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Abstract of Thesis
Abstract of Thesis
Abstract of Thesis
DOCTOR OF PHILOSOPHY
D. VENKATA RAO
RESEARCH SUPERVISOR
KAKATIYA UNIVERSITY
WARANGAL
1
2010
ABSTRACT
Financial management is concerned with raising of funds in the most economical and
suitable manner and usage of such funds profitably in comparison of risk involved in the
investment. Financial management strives to match the sources and use of funds so as to
maximize the value of the firm in the market to benefit the stake holders of the corporation. It
resources needed by a corporation to achieve its objectives. The finance function centres on
the management of funds raising and using them effectively. Financial management is
important because it has an impact on all the activities of a firm. Its primary responsibility is
process of acquiring and utilizing funds by a business. Finance function is not substitutable
Financial Policies:
resources. Financial policy includes Investment policy or Long-term asset mix policy,
Financing or capital mix policy, Dividend or Profit Allocation Policy and Liquidity or Short-
term asset mix policy. Financial policies are called for skilful Planning, Control and
execution of a firm’s activities. The prudent financial policies increase the market value of
the shares. Following is the brief discussion about the financial policies:
Investment Policy:
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Investment policy or capital budgeting involves the decision of allocation of capital or
commitment of funds to long-term assets that would yield benefits in future. Important
aspects of the investment policy include evaluation of the prospective profitability of new
investments and measurement of cut-off rate against the prospective return of new
investment. Future benefits of investments are difficult to measure and cannot be predicted
with certainty. Due to the uncertain future, investment decisions involve risk. Investment
proposal should, therefore, be evaluated both in terms of return and risk. Besides the decision
to commit funds in new investment proposals, capital budgeting also involves decision of
Financing Policy:
manager. Basically the decision of where and how to acquire funds to meet the firm’s
investment needs. The financial manager must strive to obtain the best financing mix or the
optimum capital structure for the firm. The firm’s capital structure is considered to be
optimum when the market value of the shares is maximized. The use of debt affects the return
and risk of shareholders. It may increase the return on equity funds but it always increase
risk. A proper balance will have to be struck between return and risk. When the share
holder’s return is maximized with minimum risk, the market value per share will be
Liquidity Policy:
Management of firm’s liquidity is yet another important policy. Current assets should
be managed efficiently for safeguarding the firm against the dangers of illiquidity and
insolvency. Investment in current assets affects the firm’s profitability, liquidity and risk. A
conflict exists between profitability and liquidity while managing current assets. If the firm
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does not invest sufficient funds in current assets, it may become illiquid. But it would lose
profitability as idle current assets would not earn anything. Thus, a proper trade-off must be
achieved between profitability and liquidity of the firm. In order to ensure that neither
insufficient nor unnecessary funds are invested in current assets, the finance manager should
develop sound techniques of managing current assets. A financial manager not only should
estimate the firm’s needs of current assets but also need to assure the funds available when
needed.
Dividend Policy:
Dividend policy is the third major financial policy. The financial manager must
decide whether the firm should distribute all profits or retain them or distribute a portion and
retain the balance. The dividend policy should be determined in terms of its impact on share
holder’s wealth. The optimum dividend policy is one that maximizes the market value of the
firm’s shares. Thus, if shareholders are not indifferent to the firm’s dividend policy, the
finance manager must determine the optimum pay-out ratio. This policy influences the
decision of further investing in long-term assets by using the retained earnings for growth and
development of the firm which ultimately increases the value of the firm. The finance
manager should also consider the question of dividend stability, bonus shares and cash
dividends in practice.
