Indian Pharmaceutical Industry Analysis

INTRODUCTION

The Indian Pharmaceuticals sector has come a long way, being almost non-existing during 1970,
to a prominent provider of health care products, meeting almost 95% of country’s
pharmaceutical needs. London research company Global Insight estimates that India’s share of
the global generics market will have risen from 4% to 33% by 2007. Most of the players in the
market are small-to-medium enterprises; 250 of the largest companies control 70% of the Indian
market. India’s US$ 3.1 billion pharmaceutical industry is growing at the rate of 14 percent per
year. It is one of the largest and most advanced among the developing countries. 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. Globally, the Indian industry ranks 4th in terms of volume and 13th in terms of
value & India are also one of the top 5 active pharmaceutical ingredient (API) producers. It ranks
17th with respect to exports value of bulk actives & dosage. Indian pharma has been relying on
reverse engineering to copy international drugs. However, it has started realizing the importamce
of R&D & developmental skills to tap the US/EU markets which has led to rise in export figures
of the companies.

The opportunities for the Indian players lie in both manufacturing & R&D services. The industry
has been discussed in three phases in much research report; however, the post 2005 era will be
covered in this project. The year 2005 saw a series of deelopment for the Indian pharmaceutical
players like implementation of VAT, shift from excise based levy to MRP based levy &
recognition of product patents. While the process patent regime helped in the development of
Indian pharmain the generic drugs sector, the product patent regime has restored the confidence
of the MNCs in the Indian market. In the generic field $45 bn drugs are expected to loose their

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patents protection, opening up huge opportunity for the Indian pahrma companies in the generic
field.

Top 10 Pharmaceuticals in India, 2008

Rank Company Revenue Revenue 2008

2008 (USD millions)
(Rs crore)

1 Ranbaxy 4,461 1,026

2 Sun Pharmaceuticals 2,375 550

3 Dr. Reddy's Laboratories 1,933 444

4 Cipla 1,842 423

6 Aurobindo Pharma 1,260 290

7 GlaxoSmithKline 1,228 282

8 Lupin Laboratories 1,180 271

9 Cadila Healthcare 1,091 251

10 Wockhardt 980 225

The Indian pharmaceutical industry has a unique amalgamation of three critical factors which
make it so attractive for investment thereby adding impetus to growth.

The process patent regime

Price controls

Exemptions to Small Scale Industries (SSIs).

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INDUSTRY STRUCTURE

The structure of the Indian Pharmaceutical Industry is characterized by fragmentation, with over
20,000 players – a large number of them in the small scale sector, only 260 in the organized
sector. As a result, no individual market share in Indian retail formulations market exceeds 7%.
However a trend of consolidation is visible at the top. In 2001, the top five players accounted for
22% while in 2006, they account for 28% of the market share. Also the top ten in 2001
accounted for 36%, and in 2006 they accounted for 42%.

The pharmaceutical industry can be divided on the basis of form and therapeutic application. On
the basis of form, the industry can be divided into bulk drugs and formulations, while on the
basis of application; it can be divided into various therapeutic segments. Formulations occupy
most of the market share. The anti-infective segment remains the largest in the Indian retail
formulations market at around 25%.

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PORTER’S FIVE FORCES ANALYSIS

1. THREAT OF NEW ENTRANT: has low entry barrier for new entrants. The major
barriers to entry are:

(i) The presence of economies of scale in manufacturing, R&D, marketing, sales etc
& capital requirement & financial requirements. The exsisting companies have
advantage in terms of costs involved in launching new drugs & formulations. The
new companies would find it difficult to achieve this.

(ii) Differentiation of products from the existing products in the market & creating
brand awareness in the minds of doctors & pharmacists. New entrants will face
difficulties in gaining trust of doctors/patients & they also need time to develop
efficient distribution channels & preffered arrangements with doctors/
pharmacists.

(iii) Regulatory policies including patents, regulatory standards. The Indian Patent
Act, 1970 recognized process but not product patents. The introduction of TRIPS
part of WTO agreement has led to huge barriers for potential entrants.

(iv) 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.

2. BARGAINING POWER OF BUYERS: the buyer doesnot have much power over the
manufacturers because of the presence of influencing element i.e. the doctors. Due to the
extremely fragmented nature of industry & government policies like DPCO (Drug Price
Order Control), 1970 under which the power to control prices is with the NPPA (National
Pharmaceutical Pricing Authority) the low power of buyers does not have much effect on
the manufacturers. Except in generic & OTC medicines, the buyer doesnot normally
switch medicines.

