Ever since the country switched to the product patents regime on January 1, there has been widespread speculation that the days of the Indian pharmaceutical industry are numbered.
It is just a matter of time before the market is taken over by multinationals with their wonder drugs and superior scientific knowledge.
Multinational pharmaceutical companies have always had superior firepower than their Indian counterparts. It is worth remembering that in 1971, when the Indira Gandhi government rewrote the Indian Patents Act to do away with product patents, multinational pharmaceutical companies controlled almost 80 per cent of the market.
Thanks to the change, the tables were turned and the share of the same companies had dwindled to around 20 per cent by 2004. There is a real danger that the tables could turn again.
Every sector that was opened up to foreign competition in the past 15 years has resulted in multinationals coming on top and Indian firms getting relegated to the bottom of the value pyramid.
Cars, consumer electronics, computers -- the list is long and interesting. Does a similar fate await the Indian pharmaceutical industry?
At the moment, there are no fewer than 20,000 pharmaceutical companies operating in India -- big and small, Indian and multinational. Together, they sell medicine worth Rs 200,000 crore (Rs 2,000 billion) every year in the country and export drugs worth another Rs 9,000 crore (Rs 90 billion).
With no protection for product patents, there was scope for all of them to survive -- an Indian company was free to reverse engineer any drug so long as it used an unpatented process.
Even process patent infringements were overlooked by the government. That is why every molecule would have up to 60 brands in the market. In the process, India had become the most competitive pharmaceuticals market in the world -- even market leader GlaxoSmithKline has a share of just over 6 per cent of the national pie.
Obviously, the party is over. The Indian government is going to recognise all product patents obtained after 1995. In other words, any drug or medicine patented after 1995 can no longer be cloned by Indian companies.
Sooner or later, this will choke the product flow of Indian companies. "I think it will start happening from 2007," says Malvinder Mohan Singh, president (pharmaceuticals), Ranbaxy Laboratories Ltd, India's largest pharmaceuticals company.
But this is not the end of the road for a growing number of Indian companies that have started looking at global opportunities, leveraging the capabilities they have developed in the field of process chemistry in the past 34 years.
This has earned them a place amongst the cheapest producers of off-patent generic drugs in the world. Also, sticking to India means restricting yourself to less than 2 per cent of the world market.
Industry estimates suggest drugs worth $60 billion will go off-patent by 2010. This has already led to a mad scramble for cheaper generic versions of these drugs.
There are two ways in which the Indian pharmaceutical industry is trying to tap this opportunity: some like Ranbaxy, Dr Reddy's Laboratories, Sun Pharmaceuticals and Wockhardt are going to sell their generic medicines directly in the West, while others like Matrix Laboratories, Jubilant Organosys, Nicholas Piramal India Ltd and Dr Divi's Laboratories have started supplying to multinationals scouting for cheaper options.
The second model is risk free and the returns are steady, although thin. No payments need to be made to expensive patent attorneys. The buzzword in the industry is now CRAM or contract research and manufacturing.
Such is the rush that the Shyam and Hari Bhartia-controlled Jubilant Organosys is repositioning itself from a speciality chemicals company to a pharmaceuticals company focused on CRAM.
"The opportunities are immense and we want to focus on it," says Shyam Bhartia.
At the moment it is small. Industry estimates suggest that Indian companies bagged contract manufacturing contracts worth $75 million in 2004.
"But there is no reason why it can't go up to $1 billion in the next two or three years," says Sanjiv Kaul, an advisor with ChrysCapital.
Kaul is also of the opinion that multinational pharmaceutical companies can outsource R&D work to India.
"This can be in the area of late-discovery and early development," he adds. GlaxoSmithkline Plc has already got into such a tie up with Ranbaxy.
The cost of discovering a new chemical entity has risen sharply in the past few years in the West -- it can now cost up to $1 billion.
At the same time, there is evidence to suggest that R&D productivity is on the decline. This is where Indian companies like the Ajay Piramal-controlled Nicholas Piramal India Ltd could play a role.
"We want to partner foreign companies in the area of R&D. Our model is different. We don't want to take on the pharmaceutical companies in the West," Piramal had told Business Standard some time ago.
His company had recently been appointed by Advanced Medical Optics, a global leader in ophthalmic surgical devices and eye care products, to make products in India for several overseas markets.
There is big money to be made in the other model. But the expenses are huge -- large investments need to be made in setting up your own sales and distribution network, hiring patent attorneys and so on.
The model is also fraught with risks -- reading a patent wrongly could lead to damages running into millions of dollars. Moreover, drug stores in the West are reluctant to stock more labels.
For an Indian company to make inroads into drug stores in the US requires substantial investment.
But the rewards are handsome. Especially if a company can be the first to file with the US Food and Drug Administration to launch the generic version of a drug.
This gives the company exclusive rights to market the drug in the US for a period of six months. This is the opportunity both Ranbaxy and Dr Reddy's are eyeing.
Much of their R&D effort is focused on drugs that are going off-patent. Both the companies are known to have a score of first-to-file applications under their belt.
Ranbaxy, for instance, has it for atorvastatin, an anti-cholesterol agent. This is sold by Pfizer under the brand Lipitor. Ranbaxy has challenged some patents on Lipitor held by Pfizer.
If the challenge is upheld, it can launch the drug as early as in 2006. Lipitor is the largest selling medicine in the world with a turnover of $10 billion.
Once the patent on a drug expires and generic versions come to the market, prices tumble by as much as 80 per cent and the molecule's turnover falls by an equal amount.
Also, generics capture about 50 per cent of the drug's sale. By this account, Ranbaxy could make up to $500 million in the six-month exclusivity period, if it gets to launch its atorvastatin in the US.
Of course, Ranbaxy has to get the nod of the courts before it can start selling atorvastatin in the US. In this context, Generic companies the world over are encountering "evergreening" by large pharmaceutical companies -- repeated extension of patents on molecules.
On the positive side, governments in the West are trying hard to bring down the cost of medication. In France, for instance, the government has declared that a chemist can give a generic alternative if the prescribed brand is not available.
Indian companies have positioned themselves well in the generics space in the West. Several of them, including Ranbaxy, Sun Pharmaceuticals, Wockhardt and Dr Reddy's, have set up base in the US as well as key European countries, such as the UK, France and Germany, either through acquisitions or setting up greenfield ventures.
Of course, these markets will be fed by their low cost production facilities in India.
Breaking into the generics space in the West is not easy since there are well established players like Teva, Sandoz, Watson and Ivax. (Teva of Israel even has a manufacturing facility in India, which it acquired from the Hari Shankar Singhania group over two years ago.) These companies have been significant players in the Western generics market for much longer than any Indian company. But there is no country in Asia or east Europe (the low-cost hubs of the world) where generic medicine is such a large industry.