BIOTECHNOLOGY & PHARMACEUTICAL

Submitted by: Saurabh Garg Mridul Grover Vikram Gulati Yakshi Garg

PRODUCT VALUE CHAIN
Venture Capital and Investment

Research Supplies

Research Instruments

FDA Approval

Instruments Research/Development Marketing

Labor BIOTECHNOLOGYNOLOG Y/DRUG MANUFACTURERS Chemicals

Advertising

Distribution

Farmers

Veterinarian

Pharmacies/Hospitals

Animals

Patient

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pharmaceutical and animal health sectors which are the main focus of biotechnology. entities that produce instruments. As the chart reveals. developers of new medications or biological advancements utilize outside companies to market for them so that to concentrate resources elsewhere. The industry itself can be very profitable but as you will discover there are many factors that involve becoming a major player. companies such as Scios.2 billion dollars on research and development. Industry Scope Chart The scope for the biotechnology industry is biochemical science for improvements in a variety of categories that I previously mentioned. suppliers for drug research and global biotechnology issues trading on U. will market the new product. All pose a fraction of threat to the survivability of the biotechnology firms. but as sales have shown.S. . Research and development is critical to the success of a drug developer. Research can be done on or off-site for the drug developers. the broad range focuses on specific substitutes to the products and services offered in the biotechnology industry. The substitutes pose more of a threat to smaller companies that don’t have as high of sales as the top ten do. for the purpose of modifying human health. Biotechnology is focused under the “biochemical science to large-scale production.Define the industry Description The biotechnology industry as described by the Standard and Poor’s is both a product and a service. The top five companies are the big rivals to each other in the drug-development sector. Lastly. Their category includes biotechnology drug developers and marketers. it is nothing significant. there are many alternatives to modern medicine. Product Value Chain The biotechnology industry has many raw material suppliers that function within the industry but also marketers and research companies as well. food supplies. stock markets. In 2000. which was recently bought out by Johnson and Johnson. Identify the players Rivals The rivals in biotechnology are the 330 publicly traded firms that the Standard and Poor analysis has mentioned.” The biotechnology industry involves alteration of genetic material. or the environment. Ernst and Young estimated that the public firms spent 10. The narrow scope of this industry is the agricultural. firms in agricultural biotechnology and animal health. Biotechnology larger focus involves production of medication and research that involves new and improved drugs. In some cases. Once a drug has been approved by the FDA. diagnostic companies.

chemicals. venture capital. This is a number that is unacceptable to the new head of the FDA.Buyers. Substitutes consist of generic brands. . instruments. injection needles and other specialized equipment. In specific. Without entering the industry with an economy of scale it would be almost impossible to compete with these larger companies. marketers. Complementary are instruments that administer drugs such as saline solution. Without continuous improvements and new methods. If a new medication is released onto the market by a small firm then the sales better increase rapidly otherwise they will most likely be bought out. Farming equipment and special tools used for genetic engineering are also complementary. the more money drug developers have to pay and the longer it takes for the medication to reach sick patients. Advancements had improved the health of our world and the quality of drugs produced by biotechnology firms. natural medicine. equating to 15. The suppliers to the biotechnology industry are vast and include. Suppliers. The longer it takes to approve a medication. research supplies. Strategic Group Map and Mobility Barriers We have chosen our strategic groups to be up and coming smaller firms and the five largest firms within the biotechnology industry. The bottom line is without heavy investing. the industry would be close to inexistent. and advertising. This has equated to hundreds of millions of dollars. The new head of the FDA wants to save the biotechnology firms more money so that they can invest more money into research and development. forms of therapy. The top five firms choose not to enter the other markets because it’s not worth their time when they can instead buy them out and not have to worry. This creates a big mobility barrier for smaller companies to enter their territory. The technological aspect of the industry is extremely advanced and continues to develop year after year. and he hopes to establish initiative that will expedite the process of approval. the government has allocated money for certain companies to develop vaccines and medication for protection against bio-terrorism. organic farming and holistic medicine. hypnosis. The top five companies controlled fortyone percent of the industry last year. research. religion. Other mobility barriers that don’t allow the smaller companies to take moor market are because they don’t receive enough venture capital for extensive research and development. a biotechnology firm will either be bought out or go out of business. Substitutes and Complementary The direct buyers are the distributors. pharmacies and hospitals and the final buyers are patients and farmers. Mark McClellan.1 billion dollars in sales. Without large amounts of money it becomes a major challenge for the other 325 firms to be innovative and advance ahead of the others. Macro Environment The governments including the FDA and many other organizations directly affect and continue to enact laws that shape the industry. vitamins. The FDA has been slow to approve new medications by an average of 15 months. labor.

