Pharmaceuticals Industry Analysis - Final

STRATEGIC MANAGEMENT INDIAN PHARMACEUTICAL INDUSTRY ANALYSIS
INDIAN PHARMACEUTICAL INDUSTRY (HISTORY AND GROWTH)
INTRODUCTION
Indian Pharmaceutical Industry has come a long way from being almost non-existent in the 1970’s
to being one of the largest and most advanced Pharmaceutical industries in the world. The
domestic Pharmaceutical output has increased at a CAGR of close to 13. Currently the Indian
Pharmaceutical Industry is valued at $ 8 billion (approx). Globally the industry ranks 4th in terms
of volume and 13th in terms of value. It provides employment to millions and ensures that essential
drugs are available to the vast population of India at affordable prices. Indian Pharmaceutical
Industry has attained wide ranging capabilities in the complex field of drug manufacture and
technology developed through a range of governmental incentives and the industry has been
declared a knowledge based industry. This Industry is a highly organized sector and is extremely
fragmented with severe price competitions and governmental price control. The major players in
the Industry are Ranbaxy, Dr. Reddy’s Laboratories, Cipla, Sun Pharmaceutical Industries, Lupin
Lab, Glaxo SmithKline Pharmaceutical, Cadila Healthcare, Aventis etc. According to data
published by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, the total
turnover of India's pharmaceuticals industry between September 2008 and September 2009 was
US$ 21.04 billion. Of this the domestic market was worth US$ 12.26 billion.
Pharma Industry in India – Environment Scanning (PEST Analysis)
The Indian pharmaceutical industry has shown satisfactory progress in terms of infrastructure
development, technology base and product use. It has shown domestic sales of US $ 4 billion and
exports of over US $ 3 billion, during the fiscal year 2004-05, according to the Economic Survey
2004-05. The industry produces bulk drugs belonging to all major therapeutic groups requiring
complicated manufacturing processes and has developed good manufacturing practices (GMP)
compliant facilities for the production of different dosage forms. The pharmaceutical industry is
capable in developing cost-effective technologies in the shortest possible time for drug
intermediaries and bulk actives without compromising on quality, which is realized through the
country’s strengths in organic synthesis and process engineering. India has gained fame as a low
cost producer of antiretroviral and supplier of the same to international organizations and more
importantly to the needy patients in Africa. It may be recalled that in a recent case of supplying
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anti-retroviral drugs to South Africa, the price quoted by the Indian firm was the lowest at US $
350 per year per person compared to the US $ 1679 quoted by the multinationals. The Department
of Chemicals and Petrochemicals in India is working on the issue of price management of drugs,
including making life saving drugs (LSD) available at reasonable prices, reducing trade margins on
generic drugs and data protection.
The R&D effort in India has focused on development of new molecules. Rs. 150 crore has been
provided under the Pharmaceutical Research and Development Support Fund. A Drug
Development Promotion Board under the Department of Science and Technology has also been set
up for the utilization of this fund. India’s biotech research is concentrating in the areas like
vaccines, diagnostics, molecular and cellular biology, cell culture, fermentation and hybridoma
technology. Recombinant vaccines (for typhoid, rabies and hepatitis B), HIV 1&2 diagnostics test
kit and gene probe test for TB are some of the important areas where research is being carried out.
Imports & Exports
A look at the table 1 below shows that pharmaceutical and drugs export has increased from Rs.
14,901 million in 1993-94 to Rs. 1,04,759 million in 2002-03. Similarly, the imports of
pharmaceutical and drugs have increased from Rs. 11,374 million in 1993-94 to Rs. 25,812 million
in 2002-03.
Years Exports (in Rs. Import (in Rs.
Million) Million)
1993-94 14901 11374
1998-99 61520 30473
2000-01 72302 15020
2001-02 87299 20325
2002-03 104759 25812
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Table 1: Export and Import of Drugs and Pharmaceuticals from 1993-94 to 2002-03
If one looks at the table 2, then one can find that value of bulk drugs production has increased from
Rs. 13,200 million in 1993-94 to Rs. 2,41,850 million in 2002-03. Similarly, formulation
production has increased from Rs. 69,000 million in 1993-94 to Rs. 2,41,850 million in 2002-03.
Year Bulk Drugs Production Formulation production
(Rupees in millions) (Rupees in millions)
1993-94 13200 69000
1998-1999 31480 138780
2000-2001 45330 183540
2001-2002 54390 211040
2002-2003 65290 241850
Table 2: Production of Bulk Drugs and Formulation (Rs. Million) from 1993-94 to 2002-03
The number of drugs and pharmaceutical units in India has increased No. of
Years
from 1,752 in 1952-53 to 20,053 in the year 2000-01. Units
1952-53 1752
Government of India is honouring its binding commitment to change the 1969-70 2257
Patents Act 1970 to conform to the TRIPS (Trade Related Aspects of 1977-78 5201
1979-80 5126
Intellectual Property Rights) provisions. In this process, the Act has 1980-81 6417
been amended twice in 1999 and 2002. On 26, December 2004, the 1982-83 6631
1983-84 9000
Government promulgated the Patents (Amendment) Ordinance, 2004, 1984-85 9234
followed by the amended Patents Rules 2005, issued on 31st December. 1985-86 9540
1989-90 16000
The Third Amendment to the Patents Act, 1970 was to be tabled in the 2000-01 20053
winter session of Parliament in 2004, but the Government’s justification Table 3: Number of
Drugs and Pharma Units
for the Ordinance was that the TRIPs (Trade Related Aspects of
Intellectual Property Rights) agreement under the GATT signed in 1994, required WTO members
to make their domestic patent laws TRIPs compliant by 1st January 2005 or else face retaliatory
measures from other WTO members. The main objective of the Patents (Amendments) Ordinance
2004 was to introduce product patents for food, pharmaceuticals and chemicals, preventing others
from manufacturing through different processes, without taking permission from and paying
royalty to the patent holder. To make the Patents Act 1970 TRIPS compliant, the erstwhile NDA
(National Democratic Alliance) government had carried out, among many others as well, two
important amendments—extension of term of patent protection from 7 to 20 years and grant of
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exclusive marketing rightsi to patents applicants or “Mail Box” candidates even before approval of
the patents and thus gave them a monopoly over the products ahead of completion of formalities
(see Box 1).
1970 Indian Patent Act TRIPS Agreement

