Retail Business Environment

Pharmaceutical Sector

Ilma Israr
PGDM-Retail(08)
 Contents

1. Size of the Pharmaceutical Industry

2. Structure of the Sector
3. Major Players in Pharmaceutical Industry
4. Top Five Players in Pharmaceutical Industry
5. Methods of Retail in Pharmaceutical Industry
6. Distribution Channels in Pharmaceutical Industry
7. Online Pharmacy
8. Level of Integration in Pharmaceutical Industry
9. Legal Requirement & Taxation in Pharmaceutical Sector
10. FDI in Pharmaceutical Sector:
11. Problems afflicting Pharmaceutical Industry
12. Investments and Environmental changes in Pharmaceutical
Sector
13. Analysing Pharmaceutical Sector using Porter’s Five Forces

14.Growth of Pharmaceutical Sector and its CSF

15. Bibliography
Size of the Pharmaceutical Industry
The Indian Pharmaceutical industry has become the third largest in world in terms of volume and
ranks 14th in terms of value at over Rs 1 trillion. It has grown from a humble Rs 1,500-crore (Rs
15-billion) turnover in 1980 to approximately Rs 1105.11 billion in 2010-11.The pharmaceuticals
industry generally grows at about 1.5-1.6 times the Gross Domestic Product growth, The domestic
pharmaceuticals market in India increases at a compound annual growth rate of 9.9 per cent until
2010 and subsequently at 9.5 per cent till the year 2015.
The Indian pharmaceuticals market is expected to reach US$ 55 billion in 2020, according to a
report ‘India Pharma 2020: Propelling access and acceptance, realising true potential’ by
McKinsey & Company. The report states that the market has the further potential to reach US$ 70
billion by 2020 in an aggressive growth scenario. Moreover, according to an Ernst & Young and
industry body study, the increasing population of the higher-income group in the country, will
open a potential US$ 8 billion market for multinational companies selling costly drugs by 2015.
The pharmaceutical industry in India is among the most highly organized sectors. This industry
plays an important role in promoting and sustaining development in the field of global medicine.
Due to the presence of low cost manufacturing facilities, educated and skilled manpower and
cheap labour force among others, the industry is set to scale new heights in the fields of
production, development, manufacturing and research.
Structure of the Sector:
Pharmaceutical retailing is perhaps the next big thing in the retail sector in India. Although the industry still
remains largely unorganized with corporate and international brands making an entry into the industry in a
big way, pharmaceutical retailing is poised to become one of the major organized sectors in the country in
the coming years. The organized pharmaceuticals retail constitutes Rs4000 crore in 2010 and is expected
to grow at a rate of 20% as the pharmaceuticals industry is expected to grow in leaps and bounds due to
the organized players entry into the market combined with the readiness of consumers to invest in their
health. There are more than 3,500 organised retail pharmacy outlets in India in 2010. This is expected to
grow nearly three times to 10,000 outlets by end of next year, indicated in the report titled ‘India Retail
Research 2009´ .
Advantages to Organised Pharmaceutical Retail Chains:
1. The large players in pharmaceuticals retail sector buy Raw material in bulk quantity, process in
bulk quantity, package in big lots, use high technology in processing, packaging and transporting, so
they get the finished drugs at the lowest possible prices.
2. These large players use modern, latest and automated machinery in manufacturing Drugs, in
Inventory management, supply chain management, use of latest display tools, free samples to
Doctors and hospitals etc.
3. Retailing their own pharmaceuticals brands/generic brands along with competitors brands helps in
promoting their own brands/generic brands which can fetch more profits using push strategy
through doctors and hospitals by providing free samples, sponsoring free treatment to patients. With
the optimum use of available resources and technology, some price advantages can be passed over
to patient.
4. According to the latest study it was found that up to 10% discount is offered by retail pharmacy
chains like Apollo, Hetero, Subhiksha and Med Plus to various customers.

