Indian pharma companies are looking to increase the value of services they provide by
moving early on in along the value chain into biotechnology, drug discovery & development,
which have primarily been the domain of large innovator companies. In this report, we look
at the different types of alliances and partnerships that have taken place in the Indian market,
the synergies and benefits to the parties involved as well as the key success factors which need
to be kept in mind to achieve productive and cohesive long term collaboration.
Jai Hiremath
Chairman - CII Pharma Summit 2011 and
Vice Chairman & Managing Director - Hikal Ltd.
Sujay Shetty
Executive Director - India Pharmaceuticals and Life Sciences Leader - PwC

4. Executive summary
The social, demographic and
economic context in which the
global pharmaceutical industry
operates is changing. Developed
economies with spiralling
healthcare costs are looking to rein
in healthcare expenditure. Payers
are demanding a reimbursement
model based on healthcare
outcomes. The impending patent
cliff and declining R&D productivity
threaten the sustainability of the
pharma industry’s current business
model. Emerging markets in
general and India in particular offer
a ray of hope for the global pharma
industry. India’s large domestic
market, product development
skills and scientific talent are being
increasingly sought by pharma
MNCs to tackle the challenges of
growth and innovation. Indian
pharma companies are also looking
to move up the value chain and
change the perception of India as a
cheap manufacture base to that of a
genuine intellectual contributor.
One of the main ways MNCs enter
the Indian market is through
acquisitions. However, given the
scarcity of assets, valuations in
the sector have increased over the
last 12 to 18 months. Companies
are now exploring other ways of
collaboration through alliances and
partnerships. Such collaboration
began with product sourcing and
has now blossomed into other areas
such as drug discovery, clinical
development and marketing and
sales. Collaboration between big
pharma companies and Indian drug
4 PwC - CII

5. firms has proved beneficial not just In addition, they will have to
to the two parties but to the Indian devise strategies for inclusive and
patient society as a whole. sustainable growth.
A PwC survey of opinion leaders The pharmaceutical industry in
in the Indian pharma industry India is poised for a period of robust
revealed that quality as a key growth driven by alliances and
determinant of the success of partnerships. Success in the market
alliances and partnerships. Other will be dependent not only on the
issues impacting success include pharma companies but also on
management control, valuations, other stakeholders like healthcare
corporate governance, cultural providers, health insurance
differences and awareness of local companies, medical technology
regulations. companies, government, patient
The key point of note for these groups as well as society at large,
companies looking to do deals acting in concert. How well they
is to choose an alliance partner do will determine the future of the
after conducting a thorough due industry.
diligence. While financial diligence
is a standard and integral part of
all deals and alliances, the pharma
industry needs a more thorough
operational due diligence prior
to partner selection. No one size
will fit all and companies will
have to choose and implement the
collaboration initiatives that best
meet their strategic objectives.
With increasing pressure on
healthcare costs all over the
world, pharma players will have
to pay attention to cost reduction
efforts. Efficient management
of operations, supply chain and
transfer pricing are thus issues of
paramount importance.
Pharma companies will also have
to strengthen collaboration with
key players outside the industry
such as health insurance, medical
technology and information and
communication technologies.
5

6. Growing through
alliances and
partnerships
Why partnerships
The global context
As population grows and ages, new
areas of medical need emerge. The
diseases in the developing countries
are growing increasingly similar to
those of the developed world.
Demand for new anti-infectives
is mounting, especially for
diseases like multi-drug resistant
tuberculosis. Global warming can
bring diseases such as malaria,
cholera, diphtheria and dengue
fever to more developed regions.
These changes will generate
opportunities for the global pharma
industry over the next decade.
Despite robust demand for its
products, the industry is facing
unprecedented challenges. The
impending patent cliff which could
see big companies lose over US$
118 billion worth of patented drug
sales by 20152 is a cause of great
concern. Compounding this is
the increased cost for developing
new drugs and requirements of
regulators for enhanced safety and
efficacy monitoring.
The governments of developed
economies with huge fiscal
deficits are also under pressure
to reduce spiralling healthcare
costs. At the same time, healthcare
payers and providers everywhere
have recognised that current
6 PwC - CII

7. According to PwC’s pharma 2020
Trends shaping the report, Challenging business Lilly is currently transforming itself
models, global pharma companies from a traditional fully integrated
global industry pharmaceutical company into a
will have to fundamentally change
• Emphasis will be on their operating model to capitalise fully integrated pharmaceutical
outcomes. network, so that it can draw on a
on future growth opportunities.
range of resources beyond its own
• Compliance monitoring Most large companies have walls. Lilly hopes teaming up with
will become a win-win traditionally done everything other organisations to create virtual
for patients, payers and R&D programmes will enable it to
from R&D to commercialisation
providers. get better access innovation, reduce
themselves. By 2020, however
• Focus will shift from costs, manage risks more effectively
treatment to prevention. and enhance productivity. For
example, the Chorus Project is
• New technologies will drive Bristol Myers Squibb (BMS ) uses a virtual organisation to take
R&D. a slew of alliances, partnerships molecules quickly to proof of
• The current linear phase R&D and acquisitions to complement concept. Lilly also uses external
process will give way to in- its internal capabilities in drug networks comprising third parties
life testing and live licensing. discovery and development. such as Piramal Life Sciences,
BMS calls its string of pearls Hutchison MediPharma, Suven
• There will be greater
strategy in which each Life Sciences in the development of
international regulatory
transaction will be aligned to molecules .4
cooperation.
the company’s focus on specific
• The blockbuster sales model disease areas.
will disappear.
40% of BMS patents and 50%
• The supply chain functions of revenue come from such Several pharmaceutical firms like
will generate revenue. alliances.3 Lilly and BMS have already begun
• More sophisticated direct- to use more collaborative models.
to-consumer distribution The pressure to change to new
channels will diminish the business models, triggered by
role of wholesalers internal and external factors has led
this model may no longer work
for many organisations. If they to increasing mergers, acquisition,
are to prosper, they will need to alliances and partnerships in the
improve their R&D productivity, pharmaceutical sector.
healthcare expenditure levels are
also unsustainable unless they reduce costs, tap the potential
deliver more demonstrable care of emerging economies and
and cost benefit over the long term. switch from selling medicines to
Payers are demanding evidence of managing outcomes. Alliances and
outcomes from pharma companies partnerships with firms within and
before including the medicines in outside the pharma industry is a
pharma benefit plans. key requirement of the pharma
operating model of the future.
7

