Indian Pharmaceutical Industry Analysis

INTRODUCTION
The Indian Pharmaceuticals sector has come a long way, being almost non-existing during 1970, to a prominent provider of health care products, meeting almost 95% of countrys pharmaceutical needs. London research company Global Insight estimates that Indias share of the global generics market will have risen from 4% to 33% by 2007. Most of the players in the market are small-to-medium enterprises; 250 of the largest companies control 70% of the Indian market. Indias US$ 3.1 billion pharmaceutical industry is growing at the rate of 14 percent per year. It is one of the largest and most advanced among the developing countries. The Indian Pharmaceutical Industry today is in the front rank of Indias science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple headache pills to sophisticated antibiotics and complex cardiac compounds, almost every type of medicine is now made indigenously. Globally, the Indian industry ranks 4th in terms of volume and 13th in terms of value & India are also one of the top 5 active pharmaceutical ingredient (API) producers. It ranks 17th with respect to exports value of bulk actives & dosage. Indian pharma has been relying on reverse engineering to copy international drugs. However, it has started realizing the importamce of R&D & developmental skills to tap the US/EU markets which has led to rise in export figures of the companies. The opportunities for the Indian players lie in both manufacturing & R&D services. The industry has been discussed in three phases in much research report; however, the post 2005 era will be covered in this project. The year 2005 saw a series of deelopment for the Indian pharmaceutical players like implementation of VAT, shift from excise based levy to MRP based levy & recognition of product patents. While the process patent regime helped in the development of Indian pharmain the generic drugs sector, the product patent regime has restored the confidence of the MNCs in the Indian market. In the generic field $45 bn drugs are expected to loose their

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patents protection, opening up huge opportunity for the Indian pahrma companies in the generic field. Top 10 Pharmaceuticals in India, 2008 Rank Company Revenue 2008 (Rs crore) 1 2 3 4 6 7 8 9 10 Ranbaxy Sun Pharmaceuticals 4,461 2,375 1,026 550 444 423 290 282 271 251 225 Revenue 2008 (USD millions)

Dr. Reddy's Laboratories 1,933 Cipla Aurobindo Pharma GlaxoSmithKline Lupin Laboratories Cadila Healthcare Wockhardt 1,842 1,260 1,228 1,180 1,091 980

The Indian pharmaceutical industry has a unique amalgamation of three critical factors which make it so attractive for investment thereby adding impetus to growth. The process patent regime Price controls Exemptions to Small Scale Industries (SSIs).
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INDUSTRY STRUCTURE
The structure of the Indian Pharmaceutical Industry is characterized by fragmentation, with over 20,000 players a large number of them in the small scale sector, only 260 in the organized sector. As a result, no individual market share in Indian retail formulations market exceeds 7%. However a trend of consolidation is visible at the top. In 2001, the top five players accounted for 22% while in 2006, they account for 28% of the market share. Also the top ten in 2001 accounted for 36%, and in 2006 they accounted for 42%. The pharmaceutical industry can be divided on the basis of form and therapeutic application. On the basis of form, the industry can be divided into bulk drugs and formulations, while on the basis of application; it can be divided into various therapeutic segments. Formulations occupy most of the market share. The anti-infective segment remains the largest in the Indian retail formulations market at around 25%.

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PORTERS FIVE FORCES ANALYSIS

1. THREAT OF NEW ENTRANT: has low entry barrier for new entrants. The major barriers to entry are: (i) The presence of economies of scale in manufacturing, R&D, marketing, sales etc & capital requirement & financial requirements. The exsisting companies have advantage in terms of costs involved in launching new drugs & formulations. The new companies would find it difficult to achieve this. (ii) Differentiation of products from the existing products in the market & creating brand awareness in the minds of doctors & pharmacists. New entrants will face difficulties in gaining trust of doctors/patients & they also need time to develop efficient distribution channels & preffered arrangements with doctors/ pharmacists. (iii) Regulatory policies including patents, regulatory standards. The Indian Patent Act, 1970 recognized process but not product patents. The introduction of TRIPS part of WTO agreement has led to huge barriers for potential entrants. (iv) The capital requirement for the industry is very low; creating a regional distribution network is easy, since the point of sales is restricted in this industry in India.

