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Indian Pharmaceutical Industry: Governmental Regulations And Policy Changes

The environment in which the Indian pharmaceutical industry is operating is changing at very slow rate presently, but is likely to change considerably and faster in the future.

The Indian pharmaceutical industry grew at very slow pace from 1947-1970, mainly due to the lack of incentives and the failure of the government to set-up solid regulatory framework.

These days, the industry is characterized by many governmental regulations and policy changes, stifling price controls, exact controls on formulations, and an absence of international patent protection. During 1970, the Indian Patents Act (IPA) and the Drug Price Control Order (DPCO) were approved. Although the DPCO acted as a buffer against pharmaceutical companies making free pricing illegal, it satisfied the goal of providing quality drugs to the public at sensible rates.

The introduction of IPA - which did not identify product patents but only process patents , provided a major push to the industry and its companies, which through the procedure of reverse-engineering, began to produce bulk drugs and formulations at lower costs. This led to high disintegration in the industry, due to the appearance of a number of small firms.

The Indian Pharma Industry

Today about 24,000 companies - big, medium and small, skirmishing for a USD 3.9 Billion market. The Indian pharmaceutical market is ranked 12th globally. About 300 firms are in the organized sector, about 15,000 are in the small scale sector, and the rest are very small without any economies of scale.

In India, manufactures over 400 volume drugs and around 60,000 formulations, which are dispersed by 5,000,000 chemists all over the country.

The Indian pharmaceutical industry is passing through a wave of consolidation, with the objective to make stronger their brand equity and distribution in what is basically a branded-generics market.

The Indian pharmaceutical industry has come a extended way, being almost non-existent before 1970 to a prominent supplier of healthcare products, meeting almost 95% of the country's pharmaceuticals requirements. The domestic pharmaceutical sales have amplified from Rs. 4 bn in 1970-71 to Rs. 214 bn in 2002, at a CAGR (Compound Annual Growth rate) of 13.7% per annum. The total Indian production constitutes about 1.3% of the world market in value terms and, 8% in volume terms. The per capita use of drugs in India, stands at US$ 3, is amongst the lowest in the world, as compared to Japan - US$ 412,

Germany - US$ 222 and USA - US$ 191.

General Features:

Human body is the marketplace of pharmaceutical industry, but as long as body hosts diseases. Thus, precondition for the growth of the pharmaceutical industry is maintaining and expanding diseases.

A key strategy to accomplish this goal is the development of drugs that merely mask symptoms while avoiding the curring or elimination of diseases. This explains why most prescription drugs marketed have no proven efficacy and merely target symptoms.

For further expansion of their market, the drug companies are continuously looking for new applications for the use of drugs they already market.

Another strategy to expand pharmaceutical market is to cause new diseases with drugs. For example, all cholesterol-lowering drugs currently in the market are known to increase the risk of developing cancer- but only after the patients has been taking the drug for several years.

Climbing the value chain

InIndia, pharmaceutical industry is rising up the value chain. From being a clean reverse engineering industry focused on the domestic market, the industry is moving towards basic research driven, export oriented worldwide presence, providing wide range of value added quality products and services. Government policies will play an significant role in defining the future of the pharmaceutical industry. The product patent regime which has come into effect from January 2005 will lead to long-term expansion for the future.

In present scenario, the growth of a domestic pharmaceutical company is critically dependent on its therapeutic presence. The old and mature categories like anti-infective, vitamins, and analgesics are de-growing while; new lifestyle categories like Cardiovascular, Central Nervous System (CNS), Anti-AIDS, Anti-Cancer and Anti Diabetic are expanding at double-digit growth rates.

The new trends

Increased generic penetration, intense rivalry, fragmentation of the industry has harmfully impacted the overall value growth of the domestic pharmaceutical market. In this scenario, to raise in the domestic market, pharmaceutical companies are continually eyeing for innovation, introduction of fresh value added products, product life cycle management and enlarging their market reach.

Indian companies are putting their work together to tap the generic drugs markets in the regulated high margin markets of the developed countries. The US market will remain the most profitable market for the Indian companies led by its market size and the power of blockbuster drugs going off patent. An predictable US$ 45bn of drugs expected to go off patent by 2007 in US alone.