8. The Indian context Indian generic pharma companies
have strong product development Government
The Indian pharma industry is
skills and have set up world-class
today, the third largest market announces new norms
active pharma ingredients (API)
globally in terms of volume and for FDI in pharma
and formulation manufacturing
14th largest by value. According
facilities to cater to the price- As of 2011, FDI through the
to PwC’s report Capitalising
sensitive India market and global automatic route was allowed in
on India’s growth potential,
generics market. Many of these the pharmaceutical sector in India.
the domestic pharma market is
dominate India’s domestic market Currently, 100% FDI is permitted
expected to grow at CAGR of 15
through a large sales team, strong via the automatic route.
to 20% annually to be a USD 49
relations with physicians and Given the trend of acquisitions of
billion to 74 billion market by
medical institutions. Indian pharma domestic pharma companies by
2020.5
companies are now seeking to global players, the government
India is an attractive market for a move up the value chain to drug has expressed concerns about the
variety of reasons: discovery and development by accessibility and affordability of
leveraging the country’s scientific medicines in the Indian market.
• India’s economy continues to
show signs of robust growth. talent. Given the strengths of To ensure that such deals do not
The increased spending on Indian and and global pharma result in monopolies and an increase
companies, it makes sense for them in drug prices, the government is
healthcare needs is expected
to come together to develop India’s now mulling over placing a cap on
to drive revenue growth for FDI in the pharma sector.
pharma companies. domestic market, source products
for global market and to discover & A high-level committee has been
• The emergence of chronic develop new drugs and therapies. . appointed by the government of
diseases like cancer, diabetes, India to look into this.
Cardio Vascular System (CVS) MNCs and Indian companies
Government has decided the
and Central Nervous System are stepping up their play in the
following: 6
(CNS) disorders is likely to drive market through various kinds
of partnerships to achieve the • 100 % FDI through the
demand for newer therapies. automatic route would be
following:
• With increasing pressures allowed for Greenfield projects
on curbing healthcare costs • Capitalise on the opportunities
• 100% FDI through the FIPB
in the US, India’s low-cost provided by the Indian market approval route for Brownfield
manufacturing capabilities • Make the most of India’s investments in the pharma
coupled with attention to quality capabilities in drug discovery, sector for a period of six months
(India has the highest number product development and • During these six months,
of FDA-approved manufacturing sourcing to serve overseas necessary enabling regulations
plants outside the US.) will be markets. will be put in place by the
sought by MNCs. Competition Commission
This chapter explores the different of India (CCI) for effective
• India has a large pool of kind of partnerships in the Indian threshold limits on mergers and
scientific manpower which pharma space, the challenges acquisitions to ensure that there
can be used in drug discovery, faced in creating and sustaining is a balance between public
development and clinical trials. such partnerships and the benefits health concerns and attracting
of these partnerships to various FDI in the pharma sector
• India’s diverse genetic pool of
treatment-naive population is stakeholders. • After six months the oversight
attractive for clinical trials. will be done by the CCI
entirely in accordance with the
competition laws of the country
8 PwC - CII (FIPB nod will not be required)

9. Serving the Indian market Types of Alliances
Given the growth slowdown in
developed countries, pharma
companies are keen to address the
opportunities offered by the growing Alliances
Indian market. and
partnerships
a. Mergers and acquisitions (M&A)
The Abbott acquisition of Piramal
Healthcare’s domestic formulations
business in 2010 is a good example.
Other examples include Reckitt Acquisitions
Benckiser’s acquisition of Paras
Pharmaceuticals and the acquisition
of the nutrition business of Wockhardt
by Danone in 2011. Addressing the
opportunities in the Indian market
was also one of the key drivers behind Domestic Global
the acquisition of Ranbaxy by Daiichi market market
Sankyo (though Ranbaxy did have a
global presence).
Recent M&A for addressing the Year Indian player MNC Nature of deal
Indian market 2011 Wockhardt Danone Acquisition for US$
However, given the scarcity of assets, 350 million
valuations in the sector have gone 2010 Paras Pharma Reckitt Benckiser Acquisition for US$
up over the last 12 to 18 months. 726 million
Companies are now exploring other 2010 Piramal Healthcare Abbott Acquisition
methods of partnership. of domestic
formulations
business for US$ 3.7
b. Alliances and partnerships (A&P) billion
Germany’s Bayer Healthcare 2008 Dabur (*) Fresenius Acquisition of
announced a 50-50 joint venture with 73.3% stake for
Euro 139 million
Zydus Cadila to create a new company,
Bayer Zydus Pharma focussed on 2008 Ranbaxy (*) Daiichi Sankyo Acquisition for US$
4.6 billion
the India market. Bayer Healthcare’s
pharma division will contribute its Source: Industry reports, PwC analysis
sales and marketing business in India (*) While these deals were predominantly aimed at gaining access to the domestic market, they also provided a
platform for the acquirers to target global markets.
to the new company while Zydus
will contribute its women’s health
products, diagnostic imaging and
other products.7
9

