IBS HYDERABAD

PROJECT REPORT:MANEGERIAL ECONOMICS

INDIAN PHARMACEUTICAL SECTOR

SUBMITTED BY:

SECTION - G

ANABADYA PATNAIK 09BSHYD0087

KSHITIJ CHANANA 09BSHYD0396

NAKUL KAPOOR 09BSHYD1021

PRAFUL SINGHAL 09BSHYD0566

SUDHANSHU PANDEY 09BSHYD1015

DATE:

10 September 2009
STATE OF THE ECONOMY
Economic growth decelerated in 2008-09 to 6.7 per cent. This represented a decline of 2.1 per cent from the
average growth rate of 8.8 per cent in the previous five years (2003-04 to 2007-08). The five years of high
growth has raised the expectations of the people. Few remember that during the preceding five-year period
from 1998-99 to 2002-03 average growth was only 5.4 per cent, while the highest growth rate achieved during
the period was 6.7 per cent (in 1998-99). Per capita GDP growth, a proxy for per capita income, which
broadly reflects the improvement in the income of the average person, grew by an estimated 4.6 per cent in
2008-09. Though this represents a substantial slowdown from the average growth of 7.3 per cent per annum
during the previous five years, it is still significantly higher than the average
3.3 per cent per annum income growth during 1998-99 to 2002-03.
Economic Survey of India, 2009

BACKGROUND ANALYSIS

INTRODUCTION
The 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 13.4.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 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.
RELEVANCE FOR GROWTH
India has the highest number of manufacturing plants approved by US FDA, which is next only to that in
the US. More than 85% of the formulations produced in the country are sold in the domestic market. Over
60% of India's bulk drug production is exported. India holds the lion's share of the world's contract research
business as activity in the Pharmaceutical market continues to explode, over 15 prominent contract research
organizations (CROs) are now operating in India attracted by her ability to offer efficient R&D on a low-
cost basis. Thirty five per cent of business is in the field of new drug discovery and the rest 65 per cent of
business is in the clinical trials arena. India offers a huge cost advantage in the clinical trials domain
compared to Western countries. India got a major boost with the signing of Trade Related Intellectual
Property Rights (TRIPS) under the General Agreement on Tariffs and Trade (GATT) in January 2005 with
which it began recognizing global patents. The acceptance of patent laws and the rise of contract research
 and manufacturing sourcing (CRAMS) have led to the diversification of revenue streams, enabling the
Indian Pharmaceutical Industry to experience high market growth.
EXPORT PROFILE
Exports constitute a substantial part of the total production of Pharmaceutical in India. The formulations
contribute nearly 55% of the total exports and the rest 45% comes from bulk drugs. Pharmaceutical exports
clocked $7.2 billion in 2007-08, accounting for six per cent of the country’s total exports. Indian companies
export drugs to over 200 countries, but the top 25 markets, which includes the US, Germany, Russia, China
and few European and African countries, account for about half of the total. Indian drug makers exported
medicines worth Rs 31,608 crore during April 2008-January 2009 and exports shot up 30.7% as compared
to last year due to a weak Indian currency and increased demand for low-cost generic medicines. US is the
largest importer of drugs followed by Russia and Germany.
FOREIGN PARTICIPATION
Drugs and Pharmaceuticals ranks 8th in India’s top 10 FDI-attracting sectors. The government of
India has allowed foreign direct investment up to 100% through the automatic route in the drugs
and Pharmaceuticals industry of the country, on the condition, that the activity should not fall
into the categories that require licensing. Pharmaceutical industry accounts for about 2.91% of
total FDI into the country. The FDI in Pharmaceutical sector is estimated to have touched US$
172 million, thereby showing a compounded annual growth rate of about 62. The Industry has
received almost Rs 2141 crore investment from 36 countries through FDI between April 2007 to
April 2009 with most of the fund infusion directed to healthcare and biotech ventures. Out of the
total investment, almost 82 per cent of the FDI in Pharmaceutical sector was from five countries
- Mauritius, Singapore, USA, UAE and Canada. The increase in FDI Inflows to Drugs and
Pharmaceuticals industry in India has helped in the expansion, growth, and development of the
industry. This in turn has led to the improvement in the quality of the products from the drugs
and Pharmaceuticals. Technologically strong and totally self-reliant, the Pharmaceutical industry
in India has low costs of production, low R&D costs, innovative scientific manpower, strength
of national laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its
rich scientific talents and research capabilities, supported by Intellectual Property Protection
regime is well set to take on the international market as a global leader.

