Submitted By:To:Gaurav Shrestha (PGDM-10-057) R. K.

OJHA Gaurav Singh (PGDM-10-058) Gaurav Tandon (PGDM-10-059) Harshita Singh (PGDM-10-060) Jayanti Jain (PGDM-10-061)

Submitted
Dr.

INTRODUCTION
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The Indian pharmaceutical sector has come a long way, being almost non-existent before 1970 to a prominent provider of healthcare products, meeting almost 95 per cent of the country's pharmaceuticals needs. The Industry today is in the front rank of Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. Fromsimple headache pills to sophisticated antibiotics and complex cardiac compounds, almostevery type of medicine is now made indigenously. 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. International companies associated with this sector have stimulated, assisted and spearheaded this dynamic development in the past 53 years and helped to put India on the pharmaceutical map of the world. The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units with severe price competition and government price control. It has expanded drastically in the last two decades. There are about 250 large units that control 70 per cent of the market with market leader holding nearly 7 per cent of the market share and about 8000 Small Scale Units together which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e., chemical shaving therapeutic value and used for production of pharmaceutical formulations. Following the de-licensing of the pharmaceutical industry, industrial licensing for most of the drugs and pharmaceutical products has been done away with. Manufacturers are free to produce any drug duly approved by the Drug Control Authority. Technologically strong and totally self-reliant, the pharmaceutical industry in India has low costs of production, low R&D costs, innovative scientific manpower, strength of national laboratories and an increasing balance of trade. The total Indian production constitutes about 13 per cent of the world market in value termsand, 8 per cent in volume terms. The per capita consumption of drugs in India, stands at US$3, is amongst the lowest in theworld, as compared to Japan- US$412, Germany- US$222 and USA- US$191. PHARMACEUTICAL INDUSTRY 2

Current Status
India's US$ 9.4 billion pharmaceutical industry is growing at the rate of 14 percent per year.It is one of the largest and most advanced among the developing countries. The Indian pharmaceutical industry can reach a market size of US$ 11.6 billion by 2009.

A beginning has been made with the signing of General Agreement on Tariffs and Trade in January 2005 with which India began recognizing global patents. Soon after, the Indianpharmacy market became a sought after destination for foreign players. Foreign directinvestment into the countrys pharmacy industry touched US$ 172 million during 2005-06 having grown at a CAGR of 62.6 per cent during the period beginning 2002-06. The sector recorded strong growth in the second quarter ended September 2006, driven by launch of new generic drugs with 180 days exclusivity period in the US market. The top ten pharmacy companies reported an impressive 57 per cent growth in consolidated net profit at US$ 314.3 million, as against US$ 200.7 million in the

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same quarter of the previous year, while consolidated net sales were up 51 per cent at US$ 1.7 billion.

Company Name Ranbaxy Labs. Dr. Reddy Labs Cipla Nicolas Piramal Lupin Sun Pharma Cadila Healthcare Torrent Pharma Glenmark Biocon Total

Profits(percent) 167.2 65.8 5.2 473.2 26.8 35.8 66.4 313.7 74.5 26.1 57.2

There are 74 U.S. FDA-approved manufacturing facilities in India, more than in any other country outside the U.S, and in 2005, Indian companies filed almost 20 per cent of all Abbreviated New Drug Applications (ANDA) to the FDA. Growths in other fields notwithstanding, generics are still a large part of the picture. London research company Global Insight estimates that Indias share of the global generics market will have risen from 4 per cent to 33 per cent by 2007. The focus of the Indian pharma companies is also shifting from process improvisation to drug discovery and R&D. the Indian companies are setting up their own R&D setups and are also collaborating with the research laboratories like CDRI, IICT etc.

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MICROECONOMIC TOOLS APPLICABLE IN PHARMACEUTICAL INDUSTRY IN INDIA

1. MARKET STRUCTURE:
The major forms of Market Structure with its characteristics are as follows: 1. Perfect Competition: There are large number of Buyers and Sellers, no participants can influence prices, free flow of information without any barriers to entry and products are Homogenous. Entry and Exit of Firms is free from the Industry. An Individual firm is a Price Taker. For the firm Revenue: P=AR=MR, since Price is constant and the firm is Price Taker where AR is Average Revenue, P is Price and MR is Marginal Revenue. To maximize Profit the firm adjusts the level of output for which two conditions must be fulfilled: a) MR must be equal to Marginal Cost of Production. b) Marginal Cost of Production must be increasing, Thus, P=MR=AR=MC. 2. Monopoly: One Seller and many buyers. No close substitutes of products. Firms and Industry are same. Price and Quantity are changeable. Entry of new firm is restricted. A Monopolistic firm/Industry attains maximum profit when it meets two conditions: a) MR=MC, where MR is Marginal Revenue and MC is Marginal Cost. b) Slope of Marginal Revenue should be less than the slope of marginal cost curve. A monopolist can charge different Prices for the same goods known as Price Discrimination which is classified in 3 degrees: I. Charging the maximum Price possible for each unit of output. PHARMACEUTICAL INDUSTRY 5