10. Lupin has signed a deal with drivers have created the need for the title of a genuine intellectual
Eli Lilly for anti-diabetic drugs. collaboration between MNCs and contributor.
Under the deal, Lupin will market Indian pharma companies to target Glenmark Pharmaceuticals became
and distribute the entire range global opportunities. the first Indian company to out-
of Huminsulin brand of Eli Lilly license a biological product. The
in India and Nepal. Lupin will a. Mergers and acquisitions
company licensed its biotech drug,
deploy 300 sales representatives Pharma MNCs have acquired which has the potential to generate
from its formulations business to Indian companies to maximise their revenue worth US$ 613 million,14
promote the product and will also capabilities in serving the global to French company Sanofi Aventis.
provide education to physicians and market. The acquisition of Matrix Glenmark sold the marketing rights
patients.8 Laboratories by Mylan in 2006 for North America, Europe, Japan,
Novartis has signed a deal with USV is one of the earliest examples of Argentina, Chile and Uruguay, while
Ltd to market Galvus(Vildagleptin) this trend.11 More recent examples it retained co-marketing rights for
in the Indian metros. USV will include the acquisition of the Russia, Brazil, Australia and New
manage marketing activities in injectables business of Orchid Zealand. In India, the company
Tier II and Tier III cities in the Chemicals by Hospira12 and retained its exclusive rights.
next phase.9 Also entering the Sanofi’s acquisition of Shantha
Another example is of Jubilant. The
fray is Belgium’s Omega Pharma, Biotechnics.13
company entered into a three-year
which formed a JV with Modi- drug deal with US-based Endo
Mundipharma Group to create Mergers and acquisitions to
Modi Omega Pharma India. Eight target global opportunities
brands from Omega’s product
portfolio will be manufactured in Year Indian player MNC Nature of deal
India by the Modi-Mundipharma 2009 Shantha Biotech Sanofi-Aventis Acquisition for US$ 781
Group. The marketing strategies million
and sales team will be provided by 2009 Hospira Orchid Acquisition for US$ 400
Modi Omega Pharma India. 10 million
2006 Mylan Matrix Acquisition for US$ 736
Serving the global market million
Pharma MNCs are facing challenges Source: Industry reports & PwC analysis
of impending patents and rising
R&D expenditure. They are looking
b. Alliances and partnerships Pharmaceuticals for developing
for opportunities to increase the oncology drugs.15 Under the deal,
drug pipeline and reduce costs. Previously, A&P were formed to
Jubilant will receive research
In addition, given the pressures source out products. Today, it has
funding and milestone payment
of reducing healthcare costs and expanded in R&D as well.
on successful completion of
the increasing use of generics, predetermined targets. Endo will
pharma MNCs are also looking Research and development
own the developed drugs and will
to partner with companies with Pharma MNCs are looking for pay royalties to Jubilant on the
superior product development opportunities to co-develop drugs, successful commercialisation of the
capabilities. At the same time, buy or in-license molecules from drugs.
Indian companies are also looking Indian companies. Such deals
to move up in the value chain by have helped India shed the tag of a
discovering new drugs. These cheap manufacturing base and gain
10 PwC - CII

11. Other deals for R&D Product sourcing Similarly, Pfizer signed licensing
deals with Aurobindo Pharma17,
Manufacturing deals are
Indian company Pharma MNCs Products Claris Life Sciences18, Biocon19
common in India because
Glenmark Forest Asthma and and Strides Arcolab. The deal will
of the country’s legacy in
Laboratories anti-lung strengthen Pfizer’s position in
infection research chemistry, efficient
emerging markets and expand its
production and cost advantage
Piramal Merck Cancer medicine portfolio in established
Research manufacturing. These
products business units (EPBU).
skills coupled with the fact
Glenmark Eli Lilly Pain relief The Indian companies will benefit
that India has the highest
Serum Institute MSD Pneumococcal from a steady revenue flow and the
number of USFDA-approved
of India conjugate possibility of receiving significant
vaccine plants outside the US, make
upfront payment and royalties.
Source : Industry reports & PwC analysis
manufacturing alliances an
attractive proposition. There Sun Pharmaceutical Industries and
are several examples of such Merck and Co Inc entered into a
alliances in India. JV agreement to develop, produce
Importance of Japan and market innovative generics in
GlaxoSmithKline (GSK)
The Japanese pharmaceutical emerging markets.20
expanded its market share by
market stands at US$ 96.5 Japan is an upcoming market for
striking a deal with Dr Reddy’s
billion.21 This market is collaborations given the opening-
Laboratories16 and gaining
largely innovator-based with
access to a portfolio of more up of generics market by the
the generics component
contributing about 25% of sales than 100 drugs. For Dr Reddy’s, Japanese government. Please see
by volume. In contrast, the the deal will help increase its the side bar for details.
generics component of the US product reach in regions where,
and UK stand at 88% and 71%22 till now, it only had negligible
respectively. market presence.
The Japanese market is fast
shifting its focus towards A&P for product sourcing
generics, driven by the
Indian players MNCs Nature of deal
government’s fiscal pressures
and an ageing population. Aurobindo Pharma AstraZeneca, Supply of generic medicines for developed
Pfizer and emerging markets
The government of Japan has
Strides Arcolab Ltd Pfizer Supply of 67 generic drugs to Pfizer with
been aggressively promoting focus on oncology
generics by providing incentives
to the industry and physicians. Torrent AstraZeneca Supply of 18 products for various markets
Pharmaceuticals
Hence, we see an increasing
Indoco Remedies Aspen Range of ophthalmic products for 30
number of Japanese pharma emerging markets
companies seeking partnerships
with Indian generics Indoco Remedies Watson Development and manufacture of generic
Pharmaceuticals drugs with market size of US$ 670 million
manufacturers.
Cadila Healthcare Altana, Zyban JV structure for the manufacture of patent
drugs
Torrent Novo-Nordisk Contract manufacturing of formulations
Pharmaceuticals
Strides GSK Supply of drugs for semi-regulated markets
ArcolabLimited
Source : ICRA Limited. ‘CRAMS India: Overview & Outlook’. June 2011
11

12. Benefits of collaboration Benefits of collaboration
Pharma MNCs collaborating with
Indian companies bring to the table
new products, latest technology,
higher investments, quality systems
and the knowledge of regulatory
processes. On their part, Indian
companies provide local market
knowledge, cost advantage
and local scientific talent. Such
alliances have the potential to bring
significant benefits to both parties
and add value to society as a whole.
Such partnerships bring in new
drugs and therapies to the market
and increase patient’s awareness
about diseases and wider treatment
choices available.
Success drivers
PwC’s survey of opinion leaders
in the Indian pharma industry
revealed that issues related to
quality, management control,
corporate governance, valuations,
cultural issues and understanding
Success Drivers
local regulations were crucial for
any form of collaboration.
12 PwC - CII

