The Changing Nature of Indian Pharmaceuticals Industry

By: Hrashit Sharma MBA(M&S) SECTION B ROLL NO - 39

Introduction Indian pharmaceutical industry is divided into two categories as bulk drugs and formulations by its physical properties and marketing point of view ethical, generic and OTC and line of treatment the industry is further divided as Allopathic, Ayurveda, Homeopathy, Unani etc. In our context Allopathic is more relevant as it occupies more than 80% of market share. Furthermore Indian pharmaceutical sector has successfully crossed all phases from monopolistic phase to multi-brand phase to emerging market phase and now commoditisation phase stepping ahead to give a new shape for pharmaceutical marketing. It is observed that Infrastructure base of Indian pharmaceutical industry comprises of more than 3.9 lakhs allopathic practicing doctors with 15 thousands hospitals and 1.6 lakhs primary health centres and with a highest doctor chemist ratio of 2: 3 i.e. of around 3.5 lakh chemist. Also 9 thousand pharmaceutical companies are operating their network with brand in lakhs through 60 thousand medical representatives. Beside this employment an opportunity has been increased in tune with industrialization, direct employment in organized sector is 2.9 lakh and in smallscale units 1.7 lakh and that of indirect employment with distribution & trade was 16.5 lakh. Ancillary industries provide opportunities as high as 7.5 lakh. Thus together direct and indirect contributes 28.6 lakh persons engaged in pharmaceutical industry. Also there is increasing number of pharmaceutical colleges affiliated by universities to fulfill the need of researcher, scientist and technicians. Study found that generic-generic market in India has shown substantial base of Rs. 322 Crore in the year 2000 with 828 products (OPPI census) and beside this Ayurveda, Unani, Homeopathy, etc contributing only 3.4 percent of the total sales. Biotechnology is another competent market in India with marginal low base of Rs. 1000 Crore growing with a very high rate includes sterile fermentation processes, skills in handling microbes and infrastructure in fabricating bioreactors. It is found that pharmaceutical sector has maintained steady growth in terms of production of bulk drugs as well as formulations that is a result of foreign collaboration for high investments in research and developments. In addition to

this government has received several projects related to up-gradation, expansion or starting new production units. It is observed that Bulk drugs production has been significantly increased over the decades from the year1980-81 to 2000-2001 crossing the turnover of Rs. 4533 Crore and over 60 percentage of bulk drugs production exported every year. The balance is sold locally to other formulations. However it is seen that many of the M.N.Cs import bulk drugs from the Parent Company and formulate it for local markets. Beside these local players who export formulation avails duty free imports of bulk drugs. Hence there is a significant scope for Indian companies for export in developing countries for both off patented and generic products. Production of Formulations has been crossed the bench mark of Rs 18354 crore in the year 2000-2001 and India is self-sufficient in production of formulations and more than 80 percentage of the formulation is sold in the domestic market itself. The size of formulation market is Rs. 18 thousand Crore and growing at the rate of 18 percentage as compared to previous year. The achieved growth is because of increasing export to developing nations like China, South Africa, European countries etc. As per the study, initially profitability is very high because of monopolistic competition where few companies were dominating the market. Then slowly the competition had been increased results into decrease in profitably trend because of price war amongst the companies become the common strategies of competitors. But in later half, from 1990 onwards again profitability increases marginally high due to heavy investment in moderation of production units that reduced the cost of production and raw material of formulations. The sustainable development of pharmaceutical industry and increase in profitability is a positive sign of economic growth and prosperity. On the other side it is found that Government spending on healthcare has been significantly reduced from 3.3 percent in first plan (1951-56) of total plan to 1.7 percent in eighth plan (1992-97). And if we compare Indias health expenditure in public sector undertaking with other Asian countries it is lowest amongst all. The annual per capita drug expenditure is low of Rs. 123 as compare to Japan Rs. 18000.

