Collaborating and investing in Indian life sciences industry

Bhavesh Tulsiani

Aurora Capital LLC

The article discusses the growth in the Indian life sciences industry and the reason for global pharmaceutical companies to outsource clinical trials to Indian CROs. It also highlights the Patent Amendment Act of 2005 and its contribution towards the growth of Indian life sciences industry.

Recent developments in the life sciences industry in India indicate increasing business opportunities for US and rest of the world’s biotechnology and pharmaceutical companies. The Indian life sciences industry has undergone a paradigm shift and is at a unique crossroads. It is one of the fastest-growing knowledge-based sectors in India and is expected to play a key role in shaping India’s rapidly-developing economy. India offers a lot of advantages in the field of life sciences, including investment and outsourcing opportunities, low manufacturing cost, technical capability, high-quality manpower, and innovative product market. India’s $9.4 billion biotechnology sector is growing at the rate of 14% per year. It is one of the largest and most advanced among the developing countries and has the potential to reach a market size of $11.6 billion by 2017, according to a GIA report.


“India’s $9.4 billion biotechnology sector is growing at the rate of 14% per year.”


The research and development in life sciences needs rules and regulations to function effectively. The intellectual property protection laws are to be formalized for private and public research to encourage a reasonable investment in research leading to economic application. India has already taken a step towards that. Effective January 1st, 2005, India complied with all the provisions of the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which required India to recognize product patents versus the earlier policy of protection to process patents. This removed a major obstacle for global companies to do Intellectual Property (IP) related Life Science research in India. The strict product patent regime post 2005 stimulated higher domestic investment in basic R&amp,D and discovery-led research, which will increase the probability of new therapeutics coming out of India in the years to come. Multi-national companies have become more comfortable outsourcing / off-shoring R&amp,D activities and manufacturing patented products in India. Increased activity in R&amp,D will trigger Indian companies to shift from being merely fee-for-services providers to Intellectual Property Rights (IPR) driven organizations.


“India’s Patent Amendment Act of 2005 came at the time when the world needed it the most.”


India’s Patent Amendment Act of 2005 came at the time when the world needed it the most. The R&amp,D efficiency of pharmaceutical companies has declined in recent years because of stringent regulations imposed by Food and Drug Administration (FDA). This decreased the expected revenue generated by drugs in R&amp,D phase and thus depleted firms’ valuations. Also, many patents are set to expire in 2012–2018, which will further reduce revenue and erode profits. As a result, companies are making huge efforts to reduce R&amp,D expenditure and increase profitability. Outsourcing clinical trial activities to Contract Research Organizations (CROs), particularly in the developing nations like India, is rapidly gaining acceptance in the industry. GBI research estimates that the CRO industry will grow at a Compound Annual Growth Rate (CAGR) of 12.8% to reach $56 billion by 2018. R&amp,D costs increase financial pressure on pharmaceutical companies. R&amp,D expenditure for the 10 largest pharmaceutical companies increased at a CAGR of 8.3% for the period 2004–2010 compared with a revenue turnover of 6.5%. The collective R&amp,D expenditure for the top 10 companies stood at $42.1 billion in 2004, which increased to more than $67 billion in 2010. Revenue turnover increased from $293 billion in 2004 to $428 billion in 2010. The seven companies, excluding AstraZeneca, Sanofi and GlaxoSmithKline (GSK), registered a slower growth rate in their turnover against growth in R&amp,D expenditure, indicating that at industry level, the majority of companies struggled to maintain their levels of returns on R&amp,D expenditure.

With over 0.7 million science and technology graduates and 3500 doctorates in science every year, India offers a unique low cost destination for global biotechnology companies to park their investment. Life Sciences research in India costs as little as 40% of the R&amp,D cost in US because of low operation and labor costs. Large patient pool and disease diversity enables companies to conduct a greater number of clinical trials by speeding up patient recruitment and thereby shortening the time between incubation of an idea and market launch.

All the positives around pharmaceutical investment in India come with their own restrictions. Indian pharmaceutical market is characterized by differences in prices for the same product and high profits, as well as by the marketing and selling of unnecessary drug combinations. The scale of these inconsistencies has made drug pricing an important issue for the Indian government. Due to intense competition, drug prices are already the lowest in the world. The government should take an overall view of healthcare costs and pursue a broader set of initiatives to ensure access and affordability of medicines for citizens. According to GBI research, the out-of-pocket expenses for patients account for 78% of the total healthcare expenditure followed by government spending at 20%. The insurance sector accounts for just 2% of the healthcare expenditure in India. India’s per capita healthcare expenditure is low due to its billion-plus population and low per capita income.


“Life Sciences research in India costs as little as 40% of the R&amp,D cost in US because of low operation and labor costs.”


The annual turnover helps in identifying the drugs for mass consumption. The drugs are selected based on their annual consumption and demand as well as their annual revenues. This leads to the exclusion of those that may not be drugs of mass consumption but still critical or life saving. Demand elasticity varies with the form of payment, it is directly proportional to the out-of-pocket expenditures. The larger is the proportion of out-of-pocket expenditures, the larger is the elasticity. In the case of medicines, the elasticity of demand varies with the urgency of the situation. In all circumstances, the demand for medicines is less elastic than that for many other consumer products. In the developing countries like India, spending on medicines comes largely from household resources, contributing substantially to out-of-pocket expenditures. Therefore, the demand for pharmaceuticals is stronger and less elastic in developed countries like the US and the UK, compared with India.

With all pros and cons, India presents an extraordinary platform for global pharmaceutical companies to control R&amp,D cost and realize revenue sooner than later. While this is encouraging global pharmaceutical companies to invest in India, India will also have to reform its healthcare laws and practices in order to provide better patient care and reduce out-of-pocket expenditures for individuals.


About the author:

Bhavesh Tulsiani is an Associate in Investment Banking at Aurora Capital LLC. He can be contacted at

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