This allows the larger firms to step in and buy them out before they make one sale. Capital requirements in the established biotechnology strategic group are very high because it takes a great deal of equipment and funding to start and maintain an R&D program in the industry. Since research and development is such a large part of biotechnology spending. The cost to develop a new drug is very high and cannot usually be handled by smaller firms unless they form a partnership with a large firm that has an interest in the smaller firm. The FDA has established relationships with the larger firms so it becomes a lot easier for them to get new approval for medication. any new entry into the established biotechnology strategic group would need to have completely new and innovative products that are unlike any already in existence. Porter’s Five Forces Analysis of the Established Biotechnology Strategic Group Threat of New Entrants (Into the established biotechnology strategic group) Economies of scale are high in the established biotechnology strategic group. The FDA process is critical to how quick a new medication reaches the market. the process may be delayed longer in a reliability issue. is high. These trends help government in dispersing money and funding to the correct companies and causes that make improvements in health. Therefore. Product differentiation in this strategic group is high because every drug produced by the industry has a different effect. It creates a threat to the smaller firms survivability because if they only have one medication being tested by the FDA and it takes them a year and a half or longer to approve. The large biotechnology firms’ control of distribution channels is high because their products are purchased by pharmaceutical companies and distributed only after extensive testing and approval by the FDA. The strength of this item. New entrants are less likely to be able to get approval for their products than a larger company that has released products in the past. The smaller biotechnology companies can achieve the capital for smaller R&D programs. therefore. it is difficult for a small biotechnology firm to invest enough in R&D to develop products as effectively as an established firm. The production of a new drug that has the same or similar effect to a previous drug would not be in the interest of a biotechnology firm because of the cost of R&D and time requirements. but only with a partnership with a large biotechnology company or pharmaceutical company. such as HIV/AIDS. The large company would then request marketing rights for the smaller firm’s product once it is released. the company could go bankrupt before it reaches the market. . If there is a new up and coming firm trying to get approval.Demographic trends such as the concentration of diseased people and certain areas around the world which experience more susceptibility to infection than others have allowed firms to concentrate efforts in these specific areas. The FDA doesn’t know if the company is reliable and advanced enough to develop a medication suited for human intake so they must run longer and more prolonged testing.

smaller firms. capital requirements. Proprietary knowledge in the large biotechnology industry is very high because most products are patented. The most important items are economies of scale. for example. This is one of the largest determinants of the intensity of rivalry in the big biotechnology strategic group. Intensity of Rivalry The number of competitors in the large biotechnology strategic group is medium. Experience curve effects are high for large biotechnology because it sometimes takes 1013 years to develop a product and firms that have released products in the past have a significant advantage over newer. This means that smaller firms will have to develop truly unique products by using only their own expertise. switching costs. Their size and power varies with Amgen being the most powerful. but not of significant importance. eliminating them from any competition.Switching costs for customers are high because most products from the industry are researched and designed with very specific intent. If there is only one drug for a certain illness. Securing a favorable location is not of significant importance. . will serve a purpose better than any other drug and customers will have no reason to switch to a drug that is less effective. Expected retaliation would probably be high. Products produced in the biotechnology industry must undergo very lengthy testing processes. A certain drug. Firms that are established and have produced successful products in the past are more likely to pass the testing processes than new firms. and government regulation. Access to government subsidies is high. The diversity of the competitors is fairly low in terms of mentality differences because they all spend a large percentage of their revenue on R&D. preventing new entrants from becoming established biotechnology firms. Access to raw materials most likely is high. switching costs for a customer may be very high because the only alternative may be to not be treated. The large amount of spending on R&D in the industry shows that they place a great importance on discoveries being made because these are what fuel the industry’s growth. have a similar drug development process and have the same regulations. Each of these items is high. This is a large entry barrier because firms that produce products that to not pass the stringent testing phase will not be able to become established biotechnology firms. but is not of significant importance. Each of the items that determine the threat of new entrants into the established biotechnology strategic group shows that the threat of new entrants is low. Government regulation on the biotechnology industry is very high. The industry growth rate is high because they are continuously making new discoveries and breakthroughs in areas of research such as DNA. Genetic engineering is a very large part of the industry’s research and is just beginning to produce marketable results. as the large biotechnology firms will likely buy successful new entrants.