1. Process patents in the 1. Products and process patents.
pharmaceutical sector.
2. Fields excluded from patenting: 2. Fields excluded from patenting:
nuclear, agriculture Diagnostic, therapeutic and surgical
methods for the treatments of human
and animals
3. Patent Duration: 7 years in the 3. Patent Duration: 20 years
chemical and pharmaceutical minimum from the filing date.
sector from the filing date. 14
years in other sectors.
4. Discrimination: Patent validity 4. Discrimination: Patent validity in
in case of local production. case of local production and imports.
Compulsory licenses, parallel
imports and other transfers of
rights.
Box 1: Patenting under the 1970 IPA and the TRIPS Agreements
One can conclude that the Ordinance is only a replica of the earlier ‘Mail Box’Act. Thus (a) it
simply states in general terms that a patent application has to show that there is novelty and an
inventive step involved in the new product. But both the Indian Pharmaceuticals Alliance (IPA)
and the Indian Drug Manufacturers Association (IDMA) have warned against the strategy of
‘evergreening’ of patents by allowing the filing of patent applications for new forms of older
patented drugs and for new uses of older drugs, thereby trying to block the entry of generic drugs
into the market. By allowing the ‘evergreening’ practice, off-patent drugs used for even common
ailments, which are in the generic category could get patented and monopolised. Evergreening is
possible because patentability is not defined. (b) A change in the procedure for filing opposition
against a patent application has been made. However, by not making the opposing person/agency a
party to the proceedings, the Ordinance, in the name of curtailment of delay in disposing of
objection petitions, ensures that patents are by and large granted as a matter of course and denial
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would become an odd exception. (c) The clauses related to Compulsory Licensing and Government
takeovers of patents have been left as vague as they are due to which the so called safeguard of
public interest will in practise be nullified on two counts -- one, the procedure for Compulsory
Licensing continues to be cumbersome and time consuming, and two, the royalty to be paid to the
patent holder has no fixed ceiling.
The Patents (Amendment) Bill, 2005, introduced in the Parliament in March, 2005 with the
objective of making the Patents Act compatible with India’s international obligations, particularly
under the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement)
had the benefit of detailed discussion in both the Lower and Upper Houses, pertaining to issues
like patentability of micro-organisms and the definition of 'pharmaceutical substance' to mean “a
new chemical entity (NCE)” or “new medical entity (NME)”.
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EARLIER PATENTS SYSTEM IN INDIA

Production of modern medicines by domestic units started with the setting up Bengal Chemical
and Pharmaceutical works in 1892, which was followed by the establishment of Alembic Chemical
work in 1907 and Bengal Immunity in 1919. Before the existence of Patents Act 1970, the patent
law framed by the Britishers viz. Patents and Design Act 1911 product patent system was being
practised. The prices of medicines and their availability were a serious issue during those times.
According to the Report of the American Senate Committee headed by the Senator Kefauver, the
prices of antibiotics and other medicines sold by the MNCs in India used to be the highest in the
world. During that period 85% of the medicines available in India were produced and distributed
by the Multi National Companies (MNCs). Hindustan Antibiotic Ltd. was founded in 1954, in the
first Five Year Industrial Policy Plan (1950-1955), with the technical assistance of the WHO
(World Health Organisation) and UNICEF (United Nations Children’s Fund). Its goal was to
reduce the country’s dependence on external antibiotics drug supplies and provide supplies at
lower prices than those posted by NMNCs. In the same way, the Government of India promoted
drug production from domestic raw materials. Thus, local units started to produce sulfamides and
anti-infectious drugs. In the Second Five Year Plan (1955-1960), the company Indian Drugs and
Pharmaceuticals Ltd. was set up to help in the production of low cost drugs with the technical help
of the then USSR (Felker, 1997)Process patent system was introduced with short term of patent for
only 5-7 years, with the enactment of Patents Act 1970. The licenses of right system were also
provided to guarantee effective role of the domestic industry. Over a period the role of the
domestic enterprises increased tremendously and virtually 85% of the pharmaceuticals produced
and distributed in the country are being provided by the domestic enterprises (Keayla, 2005). Since
the 1980s, the industry has grown rapidly due to the enactment of the Patents Act 1970 and
announcement of the Drug Policy 1978 (Lanjouw, 1997).
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Flexibilities within the TRIPS