DETAILED ANALYSIS OF THE PHARMACEUTICAL SECTOR

PHARMACEUTICAL GROWTH
The Indian Pharmaceutical industry has grown from a mere Rs. 1,500 crore turnover in 1980 to over Rs. 78,000
crore in 2008 with about 10 per cent of share volume of global production. High growth has been achieved
through; the creation of required infrastructure, capacity building in complex manufacturing technologies of
active production ingredients(APIs) and formulations, entering into drug discovery through original and
contract research and manufacturing (CRAM) and clinical trials and product specific strategies of acquisition
and mergers. The domestic sector had a production turnover of Rs. 47,241 crore from about 10,000 small-scale
and 300 large and medium manufacturing units in 2008.
ROLE IN FOREIGN TRADE
Pharmaceutical exports have grown from Rs. 6,256 crore in 1998-99 to Rs. 30,759 crore in 2008. Exports of
pharmaceuticals have been consistently outstripping the value of corresponding Imports in the period 1996-97
up to 2007-08. Exports registered a growth rate of 25 per cent in 2007-08 over 2006- 07. The sector attracted
FDI amounting to US$ 1,401.60 million during 2000-01 to September 2008, of which, US$ 125.30 million
occurred during April- September 2008.

YEAR EXPORT (Rs. in Crores)

1998-1999 6256.06
1999-2000 7230.16
2000-2001 8757.47
2001-2002 9751.20
2002-2003 12826.10
2003-2004 15213.24
2004-2005 17857.80
2005-2006 22578.98
2006-2007 24942.00
2007-2008 30,759.00

INVESTMENT
Investments in pharmaceutical sector are now expanding into areas of innovative R&D focused outsourcing
opportunities like clinical trials, data management services, pharmaceutical informatics, lead discovery and
optimization, Pharmaceutical co-kinetics and Pharmaceutical co-dynamics and pre-clinical drug discovery in
combinatorial chemistry, chiral chemistry, new drug delivery Systems, bioinformatics and phyto-medicines.
The Indian drug discovery market has grown from US$ 470 million in 2005 to US$ 800 million in 2007.

