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Project-Report

SWOT Analysis & Porter’s five force model analysis


of
The Indian pharmaceutical industry

Introduction______________________________
“The Indian pharmaceutical industry is a success story providing
employment for millions and ensuring that essential drugs at affordable
prices are available to the vast population of this sub-continent.”
- Richard Gerster

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 Pharma Industry is estimated to be
worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the
third world, in terms of technology, quality and range of medicines manufactured. From
simple headache pills to sophisticated antibiotics and complex cardiac compounds,
almost every type of medicine is now made indigenously.

Playing a key role in promoting and sustaining development in the vital field of
medicines, Indian Pharma Industry boasts of quality producers and many units
approved by regulatory authorities in USA and UK. International companies associated
with this sector have stimulated, assisted and spearheaded this dynamic development in
the past 53 years and helped to put India on the pharmaceutical map of the world.

The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered
units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical
companies control 70% of the market with market leader holding nearly 7% of the market
share. It is an extremely fragmented market with severe price competition and
government price control.

The pharmaceutical industry in India meets around 70% of the country's demand for bulk
drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules,
orals and injectibles. There are about 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). These units produce the complete range of pharmaceutical formulations,
i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e.,
chemicals having therapeutic value and used for production of pharmaceutical
formulations.

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Following the de-licensing of the pharmaceutical industry, industrial licensing for most of
the drugs and pharmaceutical products has been done away with. Manufacturers are free
to produce any drug duly approved by the Drug Control Authority. 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.

The industry has achieved global recognition as a "low cost producer of quality bulk
drugs and formulations".

The phenomenal progress made by the industry over the years is depicted in Tables 1 &
2.

Table 1. TEMPORAL PROGRESS OF THE PHARMA INDUSTRY

Year Status

1950s Formulations Mostly imported MNC dominance

1960s Formulations Domestic endeavour on imported bulk drugs

1970s Formulations Some imports.


Bulk drugs Indigenous manufacture by domestic companies

1980s Formulations Marginal imports (<5%)


Bulk drugs Significant indigenous manufacture (based on domestic
R&D)

1990s Formulations Significant exports, minimal imports (< 2%)


Bulk drugs Self reliant (exports > imports)

Table 2. GROWTH OF PHARMA INDUSTRY (Rs. in Million)

Compound
growth over 94-
INDICATORS 1965-66 1994-95 1997-98

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95 (%)

Investment 1,400 12,000 18,400 53.3

R&D Expenditure 30 1,400 2,200 57.0

Formulations 1,500 79,350 1,20,680 52.0


Turnover
Bulk Drugs 180 15,180 26,230 72.8

Formulations 30 9,240 28,050 32.9


Exports
Bulk Drugs 30 12,607 21,730 58.0

No. of manufacturers 2,000 - 8,250 -

Source: published reports

The year 1994-95 was the turning point for the industry due to the advent of the WTO.
The industry has since sought to reorient itself from looking inwards to being a player in
the global arena. The thrust on R&D by the Indian pharmaceutical industry is reflected by
the increased proportion of R&D expenditure to both investment and turnover.

Current Scenario_______________________________________

At a time when IT and entertainment stocks are turning out to be unpredictable options,
there is a safe sector that is solidly growing at around 18 per cent annually. And it's time
an investor knew more about pharmaceutical stocks, which have been touching record
highs in the current groundswell of appreciation on Indian stock markets.

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What makes the above statement stronger is that foreign institutional investors (FIIs) are
gleefully returning to the Indian bourses with their recession-battered funds. Even non-
resident Indians are investing heavily. Also, what is heartening to them is the fact that
foreign investment by multinationals in the pharmaceutical sector has grown.

The Indian pharmaceutical industry is the worlds 13th largest in terms of value and the
4th largest in terms of volume. With over 60,000 brands in over 60 therapeutic categories,
the total market size is approximately USD 5bn. It represents 1.6% of global size and is
growing at approximately 8 - 9%. India has world class facilities and expertise in
manufacturing with the largest number of US FDA approved manufacturing units in the
world outside the US. Ancillary industries are well developed with support available
locally. Quality bulk drugs at competitive prices are assured. In R&D, basic research and
biology skills are weak, a legacy of the lax patent regime where basic research was
neglected. But process chemistry skills – honed over decades of reverse-engineering – are
strong. The Indian pharmaceutical industry accounts for at least 35% of bulk drug filings
in the US.