13. 1. Importance of quality bound to look at India as a low- 2. Transaction-related drivers
cost manufacturing destination
As a result of increasing alliances In addition to quality related issues,
as well as a strategic partner
and the growing importance of attention needs to be focussed on
for specific operations. The key
Indian pharma globally, prominent the following determinants too.
consideration for such MNCs is to
Indian pharma companies have These need to be discussed and
choose a partner after conducting
come under the scanner of the US resolved to the satisfaction of both
a thorough investigation and with
Food and Drug Administration the parties involved in the A&P:
due diligence. While financial
(USFDA) for varying degree of • Management control
diligence is a standard and an
quality issues.
integral part of all deals and • Corporate governance
In India, USFDA audits and pre- alliances, the pharma industry
approval inspections typically focus needs a more in-depth operational • Expectations of valuation
on the following: approach prior to selecting a • Cultural differences
• Management roles, partner. • Local regulations
responsibilities and training of Aspects to focus on include the M&A along with A&P have a
personnel operating in USFDA- following: major role to play in changing
approved facilities
• Historical review of internal and the dynamics of the industry and
• Filed application integrity with external regulatory audit data taking it to the next level of growth.
specific attention to records,
• Extent to which audit findings A&P are likely to be more popular,
manufacturing systems and
have been remediated as they are mutually beneficial
laboratory test results
• Mechanisms put in place to both stakeholders. It can
• Monitoring of impurities in APIs help Indian companies scale the
to ensure implementation
and drug products innovation curve, while at the same
of adequate corrective and
• Stability studies and preventive actions time helping to increase the drug
investigation of out-of- pipeline curve for global players.
• Regulations in place to ensure India’s low-cost manufacturing
specification (OOS) incidents
sustainability of quality system capabilities will also help pharma
• Safety and integrity of the improvements MNCs meet the increasing global
supply chain demand of generics.
• Overall review of quality systems
While the impact of this regulatory implemented To ensure successful partnerships,
crisis on alliances formed cannot issues such as quality, valuations,
Companies often require domain
be muted, the more critical issue is management control, corporate
specialists to understand the
its impact on future alliances and governance and cultural
true nature of the above issues. A
on the overall image of the Indian differences need to be identified,
thorough operational diligence can
pharma industry. discussed and resolved through
help understand the appropriate
Given the mounting internal and measures that can be implemented an in-depth financial, tax and
external pressures on pricing and to mitigate any risks associated operational diligence.
healthcare costs, MNCs are still with quality. No one size will fit all and
companies will hav eto choose and
implement the path that best meet
their strategic objectives.
13

14. Bringing cost
efficiencies
With increasing pressure on the Elements of cost reduction launching several improvement
global healthcare industry to cut programmes to control these costs.
Like any other industry,
costs, pharma companies will While the sourcing teams focus on
pharmaceutical cost has several
have to look at different avenues getting materials at a competitive
direct and indirect costs:
to achieve it. Efficient operations, landed cost, many leading API
management of the supply chain
and transfer pricing are key areas
where cost efficiencies can be
achieved.
Operations
improvement
Pharmaceutical companies
can achieve year-on-year cost
reduction in their overall spending
by rigorously identifying and
eliminating wastes in their
manufacturing and business
processes.
Today, for many companies,
manufacturing costs, as a fraction
of overall costs, is considerably
higher. Therefore, it is quite logical
to start with a cost reduction
exercise in manufacturing.
Currently, pharma companies are players are undertaking initiatives
taking a hard look at various cost to improve batch yields and the
elements and are coming up with consumption of critical input
various innovative ways to reduce materials.
them. Project teams use the DMAIC
Material cost: Around, 60 to methodology to understand the
70%23 of pharma manufacturing reasons behind yield loss and
cost is influenced by raw materials. implement an action plan towards
Therefore, controlling material improvement. Today, companies
costs is one of the most important set year-on-year targets for
areas that companies need to focus improvements in yield, which in
on. Leading pharma companies are turn get converted to the budgeted
14 PwC - CII

15. yield numbers in the next financial Most companies struggle with the Energy: The pharma industry
year. This acts as a financial control question as to what is the right uses a variety of utility equipment,
for ensuring sustenance. manning number. The industry including boilers, air compressors,
API companies use various levers defines manning for each function chillers, brine units, air handling
and also fundamentally question based on certain thumbrules units (AHU), vacuum pumps,
the type and quantity of solvents (like ‘x’ chemists per HPLC, ‘y’ DG sets, etc. These machines use
required in the process. Companies scientists per project, etc.), that electricity, coal and furnace oil as
have in several instances been able make it difficult to identify the right sources of energy, all expensive
to improve the recovery of solvents number. Moreover, the industry and subject to active cost reduction
by identifying and addressing the is also struggling with increased exercises.
source of loss. Some companies requirement for casual labour. A
Savings in operating these units
have also adopted a better solvent majority of the pharma companies
primarily result from ensuring
management process and have have started to think in terms of
efficiency of these machines and
been able to eliminate a few defining manning norms. From a
preventing wastage. Companies
solvents, either by adopting an shop-floor viewpoint, the more the
typically look at generation,
alternate solvent or by an alternate number of people on the shop-floor,
consumption and distribution
manufacturing process.Similar the greater are the chances of error
efficiencies.
efforts are initiated by formulations and mix-ups.
Benchmarking key performance
players in terms of improving These questions exist for all levels
parameters, such as efficiency,
their rolled throughput yields. of staffing:
power consumption per unit
Companies are looking at various • Managerial generated, etc, of utility
factors including breakages, • Operative machines can give insights into
powder losses, etc to improve • Casual corrective actions required. Utility
yields. They are also effectively
requirements are very specific to
embracing various concepts of
the process and companies can do
lean to eliminate wastes in their Leading companies are well to link utility consumption
processes. controlling cost by defining with production planning to
Manpower cost: Like others, manning norms. In PwC’s own optimise consumption and reduce
experience, a correct manning
the pharma industry also faces wastage. PwC’s experience
exercise involves the following:
challenges such as an average suggests that energy costs can
15%24 growth in salaries and an • Activity driver based work be dramatically reduced by
approximate 20%25 attrition rate load analysis synchronising planning and
at operative and executive level. • Shared services and resource averaging out peak loads through
This puts pressure on manpower analysis proper scheduling.
costs, as the costs of recruitment • Span of control studies Most organisations today carry out
constantly increase. • Process improvement for work rigorous energy audits and take
Therefore, controlling manpower simplification several steps including replacement
cost is becoming an important of old energy-guzzling equipment
agenda item for the top with new state-of-the-art energy-
management. On an average, the efficient equipment. Companies
pharma industry spends around 7 are adapting themselves to green
to 10% on manpower costs. This is technologies to save energy costs.
slightly higher as compared to the
overall average.
15

