Pharmaceutical Industry - External Analysis

By
Group Members:
063- Aayushi Agarwal
070- Ashish Saini
077- Devesh Mishra
078- Dhruv Bhatnagar
093- NNS Rohit
114- Shruti Kapoor
 INDIAN PHARMACEUTICAL INDUSTRY

Evolution of Indian pharmaceutical sector

The Indian pharmaceutical industry has come a long way since the time of independence. Over
the years, under a favourable policy regime, the industry has grown phenomenally and has
established itself as a major supplier of not only generic products but also new formulations. The
industry, in addition to meeting domestic demand, is in a position to export significant volume of
pharmaceutical products to various destinations, including the developed markets of USA, EU
and Japan. Evolution of Indian pharmaceutical industry can be classified into the following
four periods:
Phase-I (Before 1970) Early stage
The history of Indian pharmaceutical companies goes back in the early stages of the twentieth
century. In 1901, Acharya Prafulla Chandra Roy, a renowned scientist and academician,
established Bengal Chemical and Pharmaceutical Works Limited (BCPW) in Kolkata and in
1907, Alembic Chemical Works Co. Ltd., was established in Vadodara by TK Grajjar, Rajmitra
and BD Amin. Both the companies had scientific and modern approaches to the pharmaceutical
sector. After independence, Hindustan Antibiotics Ltd (HAL) established in 1954. It was wholly
owned Government Company established with assistance of with WHO / UNICEF and engaged
in the Manufacturing & Marketing of Life Saving Drugs. In the year 1961, Indian Drugs &
Pharmaceuticals Limited (IDPL) was incorporated as a public limited company under the
Companies Act, 1956. Private players such as Cipla in 1935, also entered in the market during
this phase.
Phase-II (1970-1990) Government control and development phase
During the period 1970-1990, many local companies were started operating in the
pharmaceutical sector. The public sector undertakings such as, Karnataka Antibiotic &
Pharmaceuticals Limited (KAPL) in 1981 at Bangalore, Karnataka and Rajasthan Drugs &
Pharmaceuticals Limited (RDPL) in 1978, at Jaipur, Rajasthan, were established during this
period. The private companies like Sun Pharma, established in 1983 and Dr.Reddys Lab,
established in 1984, started showing the impact in the market. This period also marked by some
government control over pharmaceutical sector, through passing of Indian patent act 1970 and
capping the drugs price. The government also took initiative to export the pharmaceutical
products during this period.
Phase-III (1990-2010) Growth phase
The pharmaceutical sector saw many developments during this period. The Major development
was the liberalization of market, which led many multinational pharmaceutical companies to
enter into the Indian market. Competition started to increase and many Indian pharmaceutical
companies started operating in foreign countries. During this period, Patent (Amendment) Act
2005 was passed, which led to the adoption of product patent in India. VAT has been introduced
on medicine and was kept at 4 percent, Pharmaceutical Research and Development Support Fund
(PRDSF) was established during this period.
Phase-IV (Post 2010 ) Acceleration phase
The major policy changes adopted during this period were The National Pharmaceutical Pricing
policy 2012 (NPPP-2012) and adoption of New Drug price control order 2013, issued by director
of food and drugs, intended to reduce the prices of the drugs. Other policy changes during this
period were, allowing of 100% FDI in the medical device industry, National Health policy draft
2015 to increase expenditure in health care sector and Patent Act Amendment 2015, which
includes amendments in Patent Act 2002.
The period also accounts with second largest number of Abbreviated New Drug Applications
(ANDAs) and India is the worlds leader in Drug Master Files (DMFs) applications with the US.
Leading pharmaceutical companies raised funds for acquisitions and increase their product
portfolio during this period.
 Market Overview

The Indian pharmaceuticals market witnessed growth at a CAGR of 17.90 per cent, during 2005-
16, with the market increasing from USD6 billion in 2005 to USD36.7 billion in 2016. By 2020,
India is likely to be among the top three pharmaceutical markets by incremental growth and sixth
largest market globally in absolute size

Indias cost of production is significantly lower than that of the US and almost half of that of
Europe. It gives a competitive edge to India over others. Increase in the size of middle class
households coupled with the improvement in medical infrastructure and increase in the
penetration of health insurance in the country will also influence in the growth of
pharmaceuticals sector.

Market Structure
Active Pharmaceutical Ingredients (APIs): India has become the third largest global generic
API merchant market by 2016, with a 7.2 per cent market share. The Indian pharmaceutical
industry accounts for the second largest number of Abbreviated New Drug Applications
(ANDAs), is the worlds leader in Drug Master Files (DMFs) applications with the US.

Contract Research and Manufacturing Services: Fragmented market with more than 1,000
players. CRAMS industry is estimated to reach USD18 billion in 2018 and expected to witness a
strong growth at a CAGR of 18-20 per cent between 2013-2018.