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3. BARGAINING POWER OF SUPPLIERS: the main suppliers are the organic chemical
industry & labor forces. The fragmented nature of the organic chemicals industry
prevents it from having much bargaining power over the manufacturers as the switching
cost is low for the manfaturers.

4. THREAT OF SUBSTITUTES: the main substitutes to the synthetic pharmaceutical

industry are mainly the emerging biotechnology chemical industry. Also in developing
countries like India, the traditional medicines also play a major substituting role.

5. INTENSITY OF RIVALRY: the Indian Phamaceutical industry is highly fragmented

with around 250-300 manufacturing & formulation units in the organized sector which
contribute to only 70% of the market share of the total sales in the country. The
concentration ratio (proportion of total industry output by the largest firm in the industry)
for the industry is very low. Also government subsidies have led to the proliferation of
many small players. Since the product patents were not valid in the country till 2005, the
differentiation in the product is very low. The key driver in this industry is the cost-
competitiveness. Afer 2005, major MNCs like Pfizer & GSK started introducing newer
products in the market thereby increasing competition in the industry.

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SWOT ANALYSIS

STRENGTHS:

(i) Well developed industry with a strong manufacturing base. Cost of poduction of drugs
is one of the lowest.

(ii) With a penetration of mordern medicine less than 30%, India is an untapped market.
The strong marketing & distribution network will form an added advantage for
penetration.

(iii) The high middle class growth has led to the fast changing lifestyles in urban as well as
to some extent in the rural centres. This has opened a huge market for the lifestyle
drugs, which currently have a low contribution in the Indian pharmaceutical industry.

(iv) Cost of production of drugs in India is one of the lowest. Can produce drugs at 40-
50% of the cost of rest of the world.

(v) Presence of patent protected drugs that ensure future revenue streams.

(vi) Self reliant technology for production. Excellent chemistry & process reengineering
skills which helps in developing cost effective processes.

(vii) Due to consolidation of acquisition’s operations, a large pool of installed capacities

exists. Economies of scale in marketing, production & adminstration can be garnered.

(viii) Access to a pool of highly trained scientists.

(ix) Liberalization of government policies.

(x) Low R&D Costs

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WEAKNESSES

(i) Price regulation – led to reduced pricing ability of the companies. The NPPA sets the
prices of different drugs, which in turns leads to lower profitability for these
companies.

(ii) Lack of product patent- this prevents new drug introduction in the country & thereby
supress innovation & drug discovery. There is a lack of experience even to exploit the
new patent regime.

(iii) One of the least penetrated markets in the world. Mainly rely on exports because of
slow growth.

(iv) Highly fragmented because of very low entry barriers although installed capacities are
high.

(v) High monetary obligations due to the need for mergers & acquisitions.

(vi) Low investment in R&D & lack of desired resources make it difficult to compete with
MNCs on a worldwide basis. Few drug discovery system & low level of
Biotechnology add to the problem.

(vii) No strong linkage between industry & academia.

(viii) Shortage of medicines containing psychotropic substances.

(ix) Enough intermediaries are not available for bulk drugs.lack of accurate technology
for forecasting & strategic future planning.

(x) Quality standards are going to be increasingly tightened over the course of next 3-5
years. India approached the US FDA to cooperate to bring the standards of Indian
production in same lines of US FDA. Unfortunately, most Indian companies will not
be able to stand this test.

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OPPORTUNITIES

(i) The migration to new patent product regime wil transform the industry by bringing
with it new innovative drugs. This in turn will increase the profitability of the Indian
MNCs & will force domestic companies to focus more on the R&D.

(ii) New market opportunities are in the way for the Indian pharma companies as a large
number of drugs are going off patent in the US & Europe between the years 2005-09.
Spreading use of genric drugs & the fact that generic drugs are commodities by nature
will provide low cost Indian producers with a competitive advantage.

(iii) The expected growth in the per capita income & opening up of health insurance
sector are the key growth drivers for long term. This will lead to an expansion of the
healthcare industry of which pharma is an integral part.

(iv) There exists a significant export potential for the Indian companies being one of the
lowest cost producers. FDA approved plants will act as an advantage for them.

(v) With the aging of the world population combined with new diagnoses & new social
diseases, the demand for medical products on a whole is increasing. Also, there is a
growing attention to health. Moreover, with new therapy approaches & new delivery
systems, Indian industry is bound to grow.

(vi) There is a huge potential for the development of India as a centre for international
clinical trials.