16. This also contributes towards be cost-effective, while at the same Levers for cost reduction
sustainability. time adhering to delivery dates,
Companies do implement
Packing costs: Packing costs are enhancing equipment utilisation
manufacturing cost reduction
typically higher for formulations and identifying optimum manning
programmes using levers such
as compared to API. Packing costs norms.
as process improvements, shared
can be reduced by at least 10%26 Cost of manufacturing decisions: services, standardisation, first
by reducing packing rejections and Cost of manufacturing decisions principle costing, efficiency
by value-engineering the packing work primarily at the strategic improvement, etc.
design. Companies use several and tactical domain, where the Each of these levers needs to be
factors for reducing packaging cost. companies take decisions on the addressed along two dimensions,
These include strip dimensions, following:
number of colours used, packing
material thickness, optimal fitment
Strategic • Where should the plant be located?
of tablets within strips, number
• What are the RM and FG transportation costs?
of ply, shipper sizes, etc. PwC’s
• What is the technology and infrastructure such as reactors, layout,
experience suggests that while
material handling systems, etc. to be utilised?
primary packaging is a function
• What is the planned capacity utilisation of the plant?
of stability, companies do well by
Tactical • What should be the batch sizes to operate?
addressing elements of dimension
and wastages in primary packing. • How much should be the inventory in process?
• What is the production planning philosophy to be used?
However, packing designs generally
• Which are the products or intermediates to make or buy?
have a long gestation period as they
are subject to customer approval.
Hence, the benefits of these Planned versus actual capacity strategic and operational. Decisions
normally accrue over multiple years. utilisation will have an impact for strategic cost reduction will
Analysing costs: Quality costs (QC) on product costing in terms of have a long- to medium-term
in most organisations were not apportioning fixed costs over the impact. However, the complexity
tracked and it is only recently that quantity produced. Planning during will be high. In operational cost
organisations have started looking the project phase ensures minimum reduction, the impact will be for
into this. time and cost overruns. This the immediate or medium-term but
Today, organisations have gone reduces the cost of setting up the relatively less complex.
beyond the scope of production project. The cost of these decisions Many progressive companies use
and have tried to implement cost is high, and so is the impact they lean management as a concept to
containment in quality control have in the medium to long term. identify and eliminate wastes in
functions by reducing cost of Companies need to evaluate the process, thereby resulting in
analysis. Companies use factors their make-buy decisions additional throughput and better
such as material substitution, more rigorously on the back of service levels at a lower cost.
optimising quantities drawn for contribution earned. Appropriate Companies have realised 10 to
sample analysis, reduced testing, technology selection, plant location 15%27 reduction in overall costs
standardising makes of chemicals and layout and production planning and improvement in bottom-line
across sites, clubbing samples to influence cost of production. savings by implementing structured
cost reduction programmes.
16 PwC - CII

17. The Indian scenario distribution reach in domestic centric metrics, they are also
markets. With these challenges, the focussing on delivering customer
Riding on the back of 12 to 13%28
Indian pharma industry is seriously value at lower costs.
year-on-year growth, the Indian
evaluating the ways and means to The survey reveals that companies
pharma industry is going through a
reduce operation costs. are targeting improved service
very interesting phase. It is rapidly
achieving a distinctive position The recently concluded lean levels but at competitive costs.
in the global pharma space with implementation in the pharma It is clear that the Indian scenario
generics, Contract Research and industry survey conducted by the is a peculiar one and delivering
Manufacturing Services (CRAMS) Organisation of Pharmaceutical service and cost competitiveness
and clinical trials. Also as foreign Producers of India (OPPI) and PwC need to go hand-in-hand. To
MNCs fight for a share of the revealed some interesting evolving achieve sustainable improvement
market, the fragmented domestic trends. Almost all participants programmes, companies need to
market is poised for consolidation. cited improving service levels to execute holistic programmes. The
In this scenario of increased the customer as one of their prime journey is difficult, but the rewards
competition, companies will try to business needs, while reducing cost are fast and considerable.
differentiate on the basis of speed- and improving profitability came a
to-market, cost competitiveness, close second. So, while companies
quality, customer orientation and today are focussing on customer-
17

18. Supply chain The nature of distribution such Analysis of the reasons behind
as fragmented channel, channel the failure of the supply chain
efficiencies power of stockists, limited in meeting challenges of market
As Indian companies look forward visibility and push-based supply growth points to a variety of
to market growth on one side and also acts as a tipping point for practices within the Indian
the need to reduce costs on the overhauling the supply chain. pharma industry. These need to
other, an agile, customised and be addressed if efforts to create an
cost-efficient supply chain is of
Key concern areas agile, responsive, customised and
paramount importance. Companies Some of the key concern areas cost-effective supply chain are to
in many industries have taken with the supply chain include be met.
pruning shears to their supply the following:
• Pharma supply chains operate
chains to support profitable growth. • High logistics cost ranging
from 4.72 to 6.22% of sales on a pure push: Salvage net is
Until recently, pharmaceutical
as against 0.5% in the US and the cost incurred by a pharma
companies did not embrace this
2% in Europe.29 company due to expiry and
trend. However, the industry can no
breakages of products in the
longer afford a laissez faire position • Ineffective control over market or at other storage
on the operation of their supply channel inventory: 46 days locations. This is created due
chains. for a pharmaceutical company to the multiplying effect of
as against 26 days for an inefficiencies in the supply chain.
Why focus on the supply FMCG company.30 Some of the key reasons behind
chain this include the following:
• Low ARPUs per stockist and
The contributors to growth retailer • Push-based supply to depots,
of the Indian pharma market stockists and retailers
• Porous supply chain
such as increasing disposable
facilitating easy entry of • Misalignment between sales
incomes, greater health insurance
counterfeits and supply chain organisation
penetration and a gradual shift
in disease profile pose several • Sub-optimal penetration of on timing (start and end) of
questions on the existing supply the rural market promotions
chain configuration: • Inadequate access to • Budget-driven forecast leading
• Is the existing supply chain secondary and tertiary to forecast bias, mismatched
capable of supporting market sales information critical to planning horizon on account of
creation (e.g. a supply chain that planning processes sales visibility and supply lead
supports reach and coverage in times
the growing peri-urban markets, • Inadequate infrastructure to
support compliance to CGMP • Sub-optimisation at each stage
cold chain for biotech, etc)?
in the distribution chain of supply chain impacting
• Is there a need to tailor the inventory velocity
supply chain across markets
• Inventory imbalance across stock
(Tier I, Tier II and rural) and
points
disease profiles to support varied
approaches in terms of products, • Lack of visibility on products
pricing and sales coverage? nearing expiry
18 PwC - CII

