Date: 20/09/2016

Team: C.V Raman

Members:

Kavi Ranjan
Venkataramanan. V
Ranjani. M
Berny

Industry Analysis: Pharmaceuticals

Overview:
Indias Pharmaceuticals industry is the 3rd largest in the world in terms of volume and
14th by value.
We currently export:
Drug intermediates
Active pharma ingredients
Finished dosage formulations
Bio-pharmaceuticals
Clinical services across globe
2 categories in the pipeline of Indian Drugs:
Novel Medicines
Generic medicines
Generic drugs are way less cheap than the Innovator drugs.
In India, we have Branded and Unbranded generic drugs. This enabled the larger domestic
players to demand a price premium from other smaller players.
Government is encouraging the sector from early 1960s. Patents act was passed in 1970, but
the economic liberalisation in 1990s has enabled the industry to flourish.

Customers:
India exports to more than 200 countries
U.S is Indias largest headquarters
India has almost 200 USFDA drug manufacturing facilities and is the biggest supplier
of pharmaceuticals to the U.S
Over the drugs used in U.S 40% of generics are from India and 10 % of counter
products finished dosages from India
Nature of operation:
The industry is highly knowledge oriented
Every company has to undergo a long period of initial establishment followed by a
thorough scrutiny of regulatory norms
This include approvals and testing of products under pipeline
Due to the involvement of high end latest instruments and machinery along with
highly qualified employees the initial investment makes it difficult for smaller
participants
Highly sensitive and risky operating environment due to the involvement of life of
people- demands greater expertise

Size and Scope:

In 2013, there were 4655 manufacturing plants in India employing more than 345000
people
More than 80% of healthcare infrastructure in India is under private sector
Small and medium enterprises contribute to 35 to 40% of industry in terms of
production
Indian Pharmaceutical Industry is expected to grow from $23 billion in 2010 to $55
billion by 2020
Domestic market to touch from $13 billion to $25 billion by 2017.This is mainly
expected largely from tier-2 & tier-3 cities and untapped rural markets
This can mainly come from increasing generic medicine sales and continued growth
in chronic therapies
In India, 100% of FDI is allowed in this sector
150% of tax deductions for any R&D Expenditure is given by the government
Government is working on 19 SEZ to stimulate the sector across the country and
projected to spend $489.19 million to set up 10 more pharma education & research
institutions over the next few years

Growth Over past 5 years:

Total exports of pharmaceuticals grow from $ 8.6 billion in 2008 to $ 14.5 billion in
2012 factoring a growth rate of 13.8% with a CAGR of 15.2%
Exports of generic drugs grow at a rate of 24% over the past 4 years

PESTEL Model:
Political:
Policies in India like Make In India, Skill India and the policies in U.S like the
Obama Care is though favourable on Indian pharma companies, we are not yet sure
whether they will be encouraging to the Indian companies in the future
Government participation in pharma in any extent will have a direct impact in the
view of the entire industry

Economical:
Inflation will have direct impact over pricing and cost and affect the revenue
Flood and prosperousness of the country will affect the entire industry as a whole,
leaving behind only the companies which have the strength of diversification
Varied interest rate will affect the financing of the subsidiaries and parent companies
established overseas

Sociocultural:
Some ingredients of drugs are sensitively susceptible to have effect over the culture of
different regions
These characteristics have to be carefully monitored and should be altered
Various cultures of people follow a certain therapeutic method due to their sentiments
and nature of practice carried over through generations

Technological:
Indian companies are spending less on R&D and are focussed fully on the generic
drugs segment
Market leaders like Dr.Reddys laboratory and Ranbaxy laboratories spent only 5 to
10% of revenues on R&D and lie way beyond Western pharma companies
While U.S Giant Pfizers research budget was greater than the combined revenue of
the total Indian pharmaceutical Industry
This is hindered mainly due to the high cost of advanced research equipments
Lack of qualified molecular biologists hindered the discovery of new drugs
There is disconnect between the Curriculum and industry in India, which made crucial
for the development in the west

Environmental:
Tightening of regulatory norms by the US.FDA due to the lack of sanitation and
technological advancements had already made most of the companies to suffer a
setback leaving behind only the stronger players
Huge fine is being levied on those companies who are found guilty
Even some manufacturing units are shut down and suspended from operations for
years
Smaller domestic companies make it tougher due to these increased regulatory
advancements
Legal:
Any legal inclusions in the future will further reduce or increase the small scale
participation

Porters Five Forces:

Bargaining Power of Suppliers:
MNC participation in the Indian pharma industry is mainly due to the cost efficiency
Suppliers have the power of pricing only over the patented products manufacturers
and that too on a limited scale
Since due to the presence of a wide range of drugs, only suppliers of limited
substrates have a pricing power
Most on the products are generics and due to the presence of branded generics, they
have some pricing power only over the unbranded small generics manufacturers

Bargaining Power of Buyers:

Lack of awareness is prevailing amongst consumers
People mostly miss out on bargaining since the prescriptions are preferred by doctors
and their ill situation make them to adhere to doctors advice without further
negotiation
Doctors and hospital charges are not controlled by any regulations
Even among generis there is a humongous variation in price for even the same
product
For example: The price variation for a 1000 rupees drug on MRP can be bought to as
low as even 150 or 200 rupees
Even retail medical stores show this variation
These make the doctors and the medical institutions to take advantage of the huge gap
in the cost and price slab and make it to their advantage
Buyers have good bargaining power among generics as there are many substitutes
with same specification of ingredients, and they dont have enough bargaining power
on patented products