Thus, financial policies directly concern the firm’s decision to acquire or dispose off
context the financial policies are said to influence production, marketing, human resources
and other functions of the firm. Financial policy may affect the size, growth, profitability and
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The global pharmaceutical market is highly dynamic and is characterized by greater
levels of R&D expenditure and extensive regulation of its products. Increasing R&D
expenditure, longevity of population, strong economies are driving the global pharmaceutical
market. Though the developed countries dominate the global pharmaceutical market, the
share of developing countries, like India, China, Mexico, is increasing in recent years. Global
pharmaceutical sales have grown from US$ 334 billion in 1999 to US$ 773 billion by 2008,
with a CAGR of 11%. However, it may be noted that though the global pharmaceutical sales
are increasing in absolute terms, the rate of growth has been receding over the years. The
year-on-year growth rate of global pharmaceutical sales was 16.5% in the year 1999 from its
previous year and it came down to 8.11% in 2008. The market size nearly came to US $800
Billion mark the growth seen a diminishing rate. This is because of many reasons peculiar to
different countries. The major reason is the saturation of the health insurance market and
heavy growth in the cost of health insurance in the US which is a world’s largest market for
the pharma sales. One more prime reason was the number of block buster drugs gone off-
patented, which were manufactured and sold at comparatively very cheaper (Approximately
one tenth cost of the US producers) by the top most generic based companies of India, Japan
and Brazil.
policy makers in the developed as well in developing countries, including India. This special
policy preference has been due to the criticality of the pharmaceutical products for the health
security of the populace as well as for developing strategic advantages in the knowledge
based economy. However, not all developing countries succeeded in enhancing local
capabilities in the sector. The growth of the pharmaceutical industry in the developing region
is largely confined to a few countries like India, China, Singapore, Korea, Czech Republic,
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Brazil, and Argentina. Among these countries, most often the Indian pharmaceutical industry
is projected as the most successful case of a developing country scaling up the indigenous
capabilities.
manufacture modern drugs locally in the 1950s, has emerged technologically the most
significant scale and level of technological capability for manufacturing modern drugs
indigenously and cost efficiently, to emerge as a major developing country competitor in the
world market. It indigenously meets up to 70 per cent of the domestic requirement of bulk
drugs and almost all the demands for formulations, thus, restricting imports from developed
countries into India. Besides, it generates rising trade surpluses in pharmaceutical products by
established Bengal Chemical and Pharmaceutical Works in Calcutta and Alembic Chemicals
in Baroda and setting up of pharmaceutical research institutes for tropical diseases like King
Institute of Preventive Medicine, Chennai (in Tamil Nadu), Central Drug Research Institute,
Kasauli (in Himachal Pradesh), Pastures Institute, Coonoor (in Tamil Nadu), etc. through
British initiatives. The nascent industry, however, received setbacks in the post World War II
period as a result of new therapeutic developments in the Western countries that triggered
natural elimination of the older drugs from the market usage by newer drugs like Sulpha,
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indigenous materials and forced the industry to import bulk drugs meant for processing them
Evolution of Indian pharmaceutical industry can be classified into the following four
stages in the post independence period. The first stage is during 1947s-1970s, the second
stage being from 1970s, with the enactment of Indian Patent Act, 1970; third stage is
beginning from 1980s and the fourth stage begun in 1990 and fifth and final stage starts from
2001 onwards as preparatory ground in light of the regulatory changes across the global
regulated markets and post TRIPS regime begun from the year 2005.
manufacturing sector. The pharmaceutical industry has experienced a growth rate of 12%,
with the annual turnover of the sector crossing US$ 14.6 billion, in 2008-09. Globally, Indian
pharmaceutical industry ranks 4th in terms of volume with a share of 8% in the world
pharmaceuticals market. Indian pharmaceuticals industry ranks 14th in the world in terms of
value, in the Asia-Pacific pharmaceuticals market, India holds a share of 6.6%. Japan is the
biggest player in the Asia-Pacific region accounting for 67% of the total market value. The
sector has attained self-reliance in the production of formulations and produces almost 70%
bulk drug requirements of the country. The key Therapeutic segments include anti-infective,
gastrointestinal, cardiovascular segments. In India, acute therapies make up about 60% of the
pharmaceutical market. However, it is expected that with the changing lifestyle and aging
growing rapidly. A study has estimated that by the year 2010, the Central Nervous System
and Cardiovascular segment would have a market share of 33%. The industry is fragmented
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with more than 25,000 registered units, of which 300 units are large and medium scale units.
