Project-Report

SWOT Analysis & Porter’s five force model analysisof

The Indian pharmaceutical industry

Introduction ______________________________

“The Indian pharmaceutical industry is a success story providing employment for millions and ensuring that essential drugs at affordable prices are available to the vast population of this sub-continent.”

- Richard Gerster

The Indian Pharmaceutical Industry today is in the front rank of India’s 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.

Playing a key role in promoting and sustaining development in the vital field of

medicines, Indian Pharma Industry boasts of quality producers and many units

approved by regulatory authorities in USA and UK. International companies associated

with this sector have stimulated, assisted and spearheaded this dynamic development in

the past 53 years and helped to put India on the pharmaceutical map of the world.

The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered

units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical

companies control 70% of the market with market leader holding nearly 7% of the market

share. It is an extremely fragmented market with severe price competition and

government price control.

The pharmaceutical industry in India meets around 70% of the country's demand for bulk

drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules,

orals and injectibles. There are about 250 large units and about 8000 Small Scale Units,

which form the core of the pharmaceutical industry in India (including 5 Central Public

Sector Units). These units produce the complete range of pharmaceutical formulations,

i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e.,

chemicals having therapeutic value and used for production of pharmaceutical

formulations.

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Following the de-licensing of the pharmaceutical industry, industrial licensing for most of

the drugs and pharmaceutical products has been done away with. Manufacturers are free

to produce any drug duly approved by the Drug Control Authority. Technologically

strong and totally self-reliant, the pharmaceutical industry in India has low costs of

production, low R&D costs, innovative scientific manpower, strength of national

laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich

scientific talents and research capabilities, supported by Intellectual Property Protection

regime is well set to take on the international market.

The industry has achieved global recognition as a "low cost producer of quality bulk

drugs and formulations".

The phenomenal progress made by the industry over the years is depicted in Tables 1 &

2.

Table 1. TEMPORAL PROGRESS OF THE PHARMA INDUSTRY

Year Status

1950s Formulations Mostly imported MNC dominance

1960s Formulations Domestic endeavour on imported bulk drugs

1970s Formulations

Bulk drugs

Some imports.

Indigenous manufacture by domestic companies

1980s Formulations

Bulk drugs

Marginal imports (<5%)

Significant indigenous manufacture (based on domestic

R&D)

1990s Formulations

Bulk drugs

Significant exports, minimal imports (< 2%)

Self reliant (exports > imports)

Table 2.     GROWTH OF PHARMA INDUSTRY  (Rs. in Million)

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INDICATORS

 

1965-66

 

1994-95

 

1997-98

Compound

growth over

94-95 (%)

Investment 1,400 12,000 18,400 53.3

R&D Expenditure 30 1,400 2,200 57.0

               

    Turnover

                

Formulations 1,500 79,350 1,20,680 52.0

Bulk Drugs 180 15,180 26,230 72.8

     Exports

Formulations 30 9,240 28,050 32.9

Bulk Drugs 30 12,607 21,730 58.0

No. of manufacturers 2,000 - 8,250 -

Source: published reports

The year 1994-95 was the turning point for the industry due to the advent of the WTO.

The industry has since sought to reorient itself from looking inwards to being a player in

the global arena. The thrust on R&D by the Indian pharmaceutical industry is reflected by

the increased proportion of R&D expenditure to both investment and turnover.

Current Scenario_______________________________________

At a time when IT and entertainment stocks are turning out to be unpredictable options,

there is a safe sector that is solidly growing at around 18 per cent annually. And it's time

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an investor knew more about pharmaceutical stocks, which have been touching record

highs in the current groundswell of appreciation on Indian stock markets.

What makes the above statement stronger is that foreign institutional investors (FIIs) are

gleefully returning to the Indian bourses with their recession-battered funds. Even non-

resident Indians are investing heavily. Also, what is heartening to them is the fact that

foreign investment by multinationals in the pharmaceutical sector has grown.