R& D IN INDIAN INDUSTRY

Though spending on R&D in relation to the GDP in the case of India has increased over the years, the
difference between the spending in R&D between India and the developed world remains considerably high.
India spends approximately 0.88 per cent of its GDP on research and development. This is low compared to
countries like China which spend 1.42 per cent of its GDP on R&D and most developed countries spend more
than 2 per cent of their GDP.
During the period 2005-06, 74.1 per cent of the total R&D expenditure was met from government sources and
rest 25.9 per cent came from the private sector. The Central Government was the highest contributor to R&D
expenditure with a share of 57.5 per cent, the State Government had a share of 7.7 per cent while the industrial
sector contributed 30.4 per cent, and the higher education sector 4.4 per cent. It is pertinent to note that the
industrial sector R&D contribution in developed countries is usually more than 50 per cent. There are about
3,690 R&D institutions in the country. Under the Central Government R&D expenditure, 86 per cent was
incurred by 12 major scientific agencies. The share of Defence Research and Development Organisation
(DRDO) amongst the 12 major scientific agencies was 34.4 per cent. During 2005-06, the industrial sector
R&D units spent 0.55 per cent of their sales turnover on R&D. In terms of sector-wise position, the drugs and
pharmaceuticals sector occupied highest position with a share of 37.4 per cent followed by transportation and
defence with 14.7 per cent and 6.9 per cent respectively.
EVOLUTION OF INDUSTRY
In India, modern system of medicine is a 20th century phenomena, though the traditional system of
medicine has been in practice for many centuries. Therefore, in discussing the evolution of the IPI,
three points of time are very relevant. These are: 1900-1970, 1970-1990 and the decade of 1990s.
The period 1900-1970 signifies the dominance of the multinationals in this field that were basically importing
bulk drugs and formulations from abroad. Most domestic manufacturers were engaged in repacking the
formulations produced by the multinationals and production was concentrated in the hands of the
multinationals.
Production of modern medicine by indigenous units started with the setting up of Bengal Chemical and
Pharmaceutical works in 1892, which was followed by the establishment of Alembic Chemical works in
1907 and Bengal Immunity in 1919. At this point in time, the Patents Act of 1911 was in practice, which
facilitated patenting all the known and possible processes of manufacturing of the said drug besides patenting
the drug itself. Hence, the indigenous firms were legally prevented from manufacturing most of the new drugs
during the life of the patent secured by the latter, i e, for 16 years, which could be extended to a maximum of
another 10 years if the working of the patent had not been sufficiently remunerative to the patentee. This gave
them the monopoly power initially. The domestic firms were also forbidden from processing a patented drug
into formulations or importing it. However, the Second World War and the introduction of sulpha drugs and
penicillin gave on impetus to the pharmaceutical industry. The policy instruments of independent India
emphasized on creating a strong public sector unit.
In the pharmaceutical front, specific areas of production were defined for the public, private and the domestic
sector. The setting up of the public sector units and the technical institutes meant for creating technical skills in
the country contributed to the growth of the domestic industry. By 1952, a few drugs like tetanus anti-toxin,
PAS and Indocblorhydroxyquinoline were produced in India from their basic stages . However, the import
content of the basic drugs was high due to which the prices of the pharmaceutical products of India were the
highest in the world.
The second period of 1970-1990 is very significant for the IPI since, a few important changes that had
implications on the growth of the IPI took place during this time. The Patent Act of 1911 was amended in 1970,
which came into force in 1972. The 1970 Patent Act provides protection for the processes of manufacturing the
drug for seven years from the date of filing the application or five years from the date of the grant of the patent.
Under this Act only one process that was used in the actual manufacturing could be patented. This change
brought a renaissance to the pharmaceutical industry of India. More units larger in size and capacity set up in
the 1970s and 1980s started producing drugs, which were primarily imported till then. The technical institutes
that were set up in the early 1950s and 1960s resulted in creating technical and engineering skills, which could
easily adapt the technology developed elsewhere, proved to be very advantageous for the industry. By 1972,
over 100 essential drugs covering a wide spectrum of therapeutic groups like antibiotics, sulpha drugs, anti
leprotic drugs, analgesics, antipyretics, vitamins, tranquillisers, photochemical and various other pharmaceutical
chemicals were produced in India from basic stages .
A significant increase in the production of bulk drugs and formulations is observed before and after the 1970s.
In the early 1970s, the government introduced the MRTP Act the FERA, which aimed at reducing the
concentration of economic power with few units and controlling the flight of foreign exchange from the
country. Basically units, which were not bringing in any new technology were asked to reduce their foreign
equity and renewal of their licence was also subject to their bringing in new technology. This resulted in the
dilution of the foreign equity, which is reported in the Table As a strategy to protect the domestic industry from
competition, the FERA companies were also not permitted to produce a list of drugs, which were delicensed
during the 1980s.
Ownership Pattern of Foreign Companies

