Table of Content

Pharma Industry (Introduction)………………………………..2

PESTEL Analysis……………………………………………...3

Global Trends…………………………………………………12

Indian Trends………………………………………………….22

CHALLENGES IN INDIAN PHARMA MARKET…………31

Business Model used in Pharma Industry........................…….32

Pricing Strategy of Pharma Industry………………………….41

Forecasting of Pharma Industry…………….………………….50

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 PHARMACEUTICAL INDUSTRY

The pharmaceutical industry discovers, develops, produces, and markets drugs or

pharmaceutical drugs for use as medications to be administered (or self-
administered) to patients, with the aim to cure them, vaccinate them, or alleviate
the symptoms. Pharmaceutical companies may deal in generic or brand
medications and medical devices. They are subject to a variety of laws and
regulations that govern the patenting, testing, safety, efficacy and marketing of
drugs.

The pharmaceutical industry is now one of the most profitable and influential in
existence, attracting praise and controversy. Drug discovery is the process by
which drugs are discovered and/or designed. In the past most drugs have been
discovered either by identifying the active ingredient from traditional remedies
or by serendipitous discovery.

A newer approach has been to understand how disease and infection are
controlled at the molecular and physiology level and to target specific entities
based on this knowledge. New technologies and Data Management/Informatics
systems are now employed to speed up this process. Drug development is
considered a costly and intensive process. Of all compounds investigated for use
in humans only a small fraction is eventually approved, and only after heavy
investment in pre-clinical development, clinical trials, and safety monitoring to
determine the safety and efficacy of a compound

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 PESTEL ANALYSIS
It never ceases to amaze me why so many businesses fail to take the time to look
at the macro and the micro environments when completing their business plans
and strategies. These external forces will play a big part in shaping the final
outcome of the ultimate corporate achievement. Yet, most manager’s focus only
on internal factors and it is fair to say that sales growth and profits remain high
on their agenda.

The macro environment tends to have a long term impact and requires extensive
research. Couple this with the fact that many managers are over worked and under
resourced and we begin to see why the process is often not completed. This can
be illustrated with PESTEL ANALYSIS

The pharmaceutical industry has been around for millennia, but it’s only within
the last century that we’ve been able to understand and treat the majority of health
ailments. While the pharmaceutical industry is extremely profitable for those
involved, its future outlook is mixed. Despite an aging population and growing
obesity rates, the industry is held back by pricing pressures from governments
and a new trend towards being healthy. In this PESTLE analysis, we’ll look at
the Political, Economic, Sociocultural, Technological, Legal, and Environmental
factors that will decide this industry’s future.

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  POLITICAL ANALYSIS

This is all about how and to what degree a government intervenes in the economy.
This can include – government policy, political stability or instability in overseas
markets, foreign trade policy, tax policy, labour law, environmental law, trade
restrictions and so on.

It is clear from the list above that political factors often have an impact on
organisations and how they do business. Organisations need to be able to respond
to the current and anticipated future legislation, and adjust their marketing policy
accordingly.

There is now growing political focus and pressure on healthcare authorities across
the world. This means that governments will be looking for savings across the
board. Some of the questions the industry should ask are

 What pressures will be put on pricing?

 What services will be cut?
 Will the same selection of drugs be available to everyone?

Government is taking interest in limiting the price of drugs sold by

Pharmaceutical industries. For example in the United States, pharmaceutical
companies are free to price medications however they want. In recent years, this
has caused significant outrage, as many drug manufacturers choose to sell their
drugs at hugely marked-up prices. When these drugs, such as diabetes treatments
are crucial to another human being’s survival, it is incredibly unethical to price
them so highly. Ultimately, this would mean that pharmaceutical companies are
left with less profit after all things are considered.

Government support in the form of investments and regulatory interventions is

integral to initiate the innovation-led growth of industry. The government has
already launched some initiatives that can strengthen the industry but only to
some extent; like 18.6 percent increased budgetary allocations for healthcare over

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 five years to boost the domestic market, the launch of Ayushman Bharat Yojana
to cover 50 crore beneficiaries under affordable healthcare, attracting pharma
investment by intending to set up pharma parks in Andhra Pradesh, Uttar Pradesh
and Haryana. Much more intent and application from the government is required
for achieving vision 2030.

 ECONOMICAL ANALYSIS

Economic factors have a significant impact on Pharmaceutical industries. Factors

like economic growth, interest rates, exchange rates, inflation, disposable income
of consumers and businesses and so on.

These factors can be further broken down into macro-economic and micro-
economic factors. Macro-economic factors deal with the management of demand
in any given economy. Governments use interest rate control, taxation policy and
government expenditure as their main mechanisms they use for this.

Pharma industries will be affected by many economic factors, especially

inflation, unemployment, and interest rates. Any of these changes can change
how the public is able to spend their money, impacting policy spending.
Companies who manufacture medical devices won’t have many people able to
pay their rate if the unemployment rate is increased. Likewise, if less people are
able to work, they won’t qualify for work benefits, including healthcare.

For people without these benefits, it’s likely they won’t be able to pay the entire
cost of any hospital or emergency room visit. They’re less likely to seek help
when they become ill. The public will have a limited selected of health services
they can actually afford.

The number of Registered Medical practitioners is low because of this. Due to

which the reach of Pharmaceuticals is affected adversely. There are nearly
5million Medical shops. Also this affects adversely the distribution of medicines
and also adds to the distribution costs. India is a high interest rate regime.

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 Therefore the cost of funds is double that in America which adds to the cost of
goods.

Adequate storage and transportation facilities for special drugs are lacking.
Studies had indicated that nearly 60% of the Retail Chemists do not have adequate
refrigeration facilities and stored drugs under sub-optimal conditions. Thus
affecting the quality of the drugs administered and of course adds to the costs.

There is an upward trend in household healthcare spending. That’s to say that the
average individual spends more and more money on healthcare including
medication every year. Regardless of the reasons for this, it can only mean greater
revenue for the pharmaceutical industry.

 SOCIO-CULTURAL ANALYSIS

As healthcare around the world has rapidly improved, we now face the issue of
an aging population. This means that the average person is now older than ever
before. Older individuals typically have more serious health problems and more
of them than younger individuals. Thus, the aging population means we have
more health issues to tackle. This creates greater demand for pharmaceutical
products, and will lead to more revenue for the pharmaceutical industry.

Obesity of people apart from aging is one of the reason for growth in Pharma
industries. While not a “disease” per se, obesity is a serious health issue in
developed countries. While the rates of diseases such as malaria or AIDS had
severely declined in recent years while the rates of obesity are quickly rising.
There are a number of secondary health issues associated with obesity, and many
of these require pharmaceutical treatment. As a result, growing obesity rates are
actually driving more sales of some drugs, thereby increasing the overall revenue
of the pharmaceutical industry.

Despite an aging population and growing rates of obesity, there’s a trend towards
being more health conscious, especially in developed countries. Among young

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 and middle-aged adults, it’s becoming fashionable to lead a healthy life. People
are also becoming more health conscious. Some business across the country must
now post the calorie amount of each item on their menu, giving people the option
to choose what to eat based on these numbers. From partaking in regular exercise
to eating well and even practicing mindfulness, healthy choices are definitely hot
right now. If this trend continues, and influences more people to lead healthier
lifestyles, it might reduce the need for pharmaceutical products in the long term.

The new trend of eating detergent pods. Understanding why kids are turning to
such dangerous activities can help prepare clinics if they children need assistance
at their location.

The public, in general, is turning towards specific health diets including paleo and
keto. Or they’re making changes, like eating less f artificial sugars and processed
chemicals. This is in response to the growing threat of obesity in adults and
children. Hospitals and health professionals can benefit from following these
shifting and progressive trends.

 TECHNOLOGICAL ANALYSIS

Advanced machines have dramatically increased the output and reduced the cost.
Computerization has boosted the efficiency of the Pharma Industry. Newer
medication, active ingredients are being discovered.

As new medications are created from various biological sources, pharmaceutical

companies might have a wider range of drugs to produce and distribute,
generating additional revenue. On the other hand, if biotechnology is used to
produce healthier food options, it might take away from the pharmaceutical
industry. For instance, various meat alternatives are being developed from plant
sources; since meat is believed to be a major source of health problems, this might
reduce the need for pharmaceutical treatment of those problems. The
biotechnology revolution has transformed the nature of drug discovery and the

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 structure of the industry. Increasingly, new drugs originate in small firms, which
often out-license their products to more experienced firms for later-stage drug
development, regulatory review, and commercialization. In any year the
biotechnology industry may comprise a couple of thousand firms, but the identity
of these firms changes, as new start- ups are formed and established firms grow,
merge, or are acquired by other established companies. Although larger firms
have grown in market share, because of mergers, their performance has lagged
that of smaller firms, on whom the large firms increasingly rely for new products.