Disadvantages to Unorganized Retailers:

1. These small stores buy in small quantities from drug distributors with higher prices with no schemes
thereby it reduces profit margins.
2. These small retail medical shops operate from small lanes and by-lanes where it could cater to
limited range of patients who belong to those surroundings only. This results in lower turnover of
sales resulting in lower profit.
3. These small medical shops generally run on low man power or sometimes run as a family business
and therefore cannot effort to hire persons for home delivery of medicines.
4. New formulas are frequently launched into the market and doctors always want to try new formulas
on patients thereby sales of old formulas are slowed down which causes huge quantity of expires of
medicines which in turn result in heavy losses.
5. Small medical shops buy in smaller quantities and cannot avail the advantage of various schemes
on quantity purchases, there by their unit purchase prices are higher and cannot offer discount to
patients/ customers.
Major Players in Pharmaceutical Industry
Some of the leading Indian players by sales (US$ million)

Company name Sales in US$ million Year End

Cipla 1033.46 March 2009
Ranbaxy Lab 951.03 December 2009
Dr Reddy’s Labs 866.44 March 2009
Sun Pharma 805.51 March 2009
LupinLtd 603.99 March 2009
Aurobindo Pharma 582.27 March 2009
Piramal Health 483.10 March 2009
Cadila Health 354.02 March 2009
Matrix Labs 310.06 March 2009
Wockhardt 309.68 December 2009

.
Top Five Players in Pharmaceutical Industry:

Ranbaxy:

Ranbaxy is among the predominant pharmaceutical companies in India and was founded in
1961.Ranbaxy is a research based pharmaceuticals giant and became a public limited company in
1973. Ranbaxy was recently ranked among the top 10 international pharmaceutical companies in
the world have presence across 49 countries. Ranbaxy is also reputed for its 11 state-of-the-art
manufacturing facilities in countries like China,India, Brazil, South Africa, and Nigeria. The company
has also won several awards and recognitions for its pioneering initiatives in the developing markets
of the world. Ranbaxy is also a member of the Indian Pharmaceutical Alliance and Organization of
Pharmaceutical Producers of India. In the present scenario Ranbaxy commands more than 5% share
of the Indian pharmaceutical market. Ranbaxy’s product portfolio is diverse and includes drugs that
cater to nutrition, infectious diseases, gastro-enteritis, pain management, cardiovascular ailments,
dermatology, and central nervous system related ailments.
Ranbaxy’s operations in India are designed under as many as 9 SBUs which take care of the various
categories of medicines and drugs that are manufactured by Ranbaxy. The company is especially
well-known for having the highest research and development (R&D) budget among pharmaceuticals
companies in the world which is as high as US$ 100 million.
Ranbaxy India operations are handled by 2,500 employees and the company’s market share in India
is worth around US$6 billion.
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Laboratories:

Though set up in 1935, it was only in 1937 that Cipla began manufacturing and marketing its
pharmaceutical products. Today, the company has its facilities spread across several locations across India
such as Mumbai, Goa and Bangalore.
Apart from its strong presence in the Indian market, Cipla also has an extensive export market and
regularly exports to more than 150 countries in regions such as North America, South American, Asia,
Europe, Middle East, Australia, and Africa. For the year ended 31st March, 2007 Cipla’s exports were worth
approximately Rs. 17,500 million. Cipla is also considerably well-known for its technological innovation and
processes for which the company received know-how loyalties to the tune of Rs. 750 million during 2006-
07.
Sun Pharmaceuticals:

Cipla

3.
 .

Aurobindo Pharma

Aurobindo Pharma, an India-based private pharmaceutical company having presence around the world.
Aurobindo
Pharma was set up in the year 1986 and started its operations in 1988-89 in Pondicherry, India. Now, the
company is headquartered at Hyderabad, India.
Aurobindo Pharma is one of the most respected generic pharmaceuticals and active pharmaceutical
ingredients (API) manufacturing company of the world. Aurobindo Pharma operates in over 100 countries
across the world. Further, the pharmaceutical major markets over 180 APIs and 250 formulations
throughout these destinations. This Indian pharmaceutical major has filed over 110 DMFs and 90 ANDAs
for the USA market. So far, Aurobindo has received 45 ANDA approvals (both final and tentative) from
USA alone.
Aurobindo Pharma products cover segments like –
• Antibiotics,
• Anti-Retro Virals
• CVS
• CNS
• Gastroenterologicals
• Anti-Allergics
Methods of Retail in Pharmaceutical Industry:
The healthcare sector in India is getting much more sophisticated than it was
earlier. The services side of the healthcare industry is growing quite substantially
and rapidly. In a sense, pharmaceuticals retailing is a proxy for the healthcare
sector. Therefore, it will grow accordingly. Also, the disease profile in India is
changing from infectious diseases to lifestyle diseases, where you require much
more intensive care. This will entail medication on an ongoing basis, which will in
turn make prescription-based medicine mandatory. In the past if you look at the
shelf space, in a pharmacy store, OTC drugs that were priced at Rs 10-20 used
significant space. Now you need tablets and medicines that are much more
expensive for lifestyle diseases. Sales of higher value products are hence, driving
the growth in pharmaceuticals retail. Moreover, life expectancy has increased
considerably resulting in an increase in drug consumption. Furthermore, there is
significant innovation in the industry. More new drugs are coming for many
discrete diseases that were not looked at so far. Overall expenses on drugs have
amplified per household as a result of growing health awareness.

