ECONOMIC IMPLICATIONS OF PHARMACEUTICAL MANUFACTURING INDUSTRY IN INDIA V.Y.John, Associate Professor, Department of Business Management, Aristotle P.G.

College, Chilkur(Village), Moinabad (Mandal), HYDERABAD, A.P. – 501 504. INDIA. E mail: vyjohn1@yahoo.com TOPIC: ECONOMIC IMPLICATIONS OF PHARMACEUTICAL

MANUFACTURING INDUSTRY IN INDIA. Abstract: Indian Economy has been growing at a compounded annual growth rate of more than 8.5% during the years 2003-04 to 2007-08. Later on, it tapered off to 6.5% during the year 2008-09. It is recovering from the year 2009-10 onwards. The role of pharmaceutical industry which is slated to be around Rs.80,000 crores ($ 17 b) is phenomenal. About 30-60% of the turnover of the leading pharmaceutical companies in India is from abroad apart from contributing significantly to the domestic pharmaceutical industry. Indian pharmaceutical industry is a significant case of a manufacturing industry contributing to the economic growth in India in a comprehensive sense. Companies like Ranbaxy Laboratories, Dr.Reddy’s Laboratories, Aurobindo Pharma, Lupin Laboratories, Cipla and Sun Pharmaceuticals are some of those which have pursued inorganic growth routes as can be noted from the remarkable acquisitions or mergers which have taken place recently. It is observed that there

is an exponential growth in the size of the operations, number of countries to which exports are being made and different segments of products catering to diseases like AIDS, cardiovascular, gastro enteric, carcinogenic and lifestyle diseases. The state of the art technology that is adopted by the companies to incorporate effective quality in the process of manufacturing speaks volumes of how Indian companies have grown to meet the expectations of the global market. Key words: Active Pharmaceutical ingredients, manufacturing, growth and formulations.

Bio - Associate Professor V. Y. John V. Y. John is an Associate Professor in Business Management at Aristotle P. G. College, affiliated to Osmania University, Hyderabad, India. He has fifteen years of teaching experience in the area of finance apart from having worked in the industry for two years in the area of finance and accounts. He has recently published two papers on pharmaceutical industry in India.

INTRODUCTION: Indian Economy is poised to be one of the leading economies of Asia and the World in the near future. Indian Pharmaceutical Industry has an impressive record of moving in tandem with the national income growth rate and has grown at an average rate of 11% during the year 2000-01 to 2007-08. This is notwithstanding the share of services in the national income which increased to over fifty percent during the last few years. . it has slightly tapered to 10. Indian Manufacturing has undergone a metamorphosis wherein it is technologically and economically self reliant and contributing to a substantial part of the national income. 322 crores1.4% during the year 200809 which stood at Rs. while manufacturing in our economy has contributed to about 16% of the national income2.81. It is interesting to note that pharmaceutical industry in India was on an average contributing to about 10% of the manufacturing turnover during the past ten years.

713 30.2003.000 RS.3 11.000 80.000 0 2000.541 45.TOTAL REVENUES OF PHARMACEUTICALS & DRUGS IN INDIA S.061 42.000 50.2001.322 % change 9.CRORES 60.2002.8 11.2004. 2010.7 12.2006.1 10.7 10.2007.000 30.cr) 90.9 10.TABLE I .362 77.No 1 2 3 4 5 6 7 8 9 Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Pharmaceutical Revenues (Rs.cr) 27.000 40.388 35.200801 02 03 04 05 06 07 08 09 FY APRIL TO MARCH .5 12.1 10.40% Source: Financial Aggregates & Ratios.000 20.810 66.000 70.1 10. Center for Monitoring Indian Economy.810 81.2005.6 10. February.000 10.946 53.7 11 10. BAR GRAPH SHOWING THE TOTAL REVENUES OF PHARMACEUTICALS AND DRUGSN INDIA: Pharma Revenues (Rs.40% Share of Manufacturing GDP 9 9.35 10.6 11.