Ayurveda is now a well-recognized science and hence is providing the industry

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

Businesses in all industries have a unique opportunity to market directly to their

customers nowadays. This is made possible by technology; in particular, it’s the
sophisticated advertisement systems that allow brands to interact with users on
their favourite portals that can greatly improve advertising potential. By
advertising direct to consumers, businesses will be able to lower their customer
acquisition costs and gain more customers as a result. This should help the
industry grow, as clever marketing professionals attract new individuals to
purchasing various medications.

Newer drug delivery systems are the innovations of the day. The huge
unemployment in India prevents industries from going fully automatic as the
Government as well as the Labour Unions voice complains against such
establishments.

 LEGAL ANALYSIS

The legal pressures are one of the biggest challenges before the pharmaceutical
industry. In the recent years, financial penalties on pharma companies in US have
also become more frequent. Apart from anti-corruption laws, strict compliance

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 is a costly challenge before this sector. In this area, there are four major challenges
to be dealt with. Those challenges are – anti corruption, cyber security, abuse of
sales and marketing tactics and anti-trust issues. In almost every country across
the World, the pharmaceutical industry has to follow a strict regulatory
framework set by the government agencies. This regulatory framework, consists
of various drug-related laws, lays out crucial rules for operating within the
pharmaceutical industry. These laws are relates to the health and safety of people
which can be caused due to side effect of medications. It includes how
medications can be advertised and where they can be sold. For Example, Prime
Minister Narendra Modi announced that the Government would establish a legal
framework mandating doctors to prescribe medicines by their International Non-
proprietary Name (INN) only. As per the Prime Minister, it is only with this
measure that poor people would be able to access low cost medicines. In any case,
this complex regulatory framework is a serious barrier to entry for new
competitors in the pharmaceutical industry, meaning that established drug
manufacturers and distributors have it a lot easier. Investors in Indian pharma
companies may have become tolerant of the patent law suits and FDA
clampdowns, but there is a steadily emerging set of law suits class action suits,
anti-trust suits and whistle-blower suits that threaten to exponentially increase the
risk in investing in pharma stocks. Price collusion, pay-for-delay arrangements
and manufacturing malpractices are the issues that potentially invoke litigations
involving these companies.

 ENVIRONMENTAL ANALYSIS

There are some important environmental risks associated with pharmaceuticals.

Various kinds of pharmaceutical residues can pollute the environment. While
most of these products do not have a major impact on the environment, still their
proper storage and disposal is essential to avoid any kind of environmental
impact. Based upon the size of the global Pharma industry, its responsibility is

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 also big. The pressure on the Pharma companies is high over synchronization
between environmental needs. Both government and the community are pressing
the industry to invest more in environmental concerns. There is a growing
environmental agenda and the key stake holders are now becoming more aware
of the need for businesses to be more proactive in this field. Pharma companies
need to see how their business and marketing plans link in with the environmental
issues. There is also an opportunity to incorporate it within their Corporate Social
Responsibility programmes. Marketing and new product development should
identify eco opportunities to promote as well.

PESTLE ANALYSIS OF THE PHARMACEUTICAL INDUSTRY:

FINAL THOUGHTS

The pharmaceutical industry is sure to stick around. An aging population with

growing obesity numbers will always need some kind of medication, and the
tough regulatory framework ensures the market isn’t disturbed too soon.
Furthermore, for whatever reasons, average healthcare spend is also rising.
However, various pricing pressures, health trends, and biotechnology
advancements might hold pharmaceutical companies back from achieving
maximal profitability in the future.

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11
 GLOBAL TREND
The pharmaceutical industry is responsible for the development, production and
marketing of medications. Thus, its immense importance as a global sector is
inarguable. In 2014, total pharmaceutical revenues worldwide had exceeded one
trillion U.S. dollars for the first time. North America is responsible for the largest
portion of these revenues since 2014, due to the leading role of the U.S.
pharmaceutical industry. However the Chinese pharmaceutical sector has shown
the highest growth rates over previous years.

The leading pharmaceutical companies come from the United States and Europe.
Based on prescription sales, NYC-based Pfizer is the world’s largest
pharmaceutical company. In 2019, the company generated some 53.6 billion U.S.
dollars in pure pharmaceutical sales. Other top global players from the United
States include Johnson & Johnson, Merck & Co., and AbbVie. Novartis and
Roche from Switzerland, GlaxoSmithKline and AstraZeneca from the United
Kingdom, and French Sanofi are the European big five.

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 More than any other industry, the pharmaceutical sector is highly dependent on
its research and development segment. Some pharmaceutical companies invest
20 percent and more of their revenues in R&D measures. This share can be
significantly higher at small, research-specialized companies. The United States
is a traditional stronghold of pharmaceutical innovation. The origin of most new
substances introduced to the market can be traced back to the United States.
Because of the steady loss of patent protection, the invention of new drugs is of
vital importance for the pharmaceutical industry.

 The current trends of the market in 2019

The global pharmaceutical market is expected to overcome $1.5 trillion by 2023,

from the $1.2 trillion of 2018, at an annual growth rate of 3-6%. This increase
should be paralleled by the increase in the number of launched products that
might reach 54 in 2023. Competition in biosimilar is also expected to increase by
three times, while specialty share of total medicine spending will reach 50% by
2023 in most developed markets.

The US market is expected to evolve faster (4–7%) compared to the top 5

European countries (1–4%) and Japan; emerging countries should also play an
important role (5–8%). Among these last ones, Chinese market should reach a
value of $140–170 billion, even if its growth is declining to 3–6%. Turkey, Egypt
and Pakistan are expected to experience the greatest growth in the next five years,
while China, Brazil and India maintain by now the greater medicine spending.

The launch of new, innovative medicinal products shall be the main driver for
developed markets, coupled to improved access for the emerging ones. Biosimilar
will gain an increasingly important role especially in the US, while the European
scenario is dominated by policies to contain the costs for healthcare systems.

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 Pricing still remains a hot issue in the ongoing US debate, and it is subject to
complex dynamics involving different phases of negotiations between
manufacturers, the government and public and private payers. Innovative
medicinal products are being launched with very high prices since many years;
expects it could reach a median price of $100,000 per year by 2023 for orphan
and oncological drugs. Price competition, independent review of prices and
decline in the number of breakthrough approaches (i.e. CAR-T therapies or
immune checkpoint inhibitors) compared to last five years might help, according
to the report, to reduce such price increase. Pressures are also made in the US to
reduce list price increases for established branded medicines. Net prices for
manufactures increased at an estimated 1.5% in 2018 and are expected to rise at
0–3% over the next five years.

 Trends for new products

Average spending level on new products launched in 2019-2023 is expected to

reach $45.8 billion, slightly greater that the $43.4 billion observed for products
launched in 2014-2018. The next one are expected to show the bigger number of
new launches, especially in the specialty, orphan, biologics and oncology areas,
thus confirming the trend towards an increasing role of precision medicine where
a new treatment is supposed to reach fewer patients. Stratification using specific
biomarkers is an add-on characteristic of such approach.

Other emerging therapeutic areas that might see the launch of new products
include non-alcoholic steatohepatitis (NASH), migraines, neuromuscular
diseases, autism and other developmental disorders, and a range of molecular
targets for cell and gene therapies.

 The patent cliff of 2019

There will be loss of exclusivity for many branded products, leading to the launch
of the corresponding generic or biosimilar versions of the drug. The impact on

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 the market for small molecule-based products is expected to exceed $121 billion
in the next five years (+15%) in the developed areas, and to reach $17.0 billion
in 2023 for biologics. The US is expected to present the greater growth of the
biosimilar market, even if introduction of new biosimilar should continue to occur
more rapidly in Europe. The introduction of incentives for this sort of medicinal
products and an improved communication of their benefits to patients and
providers are also envisaged by the report.

 Specialty medicines to treat chronic disease

Ageing has a great impact on the increasing number of patients suffering for
chronic diseases. This area, together with those of complex and rare diseases, is
the target of specialty medicines. A market that will increase up to 50% in near
future when spending for specialty products is expected to reach $475–505
billion. Oncology, autoimmune, immunology, HIV and multiple sclerosis are the
most interesting therapeutic areas.

 Current Development in Pharma industry globally

The pharmaceutical market value is accelerating at a ground breaking rate and is

anticipated to exceed $1.1 trillion globally by 2021. In an era of unprecedented
innovation and profitability potential, there are several major trends that are
increasingly influencing the successes and competitive advantages that pharma
companies can achieve over the next year. Three of these hot-button issues are
highlighted below

o AI Advances Beyond Drug Discovery

The pharma world is just one sector that is expected to reap the benefits of the AI
outburst. Gartner, the world’s leading research and advisory company, estimates
that one in five knowledge workers around the globe will rely on AI to do non
routine jobs by 2022. Life sciences industries have a particular interest in

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 enhancing data processing efficiency for the resulting impact it can have on the
development and improvement of therapies and life-improving product

In the pharmaceutical industry, AI refers to the system of interconnected and

automated technologies, which can function autonomously, with little or no
human intervention. It is now finding its way in many aspects of pharma industry,
from drug development to diagnosis and even patient care. AI and machine
learning can be used for disease identification and diagnosis, radiology and
radiotherapy planning, research and development and clinical trials, development
of personalized medicine and rare disease identification, drug discovery and so
on. Many other applications of AI in pharma industry include

 Data entry and lab test analyses

 Data management
 Analysis of healthcare systems for errors or inefficiencies
 Natural-language processing
 Medical consultations
 Medication management

Swiss pharma giant Novartis is even equipping sales representatives with AI

“assistants” to help them choose which doctors to visit and what topics to discuss
with them.

o Medical Marijuana’s Budding Potential

Pharmaceutical companies are increasingly betting that marijuana historically

demonized as a leading source of social afflictions will become a major player in
the pain management domain and potentially bring a multitude of other beneficial
therapies.