(vii) Contract manufacturing arragements & globalization will act as additive for easier
international trading.

(viii) India being a niche player in the pharmaceutical market has a huge growth potential.
Also, the market saturation point is far away.

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THREAT

(i) The future of the current patent regime is qusetionable.

(ii) Other low cost producers like China & Israel pose a graet threat to the Indian industry.

(iii) DPCO prevents the pharmaceutical companies from being much profitable & thus
from genrating urplus that can be invested further.

(iv) Regulatory requirements hamper the R&D efforts of the Indian companies.

(v) Small pharmaceutical companies face the danger of being taken over by big players,

(vi) The MRP based excise duty regime poses a threat to the existence of many small
players.

(vii) High cost of discovering new leads to fewer & less frequent discoveries.

(viii) Greater number of potential new drugs & greater number of efficient therapies pose a
threat to the Indian players.

(ix) High entry & sales & marketing costs are also big threat to the upcoming companies
in India.

(x) Spike in raw material prices, Accelerated genericisation & intensified competition.

(xi) Forex exchange losses & mark to market losses due to the rupee depreciation in June
2008.

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ADVANTAGE IN INDIA

(i) Competent workforce: India has a pool of personnel with high managerial & technical
competence as also skilled workforce. It has an educated workforce & English is
commonly used. Professional services are easily available.

(ii) Cost-effective chemical synthesis: its track record of development, particularly in the
area of improved cost beneficial chemical synthesis for various drug molecules is
excellent. It provides a wide variety of bulk drugs & expots sophisticated bulk drugs.

(iii) Legal & Financial framework: India has a 53 year old democracy & hence has a solid
legal framework & strong financial markets. There is already an established
international industry & business community.

(iv) Information & Technology: it has a good network of world class educational
institutions & established strengths in IT.

(v) Globalization: the country is committed to a free maret economy & globalization.
Above all, it has a 70 million middle class market, which is continuously growing.

(vi) Consolidation: for the first time in many years, the internationl 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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TRENDS IN INDIAN PHARMACEUTICAL INDUSTRY IN 2008

1. Outsourcing & Off-shoring to Continue: While outsourcing and off-shoring seem to have
taken off in 2007; it has been accelerated even more in 2008. Pharma companies are
getting more and more comfortable, experienced and used-to with doing business
globally, especially in India and China.
2. Global Licensing: licensing from companies in India and other emerging countries.
3. Layoffs and Lean Operations: Pfizer, J&J, BMS, Wyeth and many others have been
announcing their plans for layoffs and lean operations.
4. Growing importance and dominance of generic companies: Barr, Ranbaxy, Mylan, Teva,
Actavis, Dr. Reddy’s Labs keep launching more and more generics and also keep moving
up the value chain by focusing on their NCEs.
5. Challenging times for Wholesalers: Wholesalers and distributors face more hurdles in
2008 as they face more problems with their business models. More and more retailers,
hospitals and PBMs (customers) and manufacturers (suppliers) are trying to figure out the
true role (and value) of wholesalers and how to compensate them.
6. M&A / Consolidation: It more M&A and consolidation.
7. Eliminating Hospital Infections: pharma industry will work more and more towards
preventing infections and creating solutions that treat infections in an expedited manner.
This is a huge shift when the onus was solely on hospital staff.
8. Prevention of Medical errors: Pharma companies are already working on informatics and
other IT tools to prevent medical errors in partnerships with healthcare institutions.
9. Emergence of new global players: companies like Actavis, Ranbaxy, Nicholas Piramal,
Dr. Reddy’s, Zydus, and Wuxi Pharmatech to take lead in a wide range of M&A
activities. More and more of these companies have the dreams to become leading pharma
companies not just in their own countries or regions but also globally.

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IMPACT OF UNION BUDGET 2008-09 ON INDIAN PHARMA SECTOR

Budget provisions for Pharma industry were:

1. Cut in excise duty to 8% from 16%: Major beneficiary on account of cut in excise duty is
the MNC pharma companies as they get higher proportion of their revenue from domestic
markets compared to home growth companies.

2. Weighted deduction of 125% on any payment made to companies engaged in R&D: The
contract research which is on take off in the county has got a boost by way of weighted
deduction of 125% on any payment made to companies engaged in R&D.