is not of great importance in determining intensity of rivalry. however. there is a high cost of exit because usually there are R&D efforts on-going. but the medical effects of doing so may or may not be severe for the customer. There are some life-threatening diseases. Strategic stakes in the industry are high because there are many opportunies to develop a breakthrough product. because competitors will most likely be marketing to customers with a different problem or ailment. This. are usually completely unique in each firm. Switching costs for customers are medium. This is because assets are specialized. Firms are willing to take high risks by spending a large percentage of revenues and years on R&D. The industry growth rate is very high and is expected to continue. strategic inter-relationships are relatively high. emotional barriers may or may not be high. The intensity of rivalry trend is that it is staying the same at medium-low. The overall strength of the intensity of rivalry force is medium-low. such as cancer. This item is also a large determinant of intensity of rivalry. This item is not very important in determining intensity of rivalry. is not of great importance in the intensity of rivalry in the industry. which will ultimately result in the less effective drug becoming obsolete. for example. This item is of medium importance in determining intensity of rivalry. but the high industry growth rate and high product differentiation are the main items that push the strength of the force more to the low side. and firms are generally not competing for the same customer base. such as AIDS and cancer. The risks of reaching a dead-end in R&D or producing a product that does not get approved always exist. but the growth rate of the industry and large amount of customers mean that the intensity of rivalry is still limited. Capacity increases are in increments that are small-medium. This is because to produce more.Fixed costs are high because a large investment is initially needed for equipment and R&D. This. Exit barriers in the established biotechnology strategic group are medium-high. the industry basically just needs to purchase more ingredients for their products. Firms are investing more in developing improved versions of existing drugs. drugs and products from the industry are probably perishable. for which many biotechnology firms are researching treatments. Product differentiation is very high in the industry because drugs. Many items that determine the strength of the force are conflicting. Storage costs are medium-high because some ingredients. This depends largely on the problem for which the industry products in question are designed. and government/social restrictions are high. This is because it is relatively easy for a customer to stop using a certain drug and begin using a different one. drives the industry to take these risks. however. . The possibility reaching a breakthrough in treatment of a large-scale problem. Customers who require a certain treatment will usually purchase only the best product that is designed specifically for their problem. however.

The volume of purchase is high because biotechnology therapeutics is usually bought in large quantities. and a large number of customers.Power of Buyers The concentration of buyers relative to the industry is low. These is because buyers generally know that the biotechnology industry spends a large percentage of . it is extremely unlikely that these organizations will integrate backwards to include biotechnology research and development efforts. Threat of backward integration by buyers is low and almost non-existent. When the product of a biotechnology firm is a treatment for a lifethreatening disease. the completed product will be purchased in large quantities so that it can be distributed to as many customers as possible as quickly as possible. There is a very high demand for treatments to life-threatening diseases and other ailments. The buyer’s knowledge of the industry’s cost structure is medium-low. This is because the products are bought in large quantities at a time usually as soon as the product development is finished. the buyer will be willing to pay more for the industry’s product. This is because direct buyers are clinics and hospitals that are not necessarily for-profit organizations. When buyers are clinics and hospitals. one of the switching costs may be death if there are no other similar treatments. In the case of a life-threatening disease. Product differentiation of the industry is very high because most products produced by the industry are unique due to the long development cycle and patent protections. Many lifethreatening diseases still have an unmet demand for treatments. and cures. This is one of the most important determinants of buyer power. This is another important item in determining buyer power. Cost savings from the industry’s product are low. The extent of buyer’s profits is medium but does not necessarily apply to buyers from the biotechnology industry. but this does not significantly affect the industry because customers will be willing to pay a very high price for biotechnology products. The percentage of total buyer’s cost spent on the industry’s input is medium-high. The importance of the industry’s input to the quality of the buyer’s final product is high because it is very important that the treatment that the industry produces works well in treating the ailment for which it was designed. The baby-boomer generation will require an increasing amount of biotechnology drugs as it ages and develops more health problems. Buyer’s switching costs are high because there may be no other treatment available for a certain ailment. This is because it takes a great deal of capital and expertise to research and develop biotechnology products. If the biotechnology treatment works better than other types of treatments. A customer with a life-threatening disease will want only the best treatment available and will pay a very high price if the only treatment is a biotechnology drug. which it often is. vaccines.

The importance of the industry to the supplier is medium. These supplies are products such as water. chemicals. It would not cost the industry much to switch to different suppliers of these products.revenue on R&D. however the biotechnology industry may be a large buyer of these products. Differentiation of the supplier’s products/services is low because their products and services may have a wide range of uses of which biotechnology is just one. This is because there are many suppliers for some requirements of the industry and fewer suppliers for others. mainly due to high product differentiation. expertise. and the high importance of the industry’s input to the quality of the buyer’s final product. Switching costs of the industry are low because the products supplied to the biotechnology industry are basic products such as water. These products will . purchase the required capital. and laboratory supplies. chemicals. few. such as certain ingredients to drugs that cannot be easily found. but will eventually start to climb slowly as they become more knowledgeable about the biotechnology industry. but low differentiation and low switching costs will most likely be the main items that determine the low power of suppliers. high switching costs. and spend the development time to produce a biotechnology product. hire the expertise. The trend is that the power of buyers will remain low for a period of time. The overall power of suppliers is low. and laboratory supplies. Power of Substitutes The rate of improvement in price performance of substitutes is low because the main substitute to biotechnology products is pharmaceutical products. The availability of substitute supplies is medium. but others are not. The overall power of buyers is low. This is because some substitute supplies are widely available. Suppliers of equipment and components may be many and suppliers of some rare raw materials. Most of the items that determine power of suppliers were based on assumptions. As they gain understanding of the way biotechnology products work and how they are priced. These products are very similar from different suppliers. they will be in a better position to determine what to buy and what not to buy. Power of Suppliers The concentration of suppliers relative to the biotechnology industry is medium-low. The threat of forward integration by the supplier is extremely low due to the equipment. Most supplies to the biotechnology industry are from suppliers whose products have a wide range of uses. but are not knowledgeable on how costs are distributed throughout R&D and on other efforts. and time required in the biotechnology industry. It would be very difficult for a supplier of materials and equipment to gain understanding of biotechnology products.