Share of Foreign Number of Number of

Equity Companies in Companies in
(Per Cent) 1976-77 1981-82
Above 74 20 5
50-74 11 14
40-50 13 16
26-40 14 10
Below 26 6 3
Total 64 48
In the 1990s, several significant changes occurred in the pharmaceutical sector with the introduction of trade
liberalization measures. All those drugs, which were reserved for the production by the public sector, were
delicensed in two stages.
One immediate impact of this de-licensing of the drugs was that production increased manifold besides
increasing the competition among the domestic firms and from foreign companies in the 1990s. The increased
production had a positive impact on exports and on the balance of trade.
The government also increased the automatic approval limit for foreign direct investment in the pharmaceutical
industry from 40 per cent to 51 per cent. This was subsequently increased to 74 per cent in 1997. In 1994,
government of India signed the TRIPS Agreement.
The de-licensing of the drugs and the policy of the government to allow subcontracting or loan licensing system
resulted in an uneven growth of the domestic pharmaceutical industry. About 70 per cent of the production in
the pharmaceutical sector is contributed by loan licensees. As of 2000, it is estimated that the total number of
units engaged in the production of pharmaceutical units is 24, 000 (including that of loan licensees). Out of
which 1.25 per cent or 300 belong to the organized sector and 23, 700 belong to the small and medium sector
[GITCO 2000]. It is estimated that out of this 300 units only a few units will have the R & D facilities that is
recognized by the department of science and technology (DST), while most others have sophisticated quality
control laboratories, some of which even match the international standards.
Most of the firms are engaged in the production of finished formulations that are in the off patent segment. Lack
of adequate funds for modernization, increased competition from the private sector and high cost of production
resulted in the decline of the public sector in the 1990s.
For analyzing the current scenario--

PORTER’S FIVE FORCES MODEL

(a) INDUSTRY COMPETITION

Pharmaceutical industry is one of the most competitive industries in the country with as many as 10,000
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.
Thus, the concentration ratio for this industry is very low. 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. The fixed cost requirement is low but the need for working
capital is high.
The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us that in bigger companies
this ratio is in the range of 3.5-4 times. For smaller companies, it would be even higher. Many small players
that are focussed on a particular region have a better hang of the distribution channel, making it easier to
succeed, albeit in a limited way.
An important fact is that, pharmaceutical is a stable market and its growth rate generally tracks the economic
growth of the country with some multiple (1.2 times average in India). Though volume growth has been
consistent over a period of time value growth has not followed in tandem.
The product differentiation is one key factor which gives competitive advantage to the firms in any industry.
However, in pharmaceutical industry product differentiation is not possible since India has followed product
patents till date, with loss favouring imitators. Consequently product differentiation is not a driver, cost
competitiveness is. However, companies like Pfizer and Glaxo 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 the patent
regime which has forced Indian companies to rethink its strategies and to invest more on R&D. Also contract
research has assumed more importance now.
(b) BARGAINING POWER OF BUYERS
The unique feature of pharmaceutical industry is that the end user of the product is different from the influencer
(read doctor). 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, govt with its
policies, plays an important role in regulating pricing through the NPPA (national pharmaceutical pricing
authority).
(c) 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.
(d) BARRIERS TO ENTRY
Pharmaceutical industry is one of the most easily accessible industries for an entrepreneur in India. The capital
requirement for the industry 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 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.
(e)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 thee field of biotechnology, can prove to be a threat to the synthetic
pharmaceutical industry.

CONCLUSION

This model gives a fair idea about the industry in which a company operates and the various external forces that
influence it. The industry seems to be operating in monopolistic market structure. However, it must be noted
that any industry is not static in nature. It’s dynamic and over a period of time the model, which we have used to
analyse the pharmaceutical industry may itself evolve.

Going forward, we foresee increasing competition in the industry but the form of competition will be different.
It will be between large players (with economies of scale) and it may be possible that some kind of oligopoly or
cartels come into play. This is owing to the fact that the industry will move towards consolidation. The larger
players in the industry will survive with their proprietary products and strong franchisee.

