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Porter’s Five Forces Analysis of current Structure of

Reddy’s Laboratories

a)

The

threat

of

new

entrants

Economies
of
Scale:
Economies of scale exist in the pharma industry. From the below table we can see that proxy variable (TE/TA) decreases with
increase in assets indicating presence of economies of scale. This reduces the threat of new entrants and increases incumbent’s
attractiveness.
Product
Differentiation:
Domestic market is branded market i.e. doctors generally prescribe the brand name. Different branded medicines exist for same
disease and are perceived differently by both doctors and patients. So there exists product differentiation in domestic formulations
market. However, the product differentiation is very less in the domestic bulk drugs market. The perceived product differentiation
is less in exports market as it is mostly development market where doctors prescribe the underlying molecule. On a whole there
exists product differentiation, and reduces the threat of new entrants and increases incumbent’s attractiveness.

Company

Dr
Lab

Reddys Cipla

4048

4048.85

Ranbaxy

Lupin

4536.77

3496.9

Total
Expenses
(TE)
Total Assets(TA) 7,465.00

5919.16

9393.11

4135.95

TE/TA

0.745

0.482

0.845

0.542

Above table clearly indicates low capital requirement and gestation period. However, the cost of producing an innovator drug is
very high due to huge R&D expenses and also requires expertise in the drug discovery process. . On a whole there is low capital
requirement, and increases the threat of new entrants and decreases incumbent’s attractiveness.

SWITCHING COSTS:
In the domestic formulations market, there are switching cost in terms of side effects from switching drugs and doctors/patients
hesitation to shift to new brand or some unidentified generic version. However there are no switching costs for bulk drugs and
exports market. On a whole there are switching costs, and decreases the threat of new entrants and increases incumbent’s
attractiveness.

ACCESS TO TECHNOLOGY/KNOW-HOW:
Before 2005, when there are process patents instead of product patents, companies used to reverse engineer the product and get
access to the technology and know-how. However, post 2005 as the era of product patents started getting access to
technology/know-how has become difficult. However the molecules for which patents have expired can be reverse engineered
and there are many patent expired drugs brands like Lipitor, Nexium, Zyprexa and Plavix providing huge opportunity. On a
whole we can say that there is moderate difficulty in getting access to technology and know-how and makes the industry
moderately attractive for incumbents.

ACCESS TO RAW MATERIALS:

Getting access to chemicals/intermediates and APIs is relatively easy as there are many suppliers. So there is threat of
new entrants and incumbent’s attractiveness is low.
Access to distribution channels:
Medical representatives, distribution warehouses, doctor’s prescription and medical stores constitute the distribution
channel for most of the drugs. In India it is easy to get access to these all distribution resources. So there is threat of
new entrants and incumbent’s attractiveness is low.

b) The bargaining power of buyers
NUMBER OF BUYERS:
For the formulations, patients are the actual end users. But they use it mostly on doctor’s prescription. So doctors can be
considered as final buyers and have considerable power. This considerably reduces the number of buyers and increases their
bargaining power.

PRODUCT DIFFERENTIATION:
As seen earlier, there exists product differentiation reducing bargaining power of buyers.

AVAILABILITY OF SUBSTITUTES:
Major substitutes are generics, biosimilar, and holistic medicines like homeopathy and aurvedhic medicines. Currently use of all
these substitutes is very less compared. Use of biosimilar and generics is considerably increasing and can pose as a proper
substitute in the long run. So currently influence of substitutes is less and reduces the bargaining power of buyers.

SWITCHING COSTS:
As seen earlier, there are switching costs reducing bargaining power of buyers.

BUYER’S PROFITABILITY:
In the pharma industry doctors can be considered as buyers for medicines and formulations manufacturers are buyers
for bulk drugs. Both of them have considerable profits reducing their bargaining power.

BUYER’S THREAT OF BACKWARD INTEGRATION:
There is no buyer’s threat of backward integration as most of the market is retail. So we can say there is no threat of
backward integration from buyers and reduces their bargaining power.

INDUSTRY’S THREAT OF FORWARD INTEGRATION:
There is little threat of forward integration i.e. formulations manufacturing opening up hospitals, as organized health
care sector is small compared to unorganised sector. So there is no threat of forward integration from industry and
increases bargaining power.

CONTRIBUTION TO BUYER’S QUALITY:
Formulations and bulk drugs contribute extensively to the buyer’s quality. Effectiveness of medicines prescribed by a doctor will
determine the quality of service provided by doctor and the API molecule supplied by bulk drug manufacturer forms core of
formulations preparation. This reduces the buyer’s bargaining power.

CONTRIBUTION TO COST:
Contribution of medicines to the health care costs and bulk drugs to formulations cost is high. This provides reason for buyers to
bargain and increases their bargaining power.

c) The bargaining
Suppliers

power

of

NUMBER OF SUPPLIERS (CONCENTRATION RATIO):
Chemical companies and API producers form the key suppliers to the pharma industry. Number of chemical companies
compared to bulk drug producers and number API producers compared to Formulation manufacturers is high. So, bargaining
power of suppliers is less. Also most of the top pharma firms make their own APIs completely eliminating the supplier power.

AVAILABILITY OF SUBSTITUTES:
Only inorganic compounds of chemicals, intermediates and APIs form the raw materials to the industry. There are no other
substitutes available. This leads to high bargaining power of suppliers.