Outsourcing in field of R&D and manufacturing is the next greatest event in the pharmaceutical industry. Strengthening costs, expiring patents, low R&D cost and market dynamics are driving the MNCs to outsource both manufacturing and research activities. India with its appropriate chemistry skills and low cost advantages, together in research and manufacturing joined with skilled manpower will attract a lot of business in days to come.

Indian companies have started investing more and more into R&D activity at home which is bound to one day give birth to original products invented in India and patented globally. This will enhance the bottom-line of Indian Pharmaceutical companies. Contract R&D is another off-shoot of this phenomenon where MNCs set Indian companies to start research in the specified areas of their big research projects. India offers cost advantages and skilled manpower for the idea.

The Fields of Bio-technology and stem-cell Research has already produced superb results. Humuno- insulin and Hepatitis-B vaccines are producing assets for India although in its infancy.

FMHG- (Fast Moving Health Goods) is fresh term introduced into advertising world. Many a company has taken the direct way to the consumer’s home just like consumer products. This has led to an increase in the occurrence of self-medication and rising sales volumes for the industry.

Non-allopathic medications is another field which is showing good promise in terms of people’s taking. With new modern technology and standardization in the manufacturing and formulating practices, the therapeutic results with alternate system of medicines are becoming more predictable. This has led to the emergence of a totally new field of therapeutics. Many MNC's have also adopted these forms and reaped the benefit of a ready market.

Export of bulk-drugs, formulations and the API (Active Pharma Intermediates) have of late become the trend. A company worth its salt has an export unit. The Government provides many fiscal incentives for exports such as Excise duty exclusion, Exports subsidy, packing credits; export Financing, IT advantages, exemptions from Local laws etc. There are a number of examples where the companies ongoing as a 100% EOUs (Export Oriented Units) and later diversified into local sales.

Key Players

Key Players in the Indian Pharmaceutical Industry are:

Aarti Drugs

Abbott India

Ajanta Pharma

Alembic

Alkem

Anglo-French Drugs

Aristo

Astrazeneca Pharma

Aurobindo Pharma

Aventis Pharma

Cadila Health

Cipla

Concept

Dr. Reddy

Elder Pharma

Franco-Indian

Fulford India

FDC

German Remedies

Glaxo Smithkline

Ind Swift Lab

Ipca Laboratories

J B Chemical

Jagson Pharma

K D L Biotech

Kopran

Krebs Biochem

Lupin

Lyka Labs

Maker

Medicorp Tech

Merck

Natco Pharma

Nicholas Piramal

Novartis

Orchid Chemicals

Organon

Panacea Bio

Pfizer

Pharmacia

Ranbaxy

Raptakos Brett

R P G Life Sciences

Shasun Chemicals

Siris Limited

Sterling Biotech

Strides Arcolab

Sun Pharma

Suven Life Sciences

Torrent Pharma

Unichem Lab

Wockhardt

Wyeth Ltd

Zandu Pharma

future

In India, medicines represent between 10% to 15% of total health care costs. This will not rise significantly when product patents are introduced, for two reasons. First, over 90% of the medicines in the Indian market are now off-patent worldwide. Second, for most of those that would be patentable, there are close alternatives available which provide efficient competition.

The genuine reason for the lack of access to medicines and other forms of healthcare is the prevailing stranglehold of Governmental rule of the Healthcare sector.

This miserable picture can, however, change dramatically if the Government takes prudent steps such as easing the DPCO and other regulations, provide sufficient budgetary provision for Healthcare (Govt. spends a miserly 1% of GDP on healthcare), allow Indian companies to buy technology, allows Indian companies to buy finance, set up subsidiary companies abroad, allows FDI into the sector, freely allows tie-ups with MNCs, takes away restrictions on exports to some countries.

The industry on its own must take steps to increase its commitment to R&D, quality, manpower development, exports, market development and consolidation for economies of scale. The development of traditional system of medication like Ayurveda, Herbal and other systems of treatment must be researched into and standardized. Documentation on their therapeutic benefits must be generated and put open for one and all to study and analyze. Ayurveda can give India the cutting edge that the Pharma industry needs against a Patented regime dominated by MNCs.

Hence, the industry has a bright future.

PEST ANALYSIS

To understand the implications of environment on any industry it is very important to study the 4 cardinal influencers on the industry namely Political, Economic, Social and Technological factors. It is rather unfortunate that in India these factors have a rather disproportionate influence on the functioning of a commercial organization. From the days of independence the business environment has been overly regulated by a handful of bureaucrats, middlemen, businessmen and politicians. Its only a decade since the country has seen an emergence of a political thought that encourages free enterprise.

