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Management – Pharmaceuticals
Created By SMS Research
1 4
Indian
Pharmaceutical Appendix
Industry
1
Global
Pharmaceutical
Industry
3
Global Pharmaceutical Market
837
Europe
North
643 America Asia, Africa
5%
and Japan
Rest of the
World
Source: Deloitte
2
Indian
Pharmaceutical
Industry
Indian Pharmaceutical Market
Indian Pharmaceutical Market Size in USD India’s Position in Global Market By 2015 (based on market size in USD Billion)
Billion
CAGR=12%
19.6
CAGR=10%
16.3
6.3
2005 2015(E)
The industry structure remains highly fragmented, with top ten pharmaceutical companies accounting for only about 35% of total pharmaceutical sales
Currently Tier 1 cities (which includes metros and other major cities with over 1 million in population) account for nearly 60% of the total market while Tier 2
cities and rural areas account for the remaining 40%
It is estimated that in the next decade over 45% of the growth is going to come from Tier 2 markets with implies that efficient distribution is going to be critical for
pharmaceutical companies
Increasing population, rising income levels of households and increasing penetration of health insurance are expected to be some of the key drivers for the rapid
growth of the pharmaceutical market
By 2015, generic products are estimated to capture about 10% of the total market
• The prices and margins of pharmaceutical drugs in the Indian market are highly regulated by the Government
through the Drug Price Control Order (DPCO), 1995. The provisions of the DPCO are implemented by a constituted
body called National Pharmaceutical Pricing Authority (NPPA)
• The central government sets the maximum sale prices of scheduled bulk drugs. While fixing the price of a
scheduled bulk drug the Government may take into consideration
Overview • A post tax return of 14% on net worth
• Return of 22% on capital employed
• Internal rate return of 12% based on long term marginal costing
• If the production is from basic stage, the post tax return is 18% and a return of 26% on capital employed is
provided
No person can sell a drug at a price higher than the one fixed for it including the local taxes
• Government fixes the retail price of Scheduled formulations using the formula
• The Union ministry of chemicals and fertilizers has initiated a move to bring all essential medicines sold in the
Expected country under a price cap
• This legislation if implemented will give the drug price regulator, National Pharmaceutical Pricing Authority
New
(NPPA), the power to control prices of about 17,000 packs of 354 drugs named in the National List of Essential
Legislation Medicines (NLEM)
Source: NPPA
3
Pharmaceutical
Supply Chain and
Leakage Points
Pharmaceutical Value Chain & Leakage Points
Suppliers/ Global
Manufacturer Wholesalers Distributors Retailers End Customers
Sourcing
Pharmaceutical
Manufacturer Wholesalers Distributors End Customer
Manufacturer
Flow of drugs
Flow of payments
Key Revenue
Leakage Areas
Bulk Drugs Value Chain
Leakage Points Note: This is a generic illustration of the pharmaceutical
supply chain.
Revenue Leakages does not include losses due to
counterfeit and loss of goods during transportation
Source: Datamonitor
Key Leakage Points In The Pharmaceutical
Industry Are In Logistics and Distribution
Retailers
Wholesaler Distributor (Pharmacy/
Hospitals etc)
Flow of payments
Chargebacks Rebates & Returns Concealed Shortages Flow of Revenue
Leakage
• Chargebacks- Chargebacks—the difference between the price at which product is sold to wholesalers, and the sometimes lower
price negotiated with end customers like PBMs or GPOs, must be reconciled with the wholesaler
• Rebates & Returns - Rebate errors, occur mainly due to a lack of standardization, or improper use of standardized
codes, between manufacturers and managed-care organizations
• Concealed shortages - Caused by customers claiming that orders were only partially filled, then seeking to make only a partial
payment for the order
Source: IDC
Pharmaceutical firms lose about 4.4% of their annual
revenues due to leakages in the supply chain
Source: IDC
Industry Survey On Key Revenue Leakage
Points
Is revenue leakage through the chargeback process a significant problem for your company?
2006 2009
• There is an increased awareness
6.0%
in the pharmaceutical industry
Unsure due to lack of evidence 16.2% 16.0% towards revenue leakage caused
21.2% 13.0%
Large problem by chargebacks
11.1%
Medium Problem 21.0% • 63% of the respondents in 2009
18.2% believed that chargebacks were
Small problem
42.0% either a large or medium sized
33.3% problem compared to 37% in
Not a problem
2006
Is revenue leakage through pharmaceutical returns a significant problem for your company?