The Indian pharmaceutical industry is the worlds 13th largest in terms of value and the

4th largest in terms of volume. With over 60,000 brands in over 60 therapeutic

categories, the total market size is approximately USD 5bn. It represents 1.6% of global

size and is growing at approximately 8 - 9%. India has world class facilities and expertise

in manufacturing with the largest number of US FDA approved manufacturing units in

the world outside the US. Ancillary industries are well developed with support available

locally. Quality bulk drugs at competitive prices are assured. In R&D, basic research and

biology skills are weak, a legacy of the lax patent regime where basic research was

neglected. But process chemistry skills – honed over decades of reverse-engineering – are

strong. The Indian pharmaceutical industry accounts for at least 35% of bulk drug filings

in the US.

The Indian pharmaceutical industry today is riding high on exports led growth. Brand

acquisition, mergers and alliances and increased focused on the generic and specialty

segments are some of the other current moves. While there is recovery of some sort in the

domestic market and on the R&D front, industry is faced with mixed fortunes. The

market is expanding and price levels are rising. This coupled with increased personal

spending, fuelled by economic growth and greater access to medical care is helping the

market expand.

India could not have stepped into the limelight at a more opportune time. From January

2005, the country became TRIPS compliant and formally recognized product patents.

Patent protection in India is now on levels comparable to developed nations (caveat). For

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any Intellectual Property (IP) sensitive industry India is now a destination to be

considered – both as a market and for manufacturing and research & development (R&D)

Post-TRIPS, the Indian pharmaceutical landscape is set to change permanently. Local

pharmaceutical majors are moving up the international value chain, focusing on generics

marketing in Europe and the US to complement their already-strong presence in bulk

active pharmaceutical ingredient (API) supply, and to capitalize on the record number of

drugs set to go off-patent over the next five years.

To leverage their experience in manufacturing, local companies are scouting for contract

manufacturing opportunities. And to leverage their country-wide network of skilled

marketing personnel they are actively seeking in-licensing and marketing opportunities.

Local pharmaceutical majors do not have the finances to take a product to market. With

annual sales of a billion - less than the R&D budgets of Big Pharma – they are

outlicensing their NME innovation , and focusing on cheaper Abbreviated New Drug

Applications (ANDAs). And to ‘learn and earn’, they are positioning themselves as

willing partners in global pharmaceutical knowledge networks. With cost and process

skills working to their advantage, local companies are also scouting to grab a share of the

international R&D outsourcing market.

Of all the opportunities for global pharmaceutical companies in this scenario, outsourcing

the clinical development phase of the R&D process appears the most promising. With a

large population and world class medical skills, this outsourcing service segment is

developing rapidly and with patent protection no longer a hurdle, a fresh look at this

segment is warranted. Including India in the clinical development outsourcing network

presents a four fold benefit – it is the most immediate opportunity with the greatest

potential benefit in the shortest possible time addressing the most pressing issue today.

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There has been an overall positive effect of India complying with TRIPS norms on

product patents. Even before January 2005, a number of MNCs have set up R&D centers

in India. Around 25 contract research organizations (CROs) and almost all multinational

pharmaceuticals companies have started full-fledged clinical trials there in the last three

years. This move accelerated from up to January 2005 and afterwards. To prepare for the

opportunity, reputed institutions for training such as the Academy for Clinical Excellence

and Institute of Clinical Research have been established over the last decade to train

physicians in ICH-GCP guidelines and ethical trial requirements. The Clinical Data

Interchange Standards Consortium (CDISC), USA, an NPO committed to the

development of clinical research organizations’ standards the world over, is looking at

setting up a chapter in India. The Indian Society for Clinical Research launched in

August 2005, aims to bring world-class clinical research organizations in India together,

advise the government on clinical trials issues and foster the highest levels of ethics in the

industry.