In terms of value, however, top 20 players control more than 50 per cent of total market.
The pharmaceutical firms need prudent financial policies to sustain their growth and
development in the light of patent regime. Many pharmaceutical companies are in doldrums
due to improper financial policies. The very nature of the pharmaceutical units involves huge
characterized by uncertainty and risk. Primarily many researches centred on basic research
and marketing research of pharmaceutical sector. Adequate research has not been conducted
on the overall financial management of pharmaceutical industry. Still this area remains
unexplored as such we felt a greater need to undertake detailed study in this area.
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Objectives of the study:
Following are the objectives of the study,
1)To present the origin and growth of the global and Indian pharmaceutical
industry,
2) To study the various sources of finances for mobilizing the funds with a view to
4) To examine the working capital policies in terms of its size, turnover, financing
6) To investigate into the financial policies, with the help of views elicited from the
Sources of Data:
The study is based on both the primary and secondary sources of data. Primary data is
collected through a structured questionnaire specially designed for the purpose and
Secondary data is collected from the published annual reports, policy documents,
websites of the pharmaceutical industry regulators across the globe (USFDA, TGA, MHRA,
MCA) and portals of Indian regulators (SEBI, RBI, NSE, BSE, Patents office), manuals etc,.
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Data is also collected from published manuals and annual reports of world Trade
Organization (WTO).Data is collected and analyzed for the period of 12 years beginning
Methodology:
The data collected from both the primary and secondary sources is classified,
tabulated and analysed. The statistical tools such as percentages, ratios, correlation coefficient
are used wherever applicable in the analysis. Executive’s views are collected through a
questionnaire and the results of the primary data are corroborated with the results obtained
Appropriate conclusions are drawn from the analysis. At the end suitable suggestions
are offered for the efficient performance of pharmaceutical industry in general and effective
Sample units selected are engaged in bulk drug manufacturing and formulations
which are composed of two small and medium companies and remaining are large
pharmaceutical companies. The basis for inclusion of the companies in sample is to make a
presence, sales quantum and exports from the country. The selected units represent 41% of
Indian pharmaceutical market share in value and 60% in volume. In the selected companies 5
companies listed in Indian as well as US and European stock exchanges and the remaining
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Design of the Study:
The present study is organized into eight (8) chapters as per the details given below:
Chapter – I “About the Study” covers the aspects such as the conceptual framework of
financial management, review of earlier research studies, need for the study, objectives of the
pre and post independence period, and present status of pharmaceutical industry including the
covering the resource mobilization in terms of equity composition like equity share capital,
reserves and surpluses, depreciation and debt composition like secured loans, unsecured
loans, current liabilities and cost of capital and profitability analysis of pharmaceutical
companies.
project planning process in pharmaceutical industry, growth in total investment and fixed
assets, Net worth vis-à-vis investment in fixed assets investment turnover including fixed
and current assets, quantitative and qualitative analysis of the productivity of R &D
Investment and correlation between R&D investment and sales revenue and regulatory filings
working capital components like inventory, receivables, loans and advances and cash in terms
of investment and their turnover including financing of current assets and liquidity.
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Chapter – VI “Dividend Policies of selected Pharmaceutical Units” comprises of
conceptual as well as legal framework of dividend policy and dividend payout and retention
Chapter – VII “Empirical Analysis” highlights views elicited by the executives with
Chapter – VIII: “Conclusions and Suggestions” deals with the conclusions from the
study and suggestions offered in the light of the findings of the study.
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CONCLUSIONS:
1) Global pharmaceutical sales have grown at a 11% during the year 2001 and 2009
experienced a sea change in its operational efficiency from its net importing
region with a 47% on an average during the period from 2001- to 2009 and all
the other regions viz., Latin America, Asia, Africa and Australia, Japan and
Europe put together have sales of 53.5% on an average in the same period.