does not exist. Government regulations on the biotechnology industry have also hindered the possibility of new entrants. Once that need is met by a drug. biotechnology products are more effective than substitutes such as pharmaceutical drugs.improve. it is difficult for . that it hinders the possibility of new entrants. Porter’s 5-Forces Analysis of Up and Coming Biotechnology Firms Threat of New Entrants In the Biotechnology Industry. Intensity of Rivalry The intensity of rivalry in this industry is very high. Economies of scale are very high since the ability to survive in this industry takes large amounts of up front money to finance research and development of a new product. meet growing demand. All drugs that are created are more or less for very different reasons. and command higher prices along with biotechnology therapeutics. The established firms with large amounts of money to spend on research and development will dwarf the abilities of a smaller company trying to break into the market. Product differentiation is also very high. The profitability of the substitute’s industry is medium-high. as well as surviving during the testing phases by the FDA force a company to have large amounts of available money in order to maintain itself. There are 330 publicly traded firms. The overall power of substitutes is medium-low. Also the experience curve effects are very high as well. This is because for ailments such as life-threatening diseases. while analyzing the Up and Coming or Smaller biotechnology firms. there are five companies that dominate the market. new entrants isn’t a major issue. but amongst the up and coming firms. Among these firms. The FDA and other government regulatory comities have such strict policies on the practices and methods of a biotechnology industry. A smaller biotechnology company can also have major issues with trying to survive during a period where one of its products does not pass the testing. This is because the main substitute to the biotechnology industry is the pharmaceutical industry. would be the fact that access to financing and subsidies is minimal due to the large amounts of funding required to start a biotechnology firm. Capital requirements are also very high. Other factors which are likely to dissuade a new entrant. the consumer will tend to be fairly brand loyal. To financial needs of producing a new product in the research and development end. Due to the fact that the overall factors that create an environment where the threat of new entrants is high. the number of companies competing is relatively high. With all these companies competing to survive in an industry where a limited amount of funding is going to be available. the rivalry to survive is intense. which is almost as profitable as the biotechnology industry. Since the up and coming firms number at about 325 firms.

so if a company does decide to do this. This similarity of operations forces an increase in rivalry amongst the firms. With these becoming more popular as time goes on. As far as the agriculture aspect of this market. pharmaceuticals have to improve as well. The smaller companies are less likely to be able to put up a battle of any kind with the buyers due to their lack of financial stability when it comes time to product dump. As natural medicines and alternative medicines are increasing in popularity. With the fixed costs of keeping experts in the field on staff. On average a small company needs to have three years of capital to support operating expenses. On the pharmaceutical end. Due to the commonality of the products that are supplied to this industry. With this equal distribution of strength. but this time in rivalry. or smaller firms of the industry is the same as that of the larger firms mentioned before. this is also the case. Each of these 325 smaller companies. plays a roll once again in the forces of business.them to survive for long. and also in a more set to standard time scale. and are unable to integrate forward. Power of Buyers The power of buyers in the up and coming. Power of Substitutes The substitutes to the biotechnology field are fairly medial currently. power of substitutes is also increasing. most of them are of equal size and power. Some things that may be slightly altered are that the potential for buyers to be even more powerful with the smaller firms may be an issue. the powers of suppliers for the smaller fish in the biotechnology pond have a similar level as that for the bigger more powerful companies. people are looking for more effective drugs. There will always . To increase capacity in increments in this field requires large outputs financially. government regulations on the market being so strong. Such restrictions placed on the firm’s forces them to operate in a more similar pattern as one another. Since buyers for the larger firms are also buying from any of the smaller firms that are successful. And finally. unless they are able to quickly develop something that will bring in money. substitutes would be organic foods and natural preservatives. and that the expertise of the biotechnology industry is so specialized suppliers can be easily replaced. as well as looking to alternative medicines. and the company running being so high. it needs to be willing and able to compete more aggressively. As diseases and illnesses change and become more and more powerful. Costs such as fixed and storage costs are also a major factor in increased rivalry. there is an increased sense of rivalry among the firms. With chemicals and developed products having a limited shelf life. but growing. if you are not competitive and successful you will not last long. it makes it more likely for these firms to be more competitive in the market. Power of Suppliers Like the power of buyers.