Political Factors

1. These days there is political uncertainty in the air. A combination of diverse political thought have got jointly to cobble jointly a rag-tag coalition, that is riddle with ideological contradictions. Therefore, any consistent political or economic policy can not be expected. This muddies the investment field.

2. Minister in charge of the industry has been threatening to compel even more strict Price Control on the industry than before. This is throwing many an investment plan into the doldrums.

3. DPCO which is the bible for the industry has in effect worked contrary to the stated objectives. DPCO nullifies the market forces from encouraging competitive pricing of goods dictated by the market. Now the pricing is determined by the Government based on the approved costs irrespective of the real costs.

4. In January, 2005 the country goes in for IPR (Intellectual Property Rights) regime, popularly known as the Patent Act. This Act will impact the Pharmaceutical Industry the most. Thus far an Indian company could escape paying a patent fee to the inventor of a drug by manufacturing it using a different chemical route. Indian companies exploited this law and used the reverse-engineering route to invent a lot of alternate manufacturing methods. A lot of money was saved this way. This also encouraged competing company to market their versions of the same drug. That meant that the impurities and trace elements found in different brands of the same substance were different both in qualification as well as in quantum.

Therefore different brands of the same medicine were truly different. Here Branding actually meant quality and a purer brand actually had purer active ingredient and lesser or less toxic impurities.

Product patent regime will eliminate all this. Now, a patented drug would be manufactured using the same chemical route and would be manufactured by the inventor or his licentiates using the chemicals with same specifications. Therefore, all the brands of the same active ingredient would not have any difference in purity and impurities. The different brands would have to compete on the basis of non input-related innovations such as packaging, color, flavors, Excipients etc.

This is the biggest change the environment is going to impose on the industry. The marketing effort would be now focused on logistics, communications, economy of operation, extra-ingredient innovations and of course pricing.

5. In Pharma industry there is a huge PSU segment which is chronically sick and highly inefficient. The Government puts the surpluses generated by efficient units into the price equalization account of inefficient units thereby unduly subsidizing them. On a long term basis this has made practically everybody inefficient.

6. Effective the January, 2005 the Government has shifted from charging the Excise Duty on the cost of manufacturing to the MRP thereby making the finished products more costly. Just for a few extra bucks the current government has made many a life saving drugs unaffordable to the poor.

7. The Government provides extra drawbacks to some units located in specified area, providing them with subsidies that are unfair to the rest of the industry, bringing in a skewed development of the industry. As a results Pharma units have come up at place unsuitable for a best cost manufacturing activity.

Economic Factors

1. India spends a very small proportion of its GDP on healthcare ( A mere 1% ). This has stunted the demand and therefore the growth of the industry.

2. Per capita income of an average Indian is low ( Rs. 12,890 ), therefore, spending on the healthcare takes a low priority. An Indian would visit a doctor only when there is an emergency. This has led to a mushrooming of unqualified doctors and spread of non-standardized medication.

3. The incidence of Taxes are very high. There is Excise Duty ( State & Central), Custom Duty, Service Tax, Profession Tax, License Fees, Royalty, Pollution Clearance Tax, Hazardous substance (Storage & Handling) license, income tax,

Stamp Duty and a host of other levies and charges to be paid. On an average it amounts to no less than 40-45% of the costs.

4. The number of Registered Medical practitioners is low. As a result the reach of Pharmaceuticals is affected adversely.

5. There are only 50,00,000 Medical shops. Again this affects adversely the distribution of medicines and also adds to the distribution costs.

6. India is a high interest rate regime. Therefore the cost of funds is double that in America. This adds to the cost of goods.

7. Sufficient storage and transportation facilities for special drugs is lacking. A study had indicated that nearly 60% of the Retail Chemists do not have sufficient refrigeration facilities and store drugs under sub-optimal conditions. This affects the quality of the drugs administered and of course adds to the costs.

8. India has poor roads and rail network. Therefore, the transportation time is higher. This calls for higher inventory carrying costs and longer delivery time. All this adds to the invisible costs. Its only during the last couple of years that good quality highways have been constructed.