Threat of new entrants:

 Increasingly the industry is changing into globalisation and that too with huge
competition
Already there is an increasing events of takeovers
Huge investments make a barrier for new entrants
The sector is highly knowledge based

Threat of Substitute Products:

In India we have nearly 99% of generic medicines and only 14 patented products
These 14 products have therapeutic equivalents
Therapeutic equivalents include various medical practices which are followed for
centuries
Like,
o Homeopathy,
o Siddha,
o Ayurveda, etc.
These practices are proven and even have treatments for some of the diseases whose
drugs have not been discovered and under research pipeline
There is an increasing rate of patients undergoing these treatments. In the recent years
due to the cost efficiency and the health consciousness that is brought up by
urbanisation and globalisation

Competitive Rivalry:
The industry is facing a serious challenge of takeovers and mergers
All M&A Comes under the scrutiny of Competition commission. This includes pre
approval by CCI & Post approval by MPPA
M&As have a direct impact on the pricing
Foreign players find an easy way by entering domestic market through acquisitions
Similar acquisitions have already taken over
o Mylan acquired Matrix Labs,
o Daiichi Sankyo acquired Ranbaxy,
o Sanofi Aventis acquired Shantha Biotech,
o Hespira acquired Orchid,
o Abbott Laboratories acquired Piramal Healthcare
They are acquiring companies at unrealistic valuations
The top firms in the Indian pharma industry are expanding in all verticals
They are taking over week and stressed companies by taking advantage of their
financial positions

Major Firms in the industry:

 Major Firms Value Revenue Core Focus
Sun Pharma 188328 Crores 7614 Crores Psychiatry, Anti-invectives,
Neurology, Cardiology,
Orthopaedic, Diabetics,
Gastroenterology, Ophthalmology,
Nephrology, urology, Dermatology,
Gynaecology, Respiratory,
Oncology, Dental and Nutritionals

Lupin 69798 Crores 11239 Crores Cardiology, Central Nervous

System(CNS),Diabetis,Anti-
Asthma,COPD,Gastro-
Intestinal(GI),Gynaecology
Dr.Reddy's Labs 53919 Crores 10207 Crores Gastrointestinal ailments,
Cardiovascular disease, Pain
management, Oncology, Anti-
infective, Paediatrics and
Dermatology.
Cipla 48075 Crores 11965 Crores Cardiovascular, Dermatology and
Cosmetology, Diabetes,
HIV/AIDS, Hepatitis, Infectious
Diseases & Critical Care, Malaria,
Neurosciences, Oncology,
Ophthalmology, Osteoporosis,
Respiratory, Urology

Aurobindo pharma 47097 Crores 9166 Crores Neurosciences, Cardiovascular,

Anti-retroviral, Anti-diabetics,
Gastroenterology and
Cephalosporins
Cadila Healthcare 39695 Crores 7035 Crores Cardiovascular, Gastrointestinal,
Analgesics, Haematinics, Anti-
infective and antibiotics,
Respiratory agents, Antidiabetics
and Immunological.

Strategies Adopted:
 Generics Industry is completely moving towards commoditisation
Focussing more on speciality generics, hard to make complex products, margin
uplifting by focussing on branded generics
Focussing more in high margin Geographies and in low penetrated generics market
and getting there faster to get a larger margin

Opportunities for the industry:

India will be in top 10 by value in globe by 2020(Price water cooper report).
Due to,
o High burden of disease,
o High disposable Income,
o Improvements in healthcare infrastructure,
o Improved healthcare financing.
Driving growth in the domestic market.

Major Challenges:
Government spent only limited on R&D
Only 1% of Indian GDP is spent on healthcare
Infrastructure development of the country have to be in line with the global pharma
industry to flow along the dynamics of the development in the industry
Policy changes in the inclusion of investment in this sector will impact the domestic
participation
Domestic players in this sector have to be aided with incentives to foster participation
Political bureaucracy

New Technologies:
Biotechnology is dynamically developing in the pharma industry
Many companies are investing in antibodies
The industry is moving from curing to prevention as antibodies are found to be the
source to eradicate malnutrition
Company like BIOCON already succeeded in this category profitably

Areas that can be improved:

 Government can regulate the pricing standards of medical institutions and can
regulate this area to have a uniform cost sharing and can pass over the benefit to the
end customers
Logistics alone contributes for around 20% of the cost. (This can be worked to
improve cost efficiency)
Hospitals and doctors can be brought up under a centralised network to and should be
continuously monitored by the government
Product description, benefits and price details for all drugs have to be displayed for
public consumers under a single window to clear away the mist about the industry
among the public

Summary:
India's government and its drug producers, both multinational and domestic- With its
enormous advantages, including a large, well-educated, skilled and English-speaking
workforce, low operational costs and improving regulatory infrastructure, India has the
potential to become the region's hub for pharmaceutical and biotechnology discovery
research, manufacturing, exporting and health care services within the next decade.
It is important that the regulatory environment continues to improve a positive environment
that not only offers drug manufacturers a product patent regime but also, and crucially, data
protection. India's continuing failure to do so needs to be urgently rectified. Industry leaders
are keen to work with government on issues of affordability and point out that price controls
will do nothing to increase access to new and effective treatments. For foreign investors,
collaborations with India present a huge opportunity both in terms of joint production for the
global market and supply of the growing domestic market.

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