Porter’s five forces are fairly low. Every force in the model was determined to be either low or medium-low. however some have the potential to rise in the future. The major hindrance to the market is the need of large amounts of capital to survive as a smaller biotechnology firm. and the overall attractiveness of the industry is high. Attractiveness and Trends of Up and Coming Biotechnology Strategic Group The industry of the up and coming firms is fairly attractive and profitable. Attractiveness and Trends of Established Biotechnology Strategic Group The established biotechnology industry is attractive based on the Porter’s five forces model. This analysis has shown that in this field. power of buyers is low. Overall. we have determined that this is a classic industry that is currently in its growth stages. The intensity of rivalry and the threat of new entrants may grow in strength in the future as the industry begins to mature. There is also the chance that one of the many small new entrants to the biotechnology industry will develop a breakthrough product that will accelerate its size and ability to close to that of the established firms.be a demand for the products of the biotechnology field. if they survive can make large amounts of money. IRME . and power of suppliers is low. The power of substitutes is a force that is most likely to increase over time. it is virtually impossible to enter the market. as a whole The industry as a whole is only attractive for those involved. but as times change so do the demands for alternatives. General Lessons The general lessons learned from this industry analysis are that by doing a five forces model and the different charts. Once the industry growth rate slows down. The smaller companies. The power of the larger firms in the industry also makes this economy less attractive. those firms in the market are going to be likely to stay. or be bought up by the bigger companies. Industry Attractiveness. This means that established segment of the industry is in a good position to maintain a high profit potential. The large established firms are controlling the market and able to gain large amounts of profit. However. without money and the availability of research and development. This will raise the threat of new entrants to the established biotechnology segment. as is power of substitutes. rivalry between firms in the industry segment will begin to intensify. the threat of new entrants is low. As these threats increases the market will become less attractive. The major force of concern in the industry is the threat of rivals. The industry currently does not have any forces that are truly threatening. Currently the threat of rivalry is high in this market and will increase as more firms enter.

tablets.5 billion. capsules.. From simple headache pills to sophisticated antibiotics and complex cardiac compounds. growing at about 8 to 9 percent annually. They are different however because the cigarette and beer industries have matured. industrial licensing for most of the drugs and pharmaceutical products has been done away with. chemicals having therapeutic value and used for production of pharmaceutical formulations. medicines ready for consumption by patients and about 350 bulk drugs. This will create an environment where the five forces have less of an effect on the biotechnology industry. assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world. pharmaceutical formulations. which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). 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. The pharmaceutical industry in India meets around 70% of the country’s demand for bulk drugs. These units produce the complete range of pharmaceutical formulations. It ranks very high in the third world. i. The Indian Pharmaceutical sector is highly fragmented with more than 20. All three of these industries have large established companies. chemicals.000 registered units. the pharmaceutical industry in India has low costs of . Pharmaceutical “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. relative to the beer and cigarette industry. orals and injectibles. Following the de-licensing of the pharmaceutical industry.” 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. Manufacturers are free to produce any drug duly approved by the Drug Control Authority.e. It has expanded drastically in the last two decades. A highly organized sector. almost every type of medicine is now made indigenously. Technologically strong and totally self-reliant. and are not growing at the same rate as the biotechnology field. International companies associated with this sector have stimulated. quality and range of medicines manufactured. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market share. There are about 250 large units and about 8000 Small Scale Units.This industry has similar attributes to the economy of the beer and cigarette industry. as smaller up and coming companies. the Indian Pharma Industry is estimated to be worth $ 4. in terms of technology. drug intermediates.. i. It is an extremely fragmented market with severe price competition and government price control.e.

production. low R&D costs. innovative scientific manpower.1 billion pharmaceutical industry is growing at the rate of 14 percent per year. will have to increasingly look at merger and acquisition options of either companies or products. which has become a generalized phenomenon in the world pharmaceutical industry. bulk drugs will account for Rs 54 bn (21%) and formulations. which is continuously growing. It has an educated work force and English is commonly used. In financial year 2001. It provides a wide variety of bulk drugs and exports sophisticated bulk drugs. Over 20. improve their R&D efforts and improve distribution to penetrate markets. imports were Rs 20 bn while exports were Rs87 bn. The domestic pharmaceuticals industry output is expected to exceed Rs260 billion in the financial year 2002. Information & Technology: It has a good network of world-class educational institutions and established strengths in Information Technology. the international pharmaceutical industry is finding great opportunities in India. ADVANTAGE INDIA Competent workforce: India has a pool of personnel with high managerial and technical competence as also skilled workforce. Globalizations: The country is committed to a free market economy and globalization. The process of consolidation. . Consolidation: For the first time in many years. Legal & Financial Framework: India has a 53 year old democracyand hence has a solid legal framework and strong financial markets. Above all. Cost-effective chemical synthesis: Its track record of development. the remaining Rs 210 bn (79%). particularly in the area of improved cost-beneficial chemical synthesis for various drug molecules is excellent. There is already an established international industry and business community. Professional services are easily available. has started taking place in India. The Pharmaceutical Industry. Indian companies.3% of the global pharmaceutical sector. strength of national laboratories and an increasing balance of trade. This would help them to offset loss of new product options. in an effort to consolidate their position. THE GROWTH SCENARIO India’s US$ 3. It is one of the largest and most advanced among the developing countries. supported by Intellectual Property Protection regime is well set to take on the international market. which accounts for merely 1. Of this. Core competencies will play an important role in determining the future of many Indian pharmaceutical companies in the post product-patent regime after 2005. with its rich scientific talents and research capabilities. it has a 70 million middle class market. STEPS TO STRENGTHEN THE INDUSTRY Indian companies need to attain the right product-mix for sustained future growth.000 registered pharmaceutical manufacturers exist in the country.

