INDUSTRY ANALYSIS

SIZE OF INDIAN PHARMACEUTICAL INDUSTRY:

The Indian Pharmaceutical Industry today is in the front rank of India’s science-based
industries with wide ranging capabilities in the complex field of drug manufacture and
technology. A highly organized sector, the Indian pharmaceutical industry is estimated
to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It is highly fragmented
with more than 20,000 registered units. It meets around 70% of the country's demand
for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets,
capsules, orals and injectables. There are approximately 250 large units and about
8000 Small Scale Units, which form the core of the pharmaceutical industry in India
(including 5 Central Public Sector Units). In terms of the global market, India currently
holds a 3.2% share.

The Pharma Industry in India produces around 20% to 24% of the global generic drugs.
The Indian Pharmaceutical Industry is one of the biggest producers of the active
pharmaceutical ingredients (API) in the international arena. The Indian Pharma sector
leads the science-based industries in the country. The pharmaceutical sector has the
capacity and technology pertaining to complex drug manufacturing. Around 40% of the
total pharmaceutical produce are exported. 55% of the total exports constitute of
formulations and the other 45% comprises of bulk drugs. The Indian Pharma Industry
includes small scaled, medium scaled, large scaled players, which totals nearly 300
different companies. There are several other small units operating in the domestic
sector.
Top 10 Pharmaceutical Companies in India:

RANK COMPANY REVENUE 2004

(Rs Crore)

1 Ranbaxy Laboratories 4,461

2 Dr. Reddy's Laboratories 1,933
3 Cipla 1,842
4 Nicholas Piramal 1,387
5 Aurobindo Pharma 1,260
6 GlaxoSmithKline 1,228
7 Lupin Laboratories 1,180
8 Sun Pharmaceutical Industries 1,110
9 Cadila Healthcare 1,091
10 Wockhardt 980
INDUSTRY SEGMENTATION:
With respect to product, industry is segmented into two parts:

- Ethical (Prescribed) Drugs: A prescription drug is a licensed medicine that

is regulated by legislation to require a prescription before it can be obtained.
- Over the Counter Drugs: Over-the-counter (OTC) drugs are medicines that
may be sold directly to a consumer without a prescription from a health care
professional.

Ethical drugs account for about 60% of total industry sales, with OTC products
representing the balance.

The ethical sector can be further segmented into:

 Brand/Trade Name Drug – A drug that has a trade name and is protected by
a patent and hence can be produced and sold only by the company holding
the patent.
 Generic Drug – A generic drug is a drug which is produced and distributed
without patent protection. The generic drug may still have a patent on the
formulation but not on the active ingredient. A generic drug must contain the
same active ingredients as the original formulation. Generics are less-
expensive equivalents of brand-name prescribed drugs.

EXTERNAL ANALYSIS:

External Analysis of the industry done based on Porter’s Five Forces Model.

Porter’s Five Forces Model

2
1. Competitive Rivalry within the Industry: Pharmaceutical industry is one of the
most competitive industries in the India with as many as 20,000 different players
fighting for the same pie. The rivalry in the industry can be gauged from the fact
that the top player in the country has only 6% (2006) market share and the top 5
players together have about 18% (2006) market share. High growth prospects
make it attractive for new players to enter in the industry. Another major factor
that adds to the industry rivalry is the fact that the entry barriers to
pharmaceutical industry are very low.
Many small players that are focused on a particular region have a better
hang of the distribution channel, making it easier to succeed, albeit in a limited
way. The product differentiation is one key factor which gives competitive
advantage to the firms in any industry. However pharmaceutical industry product
differentiation is not possible since India has followed process patents till date,
with loss favoring imitators. Consequently product differentiation is not a driver,
cost competitiveness is. However, companies like Pfizer and GlaxoSmithKline
have created big brands over the years which act as product differentiation tools.
Earlier it was easy for Indian pharmaceutical companies to imitate
pharmaceutical products discovered by MNCs at a lower cost and make good
profit. But today the scene is different with the arrival of patent regime which has
forced Indian companies to rethink its strategies and to invest more on R&D, also
contact research has assumed more importance now.

2. Bargaining Power of Customers: The unique feature of pharmaceutical

industry is that the end user of the product is different from the influencer. The
consumer has no choice but to buy what doctor says. However, when we look at
the buyer’s power, we look at the influence they have on the prices of the
product. In pharmaceutical industry, the buyers are scattered and they as such
do not wield much power in the pricing of the products. However, government
with these policies, plays an important role in regulating pricing through the
NPPA (National Pharmaceutical Pricing Authority).