Socio-cultural Factors

1. Poverty and associated malnutrition dramatically exacerbate the incidence of Malaria and TB, preventable diseases that continue to play havoc in India decades after they were eradicated in other countries.

2. Poor Sanitation and polluted water sources prematurely end the life of about 1 million children under the age of five every year.

3. In India people prefer using household treatments handed down for generations for common ailments.

4. The use of magic/tantrics/ozhas/hakims is prevalent in India.

5. Increasing pollution is adding to the healthcare problem.

6. Smoking, gutka, drinking and poor oral hygiene is adding to the healthcare problem.

7. Large joint families transmit communicable diseases amongst the members.

8. Cattle-rearing encourage diseases communicated by animals.

9. Early child bearing affects the health standards of women and children.

10. Ignorance of inoculation and vaccination has prevented the eradication of diseases like polio, chicken-pox, small-pox, mumps and measles.

11. People don’t go in for vaccination due superstitious beliefs and any sort of ailment is considered as a curse from God for sins committed.

Technological Factors

1. Advanced automated machines have increased the output and reduced the cost.

2. Computerization has increased the efficiency of the Pharma Industry.

3. Newer medication, molecules and active ingredients are being discovered. As of January 2005, the Government of India has more than 10,000 substances for patenting.

4. Ayurveda is a well recognized science and it is providing the industry with a cutting edge.

5. Advances in Bio-technology, Stem-cell research have given India a step forward.

6. Humano-Insulin, Hepatitis B vaccines, AIDS drugs and many such molecules have given the industry a pioneering status.

7. Newer drug delivery systems are the innovations of the day.

8. The huge unemployment in India prevents industries from going fully automatic as the Government as well as the Labor Unions voice complains against such establishments.

Indian Pharmaceutical Industry: SWOT analysis

It is often said that the pharmaceutical industry has no recurring factor attached to it. Irrespective of whether the economy is in recession or in an upturn, the general belief is that demand for drugs is likely to grow steadily over the long-term. True in some sense. But are there risks? This article gives a perspective of the Indian pharma industry by carrying out a SWOT analysis (Strength,Weakness, Opportunity, Threat).

Strengths:

1. Indian with a population of over a billion is a largely unexploited market. In fact the penetration of modern medicine is less than 30% in India. To put things in perspective, per capita expenditure on health care in India is US$ 93 while the same for countries like Brazil is US$ 453 and Malaysia US$189.

2. The growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centers. This opens a huge market for lifestyle drugs, which has a very low contribution in the Indian markets.

3. Indian manufacturers are one of the lowest cost producers of drugs worldwide. With a scalable labor force, Indian manufactures can produce drugs at 40% to 50% of the cost to the rest of the world. In some cases, this cost is as low as 90%.

4. Indian pharmaceutical industry posses outstanding chemistry and process reengineering skills. This adds to the competitive advantage of the Indian companies. The strength in chemistry skill help Indian companies to develop processes, which are cost effective.

Weakness:

The Indian pharma companies are spoiled by the price regulation. Over a period of time,this regulation has reduced the pricing ability of companies.

The NPPA (National Pharma Pricing Authority), which is the authority to decide the various pricing parameters, sets prices of different drugs, which leads to lower profitability for the companies. The companies, which are lowest cost producers, are at advantage while those who cannot produce have either to stop production or bear losses.

2. Indian pharma sector has been marred by lack of product patent, which prevents global pharma companies to introduce new drugs in the country and discourages innovation and drug discovery. But this has provided an upper hand to the Indian pharma companies.

3. Indian pharma market is one of the least penetrated in the world. However, growth has been slow to come by. As a result, Indian majors are relying on exports for growth. To put things in to perspective, India accounts for almost 16% of the world population while the total size of industry is just 1% of the global pharma industry.

4. Due to very low barriers to entry, Indian pharma industry is highly fragmented with about 300 large manufacturing units and about 18,000 small units spread across the country. This makes Indian pharma market increasingly competitive. The industry witnesses price competition, which reduces the growth of the industry in value term. To put things in perspective, in the year 2003, the industry actually grew by 10.4% but due to price competition, the growth in value terms was 8.2% (prices actually declined by 2.2%)

Opportunities :

Migration into a product patent based regime is likely to transform industry fortunes in the long term. The new patent product regime will bring with it new innovative drugs. This will increase the profitability of MNC pharma companies and will force domestic pharma companies to focus more on R&D. This migration could result in consolidation as well. Very small players may not be able to cope up with the challenging environment and may succumb to giants.