The competitive strength of an industry in the global market can be seen in several ways. the issue of competitiveness is critical for understanding the strengths and weaknesses of a country in the global market place. The discussion in the previous section provides strong support for the view that strategic government policies can have a long‐term impact on the growth and structure of an industry. its forward and backward integration capabilities. The future of the industry will be determined by how well it markets its products to several regions and distributes risks. In order to achieve a relatively higher growth performance among countries. In what follows. which may drive the sector to emerge as a global player. bilateral. For example. co-marketing and licensing agreements.Research and development has always taken the back seat amongst Indian pharmaceutical companies. The relevance of government policy continues to be critical even in an era of liberalization and this holds for knowledge‐based industries in developing countries. an assessment of the competitiveness of Indian pharmaceutical industry is presented. Comparative Analysis of the Competitive Strength of the Indian Pharmaceutical Industry With the arrival of global patent regime and widespread liberalization measures at the individual country. import to export ratio) . Once it is known where a country lacked in competitiveness vis‐à‐ vis others. A stronger growth performance exhibited by a particular industry in cross country comparisons indicates rising level and strength of production. This view is known as the strategic trade theory in international economics. then the concerned government can take facilitating policy measures to address the inadequacy. Hence. a comparison of the level of innovation can also. its consolidation through mergers and acquisitions. This is especially true in the case of knowledge‐based industries like pharmaceuticals. measure the competitive strength of the sector. to a certain extent.e. Innovation is an important source of cross–country differences in the productivity performance. The export market share and import coverage of the export (i. the government promotion of local technological activities through fiscal or other incentives is always needed when free market forces are not capable of scaling up the developing country’s capabilities in high technology intensive industries. regional and multi‐lateral levels. Indian companies will have to refocus and invest heavily in R&D. The Indian pharmaceutical industry also needs to take advantage of the recent advances in biotechnology and information technology. One simple way is to compare the relative size and growth performance in value‐added. its R&D. Most of the studies on cross–country and industry level comparisons of competitiveness also emphasized on the productivity level. one country in the particular sector is required to produce relatively more output per input combination over time and among competing countries. In order to stay competitive in the future.

Productivity is a key determinant of competitiveness. It can be seen that India had consistently . and through enhancements in the efficiency of the management system (Stoneman. which measures the amount of value‐added generated for per person employed. Majority of the Indian companies suffered from limitation of financial. A recent study found that in a sample of 223 firms. the research activities in the sector are quite limited and inadequately focused on development of new drugs. the extent and nature of innovation is crucial for countries to prolong their productivity growth and competitiveness in the long run. raw material and intermediate inputs. However. In broad terms the process of technological change can occur through improvements in the products.. Productivity The relatively rapid growth of output may not be sufficient to ensure competitiveness of a country in the long run unless there is sustained increase in the efficiency with which resources are employed in value‐added activity. production process. An industry doing very well in the international market suggests that it is scaling up its supplier position vis‐à‐vis other competitors and in fact possesses a strong comparative advantage in the product. self‐reliance in producing quality raw materials and production led by quality management. As the Indian industry is dominated by a large number of companies. especially in a technology‐intensive industry like pharmaceuticals. which is even less than 1 per cent of their sales in the year 1999–2000 (Pradhan. Verspagen 1991) have brought out that growth performance and competitive advantages of countries go together with their activities of technological innovation and imitation. They have shown that technological development measured by patent and R&D expenditures have significant impact on the trade performance of the countries.are also important indicators of competitive strength.g. 2002b). these technological strengths are confined to a few large Indian pharmaceutical companies. about 62. discovery in novel drugs delivery system. Those countries that produce increased value‐added per unit of inputs overtime vis‐à‐vis other countries are sure to perform better in the international market. Fegerberg 1987. Using R&D as an indicator of technological activities. both medium‐ and small‐sized. Table 5 presents the growth rates of pharmaceutical R&D in selected countries.3 per cent of firms are not engaged in innovative activities and another 21. Table 4 presents inter‐temporal performance of a group of countries with respect to labour productivity. The pharmaceutical industry being one of the most technology‐intensive industries. technical and skill resources to undertake any kind of R&D activities. Innovation Several studies on the economics of technological change and technology gap approach to international trade (e. 1983). The present section looks into the trends in above mentioned indicators to examine the global competitive strength of the Indian pharmaceutical industry.1 per cent firms undertake R&D. Indian domestic pharmaceutical companies are known for their innovative cost‐effective processes.