84 14.00.029 3.743 6.51 14.78 15.58 18.17.392 3.97 9.05. BAR GRAPH SHOWING THE GDP (MANUFACTURING) .74 4.6 15.15.405 % change 9 5.82 Source: National Income Statistics.cr) 2. Center for Monitoring Indian Economy.80.4 13.53.19.64.74 14.314 3.16 10.74 12.No 1 2 3 4 5 6 7 8 9 10 11 IN INDIA: Year 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 GDP(Manufacturing ) (Rs.50.68 Share of GDP % 15.648 7.76 15.31 15.46. S.113 3.130 7.3 15.83 16.29 16.581 2.34 16.88. July 2010.549 4.603 5.TABLE II – TABLE SHOWING GDP (MANUFACTURING) IN INDIA.03 15.32 15.

2000.2002. .2003. with its rich scientific talents and research capabilities. low R & D Costs.2004. the pharmaceutical industry in India has low costs of production. which form the core of the pharmaceutical industry in India(including five central public sector units). Technologically strong and totally self-reliant. strength of national laboratories and increasing balance of trade.2006. innovative scientific manpower. most of these being small scale units. The Pharmaceutical Industry.1999.200899 00 01 02 03 04 05 06 07 08 09 FY APRIL TO M ARCH A BRIEF PROFILE OF INDIAN PHARMACEUTICAL INDUSTRY: There are about 250 large units and about 20000 small and medium scale units.2001.2005.2007.CRORES 500000 Series1 400000 300000 200000 100000 0 1998.GDP(MANUFACTURING) IN INDIA 900000 800000 700000 600000 RS.

Dr. France. . Given below is an extract from a PricewaterhouseCoopers research on the global pharmaceutical industry. PRESENT STATE OF THE LEADING PHARMACEUTICAL COMPANIES IN THE WORLD AND IN INDIA: The operations of most of the pharmaceutical giants all over the world are facing severe constraints and challenges in manufacturing and marketing various drugs. Netherlands and the like have consistently increased over the years. Off shore Sales to countries like USA. Cipla and Piramal Healthcare were consistently enlarging and expanding their operations in the developed and developing countries. Leading players like Ranbaxy Laboratories. Sun Pharmaceuticals.Reddy’s Laboratories. Germany.supported by Intellectual Property Protection regime is well set to take on the international market. India’s major pharmaceutical companies are positioning themselves to offer generic versions of these drugs and some have predicted that they will capture at least 30 percent of the US generic replacement market.

expensive in the late stage clinical trials. Medicines must be tested on people for effectiveness earlier. companies must stop searching for the wonder drug that will sell for more than $1 billion a year. India along with Brazil. sales and administration expenses climbed 15% in the 10 years to 2005. which accounts for 3/4th s of the worldwide investments. Mexico. and the US-FDA approved about half as many as new treatments as a decade earlier. the report said. The dearth of good new compounds in its pipeline is central to all its other problems including its rising sales and marketing expenditure. Indonesia. By 2020. At the same time.”3 . US spending on drug R & D.2 billion in the year 2005-06. Russia and Turkey will account for 70% of the worldwide drug sales. Nearly half of the experimental medicines are proved ineffective. China. Its core problem is lack of innovation in making new therapies for the world’s most unmet medical needs. guided by better understanding of diseases and so-called biomarkers that indicate how drugs worked. China would be the 2nd or 3rd largest market in the world. The industry strategy of developing so-called The largest blockbuster medicines costs too much and produces too little. hit a record of $55. Companies must expand their pipelines by looking towards countries where research is burgeoning and redesigning the drug development process.3 trillion by 2020. the consultants wrote of the industry. poor financial performance and battered reputation.“The world’s largest pharmaceutical companies including Pfizer and Glaxo SmithKline must change their business models to tap a global market that will expand to $1. and focus on drugs with lower sales.