There are important components, which have not been adequately dealt with in the amending
process keeping the flexibilities available and views expressed in various important studies. These
are given below:
a. Scope of Patentability
b. Role of Domestic Enterprises through Compulsory Licensing
c. Mail Box Products in Public Domain
d. Term of Patent and Compulsory License
e. Royalty Parameters
f. Export of Pharmaceuticals Patent Product
g. Opposition to Grant of Patent
h. Data Exclusivity
Article 30 of the TRIPS Agreement allows limited exceptions to the exclusive rights conferred by a
patent provided that such exceptions do not unreasonably conflict with normal exploitation of the
patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking
account of the legitimate interests of third parties.
The Patents Act 1970, India, had been conducive to the growth of pharmaceuticals and other
industries, since it provided process patents (and not product patent) for pharmaceuticals and agro-
chemical products in addition to food substances and other chemical based products. Justice
Rajagopal Ayyangar Committee Report 1958 provided a techno-legal-developmental critique of the
well accepted fundamental grounds on which the limited patent monopoly was being granted by all
countries as part and parcel of their political economies—the crucial rationale being that patents
and their limited monopoly rights are ultimately granted and given legal protection for making
them available for national development by encouraging potential inventors for undertaking ‘R&D
of possible industrial use’ and consecutively giving rise to viable technological-industrial
development. The two Enquiry Committees namely Bakshi Tek Chand Committee-Patent Enquiry
Committee (1948-50) and Justice Ayyangar Committee-Patents Revision Committee (1957-59),
recognised that although India had a patent system in some form or the other, the country did not
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derive much benefit from the previous or the then existing systems (Damodaran, 2005). The first
investigation into the pharmaceuticals market in a Third World country was carried out by the
Hathi Committee, which was formed in February, 1974 by the Government of India and chaired by
Jaisukhlal Hathi. One of its principal conclusions was that brand names were responsible for the
large number of unnecessary and often irrational formulations on the market. The introduction of
the MRTP Act and the FERA reduced the level of foreign direct investment (FDI) in the
pharmaceutical sector in the 1980s. However, with the adoption of trade liberalisation measures,
the limit for automatic approval of FDI was first raised from 40 to 51 percent and subsequently to
74 percent and in 2001, it was raised to 100 percent.
Pharmaceutical Drugs Manufacturing
In past firms imported most of the bulk drugs (the active pharmaceutical or API ingredients) from
their parent companies abroad and sold the formulations (the end products in the form of tablets
and capsules, syrups etc.) at prices unaffordable for a majority of the Indian population.
This led to a revision of Government of India’s (GOI) policy towards this industry in 1972
allowing Indian firms to reverse engineer the patented drugs and produce them using a different
process that was not under patent. The entry of MNC’s was also discouraged by restricting foreign
equity to 40%. The licensing policy was also biased towards indigenous firms and firms with lesser
foreign equity1. All these measures by GOI laid foundations to a strong manufacturing base for
bulk drugs and formulations and accelerated the growth in the Indian Pharmaceutical Industry
(IPI), which today consists of more than 20,000 players. As a result the Indian pharmaceutical
industry today not only meets the domestic requirement but has started exporting bulk drugs as
well as formulations to the international market.
Typically, the pharmaceutical industry is characterized by low fixed asset intensity and high
working capital intensity. The Material cost, Marketing and selling cost and Manpower Cost
constitute the three major cost elements for the Indian pharmaceutical industry, accounting for
close to 70% of the operating income. In the past 6-7 years, material costs, which account for
almost 50% of the operating cost have declined owing to the decrease in prices of bulk drugs and
intermediates, increase in exports which enabled procurement of raw materials in large quantities
and hence at low prices and finally due to increase in production efficiencies. On the other hand,
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the marketing and selling expenses, comprising of promotional expenses, trade discounts,
advertising and distributing costs; and freight and forwarding costs have increased in the past few
years owing to the increase in emphasis on sales of formulations. This increased focus on
marketing partly lead to the increase in the manpower costs of pharmaceutical companies during
the last decade. The other factor for the increase in the manpower costs, at least in case of a few
companies might be due to an increase in R&D efforts, which requires quality research personnel.
Most of the parameters fostering growth are external in nature like demand in external markets etc.
The one factor which is internal and under the direct control of the management are the costs
expended for a given output. The major cost elements, which contribute towards 70% of the
operating income of a pharmaceutical firm in India are as follows:
(i) Cost of Production and selling ; (ii) Cost of Material and ; (iii) Cost of Manpower.
The choice of the inputs and outputs also is very crucial for the relative efficiencies to be useful in
arriving at meaningful conclusions. In case of Indian pharmaceutical industry like any firm,
performance or efficiency is purely relative. There are no predefined efficiency indicators given the
general constraint that the sum total of output should always be greater than the sum total of input.
Given this relative efficiency depends on the firm’s capability or to be precise the management’s
capability in utilizing the given resources better than the competition. This provides these firms
with surplus output or slack, which can be used to face market uncertainty and take advantage of
any new opportunities thus enhancing the growth of the firm. Thus Indian pharmaceutical industry
which is faced with a major period of uncertainty and an unprecedented opportunity for growth
also realizes the importance of efficiency & performance.
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Typology & manufacturing setup of Pharmaceutical companies