The Indian pharmaceutical industry today is riding high on exports led growth. Brand
acquisition, mergers and alliances and increased focused on the generic and specialty
segments are some of the other current moves. While there is recovery of some sort in the
domestic market and on the R&D front, industry is faced with mixed fortunes. The
market is expanding and price levels are rising. This coupled with increased personal
spending, fuelled by economic growth and greater access to medical care is helping the
market expand.

India could not have stepped into the limelight at a more opportune time. From January
2005, the country became TRIPS compliant and formally recognized product patents.
Patent protection in India is now on levels comparable to developed nations (caveat). For
any Intellectual Property (IP) sensitive industry India is now a destination to be
considered – both as a market and for manufacturing and research & development (R&D)

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Post-TRIPS, the Indian pharmaceutical landscape is set to change permanently. Local
pharmaceutical majors are moving up the international value chain, focusing on generics
marketing in Europe and the US to complement their already-strong presence in bulk
active pharmaceutical ingredient (API) supply, and to capitalize on the record number of
drugs set to go off-patent over the next five years.

To leverage their experience in manufacturing, local companies are scouting for contract
manufacturing opportunities. And to leverage their country-wide network of skilled
marketing personnel they are actively seeking in-licensing and marketing opportunities.

Local pharmaceutical majors do not have the finances to take a product to market. With
annual sales of a billion - less than the R&D budgets of Big Pharma – they are
outlicensing their NME innovation , and focusing on cheaper Abbreviated New Drug
Applications (ANDAs). And to ‘learn and earn’, they are positioning themselves as
willing partners in global pharmaceutical knowledge networks. With cost and process
skills working to their advantage, local companies are also scouting to grab a share of the
international R&D outsourcing market.

Of all the opportunities for global pharmaceutical companies in this scenario, outsourcing
the clinical development phase of the R&D process appears the most promising. With a
large population and world class medical skills, this outsourcing service segment is
developing rapidly and with patent protection no longer a hurdle, a fresh look at this
segment is warranted. Including India in the clinical development outsourcing network
presents a four fold benefit – it is the most immediate opportunity with the greatest
potential benefit in the shortest possible time addressing the most pressing issue today.

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There has been an overall positive effect of India complying with TRIPS norms on
product patents. Even before January 2005, a number of MNCs have set up R&D centers
in India. Around 25 contract research organizations (CROs) and almost all multinational
pharmaceuticals companies have started full-fledged clinical trials there in the last three
years. This move accelerated from up to January 2005 and afterwards. To prepare for the
opportunity, reputed institutions for training such as the Academy for Clinical Excellence
and Institute of Clinical Research have been established over the last decade to train
physicians in ICH-GCP guidelines and ethical trial requirements. The Clinical Data
Interchange Standards Consortium (CDISC), USA, an NPO committed to the
development of clinical research organizations’ standards the world over, is looking at
setting up a chapter in India. The Indian Society for Clinical Research launched in August
2005, aims to bring world-class clinical research organizations in India together, advise
the government on clinical trials issues and foster the highest levels of ethics in the
industry.

While there seems to be an exciting time ahead, a few challenges still remain. As in all
cases of successful outsourcing, three things are necessary – commitment, compliance
and quality. The right partner selection can eliminate the hazards of outsourcing and the
potential pitfalls of a well. If high ethical standards are adhered to, clinical research
studies help the poor in the country by giving them free access to the newest drugs and

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the highest levels of health care that even the middle class cannot afford to have access
to. This should always be remembered and portrayed.