the Following table shows the ratio of R & D to Sales by some of the leading Indian pharmaceutical companies. Consider the investment in R & D by some of the leading Indian companies.”4 The above observation underscores that there is a shortage of effective R & D. companies are unable to employ sufficient resources in R & D which forms the backbone of the industry. . 2005. In the Indian context. In the context of the introduction of the product patents regime in India. the foreign multinational companies invest around 15-20% of their sales in R & D. there is still a long way for Indian pharmaceutical companies to go to match up with the resources for R & D available with their global counterparts. lifestyle diseases and other unmet medical needs.5-2% of Sales. “While the Indian investment in R & D has been hovering around 1. Thus. starting from 1st January. due to pricing restrictions and relatively low margins. it would be pertinent to note how some of the leading companies in India have reacted to the same. which forms a major risk faced by the pharmaceutical companies all over the world.There was a recent report which clarifies this phenomenon in the Indian context. So there is a felt need for effective R & D to develop innovative drugs which help cure some of the medical needs like AIDS. The existing drugs with all of its volumes of sales contributing to the revenues and the bottom lines of the companies are insufficient to sustain the industry’s demand over a long-term period.

REDDY'S LABS 9% 4 MATRIX LABS LTD 5% 5 NEULAND LABS LTD 1% 6 PIRAMAL HEALTHCARE LTD 2% 7 STRIDES ARCOLAB LTD 3% 8 SUN PHARMA LTD 11% 9 GLENMARK PHARMA LTD 6% 10 IND-SWIFT LTD 3% AVERAGE 5% . 3 DR.No Name of the Company AVERAGE (2001-02 to 2004-05) FOUR YEARS BEFORE 2005 1 BIOCON LTD 8% 2 CIPLA LTD 1% 3 DR.REDDY'S LABS 6% 4 MATRIX LABS LTD 12% 5 NEULAND LABS LTD 2% 6 PIRAMAL HEALTHCARE LTD 3% 7 STRIDES ARCOLAB LTD 8% TABLE IV 8 SUN PHARMA LTD 11% 9 GLENMARK PHARMA LTD 4% 10 IND-SWIFT LTD 1% AVERAGE 6% TABLE SHOWING THE RATIO OF R & D EXPENSES TO SALES OF SELECT PHARMACEUTICAL COMPANIES IN INDIA S.TABLE III TABLE SHOWING THE RATIO OF R & D EXPENSES TO SALES OF SELECT PHARMACEUTICAL COMPANIES IN INDIA Sino Name of the Company AVERAGE Annual (2005-06 to 2008-09) Source: FOUR YEARS AFTER 2005 Reports of the 1 BIOCON LTD 7% 2 CIPLA LTD 3% Companies.

193 3. Deviation Mean 3.90 N 10 10 Std.773 1. tailed) .190 1.009 RnDRatio 95% Confidence Interval of the Difference Lower Upper T -1.082 .800 3. Std. RESULTS OF PAIRED SAMPLE ‘t’ TEST FOR TESTING THE HYPOTHESIS IF THERE IS ANY DIFFERENCE BETWEEN THE MEAN RATIO OF R & D EXPS TO SALES OF THE ABOVE 10 COMPANIES FOUR YEARS BEFORE 2005 AND AFTER 2005. Std.70 RnDRatio 4.110 Error Paired Samples Test Paired Differences Std.793 Df 9 Sig.510 1. T-Test Paired Samples Statistics Mean Pair 1 RDRatio 5. Deviati Error Mean on Mean Pair 1RDRatio – .482 3.Source: Annual Reports of the Companies.448 (2- .

These companies have visualized the need for effective R & D and therefore are on the forefront of producing new molecules which are candidates for prospective cure of some of the unmet medical needs like diabetes.Reddy’s Laboratories Ltd.Note: RD Ratio = AverageRatio of R & D to Sales four years after 2005. the null hypothesis is to be accepted that there is no significant difference in the ratio of R & D expenses to sales of the above mentioned companies four years before 2005 and after 2005. Since the ‘p’ value of the test shows a value of 0.448 at 5% level of significance. The following are the results of paired sampled ‘t” test to identify if there is a significant difference in the average PAT (Profits After Taxes) of 45 companies . There are companies in India like Matrix Laboratories. the above results give a generalized view of the expenditure on R & D by the select Indian Companies. However. COMPARISION OF THE AVERAGE PERCENTAGE OF PAT/SALES OF SELECT 45 COMPANIES IN INDIA THREE YEARS BEFORE 2005 AND AFTER 2005(COMPANIES SELECTED FROM AMONG THE TOP 100 COMPANIES BY TURNOVER). oncology and other prominent diseases. Biocon Ltd and the like which have had significant amont of investment in R & D since more than a decade. Sun Pharmaceuticals Ltd. Strides Arcolab Ltd. RnD Ratio = Average Ratio of R & D to Sales four years before 2005. Dr.