3) Global Pharma R&D spending has increased from US $ 53Billion in the year
2000 to US $ 129 Billion by the year 2009 indicating the commitment of the
new markets for the survival beyond decades by introducing block buster drugs
4) Global Pharma R&D spending has increased from US $ 53Billion in the year
2000 to US $ 129 Billion by the year 2009 indicating the commitment of the
new markets for the survival beyond decades by introducing block buster drugs
products among themselves in the same year. India stood in 5th place in terms of
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exports with US $ 5.5 billion in 2007.Value of the pharmaceutical exports of the
world increased four times from US$ 108.60 billion in the year 2000 to US $
a net exporter with Rs. 38,540 Cr by the year 2008 from its net importer status in
7) Growth of the Indian pharmaceutical industry can be classified into five (5)
stages such as, a) MNC domination and highly formulation based industry; b)
sufficiency in both the bulk drugs and formulations within the country; d) Focus
8) Indian pharmaceutical industry has grown at a 20% rate during 2000-2009. India
and 13th in value by the year 2009. Profitability of the Indian pharmaceutical
industry showed a significant growth during 1991 and 2009 (from 2% to19%).
units in 1969-70 to 29,620 units by the year 2009-10. Though the number is
largely increased the industry is dominated by only 300 large companies with
10) The total financial resources employed have grown significantly in six out of 10
selected companies, which have resulted from the increased operations by value
and volume and high growth of exports. Selected companies also concentrated
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their efforts in establishing new production facilities across the globe for which
international sources.
which these companies could raise funds from abroad through ADR’s, GDR’s
and FCCB’s. Seven out of the ten companies utilized these sources to raise
funds.
12) In most of the selected companies the Debt-Equity ratio is near to one or zero
except in a few companies. The debt-Equity ratio is very lower than the standard
norm specified i.e.2:1. The higher debt-Equity ratio found in ORCHID, AUPL
and AOL.
13) Equity share capital as a proportion of total funds is very high in AOL with an
average of 19% over the study period followed by SUPL. Most of the selected
companies (APL, AUPL, DRL, RAL, PHC and SUN) adopted ploughing back
the profits earned by way of converting the reserves and surpluses in to equity
capital through multiple number of bonus shares issues. The proportion of equity
share capital is lower in most of the companies due to the availability of huge
14) The proportion of the reserves and surplus in the total funds deployed is very
high in APL (on average 90%) throughout the study period, followed by DRL,
SUN and RAL with 74%, 64%, and 63% respectively. Most of the selected firms
except NLL and AOL possessed reserves and surpluses more than 50% of the
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15) Capital reserve, investment allowance reserve and general reserve are the main
reserve and general reserve contributed more funds than investment reserve in all
APL followed by NLL, AOL and PHC. A consistent growth in the proportion of
the study period. The proportion of secured loans in total funds deployed is very
17) Secured loans are raised by selected pharmaceutical companies mainly from
following sources viz., debentures, loans from banks (including cash credit)
rupee term loans from banks (largely from EXIM Bank), foreign currency term
loans and packing credit by hypothecation of fixed assets, movable assets and
appears to be meager. Only DRL, NLL PHC and AUPL used a smaller amount
19) Current liabilities are another source through which the pharmaceutical
20) Companies like ORCHID, NLL and AOL largely depended on debt sources of
finance and remaining companies marginally used this source of finance. For
example the companies like APL, DRL and SUN became debt free during the
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21) The weighted average cost of capital (WACC) for the selected companies varied
between 9% and 17.50% in the study period. It is found a very high WACC in
the starting period of the study (17.38%) which is decreased later on to a 9%. It
22) Net profit of the companies showed an increasing trend during the study period.
Net profit of DRL increased by 4 times in the year 2006-07 from its previous
year. In RAL similar growth in net profit observed throughout the study period
except in the year 2007-08, in the year which RAL posted a net loss of Rs.826.58
23) Net profits are volatile in case of AOL, NLL and SUPL through out the study
period. The strong growth and consistency in net profits maintained by few
companies like AUPL, PHC and SUN during the study period. However the,
reasonable when compared to the industry average. Even some of the selected
companies have a higher ROA and PAT than the industry average.