Retail pharmaceutical sector in India is highly fragmented, and the unorganized

channel of pharmaceuticals currently dominates this space commanding over
97% of the total market share The total retail pharmacy market has been
growing at an average of 18% per annum over the last few years, and is
anticipated to grow by even higher numbers in the future. Organized retail
pharmacy however, as a subset, has been growing at an average of 25%, and is
expected to grow between 35 – 40% in this next decade .The sector currently
has nearly 15 layers serving through an aggregate of 2000 stores across the
country Both, the number of players and the total stores in operations shall
increase with the increase in investments in this sector Analyst’s consensus
suggests the retail pharmaceuticals sector would witness investments in excess
of USD one billion over the next few years .High margins of 25-35% make the
retail pharmacy a very lucrative business in India With increasing consciousness
and disposable incomes, the organized pharmacy business shall experience
plenty of opportunities for growth.

Major Players in Retail Pharmaceutical:

Some of the retail majors who have successfully ventured in this segment are
Apollo Pharmacies, Himalaya Drugs, The Medicine Shoppe, Trust Chemists and
Druggists, Guardian Lifecare, Manipal Cure & Care, CRS Health, 98.4 degrees etc.

APOLLO PHARMACY:
A Division of the Apollo Hospitals enterprises – Asia’s largest healthcare Group
India’s first and largest branded pharmacy network Over 1000 stores serving 24
hours daily Operating in 17 states across India Provides genuine medicines from
leading manufacturers Pharmacy outlets manned by qualified and
trained pharmacist.Value added services include personalized pharmacy –
refilling services ,Free health camps, Toll free Helpline services, Free health
insurance on purchases over INR 6000 in a year Health newsletters 24 hours
store operations .

GUARDIAN PHARMACY :
A Six year old retail chain in India offering Pharmacy, Wellness, Health and
Beauty products Currently serves through 230 outlets Aims to have 400
operational stores by 2012 Has presence in 26 cities, spread across North, East
and West India Stores have an international look and feel Stores managed by
professionally trained pharmacist. Advisory services on drugs and their usage
Maintain record of customer’s medicine requirements Guardian Xtravalu cards:
Help earn points every time a customer shops Monthly health magazine:
Guardian Health Chronicle Senior citizen discounts: 10% discount on medicines
and an additional 1% discount on prescription medicines .Free health Check up
camps. Community service: Provide cut strips of medicines to NGOs. Tie ups with
individuals Corporates retailers.Store format is High Street stores Malls
Neighborhood stores .

HEALTH & GLOW :

A Joint venture in India between Dairy Farm International holdings ltd of Hong
Kong and Arko ltd Headquartered in Bangalore Largest
organized health and wellness player in South India currently has 65 operational
stores across four cities Bangalore, Hyderabad, Chennai and Mumbai Aims to
have over 200 stores operational in the near future . It has Drug advisory
services of International ambience with well qualified & trained staff for specialist
care .Home Delivery Gift coupons and tie ups with individuals Corporate Retailers
. Store format is Express stores Concept stores Malls Hypermarkets
Supermarkets.

RELIGARE WELLNESS:
A Part of the Religare group, which amongst other business interests carries the
‘Fortis’ brand Pioneering endeavor within India’s healthcare industry putting
health solutions on the retail map. Incorporates setting up of a Pan India World
Class Retail Network of health stores that would provide comprehensive solutions
under one roof Hopes to have a chain of 1000 complete health stores all across
India covering 400 cities by 2012 Stores managed by professionally trained
employees Value added services include Supplement advisory Ayurveda &
Homeopathy advisory Customer loyalty programs: points on purchase Free Home
delivery and 24 hours operational stores.
MEDPLUS
Established in the year 2006 with the aim of eliminating the risk of consumers
purchasing fake drugs Presently serves through over 800 pharmacy stores in five
states covering 98 cities and towns in Andhra Pradesh, Maharashtra, West
Bengal, Karnataka, and Tamil Nadu Owns India’s first exclusive hospital
pharmacy chain – RiteCure Launched state-of-the-art diagnostic lab services
which can aid in the prevention, detection, or management of a wide range of
illnesses Guided by three themes - quality, convenience, and low prices Market
share.