Study reveals that the total of import and export in Indian pharmaceutical has crossed the land mark of Rs. 11710 Crore in the year 2000-2001 with a high growth rate of about 20 percent in export over the year 1999-00 and also has high contribution to nations total export portfolio. In recent years export of formulation as well as bulk drugs has significantly increased because of increased competition results into low margin in domestic market and secondly D.P.C.O. has laid special holiday packages for export to foreign countries. It reveals that on an average/half of the sale of Indian companies is from exports because of reduced cost of production, corporate reorganization and therefore this enhanced profit adds in their growth that indirectly contributes for also strengthening Indian economy. It is found that the top ten companies represent 31 percent of total market because of intense market competition amongst them as a result that top performing company is having only 5.7 percent of market share. So the combined sale of these top three Indian pharmaceutical companies like Cipla, Ranbaxy and Sun Pharmaceutical is represent only 11.2 percentage market share & top 100 products occupies 26.65 percentage of market share that clearly shows the picture of fragmented market. Therefore the whole share of pharmaceutical market is subdivided into smaller groups and each smaller company shows its presence in its market segment. It is seen that the Government objective behind emphasis on investment in R&D is to encourage pharmaceutical company to grow through on R&D. As a knowledge and technological based industry, pharmaceutical industry has grown rapidly in last few years in research and development. In 1976-77 only Rs. 10.5 Crore were invested on R&D that shot up to high of Rs. 370 Crore in 2000-01. Furthermore it is found that the total R&D expenditure in pharmaceutical sector today is Rs. 370 Crore that is just 2 percentage of total sales in India, the reasons could be high risk involved in R&D for new product development that is very expensive and based on trial & error method. Hence few firms venture into this area and long experience with the process patent regime has also brought in a sense of complacency about product development in this industry. In product life cycle as well as market life cycle decision making is most crucial factor for a successful marketer. Therefore product should be backed by innovative

strategies to make it a successful brand to sustain in the market and analyzing the brand position with respect to competitors move helps for re-strengthening its image in market field. Furthermore now a day product life cycle becomes shorter due to heavy competition and Governments rules and restrictions. Indian pharmaceutical industry where pricing strategies is frames with residual degree of freedom from the restrictions laid by DPCO. Therefore Various bases of pricing like cost based pricing, demand based pricing, market based pricing, competition based pricing prove to be an important tool to understand the market very well and adopt suitable pricing strategies. Therefore pricing strategies involves marginal cost pricing strategy, penetration strategy, skimming pricing strategies, puts the pressure on marketer regarding pricing. Hence pricing management means decision related to pricing for a new product at launching stage, implementation of price changes in consonance with government regulation, keeping competitive price and formulation of strategic pricing policy as bonus offers, bulk purchase etc. Place is another most important element of marketing mix. Due to intensifying competition that demands for more feasible Place for the product that has to be placed as per the convenience of the marketer and with in the reach of the customer. The pharmaceutical marketing channel where the main customer i.e. physician (prescriber) is indirectly involved when the product is physically transferred from manufacture to stockists to chemist to patient. Therefore pharmaceutical marketing where place is totally depends on the prescribers habit and marketer has to sharpen their network for best service and face emerging challenges in the market and minimize the ever to increasing cost of physical distribution. Amongst four elements of marketing mix, promotion is the most significance elements in pharmaceutical marketing. Therefore in tune with changing complexities and competition, the concept of promotion is taking a new shape. It involves pursuing the attention of customer, understanding the process of perception and attention and the role and responsibilities of marketer. The suggestive model of buying process helps for better product promotion in coming era. Ethical medical advertising promotes good marketing environment for a healthy growth and reduces unnecessary competition.

Recruitment, selection, and training of medical representative are another significant factor for strengthening market network. Critical evaluations of recruitment, selection of these have further guided us to re-strengthening and improving the performance of medical representative to better future marketing network. Evaluation of performance of field force and keeping high spirit of team motivation is a key to become successful marketer. As the 70% or so of the population who currently does not have access to pharmaceuticals, the introduction of patent protection, and any price effects that may follow, is irrelevant. It has been observed that, of the drugs currently on the market, just fewer than ten percent are on patent in Europe. Extrapolating this percentage into the future, which may itself be questionable, means that even if product patents result in significantly higher prices, much of the pharmaceutical market will not be affected. Considering only the part of the market that will be affected by the new regime, there are a number of reasons for thinking that the low incomes of Indias consumers and the lack of medical insurance will not ensure low prices, It has found that the patent-owning firms may not be setting prices to maximize profits in the Indian market. They maximize global profits, and the policies of drug price regulation may predict a limit to how low they will be willing to set prices in India. It is true that Indian firms are moving into the world generics market and, although the introduction of product patents will cause them to lose their first-mover advantage, their low manufacturing costs will continue to give them an advantage in competing for this market. The bulk of production for the domestic market is drugs that are not on patent. As a result of these features, the introduction of product patents should not have a strong adverse impact on employment in the industry or on the contribution of the pharmaceutical sector to the economy. The positive contribution of intellectual property comes in its dynamic effect on the creation and implication of knowledge. Considering first the implication of scientific information, it appears that Indian firms are well able to access any scientific information. Since most important pharmaceutical innovations will be patented internationally, there is likely to be little or no additional benefit to be gained by Indians from specifications being filed domestically. An MNC with a new-patented drug may delay a launch in India because of the concern over global price regulations mentioned above.

Already the larger firms are increasing their total R&D expenditure as a percentage of sales and they are beginning to move in the direction of new molecule discovery rather then concentrating solely on development research. The coming years are going to be tough for pharmaceutical industries. Unless, there is total change in mindset towards business, it is likely that some companies may restrict their operations. The above suggestions can be useful for small and medium scale companies. Today, as we discussed earlier, companies like Pharmaceutical Companies and Ranbaxy can join their hand for Slow Release Ciprofloxacin why not small companies? A professional approach is needed. Such examples proved the path for successful pharmaceutical marketing.