Italy and matches that of Spain. In 1990. Indian pharmaceutical industry has significantly improved its R&D intensity in the 1990s. For each PPP $100 worth of R&D expenditure incurred by the US pharmaceutical sector in 1990. Between 1990 and 2000. China. 1995–99 and 2000–04. In fact.91 per cent to 8. for a group of countries is furnished. India turned out to be second highest R&D growing pharmaceutical sector among the selected countries. The growing trends of R&D expenses may be a good sign but not a sufficient condition to ensure a rising competitiveness for Indian pharmaceutical sector. the relative gap in R&D spending is falling modestly over the years. its R&D spending is not even one per cent of the value‐added and is the lowest in the cross‐country comparison. Indian pharmaceutical industry as compared to global peers incurs a very small fraction of its value‐added for research and innovative activities. Second. The growth rate has gone up to 26 and 83 per cent over the periods 1992–96 and 1997–2001 respectively. The exports have consecutively achieved higher growth rates. Moreover. Trade Performance The pharmaceutical exports of India and its growth rates over the periods 1990–94. India’s recent export growth rate has not yet translated into .2 billion. the R&D intensity of India is higher than that of Korea. The relative R&D spending of India in terms of the US spending has gone up to PPP $4 and 80 cents in 2000. 23 per cent in 1995–99 and 44 per cent in 2000–04. India’s R&D relative to the US is also observed to be increasing. South Africa. However irrespective of its impressive export growth rates. Brazil. Unless the sector sets aside an increasing proportion of its value‐added for the R&D activities over time and across countries. First. The total pharmaceutical exports in 2004 stood at US $2. Mexico. there is a vast gap in the amount of pharmaceutical R&D expenses undertaken by the US and India. Singapore and Hong Kong. of Korea. Italy. nearly five times the figure pertaining to 1990. Indonesia. This high growth rate of India in pharmaceutical R&D seems to be due to the low base of pharmaceutical R&D in the base years. Portugal. Indian pharmaceutical sector had incurred just PPP $2 and 40 cents. expanding global position would be difficult. In 2000. India’s 44 per cent growth rate is higher than that of the US.7 per cent. its R&D intensity has increased by more than ninetimes from 0. The R&D intensities. In the period 1997–2001. It can be observed that India has increased its pharmaceutical exports at a rapid pace in the 1990s. In relation to a group of selected twenty‐nine countries. Rep. it is hovering around 1 per cent of market share. Although. India is much ahead of fifteen countries in terms of growth performance in pharmaceutical exports during 2000–04. Japan. Malaysia. Argentina. Two important points can be deduced from it. The Indian pharmaceutical R&D has grown by 17 per cent during the period 1987–91. the percentage of the value‐added devoted for the R&D activities. Thailand.pushed up its pharmaceutical R&D expenses since 1987. India’s share in the global pharmaceutical exports has not shown any improvement. 14 per cent in 1990–94.

A large number of Indian companies diversified into the business of contract manufacturing in the 1990s. data management and laboratory services to global pharmaceutical companies39.gains in export share as India’s growth performance is much lower when compared to the 60 per cent growth rate of world pharmaceutical exports during 2000–2004 and also its contribution to the global sum is minimal. Indian pharmaceutical companies have undertaken $1663 million worth of investments in acquiring overseas pharmaceutical companies. At the end of March 2006. outsourcing and strategic alliances not only provide additional sources of revenues. Dishman Pharmaceutical. Most of these acquisitions. but also access to new technologies. are directed at developed markets like Europe and North America. such activities are motivated to acquire foreign research capabilities. licensing and collaborative research to strengthen its competitive strength in India and . brands and R&D laboratories. For Indian firms. nearly 76 per cent of the overseas acquisition cases. Lupin Laboratories. A few names can be mentioned like Ranbaxy Laboratories. Matrix Laboratories. The process of outsourcing brings substantial economic gains to large global firms as they contract the production of their products to those who can work cost effectively and qualitatively and thus relieve them to focus on their core competencies and high value‐added operations like research and marketing. Between 1997 and 2005. Brownfield Overseas Investment Last ten years or so have seen Indian pharmaceutical firms progressively adopting brownfield investment as an alternative strategy for trans‐border growth through acquisitions of business enterprises abroad. This shows that overseas acquisition activities of Indian pharmaceutical companies are largely developed market oriented and apart from being a market entry strategy. marketing networks and best business practices abroad. Shasun Chemicals and Jubilant Organosys.6 per cent . skills and intellectual properties. Diviʹs Laboratories. Nicholas Piramal.9 million. The number of investments for overseas acquisitions increased significantly from just 1 in 1995 to 21 in 2005 (Table 19). Contract Manufacturing and Strategic Alliances Very recently contract manufacturing emerged as a new growth strategy for many Indian pharmaceutical companies. besides offering contract services like marketing.5 million to reach $532. the amount of consideration involved in overseas acquisitions has increased by 71 times from just $7. Ranbaxy Laboratories was one of the first Indian companies to adopt the strategy of contract manufacturing. Developing countries accounted for just about 18 per cent and Central and Eastern Europe about 5. expertise in process research and easy availability of qualified workforce in India are better placed globally to get real boost from this global trend of outsourcing. Indian pharmaceutical companies with their low cost manufacturing capabilities meeting international regulatory standards. research clinical trials.

