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Drug makers add to industry mix

By CNN's Asia Business Editor Geoff Hiscock

Indian pharmaceutical companies are looking to compete globally.
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Old meets new as India attempts to balance its high tech future with a traditional past.
Recent GDP rates

1998-99: 6.5 percent
1999-00: 6.1 percent
2000-01: 4.4 percent
2001-02: 5.8 percent
2002-03: 4.0 percent
2003-04: 8.2 percent
2004-05: 6.4 percent (F)
India's financial year ends March 31

Source: Morgan Stanley
Government Debt
International Trade

MUMBAI, India (CNN) -- In recent years, India has made its name globally on the back of a vibrant information technology services sector and the lucrative, if controversial, art of business process outsourcing.

Now, as well as being the world's back office, India is striving to be its drug maker of choice.

Underpinned by high demand at home, Indian pharmaceutical companies such as Ranbaxy, Dr Reddy's, Sun Pharma and Cipla increasingly are looking for a share of the global market.

They start with a key advantage -- their costs are low.

In a country of 1 billion people where the risk of disease is ever-present, the ability to deliver cheap generic medicines stands behind the success of Indian pharmaceutical companies.

Painkillers are a good example. A packet of Paracetamol can be bought for just a few cents.

Demand for medicines of all kinds is high in India. During the monsoon season of June-September, the need for anti-infectives and anti-malarial treatment rises.

According to Morgan Stanley's India chief economist Chetan Ahya, the pharmaceuticals industry is emerging as a major growth opportunity.

"Globally, about $40 billion worth of drugs are going off patent over the next four to five years. This will throw open a big opportunity for Indian companies," he says.

Just as important is the competitiveness factor. Ahya says the costs in India for scientists, doctors and laboratory analysts are about one-fifth to one-eighth of those in the United States. India is also making a name for itself as a good place for clinical trials.

India's pharmaceutical exports were worth about $2.5 billion last year and could reach $6 billion by 2010.

While that is still a niche market compared to the $70 billion of manufactured goods India expects to export this year, it is still a significant new contributor.

Overseas sales

Overseas sales are becoming important for top-tier Indian drug companies such as Ranbaxy and Dr Reddy's, which now get about half their revenue from abroad.

But litigation is also no stranger to the industry, with critics charging Indian pharmaceutical companies simply reverse-engineer drugs developed elsewhere and don't spend money on their own research and development.

India's industry is made up of two sectors: brand names and generics.

According to Dilip G. Shah, secretary general of the Indian Pharmaceutical Alliance, one works on high margins and low volumes, the other works on low-cost mass production to ensure broad access to medicine.

The main revenue sources now are contract manufacturing of bulk drugs and the sale and development of generic drugs.

But the development of proprietary drugs is likely to assume more importance in the future as the situation changes.

From January 2005, new World Trade Organization patent protection rules will take effect, meaning Indian makers are having to step up their own R&D spending in the search for new drug products and delivery systems.

Shah will outline India's patent protection regime when he addresses the 5th Annual Generic Drugs Summit in Washington later this month.

Innovation, rather than replication, is the name of the game for Indian drug makers from now on. And while the search for new chemical entities (NCEs) is costly, it potentially is hugely profitable.

The other challenge is the rising cost of raw materials, which have grown by more than 50 percent in recent months in line with rising oil prices.

There is also huge interest and activity in the emerging area of biotechnology, which supports the broader pharmaceutical industry.

Last week, leading Indian biotech company Biocon said its R&D subsidiary, Syngene International, had signed a contract research agreement with the Novartis Institutes for Biomedical Research, based in Cambridge.

The initial three-year agreement is for research to support new drug discovery and development in the oncology and cardiovascular areas.

Industry star Kiran Mazumdar-Shaw, who set up Biocon in 1978 and took it public earlier this year, termed the alliance another step in the company's "evolution as a valuable partner to the global pharmaceutical industry."

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