ECONOMICS OF

PHARMACEUTICAL
INDUSTRY
BY SHUBHI SAINI - 18162 & SRISHTI JASMINE - 18163
 ABSTRACT
This study was undertaken to illustrate and also to comprehend the economics of pharmaceutical
industry.

In this paper, we have tried to know the polarity between generic drugs and brand drugs through
economic tools of regression and correlation. We have also tried to understand the Indian
pharmaceutical market in the same context.

From its beginnings at the start of the 19th century, the pharmaceutical industry is now one of the most
profitable and influential in existence, attracting praise and controversy. Many dynamic scientific, social
and economic factors affect the pharmaceutical industry. Some pharmaceutical companies operate in
both national and multinational markets. Therefore their activities are subject to legislation, regulation
and policies relating to drug development and approval, manufacturing and quality control, marketing
and sales. How these economic factors affect the industry prices is discussed in this paper in detail.
 INTRODUCTION
Pharmaceuticals are unique in their combination of extensive government control and extreme
economics, that is, high fixed costs of development and relatively low incremental costs of production.

The research based pharmaceutical industry makes a major contribution to the prosperity of the world
economy. It’s a robust sector that has been one of the pillars of industrialization economies and is
increasingly recognized as an important sector in the developing world as well.

It contributes to employee- direct, indirect or induced trade- through imports and exports, expenditure on
research and development (R&D), and technological building capacity. It’s also a necessary foundation
for the existence of the generic industry.

The U.S. research-based industry invests about 17 percent of sales in R and D, and R and D drives
performance of individual firms and industry structure. The government’s control over medicines has
grown in the last hundred years from literally nothing to far-reaching, and now pharmaceuticals are
among the most-regulated products in this country.

The Indian pharmaceutical industry holds the top most position among all science based industry with a
wide range of technicalities in the complex field of drug manufacturing and drug innovations. The
Indian pharmaceutical industry stands 4th in terms of volume and attains the 14 in terms of value. Export
of Indian pharmaceutical industry works as a fuel for the growth of the industry. The Indian
pharmaceutical industry is exporting in almost all developed countries and facing the severe competition
and government price control regulations.

In the last two decades, Indian pharmaceutical industry has expanded significantly. It has more than 250
larger units that rules over the 70 % of the market and rest 30% of the market taken by top ten
companies. The Indian pharmaceutical industry produces around 400 bulk drugs and out of this, 300
bulk drugs are produced domestically. It is a highly fragmented industry consisting of more than 20,000
registered units and around 8,000 small scale units.

Indian pharmaceutical industry satisfies the entire demand of the country with low cost of production,
low R&D costs and equipped with skilled manpower and excellent world class national laboratories
specialized in cost effective technologies.
 OBJECTIVE
The objective of this study is to:
1. Determine the Market size and trend of the pharmaceutical products
2. Determine the relation between brand drugs and generic drugs
3. Understand the economics of Indian Pharmaceutical Industry
4. Determine the employment opportunities created by the industry
5. Understanding the importance of generic drug to control the price of brand drug
LITERATURE REVIEW AND
SECONDARY RESEARCH
 Generic drugs are copies of brand-name drugs that have exactly the same dosage, intended use,
effects, and side effects, route of administration, risks, safety, and strength as the original drug.
In other words, their pharmacological effects are exactly the same as those of their brand-name
counterparts.
An example of a generic drug, one used for diabetes, is metformin. A brand name for metformin
is Glucophage. A generic drug, one used for hypertension, is metoprolol, whereas a brand name
for the same drug is Lopressor.

 Many people become concerned because generic drugs are often substantially cheaper than the
brand-name versions. They wonder if the quality and effectiveness have been compromised to
make the less expensive products. The FDA (U.S. Food and Drug Administration) requires that
generic drugs be as safe and effective as brand-name drugs.
 India is currently among the biggest providers of generic medicines in the world, and it accounts
for 20 percent of the volume of global generic drugs exports. What works in India’s favor is the
talented pool of scientists, researchers, and engineers, who develop innovative solutions for
healthcare at a cost base that is significantly lower than that of many other countries worldwide.

 Till 2005, product patents on medications were not granted in India, and this gave rise to the
development of generic, low-cost versions of medicines that had already been patented in other
countries. In fact, Indian talents were the first to manufacture life-saving drugs like Imatinib for
cancer and Zidovudine for HIV treatment just a few years after their launch in the US.
Pharmaceutical Industry Employment:-

The pharmaceutical industry contributes to employment in both developing and

developed countries. In 2014, it employed approximately 5.1 million people worldwide;
almost 1.5 million increase from 200696. In the United States, every job in the
biopharmaceutical industry supported 5.21 jobs outside the pharmaceutical sector, in areas from
manufacturing and construction to childcare, retail, accounting, and more97.
Spending on services and supplies totaled USD 659 billion, translating into more than 4.4
million jobs98. The industry currently directly employs more than 854,000 people in the
United States99 and 736,358 people in Europe100.
High employment in the pharmaceutical sector is not exclusive to high-income
countries. The pharmaceutical industry provides high-skilled jobs through direct
employment and induces the creation of many more indirect jobs in low – and middle
income countries as well.
 Trade in Pharmaceuticals