Currently the main activities of Indian pharmaceutical industry are broadly restricted to producing
(i) bulk drugs and (ii) formulations with very few companies risking investing in primary research
aimed at developing and patenting new drugs. The bulk drug business is essentially a commodity
business, where as the formulation business is primarily a market driven and brand oriented
business. Bulk drug business is characterized by relatively low risk and is more cost driven but
requires very low marketing and selling expenses.
Multinational companies which have entered the Indian market have mostly restricted themselves
to formulation segment till date. The domestic pharmaceutical industry (MNC’s and Domestic)
meets about 90% of the country’s bulk drug requirement and almost the entire demand for
formulations. The economics of bulk drug business and that of formulation business are quite
different.
For formulations companies, the domestic branded generics business has traditionally been the
cash cow, providing steady cash flows that serve as a buffer against the uncertainties of
international ventures. The growth prospects continue to remain strong on back of increasing
healthcare awareness, rising penetration in semi-urban and rural markets and changing disease
profile. Most MNC pharma majors have also stepped up their focus on Indian market exploring
opportunities of expanding their product portfolio. Uncertainty related to potential changes in the
scope of price control, however, remains a negative. Regulatory price controls are however an
integral part of the pharma business world-wide. The risks of adverse developments in the
domestic market also highlight the importance of geographical diversification as a risk mitigating
measure in the pharma industry.
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Price
Comparison of International Prices vis-à-vis Indian Prices with some selected products retail prices
in India and wholesale prices in other countries considered are as mentioned in the table below:
(Prices converted into Indian Rupees)
Drugs, Dosage and Prices Prices in Prices in Prices Prices
Pack in India Pakistan(R Indonesia in UK in USA
(Rs.) s.) (Rs.) (Rs.) (Rs.)
Anti- infectives
Ciproflaxin HCL 500 29.00 423.86 393.00 1185.70 2352.35
mg
10’s tabs
Times Costlier 14.55 13.55 40.89 81.12
Norflaxin 400 mg 20.70 168.71 130.63 304.78 1843.66
10’s tabs
Times Costlier 8.15 6.31 14.72 89.06
Ofloxacin 200 mg 40.00 249.30 204.34 818.30 1973.79
10’s tabs
Times Costlier 6.23 5.10 20.45 49.34
Cefpodoxime Proxetil 114.00 357.32 264.00 773.21 1576.58
200 mg
6’s tabs
Times Costlier 3.13 2.32 6.78 13.83
Anti-Ulcerants
Diclofenac Sodium 50 3.50 84.71 59.75 60.96 674.77
mg 10’s tabs
Times Costlier 24.20 17.07 17.42 192.79
Rantidine 150 mg 6.02 74.09 178.35 247.16 863.59
10’s tabs
Times Costlier 12.31 29.63 41.06 143.45
Omeprazole 30 mg 22.50 578.00 290.75 870.91 2047.50
10’s cap
Times Costlier 25.58 12.92 38.71 91.00
Lansoprazole 30 mg 39.00 684.90 226.15 708.08 1909.64
10’s caps
Times Costlier 17.56 5.80 18.16 48.97
Cardiovasculars
Atenolol 50 mg 7.50 71.82 119.70 NA 753.94
10’s tabs
Times Costlier 9.58 15.96 -- 100.52
Amlodipine Besylate 5 7.80 200.34 78.42 338.28 660.21
mg 10’s tabs
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Times Costlier 25.68 10.05 43.37 84.64