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Critical analysis of the pharmaceutical industry_____________

1. The marketplace for the pharmaceutical industry is the human body – but only for
as long as the body hosts diseases. Thus, maintaining and expanding diseases is a
precondition for the growth of the pharmaceutical industry.
2. A key strategy to accomplish this goal is the development of drugs that merely
mask symptoms while avoiding the curing or elimination of diseases. This
explains why most prescription drugs marketed today have no proven efficacy and
merely target symptoms.
3. To further expand their pharmaceutical market, the drug companies are
continuously looking for new applications (indications) for the use of drugs they
already market.
4. Another key strategy to expand pharmaceutical markets is to cause new diseases
with drugs. While merely masking symptoms short term, most of the prescription
drugs taken by millions of patients today cause a multitude of new diseases as a
result of their known long-term side effects. For example, all cholesterol-lowering
drugs currently on the market are known to increase the risk of developing cancer
– but only after the patient has been taking the drug for several years.
5. While the promotion and expansion of diseases increase the market of the
pharmaceutical investment industry - prevention and root cause treatment of
diseases decrease long-term profitability; therefore, they are avoided or even
obstructed by this industry.
6. Worst of all, the eradication of diseases is by its very nature incompatible with
and diametrically opposed to the interests of the pharmaceutical investment
industry. The eradication of diseases now considered as potential drug markets
will destroy billions of investment dollars and eventually will eliminate this entire
industry.

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SWOT Analysis________________________________________

It is often said that the pharmaceutical sector has no cyclical factor attached to it.
Irrespective of whether the economy is in a downturn or in an upturn, the general belief is
that demand for drugs is likely to grow steadily over the long-term. True in some sense.
But are there risks? This perspective of the Indian pharmaceutical industry can be
explained by carrying out a SWOT analysis (Strength, Weakness, Opportunity, Threat).

Before we start the analysis lets look a little back in the industry’s last six years
performance. The Industry is a largely fragmented and highly competitive with a large
number of players having interest in it. The following chart shows the breakup of the
growth of Indian pharmaceutical industry in last six years.

*Volume growth of existing products

The SWOT analysis of the industry basically reveals the position of the Indian pharma
industry in respect to its internal and external environment.

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Strengths_____________________________________________

1
Large untapped market:

Indian with a population of over a billion is a largely untapped market. In fact the
penetration of modern medicine is less than 30% in India. To put things in
perspective, per capita expenditure on health care in India is US$ 93 while the same
for countries like Brazil is US$ 453 and Malaysia US$189.

2
Growth of middle class:

The growth of middle class in the country has resulted in fast changing lifestyles in
urban and to some extent rural centers. This opens a huge market for lifestyle drugs,
which has a very low contribution in the Indian markets.

3
Competent workforce:

Indian manufacturers are one of the lowest cost producers of drugs in the world. India
has a pool of personnel with high managerial and technical competence as also skilled
workforce. It has an educated work force and English is commonly used. Professional
services are easily available.
With a scalable labor force, Indian manufactures can produce drugs at 40% to 50% of
the cost to the rest of the world. In some cases, this cost is as low as 90%.

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Cost-effective chemical synthesis:

Indian pharmaceutical industry possesses excellent chemistry and process


reengineering skills. This adds to the competitive advantage of the Indian companies.

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The strength in chemistry skill help Indian companies to develop processes, which are
cost effective.

5
Legal & Financial Framework:

India has a 53 year old democracy and hence has a solid legal framework and strong
financial markets. There is already an established international industry and business
community.

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Information&Technology:
It has a good network of world-class educational institutions and established strengths
in Information Technology.

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Globalisation:

The country is committed to a free market economy and globalization. Above all, it
has a 70 million middle class market, which is continuously growing.

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Consolidation:
For the first time in many years, the international pharmaceutical industry is finding
great opportunities in India. The process of consolidation, which has become a
generalized phenomenon in the world pharmaceutical industry, has started taking
place in India.

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Weaknesses___________________________________________

1
Price regulation:

The Indian pharmaceutical companies are marred by the price regulation.


Over a period of time, this regulation has reduced the pricing ability of companies.
The NPPA (National Pharma Pricing Authority), which is the authority to decide the
various pricing parameters, sets prices of different drugs, which leads to lower
profitability for the companies. The companies, which are lowest cost producers,
are at advantage while those who cannot produce have either to stop production or
bear losses.

2
Lack of product patent:

Indian pharmaceutical sector has been marred by lack of product patent, which
prevents global pharmaceutical companies to introduce new drugs in the country
and discourages innovation and drug discovery.

3
Least penetrated:

Indian pharma market is one of the least penetrated in the world. However,
growth has been slow to come by. As a result, Indian majors are relying on exports
for growth. To put things in to perspective, India accounts for almost 16% of the
world population while the total size of industry is just 1% of the global pharma
industry.