In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key players. Smaller fringe
players, who have no differentiating strengths, are likely to either be acquired or cease to exist.

The barriers to entry will increase going forward. The change in the patent regime has made sure that new
proprietary products come up 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. Economies of scale will play an important part too. Besides government will have a bigger role
to play.

The Clinch Factor:

The President
The IBRD
United Nations
Washington
September 10, 2009

Subject: Grant for the Indian Pharmaceutical Industry

Dear Sir,
This is with regard to the aid being offered by the World Bank. India, being one of the fastest growing
economies of the world, is consistently growing despite the financial crunch in the world economy. Some facts
about the Indian economy:
1. Social Welfare opportunities (initiatives)
 The Indian pharmaceutical industry is renowned for supplying affordable generic versions of
patented drugs for illnesses like HIV/AIDS to some of the world’s poorest countries.
 An Environmental Cell has been created in the department to collect, disseminate information on
Environmental matters, identify issues and solutions, create awareness and to synergize efforts for an
environment-friendly Pharmaceutical industry.
 Under the Jan Aushadhi Campaign launched by the Government along with Central Public Sector
Undertakings to provide quality medicines at affordable prices to the masses, “Jan Aushadhi” stores
would be set up in every district, where generic drugs, unbranded but equivalent in quality to
branded drugs, are being sold. The first such “Jan Aushadhi” store was opened in Amritsar in
November 2008 and the campaign is on its way to opening more than 45 stores in different places by
end-March 2009. A national toll-free helpline has been set up to provide information on this.
2. Apart from providing employment, setting up a plant is 40% cheaper in India compared to developed
countries and the cost of bulk drug production is 60-70% less.
3. Future prospects
 The Pharmaceutical industry is expected to grow at a rate of 10.8 % in the year 2009. It is expected
to grow at CAGR of 12.3% and is anticipated to cross US$20 bn by 2015. Indian companies are
vying for the branded generic drug space to register their global presence. It is also triggered by fact
that generics worth over $40 billion are going off patent in the coming few years which is close to
15% of the total prescription market of the US. This would open up new market opportunities for
the Indian pharmaceutical sector.
 With market value of about US$ 45billion in 2005, the generic sector is expected to grow to US$
100billion in the next few years.
 Contract research in India is also growing at the rate of 20-25% per year and was valued at US$ 10-
120million in 2005.
Government 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.
 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).
The Draft National Pharmaceutical Policy, 2006 has recognized the need and benefits of developing
pharmaceutical parks/SEZs in India and proposes a scheme for setting up separate SEZs for bulk and
formulations. "It is proposed to set up 25 pharmaceutical parks over five years in India.
The pharmaceutical industry in India is expected to grow from $5.5 billion now to $25 billion by 2010 and
$75 billion USD by the year 2020.
ADVANTAGE INDIA
 Competent workforce: India possess a skillful work force with high managerial and technical
competence.
 Cost-effective chemical synthesis: The track record for development, particularly in the area of
improved cost-beneficial chemical synthesis for various drug molecules is excellent.
 Legal & Financial Framework: India is a democratic country with a solid legal framework and strong
financial markets. There is already an established international industry and business community.
 Information & Technology: It has a good network of world-class educational institutions and
established strengths in Information Technology.
 Globalization: The country is committed to a free market economy and globalization. Above all, it has a
70 million middle class market, which is constantly growing.
 Consolidation: After many years, the international pharmaceutical industry has discovered great
opportunities in India. The process of consolidation, which has become a popular phenomenon in the
world pharmaceutical industry, has started taking place in the Indian pharmaceutical industry as well.
The Indian pharmaceutical industry which is worth US $ 3.1 billion is growing at the rate of 14 percent
per annum.
Keeping in mind the breakthrough performance of our industry and the social and economic benefits it provides
to the global and Indian economy, we humbly request you to sanction the grants for The Indian Pharmaceutical
Industry.

Thanking you
President
Indian Pharmaceutical Association.
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