756 5 – 82 PATAFT ER2005 Sig.three years before 2005 and three years after 2005. These companies were selected from among the top 100 companies by turnover. T-Test Paired Samples Statistics Mean Pair 1 PATBEFORE2005 9.62 N 45 Paired Samples Test Paired Differences 95% Confidence Interval Std.766.798 ORE200 46 4. (2-tailed) df 44 . of the Difference Devia Mean tion Lower Upper T Pair 1 PATBEF-2.86 PATAFTER2005 12.77340 -2.629 -.008 .

(2-tailed) .52 -2.58646 44 Sig. T-Test Paired Samples Statistics Mean N Pair 1 ROCE BEF 18.207 2005 .ROCE AFT 2005 Std.Since the “p” value of the ‘t’ test shows a value of 0.008. Deviation Std. it can be concluded that there is a significant difference between the ratio of PAT/SALES of the select 45 companies three years before 2005 and three years after 2005.3556 45 1 Paired Samples Test Paired Differences 95% Confidence of the Std.38261 . Std.24628 1. COMPARISION OF THE AVERAGE OF ROCE(RETURN ON CAPITAL EMPLOYED) OF SELECT 45 COMPANIES IN INDIA THREE YEARS BEFORE 2005 AND AFTER 2005 (COMPANIES SELECTED FROM AMONG THE TOP 100 COMPANIES BY TURNOVER).64228 1.21 1.6702 45 2005 ROCE AFT 2005 8. Error Mean 13.837 .97464 10.31 10. Interval Difference DeviatiError Mean on Mean Lower Upper t Pair 1 ROCE BEF .75 3.

It is to be noted that the above phenomena is a temporary reflection of how Indian companies.. particularly during the year 2008-09. . Sales have decreased after the year 2008.e. particularly due to the impact of US Recession on the revenues of the companies. Sales has taken a dent i. The above analysis shows that while the PAT to Sales ratio of the select companies has somewhat significantly increased after 2005. particularly those having offshore operations and revenues have been able to explore newer generic markets and increase their revenues in the present markets where off patent drugs are demanded. Companies need to develop long-term strategies like strengthening the R & D to innovate molecules and develop formulations which will help meet the unmet medical need s in the critical areas like AIDS..e. However the investment in R & D by Indian Companies is showing a marginal increase after the year 2005. which shows that there is no significant difference between the ROCE(Return on Capital Employed) of the select 45 companies three year before 2005 and three years after 2005. three years from 2005-06 to 2007-08.837.As can be noted from the above table the ‘p’ value is 0. cardio-vascular and carcinogenic diseases. i.

making it the fourteenth largest in the world. the rupee reached an all time low of Rs. particularly. a majority of which . 1995. due to the low price realizations (primarily due to price controls by the government).”5 Most of the large and medium companies complain that their margins are affected due to price control on essential drugs monitored by the Government through the National Pharmaceutical Pricing Policy and the Drug Prices Control Order. 2009. impact of US recession causing changes in the value of exchange rates.14 during March.13 per dollar during March. Since the firms cannot increase the prices of the drugs. 2008 to Rs 51. A recent report states clearly that “Though the Indian Pharmaceutical industry is the 5th largest in the world in terms of volume terms. These price controls impose a serious price risk to the firms.Companies have bled because of the dent in sales during the second half of the year 2008-09 and also due to the fluctuation in the rupee dollar exchange rate.51. The introduction of product patents. 2009 gradually changing from Rs. A good number of companies had to either close down or were in the red to a large extent due to the above mentioned developments in the pharmaceutical industry during the years 2008 and 2009. those which were importing intermediates and inputs from China. the global share of the Indian market value in terms of value is a meager 1%.13 per dollar during March.40. heavy import bills as a consequence have caused a good number of small and medium pharmaceutical enterprises in India to heavily lose on account of heavy import bills.