2. BARGAINING POWER OF BUYERS: the buyer doesnot have much power over the manufacturers because of the presence of influencing element i.e. the doctors. Due to the extremely fragmented nature of industry & government policies like DPCO (Drug Price Order Control), 1970 under which the power to control prices is with the NPPA (National Pharmaceutical Pricing Authority) the low power of buyers does not have much effect on the manufacturers. Except in generic & OTC medicines, the buyer doesnot normally switch medicines.

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3. BARGAINING POWER OF SUPPLIERS: the main suppliers are the organic chemical industry & labor forces. The fragmented nature of the organic chemicals industry prevents it from having much bargaining power over the manufacturers as the switching cost is low for the manfaturers. 4. THREAT OF SUBSTITUTES: the main substitutes to the synthetic pharmaceutical industry are mainly the emerging biotechnology chemical industry. Also in developing countries like India, the traditional medicines also play a major substituting role. 5. INTENSITY OF RIVALRY: the Indian Phamaceutical industry is highly fragmented with around 250-300 manufacturing & formulation units in the organized sector which contribute to only 70% of the market share of the total sales in the country. The concentration ratio (proportion of total industry output by the largest firm in the industry) for the industry is very low. Also government subsidies have led to the proliferation of many small players. Since the product patents were not valid in the country till 2005, the differentiation in the product is very low. The key driver in this industry is the costcompetitiveness. Afer 2005, major MNCs like Pfizer & GSK started introducing newer products in the market thereby increasing competition in the industry.

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SWOT ANALYSIS
STRENGTHS: (i) Well developed industry with a strong manufacturing base. Cost of poduction of drugs is one of the lowest. (ii) With a penetration of mordern medicine less than 30%, India is an untapped market. The strong marketing & distribution network will form an added advantage for penetration. (iii) The high middle class growth has led to the fast changing lifestyles in urban as well as to some extent in the rural centres. This has opened a huge market for the lifestyle drugs, which currently have a low contribution in the Indian pharmaceutical industry. (iv) Cost of production of drugs in India is one of the lowest. Can produce drugs at 4050% of the cost of rest of the world. (v) (vi) Presence of patent protected drugs that ensure future revenue streams. Self reliant technology for production. Excellent chemistry & process reengineering skills which helps in developing cost effective processes. (vii) Due to consolidation of acquisitions operations, a large pool of installed capacities exists. Economies of scale in marketing, production & adminstration can be garnered. (viii) (ix) (x) Access to a pool of highly trained scientists. Liberalization of government policies. Low R&D Costs

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WEAKNESSES (i) Price regulation led to reduced pricing ability of the companies. The NPPA sets the prices of different drugs, which in turns leads to lower profitability for these companies. (ii) Lack of product patent- this prevents new drug introduction in the country & thereby supress innovation & drug discovery. There is a lack of experience even to exploit the new patent regime. (iii) One of the least penetrated markets in the world. Mainly rely on exports because of slow growth. (iv) Highly fragmented because of very low entry barriers although installed capacities are high. (v) (vi) High monetary obligations due to the need for mergers & acquisitions. Low investment in R&D & lack of desired resources make it difficult to compete with MNCs on a worldwide basis. Few drug discovery system & low level of Biotechnology add to the problem. (vii) (viii) (ix) No strong linkage between industry & academia. Shortage of medicines containing psychotropic substances. Enough intermediaries are not available for bulk drugs.lack of accurate technology for forecasting & strategic future planning. (x) Quality standards are going to be increasingly tightened over the course of next 3-5 years. India approached the US FDA to cooperate to bring the standards of Indian production in same lines of US FDA. Unfortunately, most Indian companies will not be able to stand this test.

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OPPORTUNITIES (i) The migration to new patent product regime wil transform the industry by bringing with it new innovative drugs. This in turn will increase the profitability of the Indian MNCs & will force domestic companies to focus more on the R&D. (ii) New market opportunities are in the way for the Indian pharma companies as a large number of drugs are going off patent in the US & Europe between the years 2005-09. Spreading use of genric drugs & the fact that generic drugs are commodities by nature will provide low cost Indian producers with a competitive advantage. (iii) The expected growth in the per capita income & opening up of health insurance sector are the key growth drivers for long term. This will lead to an expansion of the healthcare industry of which pharma is an integral part. (iv) There exists a significant export potential for the Indian companies being one of the lowest cost producers. FDA approved plants will act as an advantage for them. (v) With the aging of the world population combined with new diagnoses & new social diseases, the demand for medical products on a whole is increasing. Also, there is a growing attention to health. Moreover, with new therapy approaches & new delivery systems, Indian industry is bound to grow. (vi) There is a huge potential for the development of India as a centre for international clinical trials. (vii) Contract manufacturing arragements & globalization will act as additive for easier international trading. (viii) India being a niche player in the pharmaceutical market has a huge growth potential. Also, the market saturation point is far away.