Legalization of medical marijuana is stepping towards completely transforming

the pharmaceutical industry. In June 2018, U.S. Food and Drug Administration
(USFDA) approved its first cannabidiol (CBD) medication, Epidiolex for

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 epilepsy treatment opening the way for pharmaceutical companies to get aboard
the medical marijuana market. Based on its adoption, the global medical cannabis
market is expected to surpass $55 billion by 2024. This high market potential is
provoking companies to invest billions of dollars into investigating new
marijuana-based remedies and are even strategically collaborating with
established cannabis companies.

 In December 2018, Tilray Inc., a Canadian cannabis company collaborated

with Novartis’ Sandoz AG, to become part of Novartis’ supply chain, sales
force, and global distribution network.
 In March 2019, Farmako secured a contract to import 50 tons of
pharmaceutical cannabis from Pharmacann Polska into the European
market over the next four years

o The Industrywide Proliferation of Cloud Technology

Data security and compliance concerns have traditionally made pharmaceutical

companies sceptical of using external networks to access resources and data.
More pharma companies are realizing that cloud computing offers greater
efficiencies, cost-savings and competitive advantages without jeopardizing
security or compliance. Cloud computing has now secured a foothold in the
industry, thanks to a shift that began in pharma R&D labs and has since spread to
wider industry adoptions once successes became evident and data security and
integrity was proven. Cloud technology’s capacity to decrease overhead costs is
proving to be especially beneficial to smaller organizations.

o Growing importance of emerging markets

A few years ago, established pharmaceutical companies were seeking for growth
and change from the uncertainty of the saturated markets of North America, and
Europe. Various multinational pharmaceutical and life sciences companies

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 focused their research and development programs almost exclusively on mature
markets. However, rapid changes took place and they found an interesting arena
of emerging markets. Based on high population, low healthcare availability, high
demand and rapid economic growth made emerging markets as an extraordinary
opportunity for the global pharmaceutical industry. The increased spending
power of these emerging countries made means for the international companies
to launch new products and gain market share. These markets have now become
the fastest growing areas and this trend is expected to continue in coming few
years as emerging countries are moving their focus towards health issues
particularly affecting their populations.

o Personalized Medicine and Value-Based Healthcare

The pharmaceutical industry, until now was mainly focusing on a group or

similarities, however personalized medicine is transforming health care from too
many to one. Personalized medicine has a huge potential in leading and
transforming the healthcare industry with drastic changes. As its key focus is on
diseases understanding & management, personalized medicine is integrated with
advanced analytics, patient data, customized medicines and other possibilities.
Personalized medicine is expected to transform the entire pharmaceutical value
chain, from early product development to companies' go-to-market models. Many
pharmaceutical companies have dedicated their process to the vision of right
drug, right patient, right time, particularly in therapeutic areas such as oncology
and neuroscience. The companies realise that this strategy provides the
opportunity to achieve extensive clinical advances in specific patient populations
compared to the exhaustive set of population.

In healthcare industry, precision medicine or personalized medicine is

approached as a research endeavour, while value-based care transformation is
outlined as a business or operational initiative. Value based care is utilized by the
pharmaceutical companies to reduce health costs and improve patients health.

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 The healthcare industry is shifting towards value based care which mainly focuses
on quality of care instead of quantity of care. Personalized medicine plays a vital
role in this shift toward value-based medicine by helping to deliver more effective
therapies with more manageable pricing profiles.

o Preventive Healthcare

Since many years, people were looking for a magic pill that could cure several
illnesses and safe lives of millions. Now, pharma companies develop and offer
supplements and pills for the sake of prevention. Targeted therapy, and preventive
interventions are dominant in tackling the marked inequalities in healthcare
outcomes and should be prioritised by the society and government. Today if there
is no treatment available for certain illnesses, some symptoms or fatal
consequences can be prevented with the help of medicines. For instance, Truvada
pill for Pre-exposure prophylaxis (PReP) by Gilead, a medicine developed to
prevent HIV. Moreover, in May 2018 FDA approved Aimovig, a medicine for
preventive treatment of migraine in adults. Such developments focusing on
preventive care are likely to create significant opportunities in the pharmaceutical
industry.

Many such advances and trends are contributing to the growth of the global
pharmaceutical industry. Based on these, large number of emerging and
established players are highly investing in research and development.

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 MERGER AND ACQUSITION

With the start of 2019, there is roar in biopharma mergers and acquisitions
(M&A) with the announcement of two multi-billion-dollar deals valued at a total
$82 billion.

Those deals accounted for roughly half the sizzling $173.326 billion in 14
biopharma drug-based M&A deals recorded for the first half of 2019 by Chimera
Research Group. Chimera does not record buyouts in biopharma tools and tech
which also sparkled this year with two deals totalling $22.7 billion.

Indeed, the value of just the top 10 deals completed and announced by bio-
pharma’s

so far this year and highlighted on this list surpassed $250 billion during the first
half of 2019. That’s 47% above the $170.2 billion combined value of the top 10
M&A deals during the first six months of 2018.

One key factor driving the current wave of biopharma R&D is the diminishing
return on investment (ROI) generated by traditional in-house R&D. In December
2018 the projected ROI fell to 1.9% last year from 3.7% in 2017, and from 10.1%
in 2010. Diminishing ROI has compelled drug developers facing loss of
exclusivity for marketed drugs to expand portfolios and replenish their pipelines
through M&A.

The M&A market was robust enough during the first half of this year that five
transactions exceeding $1 billion in value were too small to be included on GEN’s
list. The largest of these was Novartis’ up-to-$1.575 billion purchase of IFM Tre,
a subsidiary of IFM Therapeutics. The deal expanded Novartis’ pipeline with one
clinical and two preclinical programs designed to treat chronic inflammation by
inhibiting targets in the innate immune system.

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 OTHER MAJOR DEAL

o Ipsen’s up-to-$1.31 billion acquisition of Clementia Pharmaceuticals and

driven by a rare-disease drug the buyer licensed from Roche in 2014.

o Catalent’s $1.2 billion buyout of Paragon Bio services, and intended to

expand the buyer’s gene therapy capabilities.

o Illumina’s pending $1.2 billion merger with Pacific Biosciences—a deal

expected to be delayed since the U.K.’s Competition and Markets
Authority on June 18 raised anti-competitiveness concerns that may result
in a second-phase investigation.

o Vertex’s up-to-approximately $1 billion purchase of Exonics Therapeutics,

a developer of CRISPR-based treatments for Duchenne muscular
dystrophy and other genetic neuromuscular diseases.

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 INDIAN TREND
India is the largest provider of generic drugs globally. Indian pharmaceutical
sector industry supplies over 50 per cent of global demand for various vaccines,
40 per cent of generic demand in the US and 25 per cent of all medicine in UK.

India enjoys an important position in the global pharmaceuticals sector. The

country also has a large pool of scientists and engineers who have the potential
to steer the industry ahead to an even higher level. Presently over 80 per cent of
the antiretroviral drugs used globally to combat AIDS (Acquired Immune
Deficiency Syndrome) are supplied by Indian pharmaceutical firms.

With 71% market share, generic drugs form the largest segment of the Indian
pharmaceutical sector. Based on moving annual turnover, Anti-Infective (13.6
per cent), Cardiac (12.4 per cent), Gastro Intestinal (11.5 per cent) had the biggest
market share in the Indian pharma market. Indian drugs are exported to more than
200 countries in the world, with the US as the key market. Generic drugs account
for 20 per cent of global exports in terms of volume, making the country the
largest provider of generic medicines globally and expected to expand even
further in coming years.

Pharmaceutical exports from India, which include bulk drugs, intermediates, drug
formulations, biologicals, Ayush & herbal products and surgical reached US$
19.14 billion in FY19 and US$ 5.17 billion in FY20 (up to August 2019). The
exports are expected to reach US$ 20 billion by 2020. In FY18, 31 per cent of
these exports from India went to the US.

Medical devices industry in India has been growing 15.2 per cent annually and
was valued at US$ 5.2 billion in 2018 and is expected to reach US$ 50 billion by
2025.

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 The country has an established domestic pharmaceutical industry, with a strong
network of 3000 drug companies and about 10,500 manufacturing units.