3. The allocation under ‘National Rural Health Mission’ has been increased to Rs 12,050
crore

4. there is an allocation of Rs 993 crore for National Aids control programme

5. Provision of Rs 1042 crore for 2008-09 for eradication of Polio auguring well for the
industry.

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VALUE CHAIN ANALYSIS

Due to poor research and development, they have been able to develop new products. Thus, they
need strategic alliances with firms that have expertise in these areas. Secondly when entering
new geographic market, firms face entry barriers in terms of sales and distribution network.
Pharmaceutical products require extensive sales penetration and relationship with doctors. It is
difficult for a new player to build in a short time. Moreover, it requires considerable investment
which is financially not feasible when Indian firms only have a few products abroad.

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PEST ANALYSIS

1. POLITICAL

(i) Product patent act: product patent regime will filter the best from the pack and
would be favorable to players with built-in scientific and technical resources.

(ii) Pharma Export Promotion Council (Pharmexcil): Facilitation of exports of

Drugs, Pharmaceuticals, Biotechnology products, Herbal Medicines,
Diagnostics.

(iii) Foreign Direct Investment (FDI): FDI upto 74% in the case of bulk drugs,
their intermediate Pharmaceuticals and formulation.

(iv) Automatic approval for Foreign Technology Agreement (FTA) is already

available in the case of all the bulk drugs cleared by Drug Controller General
(India).

(v) Introduction of Value Added Tax (VAT).

(vi) Schedule M of Drugs and Cosmetics Act ,1940- strengthen the pharma
industry as a producer of quality medicines

2. ECONOMIC

(i) GDP growth rate less (7.9%) as compared to previous year.

(ii) Inflation rate is high at 12.14% leading in increase in prices of commodities.

(iii) Interset rates: Due to uncertainity in the econy the interest rate has been
revised many times & is comparatively higher at around 9.5%. This increase
in interest rate can affect any new company trying to set up operations for
which it would require some financing from the banks.

(iv) Appreciating rupee has been the cause of concern for the pharma industry in the
recent times, resulting in declining exports revenues for domestic companies.
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3. SOCIAL FACTORS

(i) Health consciousness: increased awareness about diseases has lead to increased health
Consciousness.

(ii) Population growth rate: the current population growth rate in India is 1.578% (2008
EST), thereby creating demand for more medicines & healthcare.

(iii) Age distribution: the age structure is 31.5% in 0-14 year’s age group; 63.3% in 15-64
years & 5.2% over 65 years of age. The median age is 25.1 years; male age is 24.7
years & female 25.5 years.

(iv) Emphasis on safety

4. TECHNOLOGICAL FACTORS

(i) R& D activity

(ii) Rate of technological change- has been keeping pace with the changing technologies
evolving on a regular basis to combat competition.

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FEW TOP COMPANIES

RANBAXY

India's largest pharmaceutical company, is an integrated, research based, international

pharmaceutical company, producing a wide range of quality, affordable generic medicines,
trusted by healthcare professionals and patients across geographies. The Company is ranked
amongst the top ten global generic companies and has a presence in 23 of the top 25 pharma
markets of the world. The Company with a global footprint in 49 countries, world-class
manufacturing facilities in 11 and a diverse product portfolio, is rapidly moving towards global
leadership, riding on its success in the world’s emerging and developed markets. For the year
2007, the Company's Global Sales at US$ 1,619 Mn reflected a growth of 21%. Profit after Tax
at US$ 190 Mn registered an increase of 67% over the previous year. The Company is driven by
its vision to achieve significant business in proprietary prescription products by 2012 with a
strong presence in developed markets. It aspires to be amongst the Top 5 global generic players
and aims at achieving global sales of US $5 Bn by 2012.

SUN PHARMACEUTICALS

It is an International speciality Pharma Company, with presence in 30 markets. They make active
pharmaceutical ingredients. In branded markets, their products are prescribed in chronic therapy
areas like cardiology, psychiatry, neurology, gastroenterology, diabetology and respiratory. The
corporation's present portfolio consists of a number of products in various strengths and package
sizes, across a variety of therapeutic segments, including epilepsy and hypertension. The revenue
in 2007 was Rs 21.320 billion & net income of Rs 7.842 billion in the same financial year.