2. Big number of drugs going off-patent in Europe and in the US between 2005 to 2009 offers a big opportunity for the Indian companies to capture this market. Since generic drugs are commodities by nature, Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world.

3. Opening up of health insurance industry and the expected growth in per capita income are key growth drivers from a long-term perspective. This leads to the expansion of healthcare industry of which pharma industry is an integral part.

4. Being the lowest cost manufacturer combined with FDA approved plants, Indian companies can become a global outsourcing hub for pharmaceutical products.

Threats:

1. There are definite over the patent regime regarding its current structure. It might be possible that the new government may change certain provisions of the patent act formulated by the preceding government.

2. Threats from other low cost countries like China and Israel exist. However, on the quality front, India is better placed relative to China. So, differentiation in the contract manufacturing side may wane.

3. Short-term threat for the pharma industry is the uncertainty regarding the

implementation of VAT. Though this is likely to have a negative impact in the short-term, the implications over the long-term are positive for the industry.

Poter’s 5 Forces Analysis :

Business environment in today’s world is extremely competitive and in economics paralance where perfect competition exists, the profits of the firms operating in that industry will become zero.

However, this is not possible because, no company is a price taker, they strive to create a competitive advantage to thrive in the competitive scenario.

Industry Competition:

This one of the most competitive industries in the country with as many as 10,000 different players fighting for the same pie. Rivalry in the industry can be measured from the fact that the top player in the country has only 6% market share, and the top fine players together have about 18% market share.

Thus, concentration ratio for this industry is very low. High growth prospective market it attractive for new players to enter in the industry.

Fixed cost turnover, which is one of the gauges of fixed cost requirements, tell us that in bigger companies this ratio is in the range of 3.5 to 4 times. For smaller companies, it would be even higher.

Players that are focused on a particular region, have a better hang of the distribution channel, making it easier to succeed.

Product differentiation is one key factor, which gives competitive advantage to the firms in any industry. In pharmaceutical industry, product differentiation is not possible since India has followed process patents till date, with law favouring imitators. The cost competitiveness is a driver not product differentiation. However, companies like Pfizer and Glaxo have created big brands in over the years, which act as a product differentiation tools.

Bargaining power of buyers:

Unique feature of pharmaceutical industry is that the end user of the product is different from the doctors. Consumer has no choice but to buy what doctors say.

In this industry, the buyers are scattered and they as such does notwield much power in the pricing of the products. However, government with its policies, plays an important role in regulating pricing through the NPPA(National Pharmaceutical Pricing Authority).

Bargaining power of suppliers:

Pharmaceutical industry depends upon several organic chemicals. Chemical industry is again very competitive and fragmented. Chemicals used in pharmaceutical industry are largely a commodity.

Suppliers have very low bargaining power and pharmaceutical companies can switch from their suppliers without incurring very high cost. However, suppliers can go forward integration to become a pharmaceutical company. Companies like Orchid chemicals and Sashun chemicals were basically chemical companies, who turned themselves into pharmaceutical companies.

Barriers to entry:

This industry is one of the most easily accessible industries for an entrepreneur in India. Capital requirement for this industry is very low, regional distribution network is easy, since the point of sales is restricted in this industry in India.

Creating brand awareness and franchisee amongst doctors is very important for survival.

Quality regulation by the government may put some hinderance for establishing new manufacturing operations.

Impending new patent regime will raise the barriers to entry. But it is unlikely to discourage new entrants, as market for generics will be as huge.

Threat of substitutes:

Pharmaceutical industry has one of the greatest advantages. Whatever happens, demand for pharmaceutical products continues and the industry thrive. One of the reasons for high competitiveness in the industry seems to have an infinite future.

However, in recent times, the advances made in the field of biotechnology, can prove to be a threat to the synthetic pharmaceutical industry.

Conclusion:

This industry is dynamic in nature.

Form of competition will be different. It will be between large players.

In India, companies like Cipla, Ranbaxy and Glaxo are likely to be key players.

Entry barriers will increase going forward.

Economies of scale will play an important role.

Last but not least, in a vast country of India’s size, government too will have bigger role to play.

Environment of the industry is also good, and industry has a bright future.

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