Out of these, 1,400 units are World Health Organization (WHO) good
manufacturing practice (GMP) approved; 1,105 have Europe’s certificate of
suitability (CEPs); more than 950 match therapeutic goods administration (TGA)
guidelines; and 584 sites are approved by the US Food and Drug Administration
(USFDA).

The pharmaceutical industry in India produces a range of bulk drugs, which are
the key acting ingredients with medicinal properties that form the basic raw
materials for formulations.

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 Bulk drugs account for roughly one-fifth of the industry output while
formulations account for the rest. India also has the expertise for active
pharmaceutical ingredients (APIs) and sees significant opportunities for value-
creation.

At present, Indian companies supply over 80 percent of the anti-retro-viral drugs

used globally to combat AIDS (Acquired Immune Deficiency Syndrome).

Six domestic firms Aurobindo, Cipla, Desano, Emcure, Hetero Labs, and Laurus
Labs have a sub license with the UN-backed Medicines Patent Pool to
manufacture anti-AIDS medicine TenofovirAlafenamide (TAF) for 112
developing countries.

 Key players in the industry: India’s generic drug producers hold a strong
position in the global supply chain and play an integral role in developing
the pharmaceutical industry.
Some of the major domestic players in the industry include Sun
Pharmaceutical Industries, Cipla, Lupin, Dr. Reddy’s Laboratories,
Aurobindo Pharma, Zydus Cadila, Piramal Enterprises, Glenmark
Pharmaceuticals, and Torrent Pharmaceuticals.
 Major pharmaceutical clusters: Andhra Pradesh, Gujarat, Maharashtra, and
Goa are the major pharmaceutical manufacturing clusters in the country.
The bulk drug clusters are located primarily in Ahmedabad, Vadodara,
Mumbai, Aurangabad, Pune, Hyderabad, Chennai, Mysore, Bangalore,
and Visakhapatnam (Vizag).
The pharmaceutical hubs offer investment opportunities in the production
of API or bulk drugs, biosimilar, vaccines, nutraceuticals, as well as food
and drug testing and contract research

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  Foreign direct investment: India’s current foreign direct investment (FDI)
policy allows 100 per cent FDI under automatic route in green field
pharmaceutical projects and up to 100 per cent FDI under government
approval in brownfield projects. Under the green field category, companies
establish their subsidiary and start their own production by constructing
new plants or facilities from the ground up. Whereas, under brownfield
investment, companies buy or lease existing facilities to begin a new
production activity.
 Export trends: Reckoned as a high quality generic manufacturer across the
globe, India exports half of its total production of pharmaceuticals to more
than 200 countries in the world.

In 2017-18, India exported pharma products worth US$ 17.27 billion. By 2020,
the industry estimates the exports to grow by 30 per cent to reach US$ 20 billion.

The US is the most lucrative generics market for India’s pharma industry. It is
valued at around $60 billion and accounts for about 25 percent of India’s total
shipment. In 2017-18, India exported about US$3.21 billion worth of generic
drugs to the US, despite the tough regulatory environment in the country.

With branded drugs going off patent during 2017-19, research agencies estimate
the export of generic drugs to the US to rise by about US$55 billion.

India’s other important export destination include the United Kingdom

(US$383.3 million), South Africa (US$ 367.35 million), Russia (US$ 283.33
million) and Nigeria (US$ 255.89 million)

 Market Size

The pharmaceutical sector was valued at US$ 33 billion in 2017. The country’s
pharmaceutical industry is expected to expand at a CAGR of 22.4 per cent over
2015–20 to reach US$ 55 billion. India’s pharmaceutical exports stood at US$
17.27 billion in FY18 and have reached US$ 19.14 billion in FY19.

25
 Pharmaceutical exports include bulk drugs, intermediates, drug formulations,
biologicals, Ayush & herbal products and surgicals.

Indian companies received 304 Abbreviated New Drug Application (ANDA)

approvals from the US Food and Drug Administration (USFDA) in 2017. The
country accounts for around 30 per cent (by volume) and about 10 per cent (value)
in the US$ 70-80 billion US generics market.

India's biotechnology industry comprising bio-pharmaceuticals, bio-services,

bio-agriculture, bio-industry and bioinformatics is expected grow at an average
growth rate of around 30 per cent a year and reach US$ 100 billion by 2025.

 Investments and Recent Developments

The Union Cabinet has given its nod for the amendment of the existing Foreign
Direct Investment (FDI) policy in the pharmaceutical sector in order to allow FDI
up to 100 per cent under the automatic route for manufacturing of medical devices
subject to certain conditions.

The drugs and pharmaceuticals sector attracted cumulative FDI inflows worth
US$ 15.98 billion between April 2000 and March 2019, according to data
released by the Department of Industrial Policy and Promotion (DIPP).

Some of the recent developments/investments in the Indian pharmaceutical sector

are as follows

o Between Jul-Sep 2018, Indian pharma sector witnessed 39 PE investment

deals worth US$ 217 million.
o Investment (as % of sales) in research & development by Indian pharma
companies* increased from 5.3 per cent in FY12 to 8.5 per cent in FY18.
o The exports of Indian pharmaceutical industry to the US will get a boost,
as branded drugs worth US$ 55 billion will become off-patent during 2017-
2019.

26
  Government Initiatives

Some of the initiatives taken by the government to promote the pharmaceutical

sector in India are as follows:

o In October 2018, the Uttar Pradesh Government announced that it will set
up six pharma parks in the state and has received investment commitments
of more than Rs 5,000-6,000 crore (US$ 712-855 million) for the same.
o The National Health Protection Scheme is largest government funded
healthcare programme in the world, which is expected to benefit 100
million poor families in the country by providing a cover of up to Rs 5 lakh
(US$ 7,723.2) per family per year for secondary and tertiary care
hospitalisation. The programme was announced in Union Budget 2018-19.
o Recently the Drug Controller General of India (DCGI) announced its plans
to start a single-window facility to provide consents, approvals and other
information. The move is aimed at giving a push to the Make in India
initiative.
o The Government of India is planning to set up an electronic platform to
regulate online pharmacies under a new policy, in order to stop any misuse
due to easy availability.

The ‘Pharma Vision 2020’ by the government’s Department of Pharmaceuticals

aims to make India a major hub for end-to-end drug discovery. Under Budget
2019-20, total allocation to the Ministry of Health and Family Welfare is Rs
62,599 crore (US$ 8.96 billion). Rs 6,400 crore (US$ 915 million) has been
allocated to health insurance scheme Ayushman Bharat- Pradhan Mantri Jan
Arogya Yojana (AB-PMJAY). As per Union Budget 2019-20, Rs 1,900 crore
(US$ 0.27 billion) have been set aside for research of the total amount and Rs
62,659 crore (US$ 8.96 billion) allocated for Ministry of Health and Family
Welfare.

27
 Current Trend in Indian Market
The Rs 1,20,000 crore plus Indian pharma industry has been through a churn in
the past five years. Over the last year, it has finally seen double-digit growth, after
having suffered periods of single-digit growth and even de-growth, post
demonetisation and implementation of the Goods and Services Tax (GST). It is
today growing at around 11 per cent per annum as compared to a high of around
15 per cent about five years ago. It pushed the case for lower prices of medicines
(including anti-cancer drugs) and medical devices and greater emphasis on the
sale of generic drugs. But industry has been upset. The industry argues that many
measures taken by the government were either unilateral or not quite consultative
in their approach. They have been quite critical of the fact that while the
government has been controlling prices and checking irrational fixed-dose
combinations, it has not made investments to strengthen the drug regulatory
institutions. According to the pharma companies, this could lead to a situation
where a big player is competing with a spurious drug manufacturer.

The industry says that the Government has been quite harsh on the sector. And
certain measures such as ban on the sale of certain fixed-dose combination drugs,
price ceilings on knee-cap and stents, have been particularly jarring for the
industry. Some measures, pharma companies say, though may sound good for the
end-consumer; they could end up hurting the industry.

 FDC ban: The Ministry of Health and Family Welfare banned 344 fixed-
dose combinations (FDC), affecting about 6,000 brands made by 100 odd
companies. The ban followed the recommendations of an expert committee
that they lacked therapeutic justification. The industry immediately took
the matter to court.

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  Implementation issues around price control: The industry is upset that
while the government has not changed the list of essential drugs, it has
invoked Para 19 of the Drugs (Price Control) Order,which gives the
regulator power to control prices of drugs that are not under the National
List of Essential Medicines (NLEM).
 Anti-cancer drugs: The National Pharmaceutical Pricing Authority
(NPPA) in February 2019, invoked extraordinary powers "in public
interest", under Para 19 of the DPCO, to bring in certain anti-cancer drugs
under price control through trade margin rationalisation.
 Generic drugs: Promotion of generic drugs in government hospitals
through the Jan Aushadhi model.
 Exports: Some of the Indian pharma industry representatives feel the
government could have done much more to make a case for the value in
Indian generic story, especially, when Indian companies that have been
under the USFDA scanner are seeing the import alerts being lifted.