2006 2009
• 42% of the respondents in 2009
believed that returns were
Unsure due to lack of evidence 13.0%
16.8% either a large or medium sized
21.8%
Large problem 26.0% problem
16.0%
Medium Problem 19.8% 10.9%
11.0%
Small problem
Note:
• Survey data based on responses from 151 industry
leaders, in more than 117 pharmaceutical companies
Source: IDC Survey Results
4
Case Studies
Case Studies
In the next two years Pfizer is likely to invest in Technologies Pfizer has already invested to plug revenue
the following technologies leakages
• Business Intelligence
Software Vendor
• Analytics
• Procurement/Purchasing Accounting Control Model N, Oracle, SAP
• Accounts Payable
• Data Transformation Grid Computing Solution, SSA ERP,
ERP
Oracle Enterprise Manager
• Forecasting
• Price Optimization Financials Model N, SSA BPCS
• B2B Ecommerce
• Lack of visibility and control over the entire revenue life cycle
Top 10 Global Challenges • Unable to track the performance of product in the market in real time
Pharmaceutical • Order to cash process plagued with errors
Company Solution
Model N
Provider
• Model N‗ implemented Revenue Management Intelligence (RMI) analytics platform with the
transactional applications in the Revenue Management Suite. This gave the company access to in-
depth and real-time performance metrics data for various products
Solution
Roadmap • Seamless integration of company’s systems with customer's SAP ERP
infrastructure to accelerate time to value and enhance the order-to-cash
process
• Replaced both custom systems and a legacy contracting vendor's systems of the company
• Model N’s solution helped the company gauge the effect of regulatory
mandates on commercial business and the bottom line
Benefits • Reduced errors and cycle time in fulfilling orders
• Improved decision making though advance modeling techniques
• Improving margins and control
Challenge: Ranbaxy had already implemented SAP ERP with the idea of improving business processes
within the organization. In addition the company was using EDI to streamline the entry of orders into
the SAP software and eliminate the inconsistencies between the information in the different
Ranbaxy geographies. For the US and European geographies, the frequency of documents was almost 200+ per
day. Customers were also showing an increasing interest in submitting POs electronically instead of via
third-party systems. Hence a live integration was required between ERP and EDI.
Solution: To minimize complexity and make the most of the common system architecture Ranbaxy
implemented SAP NetWeaver PI. With the new solution in place customers and vendors were able to
see their order status, accounts and do online tracking of cargo. Orders placed online are transmitted
through EDI and automatically updated in Ranbaxy’s SAP network. Initially the system was rolled out
to overseas customers and later for domestic customers.
Benefits: About 2,500 of Ranbaxy’s partners were connected within India, apart from a similar
number in other countries. The network is serving as a powerful marketing tool and knowledge
resource for customers. The number of stockists and dealers is so large that even if 10% of them start
online transactions, the company expects to reduce physical man-hours (and errors) and increase cost
advantages. In addition, the company expects benefits such as inventory reduction
Appendix
Overview Of The Pharmaceutical Supply Chain In
India
End Customers
Pharmaceuticals
(Patients)
Manufacturing
Company
• 1–10% on the total • 8% on scheduled • 16% on scheduled • Drugs are sold to
turnover + other drugs drugs end customers at
expenses • 10% on • 20% on MRP + tax
Margins
Flow of • On an average the nonscheduled drugs nonscheduled drugs
drugs margin is about 6%
In 2006, the market size of India‘s pharmaceutical logistics segment (distribution) was valued at around $200 million with an annual growth rate of 4%
India Organization of Chemists & Druggists (AIOCD) controls the margins of drugs in the Indian market. The maximum margins in the supply chain are
predetermined. In addition to the above mentioned margins, wholesalers and retailers are also compensated with additional trade offers
On an average, a company may work with a total of 25–35 CFAs. Unlike a CFA that can handle the stock of only one company, a stockist (distributor) can
simultaneously handle more than one company (usually, 5–15depending on the city area), and may go up to even 30–50 different manufacturers
The CFAs are paid by the company yearly, once or twice, on a basis of the percentage of total turnover of products. The stockist, in turn, after 30–45 days (a typical
credit or time limit) pays for the products directly in the name of the pharmaceutical company
Note:
• Supply chain illustrated is for pharmaceutical manufacturing companies in the domestic market only
• Drugs indicate formulations only and excludes bulk drugs