India's pharmaceutical sector is currently undergoing unprecedented change. Much of this is due to the country's introduction of product patent with effect from January 2005, an agreement on TRIPS (Trade-Related Aspects of Intellectual Property Rights) under WTO on April 15, 1994. Before that, only patents for processes were permitted to be issued, a fact that has been instrumental in the domestic industry's huge success as a worldwide exporter of high quality generic drugs. The new patent regime has also led to the return of the pharmaceutical multinationals, many of which had left India during the 1970s. Now they are back and looking at India not only for its traditional strengths in contract manufacturing but also as a highly attractive location for research and development (R&D), particularly for clinical trials (KPMG, 2006). The Indian pharmaceutical industry (IPI) is one of the most interesting national industries in the world today, in large measure because its character has been so significantly shaped by patent regimes. The 1970 Indian Patent Act granted process as opposed to product patents on drug manufacture. This meant that Indian pharmaceutical companies can manufacture drugs that already existed on patent in the market, as long as they came up with their own method for doing so. This helped the industry into one that was capable of cheap reverse-engineered bulk drug manufacture, which has in turn enables Indian drug prices to be among the lowest in the world. In 1995, however, India became a signatory to World Trade Organization (WTO) - imposes patent regimes, which required the industry there to be completely WTO compliant by 2005. The change in patent regimes toward a WTO imposed, one has therefore necessitated shift in the Indian industry as after 2005, Indian pharmaceutical companies will not be able to take a molecule already on the market, remake it through an indigenous process, and then sell it. Indian companies will now have to focus on novel drug discovery and development. In this preceding context my report has attempted to discus the changes in the economic growth of Indian pharmaceuticals industries in context of WTO regime (the Indian Patents Act, 2005) and argue available evidence on the extent to which the Patent Act, 2005 regime may be expected to raise prices of new patentable drugs in India creating monopolies (Flynn, 2008).

The changing nature of Indian Pharmaceuticals Industry

The Indian pharmaceutical sector has come a long way, being almost non-existent before 1970 to a prominent provider of healthcare products, meeting almost 95 per cent of the country's pharmaceuticals needs. Presently, the Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units with severe price competition and government price control. It has expanded drastically in the last two decades. There are about 250 large units that control 70 per cent of the market with market leader holding nearly 7 per cent of the market share and about 8000 Small Scale Units together which form the core of the pharmaceutical industry in India (Corporate Catalyst India, 2009). As per WTO, from the year 2005, India granted product patent recognition to all new chemical entities (NCEs) i.e., bulk drugs developed then onwards. Under this new law, India will be forced to recognize not only new patents but also any patents filed after January 1, 1995. Under changed environment, the industry is being forced to adapt its business model to recent changes in the operating environment. Previously, only process patents were granted, a situation that led to India's role as a world leader in the production of high quality, affordable generics. The new regime may spell the end for the domestic sector's smaller players, while for others it could represent unprecedented opportunities. Nevertheless, the domestic industry is still spending far too little on R&D, which must change quickly if it is even to begin to address these new opportunities and challenges. On the international front, the industry still has some catching up to do in terms of quality assurance while, on the local market, pricing remains a problem (KPMG, 2006). The above reason can be justified as, so far, Indian companies have made use of the cheap labor and the reverse engineering skills under the favorable conditions of process patent regime and developed generic replicas to drugs that were under patent in developed countries, which then were sold in the domestic markets and exported to other unregulated markets elsewhere in the world. This generic business enabled them to compete with multinational companies in India and abroad and resulted in good revenues. However, once the product patent regime got implemented from the year 2005, one is not allowed to reverse engineer drugs that are patented after 1995, and the revenues from this business may suffer. Whereas, the multinational companies in India, which have an impressive new

product portfolio will get exclusive marketing rights to sell their products at higher prices and will be in a position to dictate the terms.

Impact of the Patents (Amendment) Act, 2005

The Patents (Amendment) Act, 2005 has introduced product patent protection for pharmaceuticals from 1 January, 2005. Hence unless otherwise authorized, Indian pharmaceutical companies cannot produce new drugs developed abroad. It is widely believed that the global product patenting of medicines will enhance the monopoly power of the MNCs and result in higher prices and lesser access of medicines (Thomas, 2008). Patents create monopolies where there is no equally effective substitute for the patented product. In the case of Indian Pharmaceutical Industry, the 2005 patent covers the active ingredient for a needed medicine if other medicines cannot be readily substituted for it in all of its applications. This patent gave its holder (MNCs) the ability to set price for the good without regard to competitive substitutes. In a product patent regime, this can also be provided by an easy to use compulsory licensing system. A substantial amount would have to be spent by Indian firms towards royalties and license fees, which leads to higher prices (Flynn, 2008). Below figure shows the change in drug prices after the patent act 2005, implementation in India.