Anti-Viral Fungal
Zidovudine 100 mg 77.00 313.47 331.65 996.16 895.90
10’s caps
Times Costlier 4.07 4.31 12.94 11.63
Lamivudine 150
Zidovudine 300 mg 274.00 NA NA 4767.02 4988.62
10’s caps
Times Costlier -- -- 17.40 18.21
Anti-histamine
Ceterizine 10 mg 6.00 35.71 57.50 262.19 927.29
10’s tabs
Times Costlier 5.95 9.58 43.70 154.55
Anti-Anxiolotics/
Psychotics
Alpramazoo 0.5 mg 7.00 160.57 31.05 NA 446.81
10’s tabs
Times Costlier 22.94 4.43 -- 63.83
Fluxetine 20 mg 25.80 444.53 143.40 395.79 1416.42
10’s caps
Times Costlier 17.23 5.56 15.34 54.90
Anti-Cancer
Boposide 190.00 554.69 242.90 1217.43 6210.30
100 mg injection
Times Costlier 2.92 1.28 6.41 32.68
Cholestrol Reducer
Atorvastatin 10 mg 39.00 NA 565.95 537.74 1102.92
10’s tab
Times Costlier -- 14.51 13.79 28.28
Simvastatin 10 mg 35.00 283.05 187.00 537.74 1149.79
10’s tabs
Times Costlier 8.09 5.34 15.36 32.85
Antiasthmatic
Salmeterol 25 mcg
Fluticasone 50 mcg 210.00 NA 782.65 1628.25 NA
inhaler
Times Costlier -- 3.73 7.75 --
Urology
Sildenafil Citrate 50 48.00 NA 1356.93 1614.89 1744.93
mg 4’s tabs
Times Costlier -- 28.26 33.64 36.35
Conversion rate of exchange considered:
USD=Rs. 45.50, 1 GBP=Rs. 83.51 PAK, Rs= 0.84, 1 Indonesian Rp=Rs. 0.005
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Sources for prices: USA prices—Red Book 2002, UK Prices—UK MIMS Feb. 2004
Pakistan-Pharmaguide June 2002-03, India-IDR Nov/Dec 2003
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Cost Efficiency
Today India rates higher on cost efficiency as compares to other countries. This is as listed below
in the graph.
The main reason for this is that the Indian market is highly fragmented with about 8,000
manufacturers. This high competition has driven Indian companies to reduce costs across the life
cycle of a product. This is visibly reflected in the manufacturing costs of USFDA plants in India,
wherein the costs are 65 per cent lower than the US and 50 per cent lower than that in Europe.
Below Table shows the trend of outsourcing of contract research in India due to pricing & cost
efficiencies coupled with the technical capability..
The Changing Environment

During the early 1990s, markets were opened by removing restrictions on imports and in 1994
licensing was abolished for producing bulk drugs and formulations. Other than this FDI restrictions
into this sector have been modified to allow 74% foreign equity through the automatic route. More
favorable conditions are to follow in future particularly for MNCs as soon as ‘Product Patents’ and
‘Exclusive Marketing Rights’ (EMRs) are permitted.
In a situation like this, there is a lot of speculation that the indigenous companies that have been
the mainstay of the Indian pharmaceutical industry2 over the past couple of decades finally
becoming a formidable part of Indian economy and a major source of foreign income might be
facing uncertain market conditions in the future. It may also come down to a state where most of
the small scale companies have to close down, with the multinational companies dominating and
monopolizing the industry once again.
There is a justified reason for this, and that is, so far Indian companies have made use of the cheap
labor and the reverse engineering skills under the favorable conditions of process patent regime
and developed generic replicas to drugs that were under patent in developed countries, which then
were sold in the domestic markets and exported to other unregulated markets elsewhere in the
world. This generic business enabled them to compete with multinational companies in India and
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abroad and resulted in good revenues. However, once the product patent regime gets implemented
from the year 2005, one is not allowed to reverse engineer drugs that are patented after 1995, and
the revenues from this business will suffer. Whereas, the multinational companies in India, which
have an impressive new product portfolio will get exclusive marketing rights to sell their products
at higher prices and will be in a position to dictate the terms. Given the above, survival of Indian
companies depends on producing generics of drugs whose patent has lapsed and export the same to
regulated markets4. This is possible only if these firms are able to formulate these products at
much lower prices allowing then to face competition from established players in the international
markets. Other than this, avenues like contract research and manufacturing for multinational
companies have become popular business models for many small scale and medium scale firms.
Exports
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Export of pharmaceutical products from India increased from US$ 6.23 billion in 2006-07 to US$
5.92 billion in 2007-08 and to US$ 8.7 billion in 2008-09—a combined annual growth rate
(CAGR) of 21.25 per cent. According to Mr Jyotiraditya M Scindia, Minister of State for
Commerce, pharmaceutical exports from the country have recorded growth rates of 21.61 per cent,
14.37 per cent and 28.54 cent, respectively, in the three consecutive years of 2006-07, 2007-08 and
2008-09.
Technical Capability & Government Support

Pharmaceutical sector is a growth driver and this is mainly due to the technical capabilities of the
country. To give a glimpse of the achievements:
• India has 119 USFDA-approved plants in addition to 84 UK MHRA-approved plants.
• Many of these plants also have approvals from countries such as Canada, Australia,
Germany and South Africa.
• These approved sites aptly demonstrate the ability of Indian companies to deliver quality
products worldwide and act as a platform for CRAM (contract research & Manufacturing)
players.
The chart below shows the current scenario of the Indian Pharma Industry.
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Government support has played a major role in promoting the technical capabilities by :
1. Promoting Major multi-billion dollar initiative with 50 per cent public funding through a
public-private partnership model to harness India’s innovation capability. The vision is to
catapult India into one of the top five pharma innovation hubs by 2020, targeting to achieve
a global niche with one out of every five to ten drugs discovered worldwide by 2020
originating from India.
2. Collaborations between industry, academia and the government through various
programmes such as New Millennium Indian Technology Leadership (NMITLI) and Drugs
and Pharmaceuticals Research Program (DPRP).
3. By focusing on specialized pharmaceutical education . The government has set up seven
National Institutes of Pharmaceutical Education and Research (NIPERs) as institutes of
‘national importance’ to achieve excellence in pharmaceutical sciences and technologies,
education and training.
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Pharmaceutical Market Trends 2010