 Contract manufacturing and research services in India

The rising costs and regulatory pressure in developed markets are forcing many
global pharmaceutical companies to reduce their internal capacities in research
and development (R&D), and manufacturing, and turn to contract manufacturing
and research services (CRAMS), and outsourcing of research and clinical trials
to developing countries. These strategies help multinational companies reduce
costs, increase development capacity, and focus on their core profit makings
activities, such as drug discoveries and marketing, rather than on manufacturing.
India, with a large patient population and genetic pool, is fast emerging as a
preferred destination for such multinationals seeking efficiencies of cost and time.

29
 The country’s CRAM industry offers a significant cost-quality proposition, with
potential savings of about 30-40 percent compared to western markets such as the
US and Europe. Since the amendment to Patents Act in 2005, many Indian
pharmaceutical companies have gradually moved away from generic production
to the development of new drugs, exports to regulated markets and cooperative
agreements with global pharma companies.

 Advantage in India

A US$33 billion opportunity, the pharmaceutical industry in India presents

considerable potential for collaborative and outsourced R&D in drug
development, biotechnology, chemicals, and manufacturing of medicinal
products.

India’s CRAM sector is globally recognized for its high-end research services
and is one of the fastest growing segments of the country’s pharmaceutical
industry. The country has a low cost of production, low R&D costs, innovative
scientific man power, and a large number of national laboratories that have the
potential to steer the industry ahead to a higher level.

Besides, India is the only country in the world that has the highest number of
USFDA-approved plants for generic drug manufacturing outside the US. Some
of the leading Indian pharma companies derive about 50 per cent of their turnover
from exporting generic medicines to developed markets like the US and Europe.

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 CHALLENGES IN INDIAN PHARMA MARKET

 The arbitrary and unpredictable nature of India’s regulatory interventions,

including restrictions on pricing and licensing are among the several

challenges that global drug companies face in securing easy market access

to India.

 The government’s ban on fixed-dose combination drugs and

demonetization of high-value currency notes in 2016 affected 6000 brands

produced by 100 plus drug manufacturing companies. The regulations

concerning price control of drugs, or making prescriptions of medicines by

their generic name instead of brand names mandatory, too, remain key

threats for the industry.

 Other concerns include interpretations of intellectual property protection

that favour generics and biosimilar, impact of the goods and services tax

(GST) on sourcing, manufacturing, and distribution channels, as well as

policies and practices that support local manufacturers.

Considering these challenges, it is essential for foreign companies to pay more

attention to market-access capabilities as a means to capture the growth

opportunities that India offers especially for the introduction of innovative drugs.

31
 BUISNESS MODEL OF PHARMA INDUSTRY

Healthcare is the largest sector in the world – around three times larger than
banking – yet, in spite of the cutting-edge medical breakthroughs, it lags behind
in other forms of innovation.

Pharma continues to spend heavily on R&D (around $140bn a year), which

results in 30-40 new drug approvals each year, a return on investment that is not
as strong as one might expect for the investment. The industry is an example of a
‘business-as-we’ve-always-done-it’ approach.

At the heart of their operations lies their business model, which determines the
way we calibrate the six capitals and transform input into outcomes to achieve
their strategic goals. Their business model demonstrates how we conduct business
to retain their leadership position across markets.

The pharma industry is ripe for disruption. In the past, our value was in new,
cutting-edge and effective medicines, discovered, developed, manufactured,
marketed and sold by pharma. However, pharma companies are no longer alone,
and competitors are coming from unexpected sources. For example, Fuji Film
was once a rival of Kodak but has now been in the pharma business for a while,
with plans for $921m in pharma sales by 2024 and a bigger global push into
complex biologics.

New types of companies can enter the market because the barrier to entry is lower.
Once, the entire process was carried out in-house but, over time, pharma has
outsourced large parts of R&D and manufacturing, as well as distribution, and
sales and marketing. Thousands of companies now do the tasks that pharma
companies need and around 30% of drugs were licensed in.

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 Outsourcing to the competition

This reminds me of the cautionary tale of Dell, which was a leader in the computer
market when Asus (full name ASUSTeK Computer Inc), a Taiwanese company
that manufactured PC circuits, proposed producing the motherboards as well –
for 20% less. Seeing an opportunity to cut costs, Dell agreed. Asus came back
with a similar proposal for taking over assembly, then supply chain management,
and this continued until Asus controlled everything but the brand.

When Asus entered the market on its own, it offered a more affordable computer
that was essentially identical to Dell’s. In effect, Dell had trained, funded and
created this competitor and the result was disastrous, nearly putting the company
out of business. It was a hard lesson, and one that pharma companies don’t seem
to have learned from.

Once a clinical trial company, Covance has since grown to offer services at every
stage of drug development, and there are thousands of outfits right across the
pharma chain that can be outsourced to thousands of players.

With the traditional pay-per-pill model breaking down – and payers increasingly
demanding pay-for-performance pricing models – the signs for increased
financial turbulence and disruption are on the wall. Pharma needs to consider
more options.

Below are the business models of VC-funded, disruptive companies in other

industries, which may offer insights into what may happen in healthcare.

 Subscription (Netflix, Forward)

 Freemium (Dropbox, LinkedIn)
 Free (Google, Facebook)
 Marketplace (eBay, Uber, Airbnb)
 Access-over-Ownership (Airbnb, Zipcar)

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  Hypermarket (Amazon)
 Experience (Apple, Tesla)
 Pyramid (Microsoft)
 On-Demand (Uber, TaskRabbit)
 Ecosystem (Google, Apple)
Cipla Business Model

Cipla’s business model revolves around its purpose of 'Caring for Life'

The fundamental purpose of including their business model to provide their

stakeholders with an insight into their strategy and ability to generate short,
medium and long term value. In addition to providing an overarching view of
their value creation process, the model also outlines the interconnectedness
between the capitals. This relationship and interdependence between capitals is
what allows us to work in a cohesive manner, as One Cipla, to cater to all
stakeholder requirements.

The One Cipla ethos and Credo, which reflect in their day-to-day business
conduct, form the bedrock of their business model and inspire their employees to
operate within the perimeter of ethics, transparency and good governance with
every step they take.

The business model is driven by elements that are critical to Cipla and
encompasses the internal and external factors influencing the company. These
elements allow us to monitor the forces influencing business, to stay agile and to
deliver sustained stakeholder value.

34
 Their business model encourages focusing on and strengthening the following
key aspects The six capitals which demonstrate define and utilise their resources.

Strategic allocation of resources that flow in from these capitals. These resources
act as fuel for business activities, which churn out superior quality outputs and
outcomes.

The global value chain which outlines the components of their business and its
flow. Each element of the value chain works seamlessly and ceaselessly in
conjunction with others to ensure that we deliver quality products to patients. This
process operates with the help of key enablers and within defined frameworks
that ensure sustainable and transparent business conduct.

Enhanced stakeholder value which is derived through the high-quality outcomes

from the streamlined value chain.

The 6 Capitals that govern Cipla’s global operations

Financial Capital

 Deploy financial resources in a diligent manner to harness opportunities

for long-term sustainable value creation.
 Access to capital for enhanced shareholder returns

35
  Organic and Inorganic investments/ acquisitions to develop strategic
strengths in focused therapies and expand geographical presence
Manufacturing Capital

 Focus on developing complex and multi-dosage manufacturing

capabilities, improving productivity and increasing safety and reliability
of operations.
 Global manufacturing footprint with technologically advanced facilities.
 Key regulatory approvals (including US FDA and MHRA) demonstrating
operational excellence.
Intellectual Capital

 Invest in technologies to advance new and differentiated intellectual capital

to drive better patient outcomes.
 Expertise in complex products supported by over 1300+ scientists
 Continuous investment in R&D to the tune of 7.4% in FY 18-19 towards
best-in-class product development technologies and facilities with device
development and clinical capabilities.
Human Capital

 Cultivate employee capabilities and competencies to drive shared

organisational objectives.
 Strong commercial set-up across geographies driving in-market
leadership
 Empowered and diverse workforce enabling collaboration and effective
operations across the globe
 Industry-leading talent management and leadership development
processes.

36
 Social and Relationship Capital

 Leverage Social and Relationship capital to share knowledge and resources

for enhancing individual and collective well-being
 Investments in community development through initiatives that build and
nurture long lasting relationships
 Strengthen external stakeholder engagement through enhanced disclosures
and high standards of corporate governance
 Enhancing patient awareness and education through targeted initiatives
Focus on sustainable supply chain through active vendor engagement.
Natural Capital

 Commitment towards efficient operations resulting in reduced

environmental footprint.
 Focus on optimal resource utilisation to develop products that create
stakeholder value.
 Strong policy framework to govern Environment, Health and Safety
practices
Taking into account, the dynamic business and regulatory landscape, Cipla has
developed a robust strategy for sustainable value creation. This strategy disclosed
in their first Integrated Report last year, details their core strategic objectives that
act as enablers of business growth and empower them to deliver on their
commitments towards patients and other stakeholders. They have established an
internal Strategy Governance process that enables us to measure, quantify and
compare the progress made against pre-defined benchmarks. Through periodic
dedicated discussions, the Board is kept abreast of key developments on the
global strategy front. The Management and the Board review and update the
strategy to stay aligned with business needs.