19. • Inefficient warehousing • Homogenous supply chain
processes related to storage, catering to varying customer Goods and services tax
handling and retrieval needs: A homogenous (GST)
• Batch size economics in supply chain operating on
transportation, manufacturing a standardised lead time As seen in our previous report,
and procurement restrains pharma companies India Pharma Inc: Capitalising on
from effectively capitalising India’s growth potential, GST is a
PwC believes that effective comprehensive value-added tax
on all business opportunities.
synchronisation between the (VAT) on the supply of goods or
The lead time required by the services. The GST will bring with it
supply chain function and other
customer varies across product opportunities to realise efficiencies
organisational functions like sales
and markets. The figure below and related challenges.
and marketing, finance and IT can
illustrates an example of how
lead to a reduction in salvage net. The pharma industry (including
lead time expectations vary FMCG)is significantly affected by
across products and markets. GST, since it disadvantages the
Pharma companies will have classic manner of concentrated
to tailor their supply chain manufacturing and disaggregated
distribution across a national level
strategy after understanding the
C&FA/warehousing mechanism.
requirements along the cost and
responsiveness frontiers. At present, the biggest challenge for
a pharma distribution company is
the movement of goods across India,
Lead time in number of days to cater to the need of each state and
thus save the CST payable otherwise
on such inter- state movement.
Also, several entities set up
warehouses in attractive locations
like Daman as the CST rate at such
locations was previously lower than
the rates prevalent in other states.
This logistical challenge and the
added cost of compliance will
Number of days
become a focal point of attention,
post GST.
The distribution team needs to re-
ascertain the warehousing locations
from a commercial and logistic point
of view rather than from a pure
tax-saving perspective. Reduction
in such warehouses will reduce the
cost of distribution.
It is important for the pharma sector
to understand the implications and
challenges arising out of GST and to
ensure that the business model and
supply chains are re-engineered to
maximise benefits.
19

20. • Sourcing from a perspective All these factors lead to significant Mitigating fraud in the Indian
of aligning demand to supply value erosion. To participate in pharma supply chain
often overlooked: Production future growth, the pharma supply
chain will need to focus on the The worldwide scale of
plans at pharma companies are
following dimensions: pharmaceutical operations is
governed by the availability of
creating supply chains that are
raw materials rather than being • Channel management extensive and globally dispersed.
aligned to customer demand.
• Supply chain planning This introduces heavy reliance
The lack of a diversified supplier
on third parties and increases the
network constrains the pharma • Supplier relationship
risk of fraud. In particular, India’s
company from aligning demand • Outsourcing supply chain uses a fragmented
and supply, thereby creating
• Security and compliance distribution network depicted in
inefficiencies in the supply chain.
the chart below:
• IT
Source: Overview of the Indian Pharmaceutical Market (2010) published by Datamonitor
20 PwC - CII

21. A typical organisation loses 5% of the general tenets of good supply TP environment in India
its annual revenue to fraud. When chain management. They need to
Introduced in 2001, Indian TP
applied to the estimated 2010 size establish a culture that supports
regulations are broadly modelled
of the Indian pharma market, this control efforts and whistleblowing
in line with global practices
figure translates to a potential total with clear, ethical guidelines. They
including TP guidelines issued by
fraud loss of more than US$ 600 need to build loyalty within the
the Organisation for Economic
million. Managing risks and fraud organisation, give employees the
Cooperation and Development
is therefore a key area of concern confidence to do the right things
(OECD).31 Indian revenue
for Indian and global pharma and identify clear conditions for
authorities have so far completed
companies. those who commit fraud.
six rounds of audit and have made
Fortune 500 pharma companies an astronomical adjustment of
have established whistleblowing Managing transfer about Rs 54,999 crore.
reporting mechanisms which pricing (TP)
allow employees to raise concerns
Introduction of the concept
and seek guidance. They have
of “Transfer Pricing (‘TP’)” Prominent TP
also initiated the concept of anti-
retaliation protection to ensure
is a measure adopted by the challenges faced
governments to ensure the by Indian pharma
that all employees can safely
protection of the tax base of their
report potential violations.
respective countries. TP refers to
companies:
These companies are developing the basis adopted by a company • Comparison of import price
robust compliance programmes while transacting with its group of original API with price of
based on their ‘dipstick generic API
companies such that the same
assessment’ of business conducted reflect pricing and conditions • Comparison of the export
by subsidiaries or affiliates in similar to those adopted in price of the product(s) with its
Brazil, Russia, India, China (BRIC) transactions undertaken between price in the domestic market
and east European countries. Such third parties. • Benchmarking clinical trial
programmes are being rolled out support services provider with
In current times, where pharma clinical research organizations
worldwide to ensure consistency in
companies are espousing austerity (CROs) and thereby expecting
compliance globally with specific
measures on several counts higher mark-ups
focus on entities that were rated
to remain cost-competitive,
unsatisfactory in the dipstick • Expectation of higher mark-
it is important for companies ups for contract R&D services
assessment.
to understand TP issues and provided
To identify processes vulnerable to prepare an upfront defence so as
fraud, companies are conducting • Seeking justification or
to mitigate future litigation. TP
commercial rationale for
an enterprise-wide assessment of principles will also aid phama the payment of royalty or
existing fraud risks on a pro-active companies to effectively plan their management fee by the Indian
basis. This assessment considers business operations. taxpayer and
risks involved and the potential
This chapter digs deeper into the • Alleging creation of marketing
schemes to circumvent existing
overview of the current Indian TP intangibles due to the
control activities. promotional spends incurred
environment, key TP challenges for
So, to avoid fraud and risk, the pharma industry and planning by the Indian taxpayer
companies need to adopt many of opportunities using TP principles.
21