HIMALAYA HEALTHCARE
A Part of the Himalaya drug company that was founded in 1930 Specializes in
extending only Ayurvedic products to consumers Serving across 71 countries
Converted Ayurveda’s herbal tradition into a complete range of proprietary
formulations dedicated to healthy living and longevity .

Distribution Channels in Pharmaceutical Industry

Drug distribution in India has witnessed a paradigm shift. Before 1990,
pharmaceutical companies used a different distribution system, in which they
established their own depots and warehouses that now have been replaced by
clearing and forwarding agents (CFAs). These organizations are part of the
distribution chain, and are primarily responsible for maintaining storage (stock)
of the company's products and forwarding SKUs to the stockist on request. Most
companies keep one to three CFAs in each Indian state. On an average, a
company may work with a total of 25–35 CFAs. Unlike a CFA that can handle the
stock of one company, a stockist (a regional distributor) can simultaneously
handle more than one company (usually, 5–15 depending on the city area), and
may go up to even 30–50 different manufacturers.
Figure 1 show how a manufactured product passes through the company-owned
central warehouse, which supplies it to the CFA or super stockist. From the CFA
the stocks are supplied either to the stockist, substockist, or hospitals. The retail
pharmacy obtains products from the stockist or substockist through whom it
finally reaches the consumers (patients). Certain small manufacturers directly
supply the drugs to the super stockist.The prices and the margins of drugs for
the wholesaler and retailers are largely decided by the National Pharmaceutical
Pricing Authority (NPPA), which varies depending on whether the active
constituent of the product is a scheduled drug or a nonscheduled drug.
Scheduled drugs are price-controlled whereas nonscheduled drugs are not. The
NPPA is an organization of the government of India established to fix or revise
prices of controlled bulk drugs and formulations. Companies must keep drug
prices affordable to the general public. To keep medicines within reach of the
poor population, the government has covered 76 scheduled drugs.

