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PHARMACEUTICAL INDUSTRY
10-Sep-09
ASHWIN
SHRIVASTAVA(09BSHYD0189)
BIPLAV PATNAIK(09BSHYD0220)
CHHAVI JAIN(09BSHYD1013)
SNEHA NAGAR(09BSHYD0831)
SILKY AGARWAL(09BSHYD0819)
BACKGROUND ANALYSIS OF THE INDIAN PHARMACEUTICAL SECTOR :
The Indian pharmaceutical industry was estimated at US $16.6 billion (including exports) in
2007-08. India’s healthcare spending is around 6 per cent of the total gross domestic product
(GDP) of India.
Bulk drugs or APIs are made of two or more chemicals or intermediaries. Bulk drugs are
intended to have a direct effect on the diagnosis, cure, mitigation, treatment or prevention of a
disease. Out of the total Indian pharmaceutical market in 2007-08, formulations account for
around 70 per cent and bulk drugs for the balance 30 per cent in value terms. India produces 22
per cent of the world’s generic drugs (in terms of value) and is also one of the top five API
producers (with a share of about 6.5 per cent).
Concentrated Manufacturing :
In geographical terms manufacturing operations are largely concentrated in Maharashtra, Andhra
Pradesh. However, many players have shifted their manufacturing bases to excise free zones like
Baddi (Himachal Pradesh) and Haridwar (Uttaranchal) due to the shift towards MRP based
excise duty levy.
In 2006, the per capita annual drug expenditure in India was around $3 as compared to $412 and
$191 in Japan and US, respectively. This can be attributed to the huge population in India and
the declining health expenditure as a percentage of total government expenditure in India.
Unlike US, India does not have a strong health insurance sector to share the healthcare cost with
the patient. Consumers do not directly pay for their medicines in the US. Government
organisations and managed care organisations reimburse most of the drug cost to the patients in
US. However, with rising drug expenditure, patients are being asked to share a large portion of
their expenses. This has prompted consumers to choose generic drugs and forego the use of high
priced branded drugs.
R&D
While the average R&D spending in India as a whole is a meager 2% of sales, the spending of
the top five companies is about 5% to 10%. Despite having a 16% CAGR growth over the last
four years, the ratio is still way below the global average of 15% to 20% of sales. However,
despite the relatively low R&D spending, Indian companies are stepping up their research
activities to make themselves more self sufficient in terms of product development, now that the
product patent regime has come into force.
Porter’s Five Force Model for Pharmaceutical Industry:
Barriers to entry: Licensing, distribution network, patents, plant approval by regulatory
authority.
Bargaining power of suppliers: Distributors are increasingly pushing generic products in a bid
to earn higher margins.
Bargaining power of customers: High, a fragmented industry has ensured that there is
widespread competition in almost all product segments. (Currently also protected by the DPCO
i.e Drug price Control Order).
Competition: High Very fragmented industry with the top 300 (of 24,000 manufacturing units)
players accounting for 85% of sales value. Consolidation is likely to intensify.
Supply: Higher for traditional therapeutic segments, which are typical of a developing market.
Relatively lower for lifestyle segment.
Demand: Very high for certain therapeutic segments. Will change as life expectancy, literacy
increases.
Role of Pharma Sector in Indian Economy:
The Indian Pharmaceutical industry is currently the largest amongst the developing nations and
one of the flagship sectors of the Indian economy. Indian pharmaceutical companies continue to
move to the center stage of the global pharmaceutical market. As such The Indian government
has listed the pharmaceutical industry as an intellectual industry and investment in research and
development has been enhanced.
Growth:
India, a US$ 8.2 Billion pharmaceutical market, represents one of the most emerging
pharmaceutical markets in the world. The market, presently driven by over a billion population,
an expanding GDP, and rapid epidemiological transitions, is expected to be the major player in
the global pharmaceutical market both in terms of its large domestic market and also as a
pharmaceutical export hub.
Between 2007-08 and 2011-12, the Indian domestic pharmaceutical market is expected to grow
at a CAGR of nearly 16%. The size of the domestic pharmaceutical market is larger than export
market. However, owing to the growth of global generics market, stringent price controls in the
domestic market, and better margins, the export market is growing much faster than the domestic
market.