II. Pricing based on quantities of output purchased by individual consumer. III. Separating consumers or markets in terms of their price elasticity of demand. 3. Monopolistic Competition: Many Sellers selling differentiated products in the market. Products are close substitutes but not perfect substitutes for the product of competitive firm. Each firm satisfies a small share of market demand. Entry of new firm is possible. Products can be differentiated in the form of Product Quantity, Services, Location/Accessibility, Advertising and Packaging. Product Differentiation may be in the form of Features, Quantity or Quantity. The firm maximizes Profit when Marginal Revenue equals Marginal Cost. 4. Oligopoly: Few dominating Sellers and sellers are interdependent. Rivals reaction when selecting prices, output goals, advertising budgets and other business policy is taken into consideration.Products may be : a) Homogenous (Pure Oligopoly) b) Heterogeneous (Differentiated Oligopoly). Entry of new seller is difficult or impossible. Change in the prices of output by single firm affects the profit of all the firms.

MARKET STRUCTURE INDUSTRY:

OF

PHARMACEUTICAL

The Indian pharmaceutical industry is highly fragmented -- there are now more than 20,000 domestic manufacturers of end-use pharmaceuticals, particularly because of the industry's low capital requirement and the lack of product patents. Only about 300 of these are in the organized sector. This structure causes intense competition, especially in the bulk drug markets, with profitability falling as demand expands.

INDIAN PHARMACUETICAL INDUSTRYPERFECT COMPETITIVE MARKET as shown in the figure.

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For value purposes, drugs in India are generally classified into two categories -- bulk drugs and formulations. Due to India's low overhead costs, bulk drugs comprise the largest sector in the country's pharmaceutical market. Indias bulk drug sector also makes up about 6% of the international bulk drug market. Drug intermediates are used as raw materials for the production of bulk drugs, which are either sold directly or retained by companies for the production of formulations. Formulations can be subdivided into generic drugs and branded or "ethical" drugs, the latter of which are made under process patent and sold under a separate brand name. Expected short-term growth for the two types of drugs has been 20% for bulk drugs and 15% for formulations.

2. Determinants OF DEMAND:
Economic analysis has recognized the role of key variables in determining demand and consumption. In practice, the distinction between demand (as a schedule of quantities as a function of price, other factors held constant) and consumption as an equilibrium quantity at a given price, is frequently ignored. The development of "gap" type models illustrate the common approach of projecting 'demand' as a fixed quantity independent of price. Demand, as the relationship between price and quantity, is subject to change over time due to changes in the underlying factors held constant by the static notion of demand. Changes in demand "shifters" are often included in economic estimation of demand representing anticipated dynamics in these determinants.

DETERMINANTS OF DEMAND PHARMACEUTICAL INDUSTRY:

IN

The pharmaceutical industry has enormous growth potential. Factors listed below determine the rising demand for pharmaceuticals. The growing population of over of a billion Increasing income PHARMACEUTICAL INDUSTRY 7

 Demand for quality healthcare service Changing lifestyle has led to change in disease patterns, and increased demand for new medicines to combat lifestyle related diseases More than 85 per cent of the formulations produced in the country are sold in the domestic market. India is largely self-sufficient in case of formulations. Some life saving, new generation under-patent formulations continue to be imported, especially by MNCs, which then market them in India. Overall, the size of the domestic formulations market is around Rs160 billion and it is growing at 10 per cent per annum.

Demand for drugs for treatment of lifestyle-related diseases such as diabetes, cardiovascular diseases, and central nervous system are on the increase. There are around 700,000 new cases of cancer each year and total of around 2.5 million cases. It is estimated that there are around 40 million people in India with diabetes and the number is rising, 5.1 million HIV/AIDS patients, and 14 million tuberculosis cases. According to industry reports, while the Indian pharmaceutical industry witnessed a growth of 7 percent, the cardio-vascular segment recorded 15 to 17 percent growth and anti-diabetes segment of over 10-12 percent growth.

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3. ELASTICITY:

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PED is derived from the percentage change in quantity (%Qd) and percentage change in price (%P). Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand, such as income). Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (orrelatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and conjoint analysis.

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Determinants of Elasticity
The overriding factor in determining PED is the willingness and ability of consumers after a price change to postpone immediate consumption decisions concerning the good and to search for substitutes. A number of factors can thus affect the elasticity of demand for a good: Availability of substitute goods: the more and closer the substitutes available, the higher the elasticity is likely to be, as people can easily switch from one good to another if an even minor price change is made; There is a strong substitution effect. If no close substitutes are available the substitution of effect will be small and the demand inelastic.