Online Pharmacy:
Online pharmacies have been a preferred channel of purchasing medicines in
most European countries but India is still taking baby steps in this retail mode.
However, it comes as no surprise that online pharmacy players are looking to
expand their presence in the Indian market, as Indian consumers already have
access to much cheaper generic medicines available here.
In India a limited numbers of online pharmacies are operational through different
channels. For e.g. Apollo Pharmacy has installed fax machines in clinics of
doctors, from where prescriptions are faxed to Apollo stores, which then deliver
the medicines to customers at the desired location. Lifeken (Religare Wellness)
has a feature to post the requirement of drugs on the website, based on which
medicines are dispensed at the desired location. Typical online pharmacies such
as in.keegy.com, realpharma.com, chennaiclassic.com, worldwide online
pharmacy. B-2-B online pharmacies which cater to other online pharmacies
abroad make up the third channel.
Online pharmacies could have been a welcome change in the drug distribution
system however; invasion of this system by illegal operators has put safety of
the consumer/purchaser at stake. The consumer is handicapped in a sense that
he has no source to check the reliability of his service provider. In recent times
there have been a number of changes to the online pharmacy scene which has
been complicated by the large number of illegal sites that have mushroomed.
Many of them remain functional for just a few weeks to a few months and then
are shut down and restarted under different names.
Many online pharmacies do not have adequate checks in place and end up
selling harmful prescription drugs to underage people. Some pharmacies actually
promote themselves as 'no prescription required' pharmacies and induce
consumers to buy counterfeit or spurious medicines. Due to the poor regulatory
framework and inadequate implementation of rules in India, nearly 20 percent of
the global burden of illegal online pharmacies is based in India. Unfortunately, as
of now, in India, the drawbacks of online pharmacies overshadow their benefits.
The lack of separate regulations is a serious lacuna.
If contained within regulations and laws, online pharmacy will prove a very good
concept .In fact if regulators are vigilant and if adequate checks are in place,
legal full service online pharmacies that operate within domestic markets can
help ensure that patients refill their prescriptions and hence improve compliance
rates and will serve patients and customer in the right sense.
Level of Intergration in Pharmaceutical Industry :
In pharmaceuticals industry the backward integration covers research and
development (R and D) and Active Pharmaceutical Ingredients (API) part while
the forward integration includes logistic support, marketing and country brand.
Companies like Wockhardt and Ranbaxy are e.g. where pharmaceuticals and
healthcare are converged.It is a forward integration from the pharmaceuticals
company's side and a backward integration from the hospital's side. In
Wockhardt most of the drug requirement is met by the pharma arm, which is
given the first prescription. Similar is the case of Ranbaxy and Fortis
Hospitals.Also the two coming close will provide the pharmaceuticals companies
with a ready database of patients to conduct clinical trials, a research site, and
access to a vast population, hence an expansion strategy for them.
There are three things which can be achieved through this, one is the research
and development.Second they will have access to huge clinical data and the
other is clinical research and third is forward integration through which they will
be able to sell all your medication.
Legal Requirement & Taxation in Pharmaceutical
Sector:
Customs duty consists of Basic Customs Duty (BCD)-12.5 percent, additional
duty of customs under section 3(1) ('CVD')-16.32 percent and additional duty of
customs under section 3(5) (ADC)-four percent. Further, education cess at two
percentages is also levied on aggregate of customs duty. The above aggregates
to an effective rate of customs duty of 36.74 percent.
Drugs and medicines are subject to excise duty on the basis of the Maximum
Retail Price (MRP) printed on the package with an abatement of 40 percent of
MRP.
VAT/CST is levied on sale of movable goods in India. Drugs and medicines are
taxed at four percent except Assam where the rate is six percent. Although, it
was expected that VAT would bring in uniformity in classification of products,
descriptions in the tariff schedule varies from state to state. For example,
medical devices are taxed at 12.5 percent in three states, whereas in all other
states, the tax rate is four percent.
CST rate is four percent against furnishing of prescribed declarations. Otherwise,
the rate of tax is 10 percent or the VAT rate prevailing in the originating state,
whichever is higher.

The multistage taxation in the pharmaceutical industry i.e. Customs duty on

imports, Central excise duty on manufacture, Central Sales Tax (CST) / Value
Added Tax (VAT) on sale of goods, Service tax on provision of services and levies
such as entry tax, octroi, cess by the State or local municipal
corporations/municipalities is one of the key stumbling block in its progress. A
tax law, devoid of multiple taxes and manifold compliance requirements and also
enabling seamless credit mechanism, has been the dream of the industry for
long.
Introduction of GST (Goods and Services Tax) will be positive step and if
implemented in the right spirit could result in reduction in transaction cost. The
most visible and immediate impact of GST appears to be the proposed
discontinuance of (Central Sales Tax (CST) levy. As on date, CST is a cost to
pharmaceutical manufacturers whenever they procure raw materials from
outside their state and if sale is on inter-state basis. Though, over the last couple
of years CST rates have reduced from four to two percent, the said levy
continues to be a cost to the manufacturers and traders dealing in interstate
transactions. The phasing out of CST with the advent of GST could do away with
the perennial issue of credit leakage on this front.
Following are the laws governing the pharmaceutical sector:
1. The Drugs and Cosmetics Act 1940:
The object of the Act is to regulate the import, manufacture, distribution
and sale of drugs. Under the provisions of this Act, the Central
Government appoints the Drugs Technical Advisory Board to advise the
Central Government and the State Governments on technical matters
arising out of the administration of this Act. The board can constitute
subcommittees for the consideration of a particular matter.

2. The Narcotic Drugs and Psychotropic Substances Act, 1985:

This is an Act to consolidate and amend the law relating to Narcotic Drugs,
to make stringent provisions for the control and regulation of operations
relating to Narcotic Drugs and Psychotropic Substances and for matters
connected therewith.