South Africa. While the Indian policy regime has succeeded in bringing out its pharmaceutical sector as among the fastest growing in the world. Later. As per the agreement Ranbaxy would manufacture and supply finished formulations of the product to Schwarz Pharma. It entered into a joint venture with Eli Lilly of USA in 1992 to market selected Lilly products in India and in 1993 Eli Lilly started sourcing Cefaclor intermediates from Ranbaxy. and Sri lanka. Adcock Ingram formed a joint venture with Ranbaxy to obtain exclusive selling and distributing rights of Ranbaxyʹs range of anti‐retroviral products in South Africa41. Philippines. managerial.overseas markets. Although. Japan and Europe40. The fragmented nature of policy that had encouraged a large number of small‐ and medium‐sized pharmaceutical firms appears to have placed a constraint on the scale of production and capabilities to further upgrade the technological strength. Due to these factors. The starting of public sector pharmaceutical companies for indigenous production of drugs has been the initial form of government intervention. a soft patent regime was adopted since 1970. In 2002 Ranbaxy entered into two overseas agreements for reverse outsourcing. but it has also created its own limitations in pushing forward its productivity and technological activities. thus. These national policies. Schwarz Pharma AG of Germany announced a licensing deal with Ranbaxy to acquire the exclusive rights of developing. India has consistently enjoyed a favourable trade balance in pharmaceutical products. Thailand. In June 2002. productivity and R&D intensity of the Indian pharmaceutical industry is lowest among countries. marketing and distributing Ranbaxyʹs New Chemical Entity RBx‐2258 for the treatment of Benign Prostate Hyperplasia in USA. In February 2002. Singapore. . which led the domestic sector on a new technological trajectory and as a result. This technological growth has also been contributed partly by the progress that India achieved in building its scientific. a technologically vibrant domestic sector with remarkable technological capabilities to develop new cost‐effective processes and new drug delivery systems has emerged. Malaysia. its export share is still hovering around just one per cent. Ranbaxy Laboratories concluded an agreement with Penwest Pharmaceuticals of USA to get exclusive marketing rights of Nifedipine XL in selected markets such as China. which are readily and cheaply available to the industry for productive purposes. have contributed to the rise of the Indian pharmaceutical industry and to make it competitive in the world markets as among the cheapest producers of drugs internationally. The government of India has employed a variety of policy tools to develop the domestic pharmaceutical sector and to protect it from large multinational firms operating in and dominating the industry. Conclusions and Policy Options It has been a long journey for the Indian pharmaceutical industry from being merely an import dependent to emerge as a self‐reliant producer and later as an innovation‐driven developing country competitor in the global market. and general skills.

policy measures are needed to encourage mergers and acquisitions among domestic firms to offset the scale disadvantage and to overcome the trap of low R&D intensity. Government policies that encourage overseas acquisitions by the Indian companies for brands. Indian pharmaceutical firms have been increasingly entering into global securities and finance markets. brands and research facilities. Hence. Strategic alliances with and contract manufacturing.bilateral levels and across individual countries has opened up new competitive challenges for the Indian pharmaceutical sector. they are also aggressively acquiring overseas business enterprises. The Indian government can take several policy measures for enhancing the nation’s competitiveness in the pharmaceutical sectors. They are strengthening their geographical presence by starting their own subsidiaries and affiliates in different strategic overseas markets. etc can be useful policies.The policy liberalization of the past decade or so like liberalization of foreign investment. Apart from undertaking green‐field investments. Incentives and facilitation policies for encouraging global pharmaceutical companies to outsource their production and R&D works to Indian firms shall be put in place. Increases in average firm size through M&As until the concentration index of the Indian pharmaceutical industry rises significantly. may result in improving India’s competitive advantages in the pharmaceutical sector. trade and industrial policy and shift towards a strong patent regime postulated by the TRIPs at the global. For financing their global expansion. investment and tax allowances for the outsourced production and R&D works. technology and market access can also be important for strengthening firms’ technological capabilities. R&D and marketing for pharmaceutical companies from developed countries are also being employed by Indian pharmaceutical companies. The provision of low cost finance for research with subsidy facilities for indigenous research activities continues to be a key to competitive strategy. A fragmented domestic market marked by a lower degree of domestic competition is not conducive for global competitiveness. Many Indian pharmaceutical firms are adopting new internationalization strategies for meeting such challenges and achieve their goal for global growth. Data protection. regional . .

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