37
 A Recent spate of news on increasing health care frauds and the hefty fines paid
by the Pharma companies despite stringent regulations is pointing towards a new
reality- Pharma business model has changed.

Once driven by finding innovative cures for illness and making profits by treating
the patients has now been attuned to that of a consumer goods company- building
brands and creating needs for these brands to make profits. It is thus not surprising
to find that Pharma companies spend around two times more on sales and
marketing than Research and Development.

Understanding Changing Pharma Business and the Marketing Geniuses of

Pharma Companies

Pharma companies like any other business are here to make money. Pharma
companies make money by discovering and marketing the medications. These
medications before hitting the market need to undergo lengthy and expensive
clinical trials to prove their safety and effectiveness over existing alternatives (if
any). Once approved, these medicationsare then launched in the market for a
specific use that too for a limited time. This whole process of discovering,
manufacturing and marketing the medication makes the business expensive and
risky.

To improve return on investment and minimize the uncertainty, Pharma

companies turn to their marketing geniuses. Marketing true to its nature works on

 Creating the need (creating a disease)

 Building the brand (building the loyal customers)
Pharma companies by regulation are prohibited to directly sell the medications to
patients. Pharma companies need to get the prescriptions by convincing the
Providers (Physicians). Pharma marketers use both direct and indirect marketing
tools to create the need and build the brand.

38
 Most of these channels that look disjointed essentially use a very simplistic and
coherent approach. Convince the providers to “prescribe a perceived to be a
superior product to the disease educated patients”.

Despite having a stringent framework and competent regulatory body, pharma

led healthcare frauds are rising. In FY 2014, the Department of Justice (DOJ)
opened 924 new criminal health care fraud investigations. Major pharma
companies involved in these cases were:

 J&J for marketing the antipsychotic medication Risperdal off-label to

control behavioural disturbances in non-schizophrenic dementia patients at
a time when the medication was approved only to treat schizophrenia.
 Endo Pharmaceuticals for marketing of Lidoderm for low back pain,
diabetic neuropathy, and carpal tunnel syndrome, uses not approved by the
FDA
 Teva Pharmaceuticals for paying kickbacks to a Chicago psychiatrist
 Astellas Pharma for off-label promoting Mycamine to treat pediatric
patients
 Shire Pharma for promoting Adderall XR, Vyvanse and Daytrana and
Pentasa and Lialda without clinical data and making false and misleading
statements about the efficacy.
A transformation is waiting to happen in the pharma business model, a space that
is slowly evolving as we focus on better clinical outcomes and value. The current
gap lies between the theoretical understanding of the need and the execution of a
plan for it. Real change must come from the business focus; currently,they are
still focused on medicines when we should focus on our customers as people, not
as physicians or patients or payers.

To do that, we need to become a data-driven industry focused on our customers’

needs not just medical breakthroughs. Beyond-the-pill approaches can now be

39
 considered as a way to enhance customer experience (think Google and Apple)
and create new revenue streams and business models.

Start by asking the right strategic questions and prioritizing – the trillions of data
points delivered by big data and AI are critical factors in the creation,
improvement and delivery of beyond-the-pill strategies, but they can only help
you get started. A real transformation in thinking is also needed.

As more patients participate in their healthcare, opportunities arise to understand

customers in a holistic way; to analyse, understand and predict what would offer
real value to customers, and deliver more comprehensive healthcare solutions.

Most of the beyond-the-pill strategies have been involved with to date have
focused on aspects such as patient engagement, next-best action modelling in
multichannel and omni-channel strategies, sensors combined with patient data to
predict future patient-specific lack of adherence, and much more. All have
utilized big data and AI to deliver personalized solutions – they are innovative,
but they are not new business models.

Silicon Valley VCs invest in healthcare AI more than any other sector and we
work with many incubators to assist AI healthcare start-ups monetize their
offerings. Pharma should be aware of the innovation these companies are
offering, and should consider new offerings and models themselves.

40
 PRICING STRATEGY OF PHARMA INDUSTRY

In the pharmaceutical industry, costs attributed to manufacturing are a major part

of a company’s total expenses. In this paper, trends in various expense and
income categories of pharmaceutical companies have been analysed with
particular emphasis on manufacturing costs to gain an insight into their
relationships and how they may differ among types of pharmaceutical companies
such as brand name, generics, and biotechs. The study includes data published in
the annual reports of leading pharmaceutical companies from 1994 to 2005.
Twenty-two pharmaceutical companies were selected based on the annual
revenues. The set was further divided into three groups: brand names, generics,
and biotechs.

The current era is characterized by global competition. This competition forced

the manufacturing and services firms to become integrated, more flexible and
highly automated to increase their productivity by lowering their costs to survive
on the market. It is impossible to sustain the competitive advantages without
having the accurate system of cost mechanism.

There are three major systems of costing:

(i) Traditional methods

(ii) Marginal costing methods, and
(iii) ABC costing.
The current study is about the costing system used by pharmaceutical
companies. The pharmaceutical companies play a vital role in society, by
providing life-saving products to human beings. Within this perspective, this
sector explores the development and discovery of new pharmaceutical products,
the secure and quick development of the products and finally the production and
distribution of these safe and sound products to the end user.

41
 Cost Model
A cost model is used by the companies to have a better understanding regarding
the costs, in order to run their business effectively. The cost model performs the
following functions:
(i) The assessment of inventory and cost of goods sold
(ii) The estimation of the cost of products, services, customers and activities
(iii) The provision of feedback to the manager about the efficiency of the
process.
The current era the pharmaceutical sector is becoming a more multifaceted and
dynamic environment. There are a lot of changes in this industry, like the
amplified buyer cost sensitivity, the new market, the technological advancement
and the global competition, which has increased up to uncertain level. The
patient’s expectations are higher, the healthcare cost has also increased and the
incapacity of the economy to meet the increased cost is the major challenge for
the pharmaceutical industry. Like other profit driven industries the main objective
of the firm is to maximize the profit, while the profit is maximum if there is a
proper procedure for the costing; therefore, the costing techniques have a great
importance for the Pharma industry

The main costing systems can be categorized based on the product process and
the production processes as follow. Product cost. The costing methods concerned
with product costing are

 Variable/marginal/direct costing; ·
 Full/absorption costing.
The costing methods concerned with the production process cost are: ·

 Process costing; ·
 Job order costing.
According to manufacturing organizations two most common techniques are used
for the valuation of the inventory and cost of goods sold. The absorption costing

42
 is used commonly for the external purposes and the marginal costing is used for
the internal decision making by the management. The two techniques provide a
different net operating profit, while the difference may be quite high.

The absorption costing considers all the manufacturing overhead as part of the
product cost, whether it is fixed or variable. In the absorption costing, the per unit
cost consists of direct raw material, direct labour and both fixed and variable
overhead. It means that in the absorption costing the fixed part of the
manufacturing also becomes a part of the product cost, in addition to the variable
manufacturing cost. Direct material is a primary part of the product and it can be
easily traceable in the product (e.g. wood in furniture, hard drive in the computer);
direct labour can be easily traceable in the product, it is called touch labour (e.g.
the labour of the carpenter); the manufacturing costs include all costs which were
incurred on manufacturing the product, except the direct material and the direct
labour. The natural and organic substances become the material for the
pharmaceutical companies and the persons who are directly involved in the
production of pharmaceutical product become the part of direct labour. There are
the following advantages of the absorption costing

 Fixed cost of manufacturing is also recovered;

 Total cost is recognized;
 It is useful for pricing decisions and perdition of profitability;
 It is used for external purposes.
In the variable costing, only that part of the cost is considered in the product which
varies with the level of activity. It consists of direct material, direct labour and
the variable manufacturing overhead cost. Fixed cost is not considered a part of
the product cost in variable costing. The fixed manufacturing cost becomes a part
of the period cost, like the administrative and selling expenses, thus in the variable
costing the inventory and cost of goods sold does not consist of any fixed cost of
production.

43
 Variable costing has a number of advantages

 Data can be taken directly from the variable costing for Cost-Volume-
Profit (CVP) analysis; however, in absorption costing it is not easily
available;
 Profit is not affected by the change in inventories;
 The manager often assumes that the per unit cost is the variable cost, but
in absorption costing both fixed and variable costs are treated in per unit
cost;
 In the variable costing, the fixed cost is clearly shown in the income
statement; in this way we can emphasize fixed costs to become truly
profitable;
 Variable cost profit is close to the net cash flows
 Variable costing provides a better prediction of the profit, because there is
no subjective allocation of fixed cost.
A new costing system emerged from the last decade, i.e. the ABC system. The
early concept of this system emerged in the sixties and seventies in the USA by
the General electric company, and in Germany by the Schlafhorst and Siemens
However, a theoretically structured and comprehensive system of ABC was
introduced for the first time. In this technique, we established the different
activities or the development of activities which show the small group of
homogenous tasks in all the department of factory. It is used for the development
of cost estimation when the project can be divided into quantifiable activities,
discrete or a work unit. It means that this activity can be clearly implemented
when productivity can be measured in units.