The global pharmaceutical market research has been done by many companies and almost all of
the market reports indicate a significant growth of of pharma market in 2010. The forecasting
indicates pharmaceutical market growth of about 4 - 6% in 2010.
Global Market Scenario
If present industry overview is taken into consideration then the global pharmaceutical market in
2010 is projected to grow 4 - 6% exceeding $825 billion. The global pharmaceutical market sales
is expected to grow at a 4 - 7% compound annual growth rate (CAGR) through 2013. This industry
growth is driven by stronger near-term growth in the US market and is based on the global
macroeconomy, the changing combination of innovative and mature products apart from the rising
influence of healthcare access and funding on market demand. Global pharmaceutical market value
is expected to expand to $975+ billion by 2013. Different regions of the world will influence the
pharmaceutical industry trends in different ways.
Asia Pacific Pharmaceutical Market

The pharma market world over will experience significant shifts. Asia-Pacific region will emerge
as the fastest growing pharmaceutical market over the recent past. The reason for this positive shift
can be attributed to the low costs and favorable regulatory environment. This region has
experienced important developments regarding contract manufacturing, especially in generics and
APIs. Increased R&D activities in the region has helped Asia-Pacific pharmaceutical industry to
achieve an estimated market size of around US$ 187 Billion in 2009. Here, the pharmaceutical
industry is expected to grow at a CAGR of around 12.6% during 2010-2012. It can, in fact, become
the global API production hub in next few years.
Pharmaceutical sales are growing at a fast rate in India, China, Malaysia, South Korea and
Indonesia due to the rising disposable income, several health insurance schemes (that ensures the
sales of branded drugs), and intense competition among top pharmaceutical companies in the
region (that has boosted the availability of low cost drugs). China’s pharmaceutical market will
continue to grow at a 20+ % annually, and will contribute 21% of overall global growth through
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2013. India - 3rd Largest Producer of Pharmaceuticals Across the World- is already a US$ 8.2
Billion pharmaceutical market. The Indian pharmaceutical industry is further expected to grow by
10% in the year 2010.
Anti-Diabetic Drugs and those for cardiovascular diseases are expected to see the fastest growth in
2011. Cardiovascular patients will increase to 251 million in 2010, with the greatest rate of growth
forecast for the US market. This is due to the changes in demographics and lifestyle that will boost
the cardiovascular sales. However, the growth rates will be limited by continued patent expiries for
major products and due to the lack of of novel therapies. The anti-hypertensives drugs will
dominate the global cardiovascular market with a market share of nearly 50%.
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Future of pharmaceutical industry

Prediction of Pharma Industry for next decade.
• New follow-on biologics legislation in the U.S. will increase competition from generic
equivalents and eventually decrease brand profits.
• Social media marketing will become a significant part (>10%) of the pharmaceutical
marketing mix.
• The European Union will finally allow Direct-to-Consumer (DTC) advertising to its
citizens.
• Due to decreasing effectiveness of traditional physician detailing and rise of non-personal
detailing, the role of traditional sales representative will become obsolete.
• More efficient targeting of drugs and marketing to specific patient populations will greatly
increase effectiveness and decrease side effects of drugs.
• Internet-based drug promotion (including search engine marketing) will overtake TV-based
DTC in the U.S. in terms of dollars spent.
• Extensive outcomes data available to payers and comparative effectiveness research will
force the industry much further down the path of pay-for-performance (ie, adopt a more
flexible approach to pricing)
• New healthcare reform legislation will dramatically increase the sales of drugs in the U.S.
• The next BIG opportunity for targeted marketing to patients and physicians is mobile apps
on "smart phones"
• Patients will become even more influential and empowered5 in making healthcare decisions
as they are forced to pay a larger share of costs and/or have access to health information
from a variety of sources
• Broadcast (ie, TV) Direct-to-Consumer (DTC) drug promotion will be banned or sharply
curtailed by law in the U.S.
• Despite lack of innovative new drugs and/or generic competition, sales of brand drugs
worldwide will show a sharp increase due to increased demand in emerging markets (eg,
China)
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Indian Pharmaceutical Sector: Future Scenario

The dream of Indian pharmaceutical companies for marking their presence globally and competing
with the pharmaceutical companies from the developed countries like Europe, Japan, and United
States is now coming true.
The new patent regime has led many multinational pharmaceutical companies to look at India as an
attractive destination not only for R&D but also for contract manufacturing, conduct of clinical
trials and generic drug research. With market value of about US$ 45billion in 2005, the generic
sector is expected to grow to US$ 100billion in the next few years.
The Indian companies are using the revenue generated from generic drug sales to promote drug
discovery projects and new delivery technologies. Contract research in India is also growing at the
rate of 20-25% per year and was valued at US$ 10-120million in 2005. India is holding a major
share in world's contract research business activity and it continues to expand its presence.
Clinical Research Outsourcing (CRO), a budding industry valued over US$ 118 million per year in
India, is estimated to grow to US$ 380 million by 2010, as MNCs are entering the market with
ambitious plans. By revising its R&D policies the government is trying to boost R&D in domestic
pharma industry. It is giving tax exemption for a period of ten years and relieving customs and
excise duties of all the drugs and material imported or exported for clinical trials to promote
innovative R&D.
The future of Indian pharmaceutical sector is very bright because of the following factors:
• 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.
• 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).
According to an Ernst & Young and industry body study, the increasing population of the higher-
income group in the country, will open a potential US$ 8 billion market for multinational
companies selling costly drugs by 2015. Besides, the report said the domestic pharma market is
estimated to touch US$ 20 billion by 2015, making India a lucrative destination for clinical trials
for global giants.
- 21 -
Government Initiative to support future growth