SWITCHING COSTS:
There are no switching costs involved in changing from one supplier to another. More or less these raw materials are
commodity chemicals without much differentiation, so there are no switching costs. This leads to low supplier bargaining
power.

SUPPLIER’S THREAT OF FORWARD INTEGRATION:
There is considerable threat of supplier forward integration. There are instances in the past of this integration happening.
Orchid Chemicals and Sashun Chemicals were basically chemical companies, who turned themselves into pharmaceutical
companies. This threat results in higher bargaining power of suppliers.
.

INDUSTRY’S IMPORTANCE TO THE SUPPLIER:
Many chemical companies and bulk drug makers produce their products exclusively for pharma industry, so industry’s importance
is very high for suppliers. This reduces the bargaining power of suppliers.

DIFFERENTIATION OF SUPPLIER PRODUCTS:
There is not much differentiation in the supplier products. So there is no supplier bargaining power.

CONTRIBUTION TO QUALITY:
Chemicals and API form the core of products manufactured in the pharma industry. So supplier’s contribution to the quality of
product produced is high. For this reason all top pharma companies either produce APIs themselves or implement strict supplier
code of conduct. This results in increase of suppliers bargaining power.

CONTRIBUTION TO COST:
Supplier’s also contribute significantly to the manufacturing costs of pharma industry. Raw material costs constitute about 40-50%
of total costs incurred. We can see that latest total raw material costs for group of 31 companies in the industry is Rs 16282.3
crores out of 33784 crores of total expenditure(around 48%). This reduces the bargaining power of suppliers.

d) The Threat of Substitutes
 
AVAILABILITY OF CLOSE SUBSTITUTES:
In India, substitutes are available in terms of unbranded generics, biosimilar, and holistic medicines like homeopathy and
aurvedhic medicines. Currently use of all these substitutes is very less compared to branded allopathy medicines. Use of
biosimilar is considerably increasing and can pose as a proper substitute in the long run. Growth in insurance business in India
might also increase usage of generics as in developed markets and can replace the current branded medicines. So we can say
availability of substitutes is high and the threat is high.

SWITCHING COSTS:
There are considerable switching costs involved in changing to usage of substitutes. Switching to substitutes might also involve
changing completely the treatment plan which is costly. Also there can be severe side effects because of switching to substitutes
.On a whole due to high switching costs, threat of substitutes is low.

SUBSTITUTE’S PRICE-VALUE:
Generics, Homeopathy and Aurvedhic medicines are considerably cheaper than the branded medicines. This might pose as a threat
of substitutes.

PROFITABILITY OF PRODUCERS OF SUBSTITUTES:
Profitability of substitute producers is high compared to the pharma industry as their costs are very low. Generics manufacturer
will not have any R&D costs and has less fixed costs due to less capital requirements. Though the prices of these substitutes are
also less, their profitability margin is high compared to branded drugs manufacturer. So there is high threat of substitutes.

e) Intensity of rivalry among competitors
 
NUMEROUS OR EQUALLY BALANCED COMPETITORS:
industry is highly fragmented with around 300-400 companies in organized sector and around 15000 unorganized small scale
units. Altogether these players manufacture over 100000 drugs. Top player in the industry Cipla has 5.4% market share and top 10
companies have only 33% of total market share. Thus the concentration ratio is very low. After Indian Government’s rule to
implement product patents, now many foreign MNCs are eying to enter Indian pharma industry. Big global pharma companies like
Pfizer and Glaxo are actively pursuing Indian markets. This will in turn intensify the rivalry in the industry. On a whole this factor
indicates high intensity of rivalry and makes industry unattractive.

SLOWING INDUSTRY GROWTH:
Indian pharma sector has grown at a CAGR of 15% over last decade and is expected to grow at the same rate for next 5 years.
About 108 bn dollars sales worth drugs are going off patent in next 5 years presents huge generics opportunity. Also contract
research and clinical trials services are expected to grow at 15-17% for next 5 years. All these indicate good industry growth
prospects which will reduce the intensity of rivalry among competitors as there will be less price war to capture the existing
market.

FIXED OR STORAGE COSTS:
The fixed asset turnover, which is one of the gauges of fixed cost requirements, is in the range of 3.5 to 4 times for bigger
companies. For smaller companies, it is even higher. High fixed asset turnover indicates high motivation to create excess capacity
and chances for price cutting. Also we can see from latest figures that the fixed costs form 25% of total expenditure (8740 crores
out of 33784 crores). This is considerably high and indicates high chances of intense rivalry.

PRODUCT DIFFERENTIATION:
As seen earlier, there is product differentiation and perceived brand image for some companies. This reduces the intensity of
rivalry.
.

SWITCHING COSTS:
In the domestic formulations market, there are switching costs in terms of side effects from switching drugs. Switching costs make
the intensity of rivalry low.

EXCESS CAPACITY LEVELS:
As capital requirement and gestation period are low, all top players add new capacities as demand grows. However presence of
many small players creates excess capacity levels and intensifies the rivalry.

EXIT BARRIERS:
Low exit barriers in the pharma industry make it easy for unprofitable firms to quit then add to capacity of industry. This lowers
the intensity of rivalry