Formulations: Largest exporter of formulations in terms of volume, with 14 per cent market
share and 12th in terms of export value. Domestic market size currently valued at USD11.2
billion and double-digit growth is expected over the next five years.

Biosimilars: This sector is expected to touch USD1.4 billion by 2016 and the sector is expected
to grow annually at a rate of 30 per cent in India. The government plans to allocate USD70
million for local players to develop biosimilars. The domestic market is expected to reach USD
40 billion by 2030.

Market Segments

With 70 per cent of market share (in terms of revenues), generic drugs form the largest segment
of the Indian pharmaceutical sector. India supplies 20 per cent of global generic medicinesmarket
exports, in terms of volume, making the country thelargest provider of generic medicines
globally and expectedto expand even further in coming years. Over the Counter (OTC)
medicines and patented drugs constitute 21 per cent and 9 per cent, respectively, of total market
revenues of USD20 billion.
Anti-infective drugs command the largest share (16 per cent) in the Indian pharma market. The
cardiovascular segment represents 13 per cent of the market share; its contribution is likely to
rise due to the growing number of cardiac cases in India. Gastro-intestinal contributes around 11
per cent of the total value of pharma industry in India. With increasing number of research in
gastroenterology, segment is going to grow at significant pace in coming years. Top five
segments contribute nearly 57 per cent to the total drugs consumption

Key Players

Dr. Reddys accounted for the largest share in the Indian pharma market, with sales of USD2.36
billion during March 2016. Lupin had the second largest share in the Indian pharma market with
sales of USD2.09 billion in FY16. Cipla, with a revenue base of USD2.089 billion for March
2016 sales, ranked third in the market. Aurobindo ranked fourth in the market, with a revenue
base 0.8 of USD 1.17 billion for March 2015 sales. While these top four companies garnering 20
per centmarket share, top 10 companies accounted for nearly 39 per cent of the market share in
2015
Company Major Products
Dr. Reddy Omez, Nise, Stamlo, Cetrine, Novigan
Cipla Isotronin, Cepofrox, Nicotex
Lupin Gluconorm, Tonact, Rablet, Budamate
Aurbindo Cedbrox, Proxtl, Diceta
Cadilla Agomelatine, Bosentan, Divalpro

Porters 5 Force Analysis

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 in long
run. However, this is not possible because, firstly there is no perfect competition and no
company is a passive 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.

Bargaining power of buyers

The unique feature of pharma 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 pharma industry depends upon several organic chemicals. The chemical industry is again
very competitive and fragmented. The chemicals used in the pharma industry are largely a
commodity. The suppliers have very low bargaining power and the companies in the pharma
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
pharma company. Companies like Orchid Chemicals and Sashun Chemicals were basically
chemical companies, who turned themselves into pharmaceutical companies.

Barriers to entry

Pharma 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 pharma industry. Whatever happens, demand for
pharma products continues and the industry thrives. One of the key reasons for high
competitiveness in the industry is that as an on going concern, pharma 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 pharma industry.

Porters 5 forces:
 Power of Supplier
- Volume benefits occur
- Numerous suppliers, low switching
cost
- Suppliers can go for forward
integration
- Raw material cost constitute more
than 50% of the total expense
Power of Buyers
- End consumers do not have
bargaining power
- Brand identity exists, but in the
hands of influencer (doctors)
- Price sensitivity is less
- Highly sensitive market, so buyer
concentration vs industry is low

Industry Competition
- Highly competitive market, high rivalry among main companies in the industry
- The degree of rivalry among existing firms, is a main competitive force

Barrier to Entries Threat of Substitutes

- Very low barriers to entry
- Government policies supportive of
entry, but price regulation exists
- Economies of scale exists
- High research and knowledge
required to produce new drugs
Conclusion
- Biotechnology is a treat to synthetic
pharma products
- Demand for generic vs brand names
has increased because of the costs
- Generic drugs do not have high
R&D costs that allows then to sell at
low cost
- The closeness of substitute product
is a high competitive force

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 analyse the pharma
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 plays an important part too.
Last but not the least, in a vast country of India's size, government too has a bigger role to play.

Key Trends and Drivers

1. Regulatory Screening by USFDA:

The USFDA (US Drug Regulator) regularly places surprise checks on Indian manufacturers to
check for standards of manufacturing productions. From 2008-2015, USFDA has issued around
50 warning letters on Indian companies, out of which 40% were converted into import alerts.
Indian companies are required to comply with good manufacturing practices (cGMP) or else they
will lose market value as well as new approvals will get stuck leading to a loss of margin.
However the letters in 2016 decreased compared to 2015 and should be lesser in 2017 as well.
 2. Price Controls in Domestic(Indian) Pharma Industry:
Government will continue its price control policies (DPCO(Drug Price Control Orders) and
NLEM(National List of Essential Medicines)) because of which we can expect the near term
growth in the domestic industry to be slower in the coming year. If the Government decides to
increase the number of list of drugs in NLEM we can expect the margin of pharma companies to
get affected.