Impact of The Patent Act, 2005 on IPI Creates forces leading to increase in prices
Figure1 (Ramania, 2008) In the above graph figure 1, to maximize its profits, the monopoly will raise its price or license value of the product above the level that would exist in a competitive market, thus serving a smaller segment of the potential demand (i.e. it will reduce its output), until resulting losses of sales make further price increases unprofitable. The more the demand for the goods is inelastic (meaning that consumers are less likely to decrease consumption with each price increase), the higher the price that can be profitably demanded by the monopolist. Pricing above marginal costs creates two losses for consumers. The first loss is a wealth transfer from consumers to the monopolist, since every unit purchased is at a higher price than consumers would pay a competitive producer. In the case of an innovative monopolist, including a monopoly created by a patent, such a transfer from consumers to the monopolist may be thought to be the reward for innovation. The second loss from monopoly pricing is a deadweight loss from forgone transactions which would have taken place at the lower competitive price. These lost sales are known as deadweight because they do not create surplus for the buyer or seller; the surplus benefit that would have gone to consumers simply disappears, and is not compensated by any gain to the monopolist. In pharmaceutical markets, this deadweight loss is often referred to as the problem of access: the poor may not purchase a drug product because of its high price, and as a result are untreated. If the drug price had been lower, they would have been able to afford the drug and would have been treated. Thus, for drugs those are essential to life and health, the term deadweight loss created by patented drug pricing takes on added significance (Flynn, 2008). Thus, Indian Pharmaceutical Industries need to spend more on R&D to develop patentable substances in order to compete with MNCs and also to lower the drug prices in India (Maskus, 2001).

Research & Development a challenging prospect for IPI

Indias comparative advantages lie in its cost competitiveness; its reverse engineering experience, its large pool of less expensive English-speaking scientific and engineering workers, and its well-developed chemical industry infrastructure (Saranga, 2005). After 2005, implementation of patent regime, Indias Pharmaceuticals Industry recognized that they could not survive as global players (competing MNCs) without significant R&D capabilities. Thus, the leading Indian pharmaceutical majors are altering their business strategies by placing greater focus on R&D and the discovery of new chemical entities. Traditionally, the vast majority of Indias pharmaceutical R&D spending was concentrated on reverse engineering and the adaptation of patented foreign drugs to the Indian market. Most of the industrys funding went to research rather than to new drug discovery and development. Low levels of industry productivity and the relatively small size of Indias pharmaceutical companies have limited funding for R&D as they dedicated only less than 2 percent of their annual turnover to R&D compare to 15%-20% Western innovator companies (Greene, 2007). Thus, the new patent regime will enable the development of innovative new drugs, which will increase profitability for MNCs. This will force Indian Pharmaceutical players to focus on R&D, which, for those who can afford to do so, will have longterm beneficial effects, lowering the drug prices (KPMG, 2006). Thus, Indian Pharmaceutical Industries need to increase there research & development to produce innovative drugs which can lower the drug prices in India as shown in below graph.

Impact of R&D on IPI Creates forces leading to decrease in prices

Indian pharmaceutical industries should develop basic level of process R&D capabilities through imitative R&D and as a response to change in patent law these firms should also move towards the development of advance level process and product R&D capabilities to compete with MNCs. Concluding Remarks The Indian pharmaceutical firms should respond well to the challenge of a strict intellectual property rights (IPR) regime by increasing their R&D spending and, simultaneously, must improve technological capabilities to produce innovative and patentable drugs. This indeed will lower the drug prices and can compete with the MNCs in the globalization of pharmaceuticals R&D. Thus, the innovative firms in India should explore areas for complementary growth to obtain a slice of the market for R&D outsourcing (Thomas, 2008). Also, the goals set out in the Indian government's draft National Pharmaceuticals Policy for 2006 in terms of domestic market development are ambitious, and will require a positive pricing environment if the country's 1 billion people are to be able to access the life-saving and innovative medicines they need. Again, partnership is key: industry leaders are keen to work with government on issues of affordability and point out that price controls will do nothing to increase access to new and effective treatments. (KPMG, 2006). Thus, Indian Pharmaceutical Industries need proper environment for R&D in terms of skilled labour, subsidies, government support, etc to succeed in the current WTO regime. To conclude from the perspectives of above observations, it can be argued that Indian Pharmaceutical Industry can challenge the Patent Act, 2005 by strongly increasing their R&D in order to provide the cheaper drugs to poor and also to compete with the MNCs in the globalization of research in Pharmaceuticals.