Strategic Management Assignment - Ravin # 17

8/7/2019 Strategic Management Assignment - Ravin # 17

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ANALYSIS OF INDIAN

PHARMACEUTICALINDUSTRY

Submitted to:M.S. University

(MBA Evening Semester IV)

Submitted by:Mehta Ravin H (Roll # 17)

(Working with SUN Pharmaceuticals Limited)


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SUMMARYThe 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. The

domestic pharmaceutical output has increased at a compound growth

rate (CAGR) of >13% per annum.

The Indian pharmaceutical industry, with US $5 billion in domestic

sales and over US $3 billion in exports, is showing satisfactory progress

in terms of infrastructure development, technology base and product

use. The industry now produces bulk drugs belonging to all major

therapeutic groups requiring complicated manufacturing processes

and has also developed excellent good manufacturing practices

(GMP) compliant facilities for the production of different dosage forms.

The strength of the industry is in developing cost-effective

technologies in the shortest possible time for drug intermediates and

bulk actives without compromising on quality. This is realized throughthe countrys strengths in organic synthesis and process engineering.

Various models have been used for the purpose of analysis of the

Indian Pharmaceutical Industry. The models used are the Porters five

forces model which analyzes an industry by breaking down the

influencing factors into five separate parts i.e, threat of new entrants,

the bargaining power of buyers, bargaining power of suppliers, threat

of substitutes & Industry competition. P.E.S.T analysis has been used

to examine the external environment of the industry. An added

analysis of the S.W.O.T has been used which analyzes the position of

the industry with respect to its internal & external environment.


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Table of Contents

1. Introduction

2. Industry Structure

3. Porters Five Forces Model

4. Advantage in India

5. Trends in Pharmaceutical Industry

6. S.W.O.T Analysis

7. P.E.S.T Analysis

8. Opportunities for SUN

9. Future Outlook

10. Conclusion

11. Appendix


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Introduction

The Indian Pharmaceuticals sector has come a long way, being almostnon-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$ 4.1 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 $ 5-6 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 &


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R&D services. The industry has been discussed in three phases in

much research report; however, the post 2005 era will be extensively

covered in this project. The year 2005 saw a series of developments

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 pharma in 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 patents

protection, opening up huge opportunity for the Indian pahrma

companies in the generic field. Top 10 Pharmaceuticals in India as per

Market Capitalization in 2010 :

1. Sun Pharmaceuticals (Rs. 35,865)

2. CIPLA (Rs.26,059)

3. Dr. Reddy's Laboratories (Rs. 23,005)

4. Ranbaxy Laboratories (Rs. 19,497)

5. GlaxoSmithKline Pharma (Rs. 16,984)

6. LUPIN Limited (Rs. 16,320)

7. CADILA HEALTHCARE (Rs. 12,628)

8. Piramal Healthcare (Rs. 10,500)

9. Divi's Laboratories (Rs. 9,712)

10. Glenmark Pharmaceuticals (Rs.7,431)


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INDUSTRY STRUCTUREThe 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%.

PORTERS FIVE FORCES ANALYSIS


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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 existing 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 &

preferred 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 does not 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


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does not have much effect on the manufacturers. Except in generic &

OTC medicines, the buyer does not normally switch medicines.

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

manufacturers.

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 Pharmaceutical 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 cost-competitiveness. After

2005, major MNCs like Pfizer & GSK started introducing newer products

in the market thereby increasing competition in the industry


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ADVANTAGE IN INDIA

(i) Competent workforce: India has a pool of personnel with highmanagerial & 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 & exports 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 market 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 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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7. Prevention of Medical errors: Pharma companies are already working

on informatics and other IT tools to prevent medical errors in

partnerships with healthcare institutions.

8. Emergence of new global players: companies like SUN, Daiichii,Nicholas Piramal, Dr. Reddys, Zydus and CIPLA 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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SWOT ANALYSIS

STRENGTHS:(i) Well developed industry with a strong manufacturing base. Cost of

production of drugs is one of the lowest.

(ii) With a penetration of modern 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 centers. 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 40-50% of the cost of rest of the world.

(v) Presence of patent protected drugs that ensure future revenue

streams.

(vi) 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

& administration can be garnered.

(viii) Access to a pool of highly trained scientists.


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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 suppress 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) High monetary obligations due to the need for mergers &

acquisitions.

(vi) 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) No strong linkage between industry & academia.

(viii) Shortage of medicines containing psychotropic substances.

(ix) Enough intermediaries are not available for bulk drugs. Lack ofaccurate 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.