3. The Pharmacy Act 1948:

The Pharmacy Act was passed in 1948 and was amended in 1959, 1976
and 1984.The aim of this law is to regulate the profession of Pharmacy in
India.Under the provisions of this act the Central Government constitutes
a Central Pharmacy Council of India

FDI in Pharmaceutical Sector:

The government of India has allowed foreign direct investment up to 100%
through the automatic route in the drugs and pharmaceuticals industry of the
country, on the condition, that the activity should not fall into the categories that
require licensing. The increase in FDI Inflows to Drugs and Pharmaceuticals
industry in India has helped in the expansion, growth, and development of the
industry. This in its turn has led to the improvement in the quality of the
products from the drugs and pharmaceuticals industry.
However recently the commerce ministry has sought a review of foreign direct
investment policy in the pharmaceutical sector, limiting the amount of FDI into
the sector to 49 percent in the light of recent takeovers of domestic companies
by multinationals.Acquisition of Indian pharmaceutical companies by
multinationals could orient them away from the Indian market, thus reducing the
domestic availability of drugs produced by them.Such takeovers could weaken
competition resulting in higher prices of domestic drugs and may lead to just a
clutch of companies dictating prices of drugs which are critical for addressing
public health concerns.
The concept of organised pharmaceutical retail started to make its presence
felt in India only during the last few years. Even though FDI in the
pharmaceutical retail trade segment is banned in India, the organised retail
chains are bringing in international best practices into their operations. Although,
international pharmacy chains have still not established a major presence in the
country, the Indian Government has taken tentative steps towards achieving the
ultimate goal of allowing 100 percent FDI in retailing by permitting single-brand
stores to set up shop here, paving the way for entry.
The absence of FDI has also resulted in organised retail operations of large local
business houses to expand, and MNCs are finding backdoor entries to the
country by forming alliances with local business houses. So through such
alliances locally-owned retail chains are rapidly expanding throughout the length
and breadth of the country and this has enabled R&D in this field.
There may be various reasons for restricting FDI in this segment, which also
includes limited investment capabilities and stringent regulatory environment. A
great deal of concern has been expressed at various forums that globalisation
will wipe out traditional outlets. This concern is more of an emotional outburst
rather than a reality. Look at the vastness of the country in terms of geography
and population. Traditional outlets will continue, but such outlets in order to
survive must change for the better.
.

Problems afflicting Pharmaceutical Industry:

 • The treat of counterfeit drugs entering the marketplace is greater than
ever before and so is the risk of pilferage.
• Clinical effectiveness of medical reps is a challenge and so are qualified
professionals.
• Domestic market – price controls on several drugs, drug prices in India are
already amongst the lowest in the world
• Continuous rise in R&D expenditure puts pressure on the industry to
increase productivity.
• Dominating generic drugs: Indian companies are more focused on
generics whereas branded drugs market is yet to be fully captured
• Strong pricing competition among local manufacturers has led to low
margins .
• Problems related to frequent power cuts and a lack of proper transport
infrastructure will slow the growth of the pharmaceutical industry, while
limited funding from financial institutions, venture capitalists and the
government may restrict the development of the sector.
• High clinical development costs coupled with declining drug discovery
success rates are causing productivity levels to fall in the global
pharmaceuticals industry.
• The imminent patent expiry of several major blockbuster drugs and the
related rise of cheaper generic alternatives is further exacerbating the
situation.

Investments and Environmental changes in

Pharmaceutical Sector:
 • The healthcare sector has attracted growing investor support in 2010 with
nearly a tenth of the total private equity funding going to this sector.The
pharmaceutical, healthcare and biotech sector witnessed five merger and
acquisition transactions (M&A) worth US$ 250 million recently.
• The drugs and pharmaceuticals sector has attracted FDI worth US$
1,825.43 million between
2000 and September 2010.The Government plans to set up a US$ 639.56
million venture capital (VC) fund to give a boost to drug discovery and
strengthen the pharmaceutical infrastructure.
• Private equity major Sequoia Capital has made its first investment in the
pharmaceutical sector in the country by investing US$ 15.86 million into
Celon Labs, which will use the funds to double its manufacturing facility.
• Swiss Pharma major Lonza AG, would invest around US$ 55.33 million
through its Indian subsidiary in a phased manner in Genome Valley
project, Hyderabad.
• Hyderabad Menzies Air Cargo Private Limited, a joint venture between
GMR Hyderabad
International Airport Limited (GHIAL) and Menzies Aviation, has launched
India's first
airport-based pharmaceutical zone, dedicated pharmaceutical cargo
storage and handling
facility, at Hyderabad. The project involved an investment of US$ 1.22
million.
Belgium based Helvoet Pharma, part of the Daetwyler Group is setting up
its first greenfield production facility.
Analysing Pharmaceutical Sector using Porter’s
Five Forces:

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
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 is a stable market and its growth rate
generally tracks the economic growth of the country.