Since the companies are exempt from Excise Duties in the states mentioned above. This is hitting the sales of firms in states like Maharashtra and Gujarat.7000 crore in the domestic pharma market which is at least in the range of Rs. For instance. many companies particularly from Maharashtra and Gujarat have migrated to these States. HP and Uttaranchal as tax-exempt states for pharma companies to set up their plants. They are worse off as they also have to grapple with issues like limited resources and heavy expenses in marketing. need to be tightly controlled. which are among the biggest contributors – Rs. the operational costs of the firms.25000 crore and above. There are also reports that due to the Central Government recently declaring J & K. Thus. The following report explains the point “The success of the KPO and LPO segments has turned out to be a bane for the pharma sector (especially for the SMEs) which is facing manpower crunch. Many small and medium enterprises in the pharmaceutical sector are not doing well.”6 There are other issues that the pharma SMEs are to contend with. Pharma companies are facing high attrition rates of 25-30%. there was a recent report that many graduates in the area of pharmaceuticals and life sciences are getting employed in the BPO and the KPO sectors as the salaries offered by those companies are higher than those offered by the pharmaceutical companies. the price .are essential drugs in much demand and controlled by the government.6000-Rs. there is a difference in (MRP) fixed by them and companies in other states.

That is because only 1 out of 10 drugs that start human clinical trials reach the market. These companies are continuing to do what they are best at. i. exercised directly and indirectly by the government acts as a serious deterrent and a handicap to the companies. Given the Indian lead in strategic sectors like education.e.control. presence of counterfeit drugs. “India’s present budgetary allocation is just 1% of the GNP towards the health-care sector. to produce generic drugs at low cost and capture generic replacement market worldwide. the government should make sincere efforts to scale-up operations in the healthcare sector. global consolidation. IT and communications. Billions of dollars of drugs which are going off patent are being tapped by the companies which have established their offshore . There should be a substantial scale-up in this figure and the government should look to providing at least 4% of the GNP for tackling the healthcare issues. compliance with global standards and long drawn process of research. The cost of developing a new drug can be in excess of $1 billion.”7 There are special nuances in this sector like the excessive price controls in indigenous market.. CONCLUSION: Top companies in India are grappling to develop new products to compete and grow in the product patent regime. It takes about 10-12 years for the discovery and development of a new medicine and the average effective patient life for a new drug is roughly less than 10 years.

Lobbying by the stakeholders in the corporate sector like the Indian Pharmaceutical Alliance. lobbying the government where there is a divergence of needs. Most of these companies have to balance their approach and strategies as they produce and sell generic drugs across the world. . Off-record: There is a need for a change in the policy initiatives by the Indian Government.operations to a significant extent. optimizing interests between the government regulatory intervention and the industry expectations. pharmaceutical industry in India has to a large extent matured and needs to go a long way in being an effective contributor to the national growth and development. Indian Drug Manufacturers Association should also be resorted to ensure healthy growth of the pharmaceutical industry in India. All in all. They must learn to be adept at innovating new drug candidates for unmet medical costs. The Department of Pharmaceuticals must pursue initiatives to request the government to earmark more funds towards drug discovery and development by credible stakeholders in the corporate sector.

Pharma Sector. July 2010. 2005. . Generic Drug Market. International Trade Commission. Icfai University Press. Volume I. 2) William Greene. February. U. 2 3 4 5 6 7 REFERENCES: 1) http://www. 3) Guidance for the Industry “Q9 Quality Risk Management” by US Department of Health and Human Services. The Emergence of India’s Pharmaceutical Industry and Implications for the U. Economic Times dated 5/9/06.1 Financial Aggregates & Ratios. National Income Statistics. May.pharmaceutical-drug-manufacturers. Center for Monitoring Indian Economy. June 2006. Food and Drug Administration. Center for Monitoring Indian Economy. Economic Times dated 14/6/07.S. 2007. Trends and Cases. Trends and Cases. 7 Economic Times dated 6/8/06.S. Volume I. Pharma Sector. Icfai University Press. 2010.com/pharmaceutical-industry. Center for drug and evaluation research. 2005.