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THREAT (i) (ii) (iii) The future of the current patent regime is qusetionable. Other low cost producers like China & Israel pose a graet threat to the Indian industry. DPCO prevents the pharmaceutical companies from being much profitable & thus from genrating urplus that can be invested further. (iv) (v) (vi) Regulatory requirements hamper the R&D efforts of the Indian companies. Small pharmaceutical companies face the danger of being taken over by big players, The MRP based excise duty regime poses a threat to the existence of many small players. (vii) (viii) High cost of discovering new leads to fewer & less frequent discoveries. Greater number of potential new drugs & greater number of efficient therapies pose a threat to the Indian players. (ix) High entry & sales & marketing costs are also big threat to the upcoming companies in India. (x) (xi) Spike in raw material prices, Accelerated genericisation & intensified competition. Forex exchange losses & mark to market losses due to the rupee depreciation in June 2008.

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ADVANTAGE IN INDIA
(i) Competent workforce: India has a pool of personnel with high managerial & technical competence as also skilled workforce. It has an educated workforce & English is commonly used. Professional services are easily available. (ii) Cost-effective chemical synthesis: its track record of development, particularly in the area of improved cost beneficial chemical synthesis for various drug molecules is excellent. It provides a wide variety of bulk drugs & expots sophisticated bulk drugs. (iii) Legal & Financial framework: India has a 53 year old democracy & hence has a solid legal framework & strong financial markets. There is already an established international industry & business community. (iv) Information & Technology: it has a good network of world class educational institutions & established strengths in IT. (v) Globalization: the country is committed to a free maret economy & globalization. Above all, it has a 70 million middle class market, which is continuously growing. (vi) Consolidation: for the first time in many years, the internationl pharmaceutical industry is finding great opportunities in India. The process of consolidation which has become a generalized phenomenon in the world pharmaceutical industry has started taking place in India.

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TRENDS IN INDIAN PHARMACEUTICAL INDUSTRY IN 2008

1. Outsourcing & Off-shoring to Continue: While outsourcing and off-shoring seem to have taken off in 2007; it has been accelerated even more in 2008. Pharma companies are getting more and more comfortable, experienced and used-to with doing business globally, especially in India and China. 2. Global Licensing: licensing from companies in India and other emerging countries. 3. Layoffs and Lean Operations: Pfizer, J&J, BMS, Wyeth and many others have been announcing their plans for layoffs and lean operations. 4. Growing importance and dominance of generic companies: Barr, Ranbaxy, Mylan, Teva, Actavis, Dr. Reddys Labs keep launching more and more generics and also keep moving up the value chain by focusing on their NCEs. 5. Challenging times for Wholesalers: Wholesalers and distributors face more hurdles in 2008 as they face more problems with their business models. More and more retailers, hospitals and PBMs (customers) and manufacturers (suppliers) are trying to figure out the true role (and value) of wholesalers and how to compensate them. 6. M&A / Consolidation: It more M&A and consolidation. 7. Eliminating Hospital Infections: pharma industry will work more and more towards preventing infections and creating solutions that treat infections in an expedited manner. This is a huge shift when the onus was solely on hospital staff. 8. Prevention of Medical errors: Pharma companies are already working on informatics and other IT tools to prevent medical errors in partnerships with healthcare institutions. 9. Emergence of new global players: companies like Actavis, Ranbaxy, Nicholas Piramal, Dr. Reddys, Zydus, and Wuxi Pharmatech to take lead in a wide range of M&A activities. More and more of these companies have the dreams to become leading pharma companies not just in their own countries or regions but also globally.

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IMPACT OF UNION BUDGET 2008-09 ON INDIAN PHARMA SECTOR

Budget provisions for Pharma industry were: 1. Cut in excise duty to 8% from 16%: Major beneficiary on account of cut in excise duty is the MNC pharma companies as they get higher proportion of their revenue from domestic markets compared to home growth companies. 2. Weighted deduction of 125% on any payment made to companies engaged in R&D: The contract research which is on take off in the county has got a boost by way of weighted deduction of 125% on any payment made to companies engaged in R&D. 3. The allocation under National Rural Health Mission has been increased to Rs 12,050 crore 4. there is an allocation of Rs 993 crore for National Aids control programme 5. Provision of Rs 1042 crore for 2008-09 for eradication of Polio auguring well for the industry.