22. Key TP issues in the pharma
industry
Owning significant intangible
property deployed across
geographies) coupled with
the multitude of cross-border
transactions, Pharmaceutical
industry has been exposed to some
of the most significant TP litigation
over the years. From an Indian
TP perspective, following are the
prominent challenges faced by the
Pharma companies: Please see the
side bar for details.
Possible solutions
• API prices comparison
Globally, the comparison of
original (branded) API with
generic API is one of the most
contentious issues faced by
pharma companies. The same has
taken centre stage in the Indian
TP context with the Income-Tax
Appellate Tribunal (ITAT)32 ruling
on the issue in case of UCB33 and
Serdia.34 While in the case of UCB,
ITAT ruled that original API cannot
be compared with generic, in the
case of Serdia, ITAT upheld the
validity of such a comparison.
These rulings raise the question if
such a comparison is valid and if
not, how the arm’s length nature of
the imported API (branded) should
be established. Instead of focusing
on the technical difference (such
as quality, efficacy, potency, etc.)
in the two APIs, one can establish
the appropriateness of the margins
earned by the Indian company
with regard to its functional profile
22 PwC - CII

23. (i.e., functions performed, assets The objectives and practical
employed and risks assumed). implementation of a business
restructuring are effectively
• High mark-up for support and achieved by the application of
facilitation services TP principles i.e., an entity’s
A possible defence for the high remuneration is linked to the
mark-ups anticipated by the function it performs, risks it
tax authorities for the support assumes and the assets it employs.
services (such as clinical trial
While business restructuring
support, procurement support
offer business advantages, such
etc.) provided by Indian taxpayer
exercise also pose significant
lies in demonstrating the level of
risks, including the potential
the activities performed by the
for significant transfer pricing
Indian taxpayer and its relative
adjustment. Therefore, it is
contribution in the value chain.
imperative that any restructuring
To develop a transfer pricing is undertaken after duly
defence, the actual business considering the established TP
conduct should be in sync with principles.
the underlying characterisation
and should be supported by robust The road ahead
documentation. Going by the trend, the challenge
• Business restructuring of audit and the level of dispute
Business restructuring, involving (from tax authorities) faced
cross border redeployment by this industry will increase.
of functions, assets and risks Therefore, it is in the best interest
is often undertaken by the of pharma companies to adopt a
pharma companies to streamline more proactive approach to set
their business operations. and monitor their TP policies.
Commercial reasons such as They should also maintain robust
increased competition, cost documentation to support the
optimization, elimination of basis for setting these policies.
duplicative functions, need for Apart from being viewed as
centralisation, proximity to compliance requirement, TP
market etc. compel the pharma should be used to optimise
companies to adopt restructuring. business operations too. Given
Business restructuring often the nexus of TP to both tax and
results in achieving significant business, effective coordination
tax optimisation by realigning between an organisation’s tax and
the distribution of profits across business functions is required to
geographies. make the best use of TP principles.
TP is not about documenting the
end result, but about documenting
the journey.
23

24. Newer growth
trends
Pharma companies will need to issued to each family. One of the RSBY is attracting a slew of
create meaningful partnerships cards makes it possible for a worker entrepreneurs to set up hospitals
with organisations in other based in a particular state to move primarily targeted at the rural
industries like health insurance, to another place and continue to be population. Looking at the trend
medical technology and IT to drive part of the scheme. The premium of private hospitals’ participation,
growth. In addition, they will have amount of the scheme is shared by the government wants to introduce
to devise strategies to make growth the union and state governments in public-private partnerships,
inclusive and sustainable. 75:25 ratio, with a nominal amount wherein the role of the government
of Rs 30 being paid annually by will change from that of a provider
Health insurance the beneficiary. Till date, RSBY to that of a payer.
has been successfully extended In a recent PwC publication
Less than 15% of the Indian
to 23 million poor families in 330 Healthcare Unwired, we have listed
population is covered under any
districts in 27 Indian states.36 recommendations and specific
form of health insurance, including
Beneficiaries are free to avail of solutions to improve the reach of
government-supported schemes.
healthcare from any empanelled health insurance. Some of these
Only around 2.2% of the population
government or private hospital of measures include creation of a
is covered under private health
their choice. new business model, reducing
insurance. The awareness of health
insurance schemes in rural areas is Two private trusts, the IFMR Trust premiums and collection costs,
disturbingly low. Health insurance that provides rural finance to 1.7 switching from patient cure to
is, however, expected to grow at lakh households and the Manipal preventive care and simplifying
a CAGR of 15% by 2015.35 Given Education and Medical Group policies and regulatory reforms in
the diversity of India’s population covering 80,000 families, were the healthcare and health insurance
and its limited purchasing power, recently given the approval to space. Initiating these measures
innovative insurance products at participate in the RSBY scheme. The will result in increased penetration
multiple price points are needed to two trusts together will add nearly and improved coverage of health
tap the market. 2.5 lakh families, a development insurance in India.
that promises to alter the delivery of
The union government rolled
out an insurance plan for the
healthcare to the poor. Medical technology
poor, Rashtriya Swasthya Bima The government is examining Medical technology plays a
Yojana (RSBY) which provides the possibility of turning its pivotal role in improving access
medical cover for families below two important social sector to affordable healthcare services.
the poverty line (BPL). It includes programmes--old age pension It also helps early diagnosis of
hospitalisation, out-patient scheme for the BPL and the Aam diseases and creating personalised
treatment and surgical treatment Aadmi Bima Yojana (AABY) therapies for the Indian population.
in select hospitals. The medical targeting the rural landless--into
insurance provides an annual universal schemes covering the The Indian medical technology
cover of Rs 30,000 per household unorganised sector in phases. The industry, which comprises medical
and covers five members of a two schemes will be linked with the equipment, medical implants,
family. Plus, transport allowance smartcards given under the RSBY medical disposables and furniture,
of up to Rs 1,000 a year is given scheme. If implemented well, is expected to grow from US$ 2.75
to BPL families. The scheme is they can help beef up the grossly billion in 2008 to US$ 14 billion37
administered through biometric inadequate social security cover in 2020, at a compounded annual
smartcards with two smartcards available to the poor in the country. growth rate of approximately 15%.
24 PwC - CII