While there seems to be an exciting time ahead, a few challenges still remain. As in all

cases of successful outsourcing, three things are necessary – commitment, compliance

and quality. The right partner selection can eliminate the hazards of outsourcing and the

potential pitfalls of a well. If high ethical standards are adhered to, clinical research

studies help the poor in the country by giving them free access to the newest drugs and

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the highest levels of health care that even the middle class cannot afford to have access

to. This should always be remembered and portrayed.

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Critical analysis of the pharmaceutical industry_____________

1. The marketplace for the pharmaceutical industry is the human body – but only for

as long as the body hosts diseases. Thus, maintaining and expanding diseases is a

precondition for the growth of the pharmaceutical industry.

2. A key strategy to accomplish this goal is the development of drugs that merely

mask symptoms while avoiding the curing or elimination of diseases. This

explains why most prescription drugs marketed today have no proven efficacy

and merely target symptoms.

3. To further expand their pharmaceutical market, the drug companies are

continuously looking for new applications (indications) for the use of drugs they

already market.

4. Another key strategy to expand pharmaceutical markets is to cause new diseases

with drugs. While merely masking symptoms short term, most of the prescription

drugs taken by millions of patients today cause a multitude of new diseases as a

result of their known long-term side effects. For example, all cholesterol-lowering

drugs currently on the market are known to increase the risk of developing cancer

– but only after the patient has been taking the drug for several years.

5. While the promotion and expansion of diseases increase the market of the

pharmaceutical investment industry - prevention and root cause treatment of

diseases decrease long-term profitability; therefore, they are avoided or even

obstructed by this industry.

6. Worst of all, the eradication of diseases is by its very nature incompatible with

and diametrically opposed to the interests of the pharmaceutical investment

industry. The eradication of diseases now considered as potential drug markets

will destroy billions of investment dollars and eventually will eliminate this entire

industry.

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SWOT Analysis________________________________________

It is often said that the pharmaceutical sector has no cyclical factor attached to it.

Irrespective of whether the economy is in a downturn or in an upturn, the general belief is

that demand for drugs is likely to grow steadily over the long-term. True in some sense.

But are there risks? This perspective of the Indian pharmaceutical industry can be

explained by carrying out a SWOT analysis (Strength, Weakness, Opportunity, Threat).

Before we start the analysis lets look a little back in the industry’s last six years

performance. The Industry is a largely fragmented and highly competitive with a large

number of players having interest in it. The following chart shows the breakup of the

growth of Indian pharmaceutical industry in last six years.

*Volume growth of existing products

The SWOT analysis of the industry basically reveals the position of the Indian pharma

industry in respect to its internal and external environment.

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Strengths_____________________________________________

1

Large untapped market:

Indian with a population of over a billion is a largely untapped market. In fact the

penetration of modern medicine is less than 30% in India. To put things in

perspective, per capita expenditure on health care in India is US$ 93 while the same

for countries like Brazil is US$ 453 and Malaysia US$189.

2 Growth of middle class:

The growth of middle class in the country has resulted in fast changing lifestyles in

urban and to some extent rural centers. This opens a huge market for lifestyle drugs,

which has a very low contribution in the Indian markets.

3

Competent workforce:

Indian manufacturers are one of the lowest cost producers of drugs in the world. India

has a pool of personnel with high managerial and technical competence as also skilled

workforce. It has an educated work force and English is commonly used. Professional

services are easily available.

With a scalable labor force, Indian manufactures can produce drugs at 40% to 50% of

the cost to the rest of the world. In some cases, this cost is as low as 90%.

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Cost-effective chemical synthesis:

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Indian pharmaceutical industry possesses excellent chemistry and process

reengineering skills. This adds to the competitive advantage of the Indian companies.

The strength in chemistry skill help Indian companies to develop processes, which are

cost effective.

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Legal & Financial Framework:

India has a 53 year old democracy and hence has a solid legal framework and strong

financial markets. There is already an established international industry and business

community.

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Information&Technology:

It has a good network of world-class educational institutions and established strengths

in Information Technology.