100 per cent foreign direct investment (FDI) is allowed under the automatic route in the drugs and
pharmaceuticals sector including those involving use of recombinant technology. (DIPP)
The Government plans to set up a US$ 639.56 million venture capital (VC) fund to give a boost to
drug discovery and strengthen the pharma infrastructure in the country.
The Drugs and Pharmaceuticals Manufacturers Association had received an in-principle approval
for its proposed special economic zone (SEZ) for pharmaceuticals, bulk drugs, active
pharmaceutical ingredients (APIs) and formulations to be located at 19 dedicated SEZ in various
part of the country. These are at different stage of development.
The functional pharma SEZs in India include Jawaharlal Nehru Pharma City (JNPC) at
Visakhapatnam (Andhra Pradesh), PHARMEZ (Gujarat) developed by Zydus infrastructure and
PhaEZ park (Gujarat) developed by Cadila Pharma.
The other SEZ being developed are shown in the following map :
- 22 -
According to Mr Ashok Kumar, Secretary, Department of Pharmaceuticals, the Government had

issued an expression of interest (EoI) for technical and financial bids for the selection of a global
level consultant (GLC) for the preparation of a detailed project report (DPR) in order to develop
India as a drug discovery and pharma innovation hub by 2020.
According to Mr Srikant Kumar Jena, Union Minister of State for Chemicals and Fertilizers, the
Department of Pharmaceuticals has prepared a "Pharma Vision 2020" for making India one of the
leading destinations for end-to-end drug discovery and innovation and for that purpose provides
requisite support by way of world class infrastructure, internationally competitive scientific
manpower for pharma research and development (R&D), venture fund for research in the public
and private domain and such other measures.
As a strategy of growth in pharmaceuticals industry, Government of India had formulated the Drug
Policy of 1986. It was evolved under the dynamic guidance and leadership of late Shri Rajiv
Gandhi to ensuring availability, reasonably priced medicines of good quality and to leverage
India’s competency towards growth of this sector.
The policy is mentioned in Annexure – 1, Drug Policy: Government of India
Investment
• The drugs and pharmaceuticals sector has attracted FDI worth US$ 1707.52 million
between April 2000 and April 2010, according to data published by Department of
Industrial Policy and Promotion (DIPP) in April 2010.
• Indian Immunologicals Ltd (IIL), a subsidiary of National Dairy Development Board, will
launch four new vaccines next year. The company is setting up a new manufacturing facility
in Hyderabad with an investment of US$ 32.4 million. The manufacturing unit will produce
both human and animal vaccine.
Road Ahead
According to a report by PricewaterhouseCoopers (PwC) in April 2010, India will join the league
of top 10 global pharmaceuticals markets in terms of sales by 2020 with the total value reaching
US$ 50 billion. (Exchange rate used: 1 USD = 46.66 INR ,as on July 2010)
- 23 -
PART : 2
STRUCTURAL ANALYSIS OF PHARMACEUTICAL INDUSTRY
The Industry can be analyzed using the Porter’s Five Forces of Competition Framework
Porter’s Five Forces of Competition Framework
There are four structural variables influencing competition and profitability.
1. Threat of new market entrants