Traditional branded generics presently dominate the Indian pharmaceutical market but the future
will see strong growth in the specialty branded generics and patented drug segments.
The retail pharmaceutical market in India is presently highly unorganized; however, a vast
opportunity exists for the organized market.
While there has been a slowdown in the global pharmaceutical markets, the emerging markets
could drive the growth for global pharmaceutical market going forward. Emerging markets,
which form 18% of the global pharmaceutical market, outperformed developed markets in terms
of growth with a 49% in 2009 with a CAGR of 12-13% during 2003-2008, whereas the CAGR
growth for developed economies stayed around 6-8% for the same period.
According to the report of the total global outsourcing, custom manufacturing contributes almost
65% of pie of the $51 billion market in 2008. Within India, custom manufacturing is almost $1.1
billion and is growing at 43% that is thrice the global custom manufacturing outsourcing growth
rate.
This is driven by the India’s ability to create a differentiating cost value proposition
powered by its lower manufacturing costs, skilled manpower and strong technical
capabilities.
However India lacks a culture of innovation due to legacy issues such as low levels of funding,
collaboration between industry, academia and educational infrastructure with India spending
only 0.8% of its total GDP on research and innovation.
Exports:
Over the years India has emerged as one of the top generic drug suppliers globally and it is
expected that in the years to come India’s foothold over the global generics market is to get
stronger and stronger.
India’s total exports, comprising bulk drugs and formulations, increased from USD
2 billion in 2001-02 to USD 8.1 billion in 2007-08. Formulation exports witnessed a growth of
16.2 % in 2007-08 (y-o-y). With India’s ever growing popularity in the global generics markets,
a further surge in the exports is projected. The total demand for formulation and bulk drug
exports is expected to cross USD 22 billion by 2011-12. The Indian Pharma exports market is
projected to grow to almost twice the size of domestic formulations market by 2011-12.
The Indian pharmaceutical industry ranks 17th with respect to the export value of
bulk drugs and dosage forms.
US, Russia, UK, Nigeria, and Germany are the top five export destinations for India.
Foreign Participation:
A major turning point, as far as MNCs were concerned, was the liberalization programme
initiated by the Narasimha Rao government in 1991. As part of the reforms process, tariff
barriers were lowered and Foreign Exchange Regulation Act (FERA) regulations were relaxed.
This restored MNCs’ confidence to a certain extent and encouraged greater foreign investment in
the domestic pharmaceutical industry. Most multinationals undertook comprehensive cost-
containment programmes through plant relocation and retrenchment of work force, and enhanced
the pace of their new product introductions.(lower tariff barriers, cost containment programmes)
Seeing the above trend and growth in the pharmaceutical sector, the market structure looks like a
monopolistically competitive market for the following reasons:
➢ Firstly, product differentiation is widely seen in this sector. There are different drugs for a
particular disease by different companies.
➢ Secondly, price controls have been continuously relaxed. Such relaxations are giving
companies some control over the prices of their products
➢ Moreover, more than looking at each other, companies are increasingly trying to develop
newer drugs and trying to cater to the market. Research and development expenditures
are high for most of the players as they are continuously involved in innovating newer
drugs.
➢ Price wars are not seen in this sector as products are differentiated.
➢ From the market share of top players we see that the top 4 companies have a market share
of 19.3% (2005 figures)
To
The President
World Bank
Respected Sir/madam,
Please find below an analysis of the Indian Pharmaceutical sector highlighting innumerous
growth opportunities, the need for financial aid and reasons as to why it is a leading indicator in
of the Indian economy.
All these points indicate that despite the recession the Pharma sector continued to grow in double
digits and thus bolstered the Indian economy. The cost of manufacturing in India is significantly
lower as compared to costs in the regulated markets of the US and Europe. This is mainly due to
availability of cheap skilled labour and raw materials. India also has the largest number of US
FDA approved facilities outside the US (more than 100 in 2007-08).
Kindly take into consideration all these factors before making your decision.
Yours sincerely,
Ashwin Shrivastava
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