Impact of R&D investments in the pharmaceutical and AYUSH industry

By Avishek Majumder on February 2, 2019
Image by

R&D investments are an important component for driving the sales and distribution of the pharmaceutical drug market (Pammolli, Magazzini, & Riccaboni, 2011). R&D or research and development helps in improving the productivity of drug production as well as outreaching a larger target of the population. Therefore, it may be hypothesized that increased R&D investments improve the sales and distribution of the allopathic as well as AYUSH based drugs in India. R&D investments in pharmaceutical industries help improving expenditures for drug filing, improved quality control, drug clinical tests, packaging, export charges, and inspection costs (Li & Hall, 2016).

Various types of investments for R&D in the pharmaceutical industry

R&D investments can be made by both private and public entities. Private entities mainly comprise of FDIs, whereas public investments include funds by the government. However, reports indicate that private R&D investments are more effective than public investments (Abrol et al., 2017). Therefore, it is important to understand the impact of investments on the productivity of the pharmaceutical industry.

There are mainly three sources of investment for the R&D expenditure in the pharmaceutical industry (DiMasi et al., 2016). However, the initial source of investments is either private or public R&D investment (Becker, 2015). With respect to the pharma industry, these sources of investment for the R&D in the Indian pharmaceutical industries include;

  1. Government agencies (National budgets)
  2. Private fundings (FDIs, company revenues, and stakeholders)
Types of R&D investments
Types of R&D investments

Company revenues as R&D investment

The primary private investment in the R&D sector of the pharmaceutical industries comes from its own revenue generated. The company dedicates some percentage of its total revenue generated to the R&D of the new drugs. Business Standard, (2018) reported that the drug companies in India invested the lowest in the year 2017. On average, the pharmaceutical companies in India dedicated around 12 billion in the R&D in the past 5 years (Export-Import Bank of India, 2015).

Novartis in the USA has been reported to have increased its R&D investments by USD 14366 million in 2017 from USD 1343 million in 2014 (Novartis, 2017, 2014). The revenue of Novartis was reported to have increased by USD 49109 million in 2017 from  USD 16000 million in 2014.

Investments in the form of FDI for R&D

Foreign investments or FDI, are another source of R&D investments in the pharmaceutical industry. According to a report by the Department of Industrial Policy and Promotion, (2017), a total of USD 640.71 million was invested by different foreign entities on R&D for new drugs in 2016 in India. The Pharmaceutical industry has witnessed USD 2.93 billion equity inflows from April 2014 to December 2016 (Department of Industrial Policy and Promotion, 2017).

FDI in the pharmaceutical industry may be Greenfield FDI or Brownfield FDI (Mehta et al., 2017). Greenfield investment is the type of investment on new plants, whereas, brownfield investments include merger and acquisitions. Indian pharmaceutical industry mainly depends on brownfield investments for improvement in R&D.

Sanofi Pasteur Merieux, a company headquartered at France had contributed an investment of USD 123.82 million to Shantha Biotecnics Limited in India in 2016 (Department of Industrial Policy and Promotion, 2017). Shantha Biotecnics Limited, an Indian subsidiary of Sanofi has been associated with R&D for cellular and molecular drugs. This helped Sanofi in the generation of USD 23686 million in revenues from drug sales from Shantha Biotecnics (MoneyControl, 2017).

Investments from shareholders

Private entities and shareholders also play a major role as investment sources for pharmaceutical companies. As reported by the Department of Industrial Policy and Promotion, (2017); Bluewater Investment Ltd a Mauritius investment company had its shares in the Indian pharma company, Aptuit Laurus. However, in 2016 Bluewater Investment made brownfield investments valued at USD 63.49 million. This helped Aptuit Laurus in the generation of USD 267.16 million by sales of different generic products and active pharmaceutical products. Thus, shareholder investments play an important role in improving sales of drugs by pharmaceutical companies.

The government budget for R&D investments

In India, there are several government agencies like DST (Department of Science and Technology) and DBT (Department of Biotechnology) that had recognized the importance of R&D as opportunities for the growth of Indian Drug Industry. Therefore, the Government allocates a share from its budget for the infrastructure and skill development.

The PRDC (Pharmaceutical Research and Development Committee) supports researches in various pharmaceutical companies in India. Drug Development Promotion Foundation (DDPF) and Pharma Research and Development Fund were also set up by the Government of India to promote R&D (Abrol, 2014).

In a recent report by the Department of Industrial Policy and Promotion, (2017), the Government of India plans to increase the investments in the pharmaceutical industry by 2020 with respect to infrastructure, technological capabilities, and R&D capabilities. However, the Government of India do not directly engage in a monetary form of investment, rather helps in infrastructure development and formation of new research laboratories. The FDI policies that include the allowance of 100% FDI for Greenfield R&D and 74% for Brownfield R&D (IBEF, 2017).

Increased investments for AYUSH

The AYUSH sector was valued at USD 1.68 billion in the year 2017 (AYUSH, 2017). However, the Government of India has approved 100% FDI in the AYUSH sector, especially in R&D. Unilever has invested around USD 70.11 million in exclusive AYUSH based R&D in 2017 (Hindustan UniLever, 2017).

Similarly, Dabur Pharma Ltd. has invested over USD 10 billion for drugs based on principles and knowledge of Ayurveda. These products are named as Branded Ethicals by Dabur Pharma Ltd. and have generated over USD 2.62 billion from the sales of ‘Branded Ethicals’ like Dabur Restora, Dabur Active Antacid and Dabur Ashwagandhadi Lehya in 2018 (Dabur India, 2018). On the other hand, Dabur Pharma Ltd. had generated USD 1.96 billion from ‘Branded Ethicals’ with investments of about USD 5 billion. Therefore, investments by Indian ayurvedic companies towards R&D of AYUSH based pharma products have been able to increase their sales in the past few years.

Private and public R&D investments in the pharmaceutical industry

It has been reported that the pharmaceutical sector of India was valued at USD 33 billion in 2017 (IBEF, 2017). The pharmaceutical industry is also expected to expand at a CAGR of 22.4% by 2020 to reach USD 55 billion. This a result of the increased investments by the private and public entities. As mentioned earlier, FDI contributed a total of USD 2.93 billion to the pharma industry in India for the development of new drugs (Department of Industrial Policy and Promotion, 2017).

In addition, India’s pharmaceutical exports stood at USD 17.27 billion in 2018 and are expected to reach USD 20 billion in 2020. Indian companies received 304 Abbreviated New Drug Application (ANDA) approvals from the US Food and Drug Administration (USFDA) in 2017 as a result of public and private investments.

On the other hand, the AYUSH sector has generated a total of USD 19.99 billion in 2017 as compared to USD 15.04 billion in 2015 from sales of AYUSH and active products. It is also implicated that investments for R&D in AYUSH has led India to become 2nd largest exporter after China of AYUSH raw and manufactured products globally.