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DR. REDDY’S LAB

Dr. Reddy’s Laboratories Ltd. (Reddy's), founded in 1984 by Dr. K. Anji Reddy, and has
become India’s biggest pharmaceutical company. Dr. Anji Reddy had worked in the publicly-
owned Indian Drugs and Pharmaceuticals Ltd. Reddy's manufactures and markets a wide range
of pharmaceuticals in India and overseas. The company has more than 190 medications ready for
patients to take, 60 active pharmaceutical ingredients for drug manufacture, diagnostic kits,
critical care and biotechnology products. By 2007, Dr. Reddy’s had six FDA-plants producing
active pharmaceutical ingredients in India and seven FDA-inspected and ISO 9001 (quality) and
ISO 14001 (environmental management) certified plants making patient-ready medications –
five of them in India and two in the UK. The revenues as on May 2007 were $1.5 billion & net
income as on May 2007 was $216 million

CIPLA

Cipla, originally founded as The Chemical, Industrial & Pharmaceutical Laboratories is a

prominent Indian pharmaceutical company, best-known outside its home country for producing
low-cost anti-AIDS drugs for HIV-positive patients in developing countries. Cipla makes drugs
to treat cardiovascular disease, arthritis, diabetes, weight control, depression and many other
health conditions, and its products are distributed in more than 180 countries worldwide. Among
the hundreds of generic medications it produces for international distribution are atorvastatin,
amlopidine, fluoxetine, venlafaxine hydrochloride and metformin.

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FUTURE OUTLOOK

Better growth is expected in the domestic market & the players’ initiatives to focus on
contract research & manufacturing services & generics in advanced markets can sustain
expansion in the international markets.

The pharmaceutical industry is one of the fastest growing sectors in Indian economy.
Visiongain predicts that market for pharmaceuticals in India has strong potential for
increased growth from 2008 right through to 2023. India has had a strong domestic
pharmaceutical industry and a rapidly expanding market with a population of over a
billion and a rapidly expanding economy.

Prevalence values of many diseases are likely to increase with expansion of population,
urbanisation and with higher identification rates in the coming decade.

India's pharmaceutical market is increasingly important in global pharma, with both

domestic and foreign companies benefiting. Healthcare provision – both public and
private – is improving, leading to fast-expanding markets for healthcare products,
especially modern pharmaceuticals.

As the demand for medicines would never lessen, on the other hand this would increase
owing to new disease discovery & the discovery of drugs to counter these diseases. So in
this situation it is evident that the Indian Pharma Industry has a huge growth prospects.

India is an interesting geography for several global drug majors who are attracted by huge
talent pool, scientific skills & cheap labour that has enabled Indian companies
manufacture drugs at about a third of the cost in the west. There can be an increase in the
nuber of global players entering the Indian market despite of the current economic
conditions.

Future state (2010): at least 100 NCEs in various stages of development; Contract
Research: High end drug discovery services; Clinical Research: At least 10 % of global
trials. Global Distribution: Top 15-20 Indian players to have direct presence.
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CONCLUSION

The global pharmaceutical industry has grown at 9% in 2007 and the focus of the pharmaceutical
market continues to shift towards emerging countries where the growth rate is higher. As per
industry reports, the size of Indian industry is increasing at more than 10% a year.
Robust economic growth, availability of a skilled scientific workforce at low cost, a fairly
stringent regulatory environment and largest number of US FDA approved plants outside the
USA, makes India an attractive destination in the eyes of multinational conglomerates. Contract
research and contract manufacturing is one area offering plenty of opportunities to India.

After more than four decades as a closed economy and 14 years of reform, India has made its
name in the global arena and laid the groundwork for rapid growth in Industries such as
pharmaceuticals and IT. The foundation is in place for the pharmaceutical industry to
substantiate its place in the world market, but further effort and unwavering commitment are
needed for Indian pharmaceutical companies to emerge as undisputed leaders in the global arena.

The various models used for analysis have evidently served the purpose. The Porter’s Five
Forces 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 been used to analyse the
pharma industry may itself evolve. The S.W.O.T analysis has been used which analyzes the
position of the industry with respect to its internal & external environment. Value cahin analysis
measures systematically the development of competitive development. P.E.S.T analysis has been
used to examine the external environment of the industry.

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APPENDIX

http://biotechindia.wordpress.com/2008/02/22/an-overview-of-the-indian-
pharmaceutical-industry/

www.pharmabiz.com

http://ezinearticles.com/?Impact-of-Product-Patent-on-FDI-in-Indian-Pharmaceutical-
Industry&id=89594)

www.managementparadise.com

http://www.rediff.com/money/2004/aug/27pharma.htm
Strategic Value-chain Analysis of Indian Pharmaceutical Alliances by Gaurav Raizada &
Atul Pall (IIM, Lucknow).
Capital Market Feburary 2008 issues.
Indian%20Pharmaceutical%20Industry-%20Vision%202010

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