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Unfortunately, most Indian companies will not be able to stand this

test.

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

pharmaceutical companies as a large number of drugs are going off

patent in the US & Europe between the years 2005-09. Spreading use

of generic 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 whichpharmaceutical 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.


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(vi) There is a huge potential for the development of India as a centre

for international clinical trials.

(vii) Contract manufacturing arrangements & 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.

THREATS

(i) The future of the current patent regime is questionable.

(ii) Other low cost producers like China & Israel pose a great threat to

the Indian industry.

(iii) DPCO prevents the pharmaceutical companies from being much

profitable & thus from generating surplus that can be invested further.

(iv) Regulatory requirements hamper the R&D efforts of the Indian

companies.

(v) Small pharmaceutical companies face the danger of being taken

over by big players,

(vi) The MRP based excise duty regime poses a threat to the existence

of many small players.

(vii) High cost of discovering new leads to fewer & less frequent

discoveries.

(viii) Greater number of potential new drugs & greater number of

efficient therapies pose a threat to the Indian players.


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PEST ANALYSIS

To understand the implications of the environment on any industry it isimperative to study the four cardinal influencers on the industry

namely Political, Economic, Social and Technological factors. It is

rather unfortunate that in India these factors have a rather

disproportionate influence on the functioning of a commercial

organization. From the days of independence the business

environment has been overly regulated by a handful of bureaucrats,

middlemen, businessmen and politicians. Its only a decade since the

country

has seen an emergence of a political thought that encourages free

enterprise. A welcome change indeed!

Political Factors

1. Today there is political uncertainty in the air. A combination of

diverse political thought have got together to cobble together a

rag-tag coalition, that is riddle with ideological contradictions.

Therefore, any consistent political or economic policy can not be

expected. This muddies the investment field.

2. The Minister in charge of the industry has been threatening to

impose even more stringent Price Control on the industry than

before. This is throwing many an investment plan into the

doldrums.

3. DPCO which is the bible for the industry has in effect worked

contrary to the stated objectives. DPCO nullifies the market forces


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from encouraging competitive pricing of goods dictated by the

market. Now the pricing is determined by the Government based

on the approved costs irrespective of the real costs.

4. Effective January, 2005 the country goes in for the IPR

(Intellectual Property Rights) regime, popularly known as the

Patent Act. This Act will impact the Pharmaceutical Industry the

most. Thus far an Indian company could escape paying a patent

fee to the inventor of a drug by manufacturing it using a different

chemical route. Indian companies exploited this law and used the

reverse-engineering route to invent a lot of alternate

manufacturing methods. A lot of money was saved this way.

5. This also encouraged competing company to market their

versions of the same drug. That meant that the impurities and

trace elements found in different brands of the same substance

were different both in qualification as well as in quantum.

Therefore different brands of the same medicine were truly

different. Here Branding actually meant quality and a purer

brand actually had purer active ingredient and lesser or less

toxic impurities.

6. Product patent regime will eliminate all this. Now, a patented

drug would be manufactured using the same chemical route and

would be manufactured by the inventor or his licentiates using

the chemicals with same specifications. Therefore, all the brands

of the same active ingredient would not have any difference in

purity and impurities. The different brands would have to

compete on the basis of non input-related innovations such as

packaging, color, flavors, excipients etc. This is the biggest

change the environment is going to impose on the industry. The


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marketing effort would be now focused on logistics,

communications, economy of operation, extra-ingredient

innovations and of course pricing.

7. In Pharma industry there is a huge PSU segment which is

chronically sick and highly inefficient. The Government puts the

surpluses generated by efficient units into the price equalization

account of inefficient units thereby unduly subsidizing them. On

a long term basis this has made practically everybody inefficient.

8. Effective the January, 2005 the Government has shifted from

charging the Excise Duty on the cost of manufacturing to the

MRP thereby making the finished products more costly. Just for a

few extra bucks the current government has made many a life

saving drugs unaffordable to the poor.

9. The Government provides extra drawbacks to some units located

in specified area, providing them with subsidies that are unfair to

the rest of the industry, bringing in a skewed development of the

industry. As a results Pharma units have come up at placeunsuitable for a best cost manufacturing activity.

Economic Factors

1. India spends a very small proportion of its GDP on

healthcare (A mere 1%). This has stunted the demand and

therefore the growth of the industry.

2. Per capita income of an average Indian is low (Rs.

12,890), therefore, spending on the healthcare takes a low

priority. An Indian would visit a doctor only when there is an


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emergency. This has led to a mushrooming of unqualified doctors

and spread of non-standardized medication.