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VALUE CHAIN ANALYSIS

Due to poor research and development, they have been able to develop new products. Thus, they need strategic alliances with firms that have expertise in these areas. Secondly when entering new geographic market, firms face entry barriers in terms of sales and distribution network. Pharmaceutical products require extensive sales penetration and relationship with doctors. It is difficult for a new player to build in a short time. Moreover, it requires considerable investment which is financially not feasible when Indian firms only have a few products abroad.

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PEST ANALYSIS
1. POLITICAL (i) Product patent act: product patent regime will filter the best from the pack and would be favorable to players with built-in scientific and technical resources. (ii) Pharma Export Promotion Council (Pharmexcil): Facilitation of exports of Drugs, Pharmaceuticals, Biotechnology products, Herbal Medicines,

Diagnostics. (iii) Foreign Direct Investment (FDI): FDI upto 74% in the case of bulk drugs, their intermediate Pharmaceuticals and formulation. (iv) Automatic approval for Foreign Technology Agreement (FTA) is already available in the case of all the bulk drugs cleared by Drug Controller General (India). (v) (vi) Introduction of Value Added Tax (VAT). Schedule M of Drugs and Cosmetics Act ,1940- strengthen the pharma industry as a producer of quality medicines 2. ECONOMIC (i) (ii) (iii) GDP growth rate less (7.9%) as compared to previous year. Inflation rate is high at 12.14% leading in increase in prices of commodities. Interset rates: Due to uncertainity in the econy the interest rate has been revised many times & is comparatively higher at around 9.5%. This increase in interest rate can affect any new company trying to set up operations for which it would require some financing from the banks. (iv) Appreciating rupee has been the cause of concern for the pharma industry in the recent times, resulting in declining exports revenues for domestic companies.
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3. SOCIAL FACTORS (i) Health consciousness: increased awareness about diseases has lead to increased health Consciousness. (ii) Population growth rate: the current population growth rate in India is 1.578% (2008 EST), thereby creating demand for more medicines & healthcare. (iii) Age distribution: the age structure is 31.5% in 0-14 years age group; 63.3% in 15-64 years & 5.2% over 65 years of age. The median age is 25.1 years; male age is 24.7 years & female 25.5 years. (iv) Emphasis on safety

4. TECHNOLOGICAL FACTORS (i) (ii) R& D activity Rate of technological change- has been keeping pace with the changing technologies evolving on a regular basis to combat competition.

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FEW TOP COMPANIES

RANBAXY India's largest pharmaceutical company, is an integrated, research based, international pharmaceutical company, producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies. The Company is ranked amongst the top ten global generic companies and has a presence in 23 of the top 25 pharma markets of the world. The Company with a global footprint in 49 countries, world-class manufacturing facilities in 11 and a diverse product portfolio, is rapidly moving towards global leadership, riding on its success in the worlds emerging and developed markets. For the year 2007, the Company's Global Sales at US$ 1,619 Mn reflected a growth of 21%. Profit after Tax at US$ 190 Mn registered an increase of 67% over the previous year. The Company is driven by its vision to achieve significant business in proprietary prescription products by 2012 with a strong presence in developed markets. It aspires to be amongst the Top 5 global generic players and aims at achieving global sales of US $5 Bn by 2012. SUN PHARMACEUTICALS It is an International speciality Pharma Company, with presence in 30 markets. They make active pharmaceutical ingredients. In branded markets, their products are prescribed in chronic therapy areas like cardiology, psychiatry, neurology, gastroenterology, diabetology and respiratory. The corporation's present portfolio consists of a number of products in various strengths and package sizes, across a variety of therapeutic segments, including epilepsy and hypertension. The revenue in 2007 was Rs 21.320 billion & net income of Rs 7.842 billion in the same financial year.