44
 The following are the limitations of the ABC costing.

 To implement the ABC system there is need of more resources, hence it is

more costly than traditional costing.
 The ABC system provides the numbers e.g. product margins and it odds
with the numbers produced in the traditional costing. The managers are
used to employ traditional costing to run business operations and
traditional costing is frequently used for performance evaluations.
 The data based on the ABC costing can easily be misinterpreted for making
decisions, therefore the manager has to care full for making decisions based
on the ABC costing, by considering which cost is relevant or irrelevant.
 The ABC method is also not conforming to the generally accepted
accounting principles (GAAP), therefore the organization has to prepare
the statement on the basis of two methods: one for external and one for
internal purposes.

45
 The costing system in the pharmaceutical sector, which is the main objective
of this survey. The majority of the pharmaceutical sector is currently using
the marginal costing system for the cost estimation, which is very important
for the internal costing. The ABC system is used in very few firms due to its
complexity. 35 out of the 96 respondents use the absorption costing (37%), 47
respondents (49%) use marginal costing, and 14 firms are using the ABC
system, meaning 15% approximately.

46
 The costing system is based on some standards or principles that dictate the
manner in which the record of costing is maintained, for managerial decision
making. As per the survey results, 75% of the pharmaceutical companies have
a standard for costs, and the remaining 25% has no standard for costs.

Most of the pharmaceutical companies have the position of cost accounting

manager, who manages the organization’s costing system. 66% of the
companies have the position of the accounting manager and 34% of the
organizations have no proper set up of accounting manager and the costing
system is managed by other categories of employees.

In the current era of technology, most organizations use the accounting

software for keeping the accounting records. 74% of the pharmaceutical
companies use a cost accounting software for the costing system, while 26%
of the pharmaceutical companies use no software for the costing process.

Problems in the costing system

In the pharmaceutical sector, the following problems were examined

regarding the costing system:

 Incorrect allotment of indirect costs,

 Complexities in the raw data assembly process,
 Delays in the gaining of accurate costing information.
The most important problem which the pharmaceutical companies face in
terms of the costing system is the incorrect allocation of indirect costs,
according to the managers’ answers to the questions in the survey. 54
respondents argue that the major problem is the incorrect allocation of indirect
costs, 20 respondents are of the view that the delay in gaining the accurate
costing information is the major problem and 23 respondents are of the view
that the main problem in costing consists in the complexities in the raw data

47
 assembly process. The following table shows the managers’ responses
regarding the problems faced by the pharmaceutical sector.

The other major objective of the survey is to observe the satisfaction level of
the respondents regarding the costing systems which they are using in the
pharmaceutical sector. Managers may be satisfied with the costing system, or
dissatisfied, or neither satisfied nor dissatisfied. The results show that 60% of
respondents are satisfied with the system that they are using, 30% are neither
satisfied nor dissatisfied and 10% are not satisfied with the system. It is also
observed that the firms which are using the ABC system are most satisfied as
compared to those firms who are using the marginal and absorption costing,
however the following graph shows the level of the respondents’ satisfaction,
neutral position and dissatisfaction.

Decision Making

The last and most important objective of the research was to show which
costing system is better for decision making. Most managers argue that the
marginal costing is better for decision making, as compared to absorption
costing and ABC costing. 59% argue that the marginal costing is better, 10%
opted for the absorption costing and 28% stated that the ABC system is best
suited for decision making. The following graph shows the managers’
responses regarding the best suited costing system for decision making.

In the current era, there is great importance of the pharmaceutical companies,

because they deal with the human life. The pharmaceutical companies try to
provide quality products along with minimizing the cost. The profit of the
organization depends on the costing techniques which the organization uses.

The costing system, and other relevant issues which are of great importance
for the costing system used by the pharmaceutical companies. Most
companies in the pharmaceutical industry use the marginal costing, instead of

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 the absorption or ABC costing. The managers of the companies that are using
the ABC system are more satisfied with the costing techniques, as compared
to those using any other costing techniques.

 The companies have standards for costing and also use a software
for costing.
 Most managers are of view that the marginal costing is better for
decision making as compared to any other techniques.
 The major problem which the organization is facing in the costing
system is the incorrect allocation of the indirect cost.
In the future, the study can be conducted to examine the drawbacks and plus
points of using any costing techniques in the pharmaceutical companies, as
well as the impact on the profit by changing the costing techniques.

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 FORECAST OF PHARMA INDUSTRY

Models for New Product and In-Market Forecasting and how to use them is
premised on the four challenges of the subject accuracy, bias, over-generalization
and over-detail.

Predicting the future is quite difficult and forecasting accuracy is generally

challenged by uncertainties around key assumptions. But uncertainty can be
turned into a positive factor informing decision-makers about uncertainty to
increase their awareness in their decision-making.

Forecasts always contain bias. Sometimes this is the result of data collection
methodologies, sometimes it is contributed by the depth of conviction of key
opinion leaders, and sometimes it is simply the result of a loud, vocalized stance.
Bias is inevitable, but hidden bias is the bane of the forecaster and contributes to
sub-optimal decision making.

The balance between “too general” and “too detailed” is difficult to define a
priori. An example of a “too general” forecast is one that is a simple spreadsheet
where patients are first multiplied by share and then by price per therapy to
generate revenue. This is a valid forecast algorithm, but once more subtle
questions are asked such as, are there different patient segments, how is share
constructed and what is the compliance rate the forecast loses its utility. At the
other end of the spectrum are forecasts that are “too detailed.” These tend to take
the form of complex algorithms and multi-paged spreadsheets with many
formulae. This is also a valid forecast algorithm, but the transparency and
transferability of the forecast itself becomes quite low.

In Forecasting for the Pharmaceutical Industry, we address these four main

challenges. First, we transform the uncertainty in forecasting into a perspective
that enables more informed decisions. The final challenge balance between “too
general” and “too detailed” is a function of corporate culture and what is

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 acceptable within an organization. However, examine the characteristics of each
extreme and suggest approaches to balanced forecasting.

Forecasting feeds into and influences many other functional areas within an
organization: sales, marketing, manufacturing, finance, portfolio management
and others. These linkages may be unidirectional (where forecasts feed into
decisions made by the other functional areas) or bidirectional (where the forecast
is used to quantify the effects of market changes envisioned by other functional
areas).

One way to consider the role of forecasting in an organization is to map out the
decisions influenced by the forecast. The inputs of the forecast to the various
planning processes range from guidance on clinical trials (value of the target
product profile claims) to guiding business development activities to both long-
and short-term brand planning activities, to detailed manufacturing planning.

Thus, the many functional and planning areas that interact with the forecast create
tremendous pressure on the model construct, the analytics, the inputs and the
outputs of the forecast. The danger is that every function develops its own model
for its own planning purposes, based on a different set of assumptions with little
or no consistency across the board. The key challenge to forecasting is to create
a process where the needs of function can be made without compromising the
integrity of the forecast approach.

Demand Forecast of Pharmaceutical industry

Prescription drug sales CAGR for 2019 through 2024 three times that in 2010
through 2018; Orphan drug market to almost double. Prescription drug sales for
2010 through 2018 grew at a CAGR of +2.3%. This can be compared to the
forecast annual CAGR of +6.9% for 2019 through 2024 with expected sales to
reach $1.18trn. The growth rate for the prescription market in 2019 is forecast to
be +2.0%, which depicts a decline in growth rate compared to 2018 (+5.0%). So

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 far the industry has seen a major set-back with one of the biggest failures,
aducanumab, which was discontinued in Phase 3 trials for Alzheimer’s disease.
The Trump administration has been in the news for discussions related to changes
to the prescription drug policy which could be implemented in early 2020. These
changes could be challenging for pharmaceutical drug manufacturers, as it could
affect drug prices in one of the largest markets in the world if implemented. On
the positive side, the industry has seen the launch of Ultomiris (Alexion
Pharmaceuticals) and Takhzyro (Takeda). Consensus forecasts indicate that
$198bn of sales are at risk between 2019 and 2024, with 2023 set to see the expiry
of key patents for a number of biologics including Humira and Stelara. Both of
these products are still forecast to retain spots within the world’s top 10 selling
drugs in 2024

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 Worldwide Prescription Drug Sales (2010-2014)

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 Worldwide Sales At Risk from Patent Expiration (2010-2024)

R&D Spend by Pharma & Biotech Companies

Forecast worldwide R&D CAGR lower in 2018 through 2024 and proportion of
R&D spend to pharmaceutical revenue to reduce. Worldwide pharmaceutical R&D
spend totalled $179bn in 2018 representing an increase of +6.5% on the previous
year. Going forward, R&D spend is forecast to grow at a CAGR of 3.0% between
2018 and 2024. This is comparable with a CAGR of 4.2% between 2010 and 2018,
with an average proportion of R&D spend to pharmaceutical revenue for the same
period of 19.8%, compared to 20.2% for 2018-25. Despite an initial peak in 2019,
the proportion of R&D spend to pharmaceutical revenue falls quickly in subsequent

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 years. This reduction in R&D spend could be an indication that companies are
investing now to improve their future R&D efficiencies. Use of real world data
combined with machine learning techniques in addition to collaborative R&D
programs, are a few of the initiatives being employed by companies to help them
stay one step ahead in an era demanding more patient targeted drug development.
Similarly, this reduction in R&D spend could be an indication that less revenue is
being directed towards replenishing pipeline.