24) The pharmaceutical firms are using most modern techniques available for the
project selection and evaluation. Most of the Indian pharmaceutical firms are
using scenario analysis, PERT-CPM for the estimation of cost and time required
25) Pay back period and Internal Rate of Return are widely applied capital budgeting
projects. In addition, the excess net present value method and profitability index
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26) The selected pharmaceutical companies concentrated on the acquisition of
found in case of RAL, DRL, PHC, AUPL and SUN. Indian pharmaceutical
markets such as EU Nations, Africa and Japan to minimize the cost of operations
corporate objectives, long term growth, sustainability and the philosophy of the
28) The investment in fixed assets by the selected companies has grown manifold
throughout the study period. Huge growth in fixed assets is found in AUPL (180
times) during the study period (Which increased from a mere Rs.140Cr to
Rs.2,625Cr) followed by RAL, PHC, DRL and SUN with 17 times, 16 times 14
29) Net worth to fixed assets of the selected pharmaceutical companies indicates that
the amount of owner’s funds used for the acquisition of the fixed assets. A mixed
trend of net worth to fixed assets is observed in the selected companies over the
study period. Most of the selected companies’ net worth to fixed assets ratio is
greater than one (1) which indicates that the fixed assets are acquired by using
owner’s funds in case of SUPL this ratio is marginally less than one (around
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0.96) which means the company acquired the fixed assets by using loan funds
partially.
30) Fixed assets turnover ratio seven out of ten selected companies the showed a
decreasing trend till the year 2005-06 and later on increased. In case of APL,
SUN and RAL the fixed assets fixed assets turnover ratio has grown throughout
pharma companies with the total amount by pharma industry on R&D, the
32) R&D in Indian pharmaceutical industry mainly influences the export sales, the
effectiveness of the R&D investment can reveal from the growth in export sales.
Export sales for the last ten years reveal that the exports increased in line with
33) The interrelation between R&D expenditure and the sales can be understood
from the coefficient of correlation between these two factors. In the eight, out of
correlation in AUPL, DRL, NLL, SUPL ORCHID and SUN is above +0.80,
indicating these companies’ R&D expenditure is very closely related with sales
revenue and in case of RAL and PHC a moderate correlation (+0.64 each) is
34) In case of filing of DMF’s, it is highest in AUPL with 1,915 filings to date
followed by RAL and SUN with 1,588 filings and 1,106 filings respectively in
which these companies have a success rate above 80% in getting approvals.
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35) The percentage of current asset investment to fixed assets investment increased
from 90% in 1997-98 to 483% till 2007-08 and decreased to 430%% in the year
between 0.33 and 4.52 which means the highest sales revenue generated per
rupee invested in current assets was Rs.4.52 in APL during 1997-98 and least
sales revenue generated per rupee of investment in current assets was Rs.0.33 in
RAL during 2008-09. The current assets turnover ratio showed a decreasing
trend in all the selected companies except NLL during the study period.
13% and 64% during a major period of study. The highest percentage of
inventories in current assets occupied in case of AOL and NLL throughout the
followed by ORCHID, AUPL and DRL during the last four years of the study
period.
companies showed a specific pattern of decrease in five out of the ten companies
selected for the study. In the remaining five companies three companies showed
a continuous growth in sales per rupee held in inventory and the two companies
39) Days of inventory turnover is very high in case of ORCHID followed by AOL
during 2004-2009 and the shortest inventory turnover is observed in SUN, in the
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remaining companies the days of inventory turnover either constant or decreased
between 5% and 73.50% and thus formed next major component after inventory.
in AUPL followed by AOL (41%) and DRL (36%). It was lowest in APL
followed by SUN.