3. Bargaining Power of Suppliers: The pharmaceutical industry depends upon

several organic chemicals. The chemical industry is again very competitive and
fragmented. The chemicals used in the pharmaceutical industry are largely a
commodity. The suppliers have very low bargaining power and the companies in
the pharmaceutical industry can switch from their suppliers without incurring a
very high cost. However, what can happen is that the supplier can go for forward
integration to become a pharmaceutical company. Companies like Orchid
Chemicals and Sashun Chemicals were basically chemical companies who
turned themselves into pharmaceutical companies.

4. Threats of New Entrants (Barriers to Entry): Pharmaceutical industry is one of

the most easily accessible industries for an entrepreneur in India. The capital
requirement for the industries is very low, creating a regional distribution network
is easy, since the point of sales is restricted in this industry in India. However,
creating brand awareness and franchisee among doctors is the key for long term

3
 survival. Also, quality regulations by the government may put some hindrance for
establishing new manufacturing operations. The new patent regime has raised
the barriers to entry. But it is unlikely to discourage new entrants, as market for
generics will be as huge.

5. Threat of Substitutes: This is one of the great advantages of the

pharmaceutical industry. Whatever happens demand for pharmaceutical
products continues and the industry thrives. One of the key reasons for high
competitiveness in the industry is that as an ongoing concern, pharmaceutical
industry seems to have an infinite future. However, in recent times the advances
made in the field of biotechnology, can prove to be a threat to the synthetic
pharmaceutical industry.

The barriers to entry will increase going forward .the change in the patent regime has
made sure that new proprietary products come up with making imitation difficult. The
players with huge capacity will be able to influence substantial power on the fringe
players by their aggressive pricing thereby creating hindrance for the smaller players.
Economics of scale will play an important part too. Besides this the government will
have a bigger role to play. The industry is an attractive industry for a new entrant, and
also an attractive industry for a current player, as the type of product itself makes it a
safe ground to play for them.

SWOT ANALYSIS:

Strengths:
 English-speaking manpower and fair protection of intellectual property rights.
 Skilled scientists/technicians/management personnel at affordable cost leading to
low cost of innovation/manufacturing/expenditure to run GMP compliance.
 India has filed a number of non-infringing process patents.

Weakness:
 Low investments in innovative R&D - a major weakness of Indian pharmaceutical
industry.
 Lack of strong linkages between industry and academia.
 Inadequate regulatory framework or compliance and enforcement regime,
reflected in occurrences such a production of spurious or low quality drugs.
 Sales and marketing knowledge is inadequate.

Opportunities:
 US$40 billion worth of drugs in the U.S.A and US$25 billion worth of drugs in
Europe are expected to go off patent soon.
 Licensing deals with MNCs for NCEs (New Chemical Entities) and NDDS (New
Drug Delivery Systems) offer new opportunities for Indian manufacturers.

4
  India can become a niche player in global pharmaceutical R&D and possibilities
exist for expansion of biotechnology generics (also known as bio-similars) and
biopharmaceuticals.

Threats:
 Product patent regime poses serious challenge to domestic industry unless it
invests in research and development.
 Drug Price Control Order puts unrealistic ceilings on product prices and
profitability.
 Lowering of tariff protection has increased competition in domestic markets
resulting in erosion of profitability.
 Mergers and acquisitions may completely change the direction of India’s
pharmaceutical movement neutralizing its thrust on generics and cost
competitiveness.

VALUE CHAIN:

Value Chain of Pharmaceutical Industry

A value chain involves all the components or process which is required for a raw
material or fundamentals to be transformed into something that can give value to the
consumer. Discovery stage primarily has lots of R&D and new molecule discovery. At
this stage we hardly think of prices or market of drugs, it’s all about getting a cure for
some illness. In the Development stage, when the molecule is synthesized, Target
Specific Formulation is carried out, which involves getting the drug ready for commercial
use by adding additional chemicals to minimize side effects. Once that is done a four
phase clinical trial is carried out on specimens, to test the quality and effectiveness of
the drug. In manufacturing stage, government approvals for marketing the drug are
taken and all other regulatory formalities for it is done. Structuring and planning supply
chain is also done for the new drug. Since drugs are specialized products, both
Marketing and Sales are carried out by trained professionals. Marketing is done where
doctors are targeted. It’s the uniqueness of pharmaceutical industry, incentives are
given to doctors, but consumption of the product is done by the patients. Marketing
team are the ones who keep track of the sales and targets, based on which target for
next quarter is set.