Percentage of income: the higher the percentage of the consumer's income that the product's price represents, the higher the elasticity tends to be, as people will pay more attention when purchasing the good because of its cost; The income effect is substantial. When the goods represent only a negligible portion of the budget the income effect will be insignificant and demand inelastic.

Necessity: the more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price, such as the case of insulin for those that need it.

Duration: for most goods, the longer a price change holds, the higher the elasticity is likely to be, as more and more consumers find they have the time and inclination to search for substitutes. When fuel prices increase suddenly, for instance, consumers may still fill up their empty tanks in the short run, but when prices remain high over several years, more consumers will reduce their demand for fuel by switching to carpooling or public transportation, investing in vehicles with greater fuel economy or taking other measures. This does not hold for consumer durables such as the cars themselves, however; eventually, it may become necessary for consumers to replace their present cars, so one would expect demand to be less elastic.

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Brand loyalty: an attachment to a certain brandeither out of tradition or because of proprietary barrierscan override sensitivity to price changes, resulting in more inelastic demand.

Who pays: where the purchaser does not directly pay for the good they consume, such as with corporate expense accounts, demand is likely to be more inelastic.

The key characteristics of Indian pharmaceutical industry is that it has a low price elasticity and high demand elasticity.

Effect on tax incidence

When demand is more elastic than supply, producers will bear a greater proportion of the tax burden than consumers will.

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The Effect of Generic Pharmaceutical Prices

Entry

on

Figure 1: Pharmaceutical Prices, Labor Costs, and Material Input Costs

A simple Market Segmentation Model

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The profit-maximizing brand name producers face the segmented demand curve: the loyal customers (DL), and the cross-price-sensitive customers (DS), who will switch to generic substitutes in the second period. The brand name producer's demand function is: Qb = DL(Pb) + DS (Pb, Pg) Where Qb is the brand name quantity demanded, Pb and Pg are the brand name and generic prices. Fig 1:

Brand name drug producers do not face entry in the beginning, so the first period graph looks just like the classic monopoly model, where a brand name firm produces at MC = MR. The market segmentation line demarcates the loyal consumer (DL), who occupy the top half of the demand curve due to their higher willingness to pay, from the price-sensitive consumers (DS) that reside in the lower bottom.

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Fig 2:

As generic firms begin to enter the market in the second period after the patent expires, the generic demand (Dg) takes away part of brand name firm's consumers and causes the demand for brand name products become more inelastic. As a result, the brand name producer maximizes its second period profit with respect to the new marginal revenue curve (MR'). And because now the brand name firm is facing a PHARMACEUTICAL INDUSTRY 15

more inelastic demand than the first period, it will supply at higher price (Pb') to extract consumer surplus.

Figure3: Modified Dominant-Firm-Competitive-Fringe Model

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This modified version shows that the price of a brand name drug will definitely decrease upon generic entry, because generic firms will capture the upper part of demand, therefore reducing the consumers' willingness to pay at high prices.

Figure 6:Effect of Informational Advertising

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Lower levels of advertising reflect drug innovators' concerns about future lower returns from such investments once patents expire and generic entry grows likely.

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Conclusion
The entry effect on brand name pharmaceutical products in this analysis is based on the assumption that brand name producers follow an optimal behavior principal, in which the firms profit-maximize with demand curves subject to generic entry. The necessary conditions to cause brand name prices to increase simultaneously as advertising expenditures to decrease in response to generic entry are: 1) the entry leads to a substantial decline in price elasticity of reduce-form brand name demand, and 2) market-expanding advertising reduces the cross-price-sensitive segment of brand name demand curve. Such an outcome leads to several observations regarding the pricing pattern in this market. First, it appears that as the number of generic entries increases, the competition among generic drug producers becomes fierce, and eventually forces generic drug prices to approach the market efficient point. Second, increasing generic competition is not necessarily accompanied by lower prices in brand name drugs. However, the Drug Price Competition and Patent Term Restoration of 1984 did not completely fail its expectations. Evidence has shown a 40 to 50% shift in market share from brand name producers to generic firms, along with a 25 to 30% reduction in generic drug price. That means, even though the price of brand name drugs rises when their generic substitutes are introduced, the average price of the prescription drugs fall, and the trend of name-brand price increase will be attenuated as the cross-pricesensitive segment of the market continues to expand. Thus, the moral of the story is not to condemn generic competition, but to elucidate switching costs in consumer behavior as a form of market failure caused by imperfect information. Switching costs are incurred when consumers are ignorant of the bioequivalency of generic substitutes. Policy makers should focus on eroding switching costs by educating consumers.

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BIBLIOGRAPHY

Google search engine www.economics.about.com www.scribd.com www.citeHR.com www.PRlog.com www.Aarkstore.com www.articleandinfo.co.cc www.meps.ahrq.gov/ www.kff.org www.aei.org

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