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 favouring imitators. Consequently, product differentiation is not the
driver, cost competitiveness is.

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 pharmaceutical 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.

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 very
huge.

Threat of substitutes:

Three major types of substitutes influence the ethical pharmaceutical industry:

alternative therapies, the health consciousness of the customer and
generics(substitute for original brands).
Whatever happens, demand for pharmaceutical products continues and the
industry thrives. However, in recent times, the advances made in the field of
biotechnology, can prove to be a threat to the synthetic pharmaceutical
industry.
Growth of Pharmaceutical Sector and its CSF:
Domestic pharmaceutical market is likely to reach US$ 20 billion by 2015.The
key factors that will propel the growth of the market are changing population
dynamics, high disease prevalence, increased access to health care, and
increased affordability. These drivers have been explained below.
Change in Demographics and disease pattern:
The age structure of the Indian population has been changing favourably for the
growth of the pharmaceutical industry. In 2001, the share of the population
between the age group of 15-64 years was approximately 62 percent. The figure
is likely to be approximately 66 percent in 2011. This is the age-group that is
more prone to diseases and has greater affordability (as it is the working
population).
Disease profile of the market is changing from acute illnesses to chronic
ailments. As per WHO, India will account for 60 percent of world's cardiac
patients by 2010. Rising income levels and changing lifestyle patterns are
causing a shift from infectious diseases to lifestyle related diseases and the
prevalence of lifestyle diseases is rapidly increasing. Cardiovascular disorders,
asthma, diabetes and cancer have become the top segments in lifestyle diseases
in India and are expected to represent nearly 50 percent of total healthcare
expenditure.
Increased access to healthcare:
Thanks to various public and private initiatives, the accessibility of healthcare
has increased considerably in the rural areas. Central as well as state
governments have designed and deployed several health related initiatives,
which have taken health benefits at the doorstep of people residing in far-flung
areas. The initiatives have also led to the increase in the number of healthcare
facilities in rural areas. Increased government spending on infrastructure (roads,
telecom etc) has encouraged pharmaceutical companies to take their offerings
to the distant interiors of India.
Increased affordability:
Increasing population and rise in personal disposable income indicates significant
potential for healthcare services in India.Over the past 10 years, the proportion
of households in lower middle, middle and high income groups has risen
significantly and currently forms over 75 percent of total households. The
growing affluence of the 300 million strong middle income consumers is creating
greater demand for healthcare as rising purchasing power is causing a shift in
needs from basic needs to healthcare and education related needs.Moreover,
due to the government sponsored health insurance schemes like Rashtriya
Swasthya Bima Yojana and Rajiv Arogyasri, the financially backward and Below
Poverty Line (BPL) families now have access to healthcare services and drugs.

Increase in revenues from services:

The revenues from the service segment are likely to increase rapidly due to the
increase in outsourcing of contract research and manufacturing services
(CRAMS) to India. The Indian clinical trials market is forecasted to grow at a
CAGR of approximately 30 percent over the next few years, at almost double the
global average. The contract manufacturing market in India is valued at $1.1
billion; and India's share of the global contract manufacturing market is likely to
increase from 2.8 percent in 2007 to 5.5 percent in 2010.
Changing mix of distribution channels
There are around 500,000 retail pharmacies in India and most pharmacies are
individual privately owned entities. The scenario is changing as the traditional
round-the-corner pharmacy stores are increasingly being replaced by large
corporate pharmacy chains like Apollo, Medplus, Medicine Shoppe, Health &
Glow etc. Most of the pharmacy chains have the backing of large corporate
houses and thus have the financial might and resources to play at the top level.
Most of the pharmacy chains have plans to increase their presence and reach in
2011.
Health insurance
The health insurance market is growing at an exceptional rate and it is the
fastest growing segment in the non-life insurance industry in India. Several
factors like growing awareness, higher disposable income, government
initiatives, rising healthcare costs are driving the growth of health insurance in
India.In the future the health insurance market is likely to get impetus through
the entrance of foreign players (health insurers). Industry experts suggest that
there are around 50 health insurers that are contemplating entry in the Indian
market. The entrance of foreign players will increase the competition and should
result in increased penetration. Higher penetration of