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Highly fragmented:

Due to very low barriers to entry, Indian pharma industry is highly fragmented with
about 300 large manufacturing units and about 18,000 small units spread across the
country. This makes Indian pharma market increasingly competitive. The industry
witnesses price competition, which reduces the growth of the industry in value
term. To put things in perspective, in the year 2003, the industry actually grew by
10.4% but due to price competition, the growth in value terms was 8.2% (prices
actually declined by 2.2%).

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Opportunities_________________________________________

1
Innovation:

The migration into a product patent based regime is likely to transform industry
fortunes in the long term. The new patent product regime will bring with it new
innovative drugs. This will increase the profitability of MNC pharma companies and
will force domestic pharma companies to focus more on R&D. This migration could
result in consolidation as well. Very small players may not be able to cope up with the
challenging environment and may succumb to giants.

2
Drugs going off-patent:

Large number of drugs going off-patent in Europe and in the US between 2005 to
2009 offers a big opportunity for the Indian companies to capture this market. Since
generic drugs are commodities by nature, Indian producers have the competitive
advantage, as they are the lowest cost producers of drugs in the world.

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Impact of the Health Insurance Sector:

Opening up of health insurance sector and the expected growth in per capita income
are key growth drivers from a long-term perspective. This leads to the expansion of
healthcare industry of which pharma industry is an integral part.

4 Glob
al outsourcing hub:

Being the lowest cost producer combined with FDA approved plants, Indian
companies can become a global outsourcing hub for pharmaceutical products.

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Threats_______________________________________________

1
Patents:

There are certain concerns over the patent regime regarding its current structure. It
might be possible that the new government may change certain provisions of the
patent act formulated by the preceding government.

2 Oth
er low cost countries:

Threats from other low cost countries like China and Israel exist. However, on the
quality front, India is better placed relative to China. So, differentiation in the contract
manufacturing side may wane.

3 V
AT:

The short-term threat for the pharma industry is the uncertainty regarding the
implementation of VAT. Though this is likely to have a negative impact in the short-
term, the implications over the long-term are positive for the industry.

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Michael Porter’s Five Forces (5f) Model_ Of Indian_________
Pharmaceutical Industry________________________________

Today's business environment is extremely competitive and in economics parlance where


perfect competition exists, the profits of the firms operating in that industry will become
zero.

However, this is not possible because, firstly no company is a price taker (i.e. no
company will operate where profits are zero). Secondly, they strive to create a
competitive advantage to thrive in the competitive scenario. Michael Porter, considered to
be one of the foremost gurus' of management, developed the famous five-force model,
which influences an industry.

Here, we apply this model for the Indian pharmaceutical industry.

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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% market share, and
the top five players together have about 18% 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 to 4 times. For smaller
companies, it would be even higher.

Many smaller 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.

An important fact is that pharmaceutical industry 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 process patents till date, with laws favoring imitators.

Consequently, product differentiation is not the driver, cost competitiveness is. However,
companies like Pfizer and Glaxo have created big brands in over the years, which act as

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product differentiation tools. This will enhance over the long term, as product patents
come into play from 2005.

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 pharma industry, the buyers are scattered and they as such does not wield much power
in the pricing of the products. However, government with its policies, plays an important
role in regulating pricing through the NPPA (National Pharmaceutical Pricing Authority).

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.

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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 amongst doctors is the key for long-
term survival. Also, quality regulations by the government may put some hindrance for
establishing new manufacturing operations.

Going forward, the impending new patent regime will raise the barriers to entry. But it is
unlikely to discourage new entrants, as market for generics will be as huge.

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 on going 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.

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Conclusion____________________________________________

This model gives a fair idea about the industry in which a company operates and the
various external forces that influence it.

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 have used to analyze 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. Though consolidation within the current big names is not ruled out. 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 will
see new proprietary products coming up, making imitation difficult. The players with
huge capacity will be able to influence substantial power on the fringe players by their
aggressive pricing which will create hindrance for the smaller players.

Economies of scale will play an important part too. Last but not the least, in a vast
country of India's size, government too will have bigger role to play.

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