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DR. REDDYS LAB Dr. Reddys Laboratories Ltd. (Reddy's), founded in 1984 by Dr. K. Anji Reddy, and has become Indias biggest pharmaceutical company. Dr. Anji Reddy had worked in the publiclyowned Indian Drugs and Pharmaceuticals Ltd. Reddy's manufactures and markets a wide range of pharmaceuticals in India and overseas. The company has more than 190 medications ready for patients to take, 60 active pharmaceutical ingredients for drug manufacture, diagnostic kits, critical care and biotechnology products. By 2007, Dr. Reddys had six FDA-plants producing active pharmaceutical ingredients in India and seven FDA-inspected and ISO 9001 (quality) and ISO 14001 (environmental management) certified plants making patient-ready medications five of them in India and two in the UK. The revenues as on May 2007 were $1.5 billion & net income as on May 2007 was $216 million CIPLA Cipla, originally founded as The Chemical, Industrial & Pharmaceutical Laboratories is a prominent Indian pharmaceutical company, best-known outside its home country for producing low-cost anti-AIDS drugs for HIV-positive patients in developing countries. Cipla makes drugs to treat cardiovascular disease, arthritis, diabetes, weight control, depression and many other health conditions, and its products are distributed in more than 180 countries worldwide. Among the hundreds of generic medications it produces for international distribution are atorvastatin, amlopidine, fluoxetine, venlafaxine hydrochloride and metformin.

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FUTURE OUTLOOK
Better growth is expected in the domestic market & the players initiatives to focus on contract research & manufacturing services & generics in advanced markets can sustain expansion in the international markets. The pharmaceutical industry is one of the fastest growing sectors in Indian economy. Visiongain predicts that market for pharmaceuticals in India has strong potential for increased growth from 2008 right through to 2023. India has had a strong domestic pharmaceutical industry and a rapidly expanding market with a population of over a billion and a rapidly expanding economy. Prevalence values of many diseases are likely to increase with expansion of population, urbanisation and with higher identification rates in the coming decade. India's pharmaceutical market is increasingly important in global pharma, with both domestic and foreign companies benefiting. Healthcare provision both public and private is improving, leading to fast-expanding markets for healthcare products, especially modern pharmaceuticals. As the demand for medicines would never lessen, on the other hand this would increase owing to new disease discovery & the discovery of drugs to counter these diseases. So in this situation it is evident that the Indian Pharma Industry has a huge growth prospects. India is an interesting geography for several global drug majors who are attracted by huge talent pool, scientific skills & cheap labour that has enabled Indian companies manufacture drugs at about a third of the cost in the west. There can be an increase in the nuber of global players entering the Indian market despite of the current economic conditions. Future state (2010): at least 100 NCEs in various stages of development; Contract Research: High end drug discovery services; Clinical Research: At least 10 % of global trials. Global Distribution: Top 15-20 Indian players to have direct presence.
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CONCLUSION
The global pharmaceutical industry has grown at 9% in 2007 and the focus of the pharmaceutical market continues to shift towards emerging countries where the growth rate is higher. As per industry reports, the size of Indian industry is increasing at more than 10% a year. Robust economic growth, availability of a skilled scientific workforce at low cost, a fairly stringent regulatory environment and largest number of US FDA approved plants outside the USA, makes India an attractive destination in the eyes of multinational conglomerates. Contract research and contract manufacturing is one area offering plenty of opportunities to India. After more than four decades as a closed economy and 14 years of reform, India has made its name in the global arena and laid the groundwork for rapid growth in Industries such as pharmaceuticals and IT. The foundation is in place for the pharmaceutical industry to substantiate its place in the world market, but further effort and unwavering commitment are needed for Indian pharmaceutical companies to emerge as undisputed leaders in the global arena. The various models used for analysis have evidently served the purpose. The Porters Five Forces model gives a fair idea about the industry in which a company operates and the various external forces that influence it. However, it must be noted that any industry is not static in nature. It's dynamic and over a period of time the model, which have been used to analyse the pharma industry may itself evolve. The S.W.O.T analysis has been used which analyzes the position of the industry with respect to its internal & external environment. Value cahin analysis measures systematically the development of competitive development. P.E.S.T analysis has been used to examine the external environment of the industry.

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APPENDIX
http://biotechindia.wordpress.com/2008/02/22/an-overview-of-the-indianpharmaceutical-industry/ www.pharmabiz.com http://ezinearticles.com/?Impact-of-Product-Patent-on-FDI-in-Indian-PharmaceuticalIndustry&id=89594) www.managementparadise.com http://www.rediff.com/money/2004/aug/27pharma.htm Strategic Value-chain Analysis of Indian Pharmaceutical Alliances by Gaurav Raizada & Atul Pall (IIM, Lucknow). Capital Market Feburary 2008 issues. Indian%20Pharmaceutical%20Industry-%20Vision%202010

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