5
PHARMACEUTICAL REGULATORY BODIES IN INDIA:

National Pharmaceutical Pricing Authority (NPPA) is an organization of the

Government of India which was established, to fix/revise the prices of controlled bulk
drugs and formulations and to enforce prices and availability of the medicines in the
country, under the Drugs (Prices Control) Order, 1995. The organization is also
entrusted with the task of recovering amounts overcharged by manufacturers for the
controlled drugs from the consumers. It also monitors the prices of decontrolled drugs in
order to keep them at reasonable levels.

Central Drugs Standard and Control Organization (CDSCO) controls the quality of
drugs imported into the country. CDSCO helps in co-ordination of activities of the
State/UT drug control authorities. It is the authority that decides whether or not to
approve any proposed new drugs to be imported, domestic demand and the ability of
domestic players to cater to that. CDSCO after rigid inspection and analysis decides
whether any pharmaceutical company should be allowed to manufacture a drug or not.
It is the central licensing approving authority.

Department of Chemicals & Petrochemicals (DCP) provides impartial and prompt

services to the public in matters relating to chemical, pharmaceutical and petrochemical
industries. It takes steps to speedily redress of grievances received. It is a regulatory
body that formulates policies and initiates consultations with Industry associations and
amends them whenever required.

PHARMACEUTICAL INDUSTRY AND PATENTS:

The Patents Act 1970 did not differentiate between Process and Product patents for
medicines, food and chemicals. Price Control Order, 1970 put a cap on the maximum
price that could be charged and ensured that life saving drugs is available at reasonable
prices. The Act of 1970 safeguards the interests of the inventor and consumer in an
even-handed manner. Post 1970, strong and highly competitive domestic
pharmaceutical industry was in the grip of a rigid price control framework.

On April 20 1972, Indian Patent Act 1972 was a red-letter day for India. This Act
abolished product patents and allowed process patents for seven years only. In 1971,
MNCs had an over 70 per cent share of the Indian pharmaceutical industry. But in 2007,
in a reversal of roles, Indian companies commanded 83 per cent, thanks to the 1972
Act.

The Patents Amendment Act 2005, made the 1972 Act more stringent. According to the
2005 amendment, an invention in order to be patentable, should:
 involve an inventive step capable of industrial application
 involve technical advances as compared to the existing knowledge or having
economic significance or both; and
 not be obvious to a person skilled in art. This section prevents frivolous
inventions from being patented.

6
FUTURE OF INDIAN PHARMACEUTICAL INDUSTRY:

Looking at the growth curve of Indian pharmaceutical industry and the Indian economy
as a whole, the future looks very bright for pharma sector. India is fast becoming a
lucrative hub for R&D. Clinical trials in India cost US$ 25 million each, whereas in US
they cost between US$ 300-350 million each. Indian pharmaceutical companies are
spending 30-50% less on custom synthesis services as compared to its global costs,
which brings down the final cost of medicine making it more accessible. In India
investigational new drug stage costs around US$ 10-15 million, which is almost 1/10th
of its cost in US (US$ 100-150million).

However there are some issues and challenges that the industry and government
should take care of. Indian pharmaceutical companies are fast falling prey to merger
and acquisitions by international big players (e.g. - Ranbaxy), steps should be taken to
prevent that. Attrition rate in the industry is high mainly because of low pay, and
students prefer mainstream engineering and medicine over pharmacy or bio-tech. So,
companies should make the industry attractive and retain skilled workforce.

CONCLUSION:

India is a very small player in world pharmaceutical market, but as mentioned above the
ground is set for a rapid growth in the sector. Cheap skilled workforce, attractiveness
towards industry and a steady demand in the market will help India take a respectable
position in the global pharma market.

International pharmaceutical companies are fast being attracted towards India for R&D
and clinical trials, because of presence of proper infrastructure, technology and most
importantly highly skilled workforce needed for the job. Government should act rigidly in
terms of proper pricing and licensing policies for the growth of the industry and patent
laws to protect them. There are immense opportunities for pharmaceutical players both
at the domestic as well as the global level, but along with opportunities are challenges
which need to be overcome in order to achieve sustainable growth in the future. 