The line separating generics and R&D is a fluid one in the Indian context because firms have tended to invest historically in R&D activities related to the production of generics. In the years leading up to India complying with the TRIPS Agreement, the dominant business model was one where firms focused on retaining generic product pipelines, albeit extending into more demanding and innovative generic categories, such as novel drug delivery systems.6 Now several pharmaceutical firms have established separate R&D companies making the division between generics “R&D” and new drug discovery more explicit. Broadly speaking, R&D investments in the sector can be split up into generics-related R&D and proprietary R&D for drug discovery research. The generics R&D is geared towards creating drug master files (DMFs) that are required to get approval in the US market for the sale of active pharmaceutical ingredients and to submit Abbreviated New Drug Applications (ANDAs) that are a prerequisite to receive market approval for generic drugs. Indian generic firms are specialized in developing non-infringing processes for the manufacture of generic products. Production of non-infringing processes helps firms to produce generic versions of a product where the patent on the new chemical entity (NCE) has expired but the product may have process and formulation patents that are still valid.7 Using country-level data collected on these variables, the firms can broadly be classified into three main categories. The first group of firms (hereafter, group 1) comprises large-scale pharmaceutical firms that are both subsidiaries of MNCs in India or wholly-owned Indian firms. Group 1 includes firms like Ranbaxy, which is the largest pharmaceutical company in the country, also
ranked in the top 100 companies worldwide; Cipla, which is the largest producer of generic drugs in India with around 800 products in the market (Interviews). These “innovative” firms already have large market shares domestically, and are supplying to regulated, semi-regulated and non-regulated markets. They focus on both R&D and generics production and the R&D expenditure of the companies is projected to rise up to 10 per cent by the year 2010.8 The second group of companies (hereafter, group 2) comprises medium-sized operators who are either generic producers or specialists in niche areas of contract research and small-scale units which manufacture drugs for the bigger firms within India. These companies supply predominantly to the Indian market as well as to other semi-regulated and unregulated markets. Firms classified as group 2 have more limited capabilities to invest in R&D. They are either pure generic suppliers, or are shifting to product development categories that involve specializations. Companies in group 2 are trying to establish themselves as niche players in contract research and manufacturing by choosing specific areas where they can be competitive. Some of these companies that are quite high up in the profitability chain presently are also planning to expand their activities and gradually move into regulated markets following the example of group 1 companies, thereby climbing up the industry value chain. The third and final group of companies (hereafter, group 3) comprises those that mainly perform manufacturing activities for bigger Indian companies, both local and multinational companies. Companies that fall into group 3 have an annual turnover of less than 100 crore rupees (US$210,410) annually. Group 3 companies, contrary to popular misconceptions, are mainly threatened by the standards on minimum good manufacturing practices that have been introduced in India as of 2005. This is one of the predominant reasons (and not product patent protection) that has led to consolidation in the sector. This categorization of the local sector into various groups helps pinpoint the extreme variance in industry structure because it embodies the vast differences amongst firms in terms of firm size, employment capacity, innovation potential, R&D investments and exports. Both surveys in 2005 and 2007 confirmed the strong division of labour between the three broad groups. Table 6.1 contains an illustrative list of emerging strategies amongst firms in the three groups. As the table shows, the group 1 and group 2 firms are banking on a range of activities to diversify their activities and expand beyond generics production. Their new range of activities includes (a) generics-based R&D (this includes developing novel delivery systems, non-infringing processes, and similar activities that feed into the generics business), (b) drug discovery and development, and (c) contract research and manufacturing for global firms, which includes clinical trials work. Both groups are choosing a mix of cooperative and competitive strategies to deal with challenges and opportunities post-2005, and this is also supported through the recent reorganization of big firms (such as Sun Pharmaceuticals) into separate R&D and generics entities (Gehl Sampath, 2008). Group 2 firms are niche operators, slowly moving into areas of clear specialization in the drug discovery and development value chain or focusing on
specific categories of generic drugs or innovation categories. There is an enormous emphasis being laid upon specialized contract research in the areas of clinical research, drug discovery, non-infringing process development and the manufacturing of biogenerics. Several group 2 companies specialize in developing non-infringing processes for drugs and firms like Strides Acrolab India and Matrix Laboratories have managed to move from group 2 into group 1.9 Group 3 firms are basically geared towards surviving by upgrading their manufacturing facilities, and continuing to manufacture to either supply to big manufacturers within India, or directly export to unregulated markets in Africa. Most of these firms are struggling to cope with changes to the status quo, although learning continues in those who manage to upgrade their production activities, hence qualifying to be called “manufacturers”. Data gathered in the two surveys corroborated this categorization of innovative activities and R&D spending. Although the percentage of annual sales turnover that is spent on R&D by all three groups is quite low (less than 10 per cent), it has increased notably since 2000 (see Table 6.2). Group 1 firms that were surveyed spent 8.09 per cent of their annual sales on R&D in 2004, as compared to 5.15 per cent in group 2 and 7.74 per cent in group 3. Whereas the amount indicated by groups 1 and 2 clearly represents their respective activities, the figure for group 3 needs to be clarified. The amount is indicative of the investments that group 3 firms are making on upgrading their manufacturing facilities and enhancing their process technologies.