Global sales of pharmaceutical products represent the international spread of medical

technology that comes as the result of highly intensive R&D efforts in the exporting
countries. At the same time, importing countries receive these benefits through health
improvements – even if they do not participate in R&D activities themselves107. Medical
innovation is transmitted across the world, thus contributing to significant gains in
average life expectancy. Europe has traditionally been the biggest exporter of pharmaceuticals in
the world.
Pharmaceutical exports represent more than a quarter of Europe’s total high-tech
exports109. In recent years, other countries like India, Singapore and Israel have also
managed to position themselves as important pharmaceutical exporters.
 METHODOLOGY
Correlation Analysis:-

Correlation analysis is a method of statistical evaluation used to study the strength of a relationship
between two, numerically measured, continuous variables (e.g. height and weight). This particular type
of analysis is useful when a researcher wants to establish if there are possible connections between
variables. It is often misunderstood that correlation analysis determines cause and effect; however, this
is not the case because other variables that are not present in the research may have impacted on the
results.
● Positive correlation exists if one variable increases simultaneously with the other, i.e. the high
numerical values of one variable relate to the high numerical values of the other.
● Negative correlation exists if one variable decreases when the other increases, i.e. the high
numerical values of one variable relate to the low numerical values of the other.

Regression Analysis:-

Regression analysis is a reliable method of identifying which variables have impact on a topic of
interest. The process of performing a regression allows you to confidently determine which factors
matter most, which factors can be ignored, and how these factors influence each other.
● Dependent Variable: This is the main factor that you’re trying to understand or predict.

Independent variables:-

These are the factors that you hypothesize and have an impact on your dependent variable.
 DATA ANAYSIS
CO-RELATION ANALYSIS

USA
3000

2500

2000

1500 USA
1000 y = 96.774x - 253.69 Linear (USA)

500

0
0 5 10 15
-500

R=0.736
There exists a strong positive correlation between brand drugs and generic drugs. As the revenue for
brand drug increases, the global revenue for generic drugs also increases rapidly.
REGRESSION ANALYSIS

REGRESSON ANALYSIS
3000

2500

2000

1500 REGRESSON ANALYSIS

x

1000
Linear (REGRESSON
500 ANALYSIS)

0
y = 96.774x - 253.69
0 5 10 15 R² = 0.2862
-500
Axis Title

Regression Equation Y= 96.77X - 253.6

R²= 0.286
The interpretation of this equation is that every extra billion dollars of generic drug will lead to an extra
96.77 billion dollars of brand drug revenue, and that brand drug revenue will reduce due to other factors
by 253.6 billion dollars per year.
 FINDING AND RESULT
Through our research it’s evident that survival of generic drugs is only possible due to presence of
brand drugs in the market but on the other hand, generic drugs are also equally important to
control the prices of brand drugs. The manufacturers of brand drugs may differentiate in generic
and brand drugs and consider themselves superior due to investment in R&D thereby increasing
the prices but generic drugs will ensure that prices of brand drugs does not rise increasingly.

• At approximately $5.4 trillion today, the pharma industry is around 30% larger than previously
thought and is one of top five in the global economy by total value.1
• Despite widespread concerns about the slowing of innovation and continued cost controls
in pharmaceuticals, we predict that the pharmaceutical industry will grow substantially in the
decades ahead.
• We estimate that the total revenue of the pharmaceutical industry will triple in real terms
between 2017 and 2060.
– Short-term growth driven by rare disease drugs and biologics
– Longer-term growth driven by nucleic acids and implantable
• Major innovations will continue to drive the size and growth of the sector with positive
implications for the health of the global population.

The pharmaceutical sector of the future will be very different than today’s market which
is led by small molecule oral solid dose pills. The future sector will feature co-existence
of chemical drugs, advanced biologics, nucleic acid therapeutics, cell therapies, and
implantable.
 CONCLUSION
Pharmaceutical innovation is behind some of the greatest achievements in modern medicine. Today
people live longer and healthier lives than previous generations. Medical advances allow people to enjoy
a better quality of life and increase their productivity, contributing to the overall prosperity of society.
Pharmaceutical innovation also creates jobs, spurs technology, and represents an important source of
income. Unfortunately, not everyone has yet fully benefited from these medical advances. Poverty and
great wealth inequality between and within countries mean that many do not have access to even the
simplest healthcare interventions. Addressing these issues is a complex challenge that requires long-term
commitment from government, civil society, and the private sector. Through differential pricing
schemes, donation programs, and technology transfer initiatives, the pharmaceutical industry has been
doing its part to help those in greatest need to also enjoy the benefits of medical progress. Much still
needs to be done; the path forward will require a constant rethinking on how to maximize
the research-based industry’s positive impact on the health and prosperity of societies.

Pharmaceuticals in India first started gaining prominence in the 1970s, but standards were not
completely regularized and any manufacturer could establish plants. But today, the authorities are
focusing on the regulation of drugs.

The government of India too has taken steps to help the sector grow further, with several initiatives
aimed at the same. One example is the 'Pharma Vision 2020' – an initiative that aims to make the
country a leader of end-to-end drug manufacture globally. In addition, the approval time to open new
facilities has been reduced in order to boost investments in the sector.
 REFERENCES
1. https://www.ncbi.nlm.nih.gov
2. https://www.ifpma.org
3. https://www.ibef.org
4. http://shodhganga.inflibnet.ac.in
5. https://www.econlib.org
6. https://www.healthcare-economist.com
7. http://www.easternsrx.com