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Globalisation:

The country is committed to a free market economy and globalization. Above all, it

has a 70 million middle class market, which is continuously growing.

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Consolidation:

For the first time in many years, the international 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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Weaknesses___________________________________________

1

Price regulation:

The Indian pharmaceutical companies are marred by the price regulation.

Over a period of time, this regulation has reduced the pricing ability of companies.

The NPPA (National Pharma Pricing Authority), which is the authority to decide

the various pricing parameters, sets prices of different drugs, which leads to lower

profitability for the companies. The companies, which are lowest cost producers,

are at advantage while those who cannot produce have either to stop production or

bear losses.

2

Lack of product patent:

Indian pharmaceutical sector has been marred by lack of product patent, which

prevents global pharmaceutical companies to introduce new drugs in the country

and discourages innovation and drug discovery.

3

Least penetrated:

Indian pharma market is one of the least penetrated in the world. However,

growth has been slow to come by. As a result, Indian majors are relying on exports

for growth. To put things in to perspective, India accounts for almost 16% of the

world population while the total size of industry is just 1% of the global pharma

industry.

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4

Highly fragmented:

Due to very low barriers to entry, Indian pharma industry is highly fragmented with

about 300 large manufacturing units and about 18,000 small units spread across the

country. This makes Indian pharma market increasingly competitive. The industry

witnesses price competition, which reduces the growth of the industry in value

term. To put things in perspective, in the year 2003, the industry actually grew by

10.4% but due to price competition, the growth in value terms was 8.2% (prices

actually declined by 2.2%).

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Opportunities_________________________________________

1

Innovation:

The migration into a product patent based regime is likely to transform industry

fortunes in the long term. The new patent product regime will bring with it new

innovative drugs. This will increase the profitability of MNC pharma companies and

will force domestic pharma companies to focus more on R&D. This migration could

result in consolidation as well. Very small players may not be able to cope up with

the challenging environment and may succumb to giants.

2

Drugs going off-patent:

Large number of drugs going off-patent in Europe and in the US between 2005 to

2009 offers a big opportunity for the Indian companies to capture this market. Since

generic drugs are commodities by nature, Indian producers have the competitive

advantage, as they are the lowest cost producers of drugs in the world.

3

Impact of the Health Insurance Sector:

Opening up of health insurance sector and the expected growth in per capita income

are key growth drivers from a long-term perspective. This leads to the expansion of

healthcare industry of which pharma industry is an integral part.

4

Global outsourcing hub:

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Being the lowest cost producer combined with FDA approved plants, Indian

companies can become a global outsourcing hub for pharmaceutical products.

Threats_______________________________________________

1

Patents:

There are certain concerns over the patent regime regarding its current structure. It

might be possible that the new government may change certain provisions of the

patent act formulated by the preceding government.

2

Other low cost countries:

Threats from other low cost countries like China and Israel exist. However, on the

quality front, India is better placed relative to China. So, differentiation in the contract

manufacturing side may wane.

3

VAT:

The short-term threat for the pharma industry is the uncertainty regarding the

implementation of VAT. Though this is likely to have a negative impact in the short-

term, the implications over the long-term are positive for the industry.

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Michael Porter’s Five Forces (5f) Model_ Of Indian_________

Pharmaceutical Industry________________________________

Today's business environment is extremely competitive and in economics parlance where

perfect competition exists, the profits of the firms operating in that industry will become

zero.

However, this is not possible because, firstly no company is a price taker (i.e. no

company will operate where profits are zero). Secondly, they strive to create a

competitive advantage to thrive in the competitive scenario. Michael Porter, considered

to be one of the foremost gurus' of management, developed the famous five-force model,

which influences an industry.

Here, we apply this model for the Indian pharmaceutical industry.

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Industry Competition___________________________________

Pharmaceutical industry is one of the most competitive industries in the country with as

many as 10,000 different players fighting for the same pie. The rivalry in the industry can

be gauged from the fact that the top player in the country has only 6% market share, and

the top five players together have about 18% market share.