41) The receivables turnover ratio of the selected pharmaceutical companies was
very high in APL followed by AOL and NLL and the lowest in DRL followed
by SUN it is constantly grown throughout the study period in case of PHC, SUN
42) The average debt collection period is as high as 197 days (ORCHID in 2008-09)
countries all of them may have longer debt collection period, the 197 days
43) Cash formed a major percentage of total current assets in the case of APL
throughout the study period ranging between 29% and 92% followed by SUN in
which cash to total current assets percentage ranging between 25% and 63%
44) Cash to sales turnover ratio is very high in few companies like AUPL, DRL,
RAL and PHC which indicates that these companies are practicing proper cash
management methods.
45) Most of the selected pharmaceutical companies used the short term liabilities for
the purpose of financing the current assets. Trade credit, advances from
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customers, differed liability and other deposits are predominantly used as a
clear shift towards a specific source of short term finance did emerge from the
analysis.
each component of the current assets such as cash and marketable securities,
47) Loans and advances formed a moderate percentage in total current assets in most
percentage of total current assets in the case of RAL followed by DRL, NPIL. It
was lowest in APL followed by ORCHID. In case of AUPL, DRL and SUN the
48) In RAL and DRL major percentage of the loans and advances occupied by MAT
credit entitlement, prepaid Income Tax, advance to material suppliers and the
49) Earnings per share (EPS) showed very high growth in AUPL followed by SUN,
PHC and APL. In three of the selected companies EPS became negative which
in EPS is reported in few companies like NLL, APL, PHC and SUN.
to 60% to 75% in 2008-09, in few of the selected companies like RAL, DRL the
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Suggestions:
Following suggestions are offered for the efficient performance of pharmaceutical industry in
innovation of the “block buster drugs”, as they face competition from the
2) Cost cutting is another measure which makes our products very cheaper in
price and can be promoted and sold easily in not only third world countries but
3) A recent move by the African Union under New partnership for Africa’s
companies can build a track record of phenomenal growth from the following
new original research products from its R&D stable and e) the congenial
model, where the universities are the sites of innovation and the industry
commercializes the product. The universities are permitted to own the IPR and
get the share out of profits. Academic institutions will then become the engines
of entrepreneurship.
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5) Greater stress on professionalization, better utilization of resources and
the industry will be determined by how well it markets its products to several
regions and distributes risks, its forward and backward integration capabilities,
America which are major markets for our medicines, these strategies can be
8) The regulated markets, especially the United States and Europe are opening up
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buster patented products (worth around $80 billion) are expected to go off
10) The Indian computer industry is on par with its American counterpart, and
increasing, and in particular they are being applied to data management and
“Jan Aushadhi Stores” in the states of Andhra Pradesh, Bihar, Delhi, Haryana,
Punjab, Utharakhand etc., and further planning for opening many more such
price to the needy people. Pharmaceutical companies are suggested to use the
opportunity and plan for supply of essential drugs in bulk quantities. They can
12) Highly fragmented pharma industry with a large number of small players can
resources for taking up of R&D operations to innovate new drugs in the areas
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13) Most of the companies are not utilizing the tax advantage of debt capital, in
use the sources of debt capital to have tax advantage on interest paid and hence
14) Balance sheets of major pharmaceutical companies remained strong with huge
companies that they can raise debt capital to have minimum WACC and
15) The Indian Pharma Industry presently investing a less than 4% of sales
revenue in basic R&D, where as R&D spending to total sales at world level of
16) India should exploit its know-how in herbal medicines as these medicines does
not come under purview of TRIPS regime and research in NCEs involves
17) The Indian government can take several policy measures for enhancing the
average firm size through M&A until the concentration index of the industry
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18) One of the main problems that remain for the domestic drug manufacturers is
resolutions to this problem are tagging true drugs with Electronic Product
segregation of genuine medical drugs and supplies. RFID serves the purpose
of improving the integrity of the supply chain. Companies can maintain much
controlled. Receivables have carrying costs just as inventory has and the
finance manager should see to it that their costs do not out weigh the
advantages to be derived from increased credit sales which give rise to them.
worthiness. Well thought out, predetermined credit limits and alert collection
methods will hold down the bad debt losses ratios as well as minimize the
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amount of funds tied up in accounts receivable without reducing sales and
profits.
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