3. Mergers and Acquisitions:

The Industry is being heavily driven by M&A not only in India but the world over. Close to 1
Billion dollars of M&A deals had been struck by Indian players by end of 2016, most notable of
them being Cipla's takeover of InvaGen and Exelan Pharmaceuticals for a combined value of 550
Million dollars. Most of them are by players trying to expand to new markets, deepen their
presence in existing ones, get access to manufacturing assets and fill our any portfolio gaps.
Organic growth and profitability is leveling, M&A might just help support growth.

4. Strategy of Generics to building brands:

Companies are employing greater funds to indigenous research or acquiring late stage clinical
drugs as the market is moving towards differentiated brands. It is big challenge as trying to be an
innovative brand is much different from selling generics to distributors. It is important to build a
pipeline of drugs as not are expected to succeed with approvals. Another reason for the
increasing R&D spend is the introduction of Product Patents in India in 2005.
Major Indian pharma cos are focusing on specific areas and investing in R&D as well as
acquiring companies from those areas only. Sun Pharma is sharply on ophthalmology, cancer and
dermatology products. Dr. Reddy's has increased its R&D spends to 11-15% of sales (a new
high).
 5. Other Markets other than US driving growth:
Japan and Europe are markets where Indian companies can look to expand as those regions are
characterized by ageing population and economic slowdowns (which will field demand for
generics). The growth(in Japan) will mainly come from higher generic penetration. The
government is keen to have a larger generic share to reduce their healthcare costs - Kewal
Handa, a former managing director of Pfizer Ltd.

6. Biosimilars:
The market is expected to touch 1.4 Billion USD and expected to grow at 30% y-o-y in India.
Once the patents on Biologics expire in a next few years (Patent Cliff), Biosimilar have a huge
market waiting for them. The Indian biosimilar industry is expected to touch 40 Billion USD by
2030.
Indian firms are already making investments in this space to gain a competitive first mover
advantage. Biocon and Dr. Reddy's are filing new drug applications in regulated markets like
Europe and USA.

Strategy Groups
The strategic group concept is a relatively new one and an important tool for modelling and
analysing industries. The underlying premise of the construct is that companies within an
industry are not necessarily homogeneous, but neither are all companies unique. Instead, groups
of similar companies can be dened such that the groups are, in general, homogeneous within
and heterogeneous between. These clusters can be defined on the basis of any of the following
dimensions like we have used five strategic variables relevant for internationalization of Indian
pharmaceutical firms:
a) Research and Development (R&D) intensity
R&D intensity as measured by the ratio of amount spent by a firm annually on R&D and its
sales revenues, a high R&D intensity in a firm is thus indicative of a strategic disposition of
exploration in terms of new products and/or developed markets

b) New drug discovery

The number of new molecules or NCEs under development is therefore a good measure of
the focus of the firm to develop new proprietary drugs and emerge as a research-based global
pharmaceutical major

c) Focus on low-value added products

The proportion of API (active pharmaceutical ingredients) products in the revenues of a
company reflects its focus on low value added products

d) Focus on developed markets

The strategic focus on developed markets can be measured by ANDA (Abbreviated New
Drug Application) filings

e) Contract manufacturing
The proportion of CRAM revenues to total revenues is a measure of the strategic focus of the
firm on becoming an international outsourcing partner
These variables adequately capture the predominant strategic posture of the top 40 firms either
towards exploitation in terms of similar products and/or in similar markets or towards
exploration in terms of new products and/or new developed markets.
Strategic group 1 (Exploiters)
High proportion of API or bulk drugs, very few ANDAs, have no NCEs under development, a
low proportion of CRAM revenues and the average R&D intensity of the firms of this group is
the lowest among all the identified groups.
Strategic group 2 (Explorers)
Some foray into global markets with ANDA filings of over five per firm on an average, one or
two NCEs under development, average share of API less than thirty percent. The average R&D
intensity of this group is more than double that of the exploiters.
Strategic group 3 (Outsourcers)
Resemble the exploiters closely on most parameters, however, they stand apart from the rest of
the groups due to the fact that they get most of their revenues from contract research and
manufacturing (CRAM)
Strategic group 4 (Explorers)
On the path to become, research-driven international pharmaceutical firms. On an average, the
group has over 27 ANDA filings per firm and close to 5 NCEs under development per firm. The
average R&D intensity for the firms in the group is high.
Strategic group 5 (Global)
One firm may create a strategic group and this group has a lone firm, Sun Pharma. It is the
largest pharmaceutical firm in India in terms of sales and close to 70% of its revenues are
accrued in foreign markets. It has a significant focus on global generics markets as indicated by
its 150 ANDA filings

References
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