Thus, the concentration ratio for this industry is very low. High growth prospects make it

attractive for new players to enter in the industry.

Another major factor that adds to the industry rivalry is the fact that the entry barriers to

pharmaceutical industry are very low. The fixed cost requirement is low but the need for

working capital is high.

The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us

that in bigger companies this ratio is in the range of 3.5 to 4 times. For smaller

companies, it would be even higher.

Many smaller players that are focused on a particular region, have a better hang of the

distribution channel, making it easier to succeed, albeit in a limited way.

An important fact is that pharmaceutical industry is a stable market and its growth rate

generally tracks the economic growth of the country with some multiple (1.2 times

average in India). Though volume growth has been consistent over a period of time, value

growth has not followed in tandem.

The product differentiation is one key factor, which gives competitive advantage to the

firms in any industry. However, in pharmaceutical industry product differentiation is not

possible since India has followed process patents till date, with laws favoring imitators.

Consequently, product differentiation is not the driver, cost competitiveness is. However,

companies like Pfizer and Glaxo have created big brands in over the years, which act as

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product differentiation tools. This will enhance over the long term, as product patents

come into play from 2005.

Bargaining Power Of Buyers_____________________________

The unique feature of pharmaceutical industry is that the end user of the product is

different from the influencer (read doctor). The consumer has no choice but to buy what

doctor says. However, when we look at the buyer's power, we look at the influence they

have on the prices of the product.

In pharma industry, the buyers are scattered and they as such does not wield much power

in the pricing of the products. However, government with its policies, plays an important

role in regulating pricing through the NPPA (National Pharmaceutical Pricing Authority).

Bargaining Power Of Suppliers___________________________

The pharmaceutical industry depends upon several organic chemicals. The chemical

industry is again very competitive and fragmented. The chemicals used in the

pharmaceutical industry are largely a commodity.

The suppliers have very low bargaining power and the companies in the pharmaceutical

industry can switch from their suppliers without incurring a very high cost.

However, what can happen is that the supplier can go for forward integration to become a

pharmaceutical company. Companies like Orchid Chemicals and Sashun Chemicals were

basically chemical companies, who turned themselves into pharmaceutical companies.

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Barriers To Entry______________________________________

Pharmaceutical industry is one of the most easily accessible industries for an entrepreneur

in India. 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.

However, creating brand awareness and franchisee amongst doctors is the key for long-

term survival. Also, quality regulations by the government may put some hindrance for

establishing new manufacturing operations.

Going forward, the impending new patent regime will raise the barriers to entry. But it is

unlikely to discourage new entrants, as market for generics will be as huge.

Threat Of Substitutes___________________________________

This is one of the great advantages of the pharmaceutical industry. Whatever happens,

demand for pharmaceutical products continues and the industry thrives. One of the key

reasons for high competitiveness in the industry is that as an on going concern,

pharmaceutical industry seems to have an infinite future.

However, in recent times, the advances made in the field of biotechnology, can prove to

be a threat to the synthetic pharmaceutical industry.

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Conclusion____________________________________________

This 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 used to analyze the pharmaceutical industry may

itself evolve.

Going forward, we foresee increasing competition in the industry but the form of

competition will be different. It will be between large players (with economies of scale)

and it may be possible that some kind of oligopoly or cartels come into play.

This is owing to the fact that the industry will move towards consolidation. The larger

players in the industry will survive with their proprietary products and strong franchisee.

In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key

players. Though consolidation within the current big names is not ruled out. Smaller

fringe players, who have no differentiating strengths, are likely to either be acquired or

cease to exist.

The barriers to entry will increase going forward. The change in the patent regime will

see new proprietary products coming up, making imitation difficult. The players with

huge capacity will be able to influence substantial power on the fringe players by their

aggressive pricing which will create hindrance for the smaller players.

Economies of scale will play an important part too. Last but not the least, in a vast

country of India's size, government too will have bigger role to play.

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