3. The incidence of Taxes is very high. There is Excise

Duty ( State & Central), Custom Duty, Service Tax, Profession

Tax, License Fees, Royalty, Pollution Clearance Tax, Hazardous

substance (Storage & Handling) license, income tax , Stamp

Duty and a host of other levies and charges to be paid. On an

average it amounts to no less than 40-45% of the costs.

4. The number of Registered Medical practitioners is low.

As a result the reach of Pharmaceuticals is affected adversely.

5. There are only 50,00,000 Medical shops. Again this

affects adversely the distribution of medicines and also adds to

the distribution costs.

6. India is a high interest rate regime. Therefore the cost

of funds is double that in America. This adds to the cost of

goods.

7. Adequate storage and transportation facilities for

special drugs is lacking. A study had indicated that nearly 60% of

the Retail Chemists do not have adequate refrigeration facilities

and store drugs under sub-optimal conditions. This affects the

quality of the drugs administered and of course adds to the

costs.

8. India has poor roads and rail network. Therefore, the

transportation time is higher. This calls for higher inventory

carrying costs and longer delivery time. All this adds to the


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invisible costs. Its only during the last couple of years that good

quality highways have been constructed.

Socio-cultural Factors

1. Poverty and associated malnutrition dramatically exacerbate the

incidence of Malaria and TB, preventable diseases that continue

to play havoc in India decades after they were eradicated in

other countries.

2. Poor Sanitation and polluted water sources prematurely end the

life of about 1 million children under the age of five every year.

3. In India people prefer using household treatments handed down

for generations for common ailments.

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

5. Increasing pollution is adding to the healthcare problem.

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

healthcare problem.

7. Large joint families transmit communicable diseases amongst

the members.

8. Cattle-rearing encourage diseases communicated by animals.


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

children.

10. Ignorance of inoculation and vaccination has prevented the

eradication of diseases like polio, chicken-pox, small-pox,

mumps and measles. People dont go in for vaccination due

superstitious beliefs and any sort of ailment is considered as a

curse from God for sins committed.

Technological Factors

1. Advanced automated machines have increased the output and

reduced the cost.

2. Computerization has increased the efficiency of the

Pharmaceutical Industry.

3. Newer medication, molecules and active ingredients are being

discovered. As of January 2005, the Government of India has

more than 10,000 substances for patenting.

4. Ayurveda is a well recognized science and it is providing the

industry with a cutting edge.

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

a step forward.

6. Humano-Insulin, Hepatitis B vaccines, AIDS drugs and many

such molecules have given the industry a pioneering status.

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


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OPPORTUNITIES FOR SUN

It is an International specialty Indian Pharmaceutical 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.

Highly diverse and multi therapy area based portfolio provides an advantage to the company

in exploring new regulated and non regulated markets. The company has production sites at

various locations in India and also outside India. With strategic presence in various regulated

markets such as USA (Caraco), Hungary, Israel (Taro) the company is poised to explore the

generics market share to the maximum.

The company optimally utilized the pre 2005 IPR arena whereby no product patents were

allowed in India and company very accurately developed (copied) various innovator products

developed by various MNCs outside India. Post 2005, the company has also initiated its own

product and process development R&D whereby it has identified few peculiar therapy areas

and started exploring drugs for that.

Company has also got its own 2 API (active pharmaceutical ingredient) plants where by it

provides the raw material for drug manufacturing for SUNs own products and also is a great

API Supplier in the market. Due to its strong marketing strategies and easy penetration due to

its already established network, the company stood at first position in top Indian

Pharmaceutical Companies as per Market Capitalization in 2010.


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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. Vision gain predicts that market for

pharmaceuticals in India has strong potential for increased

growth from 2012 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, urbanization and with higheridentification rates in the coming decade.

India's pharmaceutical market is increasingly important in global

pharmaceutical, 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


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it is evident that the Indian Pharmaceutical 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

labor that has enabled Indian companies manufacture drugs at

about a third of the cost in the west. There can be an increase in

the number of global players entering the Indian market despite

of the current economic conditions.

Future state: at least 100 New Chemical Entitys (NCEs) in

various stages of development; Contract Research: High end

drug discovery services.


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CONCLUSION

The global pharmaceutical industry has grown at 9% in 2007 and

the focus of 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 beenused to analyze the pharmaceutical 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. P.E.S.T


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analysis has been used to examine the external environment of the

industry.

Strategic Management Assignment - Ravin # 17

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