25. Post independence, India adopted • Usher further reform in the
Innovative an import substitution policy for insurance sector to stimulate
the development of indigenous health insurance.
initiatives38 industries under the umbrella of a • Set up a venture investment fund
• Transasia Biomedicals has strong public sector. The medical
developed in-vitro diagnostic to address the lack of early stage
technology sector, however, was not venture capital.
equipment through its R&D on the list of government priorities.
base in Mumbai. • Ensure a level playing field for
Also, no pathbreaking effort was
• Sushrut Adler Group has made to build domestic capabilities all companies with a distinct
developed an external fixator in R&D and manufacturing. The regulatory pathway for medical
through its facility in Pune. technology free of ambiguities.
seeds of import reliance were thus
• Johnson & Johnson has sown in the early years of free India. • Make research a rewarding
developed a knee implant The reliance on imports continued in career option.
suitable for the Indian market the subsequent years in spite of high
as well as a reusable stapler • Reform the medical education
import duties and tariffs. Today, 80%
for use in surgeries, both at system to include medical
amenable price points for the
of the medical technology market is
technology education with
Indian market. through imports.
assistance from institutes
• Roche Diagnostics has The last few years have seen like National Institute of
developed a screening device an increase in the domestic Pharmaceutical Education and
for cardio-vascular disease manufacture of medical equipment. Research (NIPER).
suitable for use in rural With impetus from the government,
settings too. • Evolve medical technology
India is finally being recognised as
clusters with common facilities
• GE Healthcare has developed a manufacturing destination for
for the benefit of small
a low-cost ECG machine and a sophisticated medical technology.
low-cost ultrasound machine entrepreneurs who want to
International medical technology
for the Indian market. set up companies focusing on
companies are also using India
medical technology.
• Philips Healthcare is using its as a manufacturing base by
recent acquisitions in India to either setting up facilities of their • Assist existing manufacturers to
develop and launch a low-cost own or by acquiring domestic upgrade their quality systems to
cath lab for the Indian market. manufacturers. match international standards.
There is also a strong need Medical technology is a
of innovation in the medical nascent sector in India and the
technology market given its opportunities for innovation-led
ground realities. Innovation in growth are immense. Innovation
medical technology, however, faces in medical technology requires a
challenges that need to be addressed vibrant and participative ecosystem
by the government. Some of the comprising patients, medical
steps which the government can centres, universities, the industry,
take include the following: health insurance companies and
the government. All stakeholders
• Increase public spending in
have to act in concert for the
healthcare from 1% of GDP to 3%.
sustained growth of the industry
and the benefit of patients.
25

26. Information
technology (IT)
Many pharma companies have
entered into strategic partnerships
with Indian IT companies in areas
of pharmacokinetic modelling,
data management and validation,
pharmacovigilance, etc.
Pharma IT Objective
BMS Accenture Clinical data and document
management, pharmacovigilance and
scientific writing
GSK Tata Clinical data management and clinical
Consultancy submission support
Services
AstraZeneca Cognizant Clinical data management, clinical
Technology study set-up for electronic data
Services capture, medical coding, adverse event
reconciliation
Elan Infosys Co-creation engagement model
to design and implement research
informatics system
Eli Lilly HCL Co-innovation hub to accelerate the
process of bringing ideas to fruition
Source: Industry & PwC Analysis
Mobile health
Mobile technologies are also
finding their way into areas
like disease awareness, disease
management, patient compliance
to drug schedules, etc.
Mobility solution provider Pharma application
Nokia Diabetes disease management
Univercell Medi alert
Sproxil Mobile product authentication
Source: Industry & PwC Analysis
26 PwC - CII

27. Sustainability
In recent years, addressing various
sustainability issues has become
increasingly important for the
pharma industry. Sustainability is
about long-term value creation not
only for businesses but also for all
stakeholders such as employees,
customers, the industry sector,
investors and the communities
where the company operates. Key focus area
Indian companies have started on environment
sustainability programmes on the sustainability
lines of their global counterparts. • Adopting the use of
They are at various stages in their sustainable packaging
journey on sustainability reporting. initiatives
An analysis of the sustainability • Reducing the use of
reports of these firms identifies potentially hazardous input
similar trends as those initiated by materials
global majors. They develop CSR • Improving production
programmes which focus largely processes to reduce
on improving environmental environmental impacts
performance of their operations • Reducing the emissions
and providing better access to to air of Ozone Depleting
medicines. Substances (ODSs) and
Companies are also partnering Volatile Organic Compounds
with suppliers to improve their Increasing energy efficiency in
the manufacturing process
sustainability performance. Most
other companies have programmes • Reducing the use of coal
focusing on social initiatives to and oil in manufacturing
operations
improve local infrastructure,
economic and social conditions, • Implementing the
organising various medical camps, requirements of the EU’s
providing free consultations and REACH legislation
treatments and raising awareness
about HIV-AIDS.
Companies report extensively on
their initiatives and performance,
but do not focus on how to improve
their communication and the reach
of their sustainability programmes
in India.
27

28. Conclusion
The Indian pharma industry is on
a major growth trajectory and is
expected to reach US$ 74 billion
by 2020. In order to realise the
full potential of the market and
tap growing global opportunities,
companies operating here will
have to collaborate in a mutually
beneficial manner.
As we move into the next decade,
mergers and acquisitions,
partnerships and licensing will
drive future growth. MNCs will
not be averse to acquisitions but
high valuations will make M&As
expensive in India. Alternatives
such as alliances and partnerships
will actually prove to be more
flexible and value-enhancing in the
long term.
MNCs can benefit from the local
market knowledge of Indian
companies, the strength of their
sales force and significant cost
advantage across drug development
and the manufacturing process.
Global pharma companies have
the capability of bringing in newer
products, technology, capital and
quality leadership. They can help
their Indian counterparts in their
desire to ascend the innovation
curve.
However, alliances and
partnerships face significant
challenges of quality, valuation,
28 PwC - CII