2. Bargaining power of buyers
3. Power of suppliers
4. Threat of substitute products (including technology change)
These factors tell about the competitive rivalry amongst the players.
In practice, there are many features of an industry that determine the intensity of competition and
the level of profitability. To analyze, we have used widely accepted framework for classifying and
analyzing these factors i.e. Porter’s Five Forces of Competition framework
- 24 -
COMPETITIVE RIVALRY
Number of Competitors: There are large numbers of players in this sector. More than 15 major
pharma companies exist in the Nation.
Industry Growth: There is very high growth rate (approx 25% this year and 14 % till 2015) in this
industry.
Fixed Cost: The SME needs to bear a Moderate Fixed Cost for a non patented technology,
however in case of R & D & patented manufacturing; the capital required would be high.
Differentiation: There are thousands of Brands existing in the OTC drugs segment and hence it
has high differentiation in terms of customer’s perspective.
Excess capacity: The excess capacity acts inversely to industrial growth if the rate of latter is
lower than the capacity. This increases the rivalry as the price pressure becomes intense and the
fight for market share intensifies. Presently the growth rate surpasses the capacity thereby creating
a demand.
Barriers to exit: Costs associated with capacity leaving this industry is high due to high costs of
dismantling, environmental cleanup, and employee layoffs
- 25 -
Hence Industry Competitive Rivalry is high. There also remain the first mover advantages in form
of stringent patents / copyright laws.
THREAT OF ENTRY
Economies of scale: High capacities impact the price and hence act as a deterrent to a new entrant.
However in the API and patent free segment there is a room for players on a small scale to produce
with limited capacities till the time they are cost effective.
Product differentiation: While the threat of differentiation is high if a company comes with a
molecule basis the R&D efforts and attaches a patent to it. It is low for the OTC Brands brands like
Vicks, Saridon etc which has created high brand equity.
Brand Identity: Lack of Brand Identity is a barrier to entry for OTC and other branded products;
it is low for API & formulations market which can be sub-contracted.
Access to distribution channels: The importance of the distribution channel for the pharma
products for domestic as well as in global products makes the entry barrier high.
Capital requirements : Is high due to the quality standards needed as well as the bulk
manufacture of the drugs.
Access to technology: The Technology plays important part on the production hence the rating
would be High.
Access to Raw material: Moderate to Low for Non Patent drugs & intermediateries while high for
patented ones.
Government and legal barriers: Are moderate due to the liberal policy coupled with quality
standards requirements in production.
Retaliation by established producers: is high for the patented drugs being legal issue of patent
infringement. However it is low for OTC & API drugs.
Hence Barrier to entry is high due to Cost of R&D and patent limitations
- 26 -
THREAT OF SUBSTITUTES
Availability of close substitutes: is low for products with patents and medium after patent expiry
or open to market.
Switching Cost is moderate for non patent components
Buyer propensity to substitute is high due to availability of raw materials as well as.
Relative prices and performance of substitutes is same hence the effect is low.
Hence effect of substitutes is low with patents and medium after patent expiry
SUPPLIER POWER
Size and concentration of suppliers is high for the non patent API while it is low for patented
API.
Availability of substitutes is high for the non patent API while it is low for patented API.
Switching costs is low for the non patent API.
Ability to forward integrate is not possible for the patented API while it is moderate to high for
patented API.
Industry’s threat to backward integrate is a possibility but with low effect.
Cost of product relative to total cost is having a high effect as the margins are low for open API
market due to many suppliers.
Competition between buyers is high thereby having low supplier power due to high pricing
pressure
Hence Suppliers: supplier power is low
- 27 -
BUYER POWER
Number of buyers is high hence having high power
Availability of substitutes is less present for OTC drugs hence is low as the API remains the same
for a drug.
Switching costs is less for OTC drugs and similar brand promotions hence is less, however for
patented technology it is more.
Ability to backward integrate is low for SME but high for the major players due to the volumes
and the variety of drugs under production.
Industry’s threat to forward integrate is high for non patent API while it is low for patented API
thereby high Buyer power for patented ones.
Cost of product relative to total cost is moderate for the non patent API hence moderate buyer
power while it is high for patented API hence more buyer power.
Profitability & Product differentiation is high for Branded & Patented drugs hence the buyer
power is high for differentiated products.
Buyer’s Information: The Buyer has more information and controls the patented API hence have
more power.
Hence Buyer power is low for OTC and non patented API drugs but moderate to high for patented
API drugs.
- 28 -
CONCLUSION
Compilation of the above analysis reveals two broad types of segment in Pharma Industry
1. OTC / API manufacturing
2. Patented drug manufacturing
The following block explains the Competitive scenario for bothe these segments.
Competitive Barrier to Threat of Supplier Buyer power

Rivalry entry substitutes power
OTC / API Moderate /
High Moderate Low Low
Segment High
Patented drug Moderate /
High High Low Low
Segment High
Hence the Competitive forces are High in the Patented Drug Segment while Moderate to Low in
the OTC & API segment.
- 29 -

Pharmaceuticals Industry Analysis - Final

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STRATEGIC MANAGEMENT INDIAN PHARMACEUTICAL INDUSTRY ANALYSIS

INDIAN PHARMACEUTICAL INDUSTRY (HISTORY AND GROWTH)

1970 Indian Patent Act TRIPS Agreement

EARLIER PATENTS SYSTEM IN INDIA

Flexibilities within the TRIPS

Typology & manufacturing setup of Pharmaceutical companies

Times Costlier 25.68 10.05 43.37 84.64

The Changing Environment

Technical Capability & Government Support

Pharmaceutical Market Trends 2010

Asia Pacific Pharmaceutical Market

Future of pharmaceutical industry

Indian Pharmaceutical Sector: Future Scenario

Government Initiative to support future growth

According to Mr Ashok Kumar, Secretary, Department of Pharmaceuticals, the Government had

STRUCTURAL ANALYSIS OF PHARMACEUTICAL INDUSTRY

Porter’s Five Forces of Competition Framework

There are four structural variables influencing competition and profitability.

1. Threat of new market entrants

Switching Cost is moderate for non patent components

Switching costs is low for the non patent API.

Industry’s threat to backward integrate is a possibility but with low effect.

Hence Suppliers: supplier power is low

Number of buyers is high hence having high power

Competitive Barrier to Threat of Supplier Buyer power

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