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 Indian Pharma Industry forecast

The Indian pharmaceutical industry is poised for growth. Even at current rates of
seven to eight percent CAGR, the industry’s annual revenues can grow to about
USD 80 to 90 billion by 2030. However, it could also set bold aspirations of eleven
to twelve percent CAGR, and grow to annual revenues of about ~USD 65 billion by
2024 and about ~USD 120 to 130 billion by 2030.

Indian pharma industry can embark on a vision of establishing India’s global

leadership in life sciences, while driving deeper domestic access and affordability.
Industry can work towards four primary goals as part of this vision for 2030.

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  Accelerate the goal of universal health care across India and the world by
providing access to high-quality affordable drugs: Keeping in line with the
Government of India’s vision of providing universal healthcare for India, the
industry can support this goal by providing access to quality medicines at
affordable prices. In India, as more and more patients come under treatment,
this could help reduce the disease burden substantially. The aspiration could
be to make the DALY (Disability Adjusted Life Years) in India and other
emerging markets comparable to the developed economies such as the US
and UK by 2030 (currently India’s DALY is 72 percent higher than
China’s14).
 Emerge as an innovation leader to build a globally recognized position for
India: We believe the industry can aspire to build a strong innovation pipeline
(with three to five new molecular entities launched or in late clinical trial
phases and 10–12 incremental innovation launches per year by 2030) and
enhance Indian pharma's significance beyond generics, to biologics, new drug
development and incremental innovations. Become the world’s largest and
most reliable drug supplier and reach USD ~120-130 billion by 2030:
 The Indian pharmaceutical industry can aspire to become the world’s largest
supplier of drugs by volume. This can be achieved by establishing a
leadership position in the US generics space, focusing on building one to two
‘home’ markets outside India, and developing a strong presence in all large
markets such as Japan and China.
 Contribute significantly to the growth of the Indian economy: The Indian
pharmaceutical industry can contribute substantially to the growth of the
Indian economy. The industry can aspire to push the net foreign exchange
earnings to around USD 30 billion to 40 billion annually by 2030 from current
levels of ~USD 11 billion15. The industry can also create one to two
million16 additional jobs for the country in the same period, boosting
consumption in the local economy.

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 Opportunities and challenges for achieving Vision 2030
The Indian pharmaceutical industry’s success has been built on the
foundations of its distinctive capabilities in key areas of the value chain, such
as manufacturing, product development and process innovation. Recently, the
industry has been facing headwinds both domestically, and in key global
markets (like the US) which have subdued its growth to the existing CAGR
of seven to eight percent18. Nonetheless, many opportunities still exist across
new geographies and product classes for Indian pharmaceutical players to
chart an accelerated growth path.

Supporting state-sponsored health coverage programs and a focus on chronic

healthcare could enable universal drug access
The Ayushman Bharat Yojana (a centrally sponsored National Health
Protection programme) is estimated to benefit 10 crore vulnerable families
(about 50 crore beneficiaries or about 40 percent of India’s population). It
will provide poorer households with affordable access to healthcare facilities,
while also improving health insurance penetration. This is an opportunity for
the industry to help India’s underserved masses with affordable drugs.
Additionally, with the disease burden in India now transitioning towards
chronic diseases, there is an increased demand for specialised drugs which
are currently more expensive than acute drugs20. The industry is well placed
to address this need through affordable, high quality drugs for chronic
diseases.
Pursuing opportunities in newer product classes such as biosimilars, gene
therapy and specialty drugs Until now, the Indian pharmaceutical industry's
success has largely been due to production of generics drugs.
While the industry was one of the first to initiate biosimilar development and
launch in the Indian market (e.g., the first biosimilar to Rituximab, Reditux,
was launched by India’s Dr. Reddy’s in 200721), successes in the

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 developments at scale of next-generation product classes such as gene therapy
and specialty drugs have been limited. The enabling environment on
supporting development, i.e. Department of biotechnology and regulatory
could have played a more facilitating role but are possibly constrained.
Spurring innovation in these product classes can usher-in the next leg of
growth for Indian pharma industry. For example, the biosimilars market could
exceed USD 60 billion by 2030. If Indian Pharma industry is able to capture
even 10 percent of this market, it could grow by 13 percent. Pharmaceutical
companies however, will have to take a long-term view, about 8 to 10 years,
to capture these opportunities, since investments in these technologies have
high gestation periods. It may also need conducive investment environment
in the domestic market to be able to do so.
Capitalizing on its rich demographic dividend – India has a large skilled, yet
cost-efficient workforce Over 2,25,000 pharmacy students graduate from
India's education system (compared to just about 17,000pharmacy students
graduating in the US). The workforce includes highly-skilled medical
practitioners and specialists who bring significant expertise and actively
contribute to clinical research. This is boosted by an astute and highly-skilled
team of people working in the field of clinical research across the industry
and academia. Moreover, availability of a diverse patient pool makes India as
one of the most potential destinations for clinical research. Additionally,
labour cost efficiencies provide a significant competitive advantage to the
Indian companies. Their manpower costs are about 33 percent lower than
their western counterparts’, on average25. This advantage of skilled labour
supply is expected to continue.
Leveraging the patent cliff, with drug sales worth USD 251 billion going off-
patent. Patents for branded molecules with cumulative global sales of over
USD 251 billion are expected to expire between 2018 and 2024 opening new
opportunities for the industry. The Indian generics industry can benefit

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 substantially from the patent cliff, given an increased Abbreviated New Drug
Application (ANDA) share (from 26 percent in 2011 to 38 percent in 2017)
and faster time-to-market . The industry may need to formulate a sharp
molecule-level strategy, coupled with superior regulatory and in-market
execution excellence.
Actions needed to achieve Vision 2030
Indian pharmaceutical companies need to take bold strategic moves into
uncharted territories (like making big bets on markets like China, Japan or
developing technology platforms like biosimilar, and next-gen APIs like ionic
liquids). At the same time, they need to protect their core through the
extensive adoption of new-age digital and advanced analytics techniques to
drive newer efficiencies across front-end and back-end operations. Capability
building, especially on the quality front, with regular and deeper engagement
with regulators like the US FDA and other drug authorities, can build trust
with regulators. More and more frequent dialogue between industry and the
Indian regulators on key areas of concern, will be helpful in arriving at joint
recommendations on policies that will help industry to grow further. The
Indian government and its regulatory bodies have a bigger-than-ever role to
play in driving the next wave of growth for the pharmaceutical industry.
Enabling policies and a supportive ecosystem would help the industry achieve
Vision 2030. The government has already launched some initiatives that
could strengthen the industry.
Today, the industry is worth over USD 38 billion and can aspire to grow to
USD 120 to 130 billion by 2030 by capitalizing on the tremendous
opportunities that lie ahead. However concerted efforts by all stakeholders –
Indian pharmaceutical companies, the government and regulatory agencies,
and IPA – are needed to achieve the aspiration of eleven to twelve percent
CAGR. Indian pharmaceutical companies need to take bold strategic moves
into uncharted geographies, products and technologies to reclaim its position

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 as a world-class provider of affordable high-quality drugs. Government
support in the form of investments, policy support and regulatory
interventions is integral to drive this innovation-led growth. IPA can help
accelerate the impact by facilitating greater collaboration between the two.
The government can be a key enabler to achieve this aspiration through seven
strategic interventions:
ƒ Accelerate the universal healthcare programme by strengthening
healthcare infrastructure and using digital technologies
ƒ Create a stable and supportive regulatory environment for the industry to
plan investments
ƒ Explore the creation of an independent ministry for pharmaceuticals to
drive focussed policy-making
ƒ Facilitate API production in India by setting up API parks, hubs and SEZs
to reduce the reliance on imports
ƒ Promote innovation by creating a research ecosystem, and make India a
life sciences innovation hub
ƒ Expand and upskill the talent pool to handle complex technologies
ƒ Expand and consolidate global footprint and collaborate with international
regulatory bodies along with the IPA to shape international policies,
guidelines and regulations. IPA are committed to catapulting the industry on
to a high-growth path and achieve Vision 2030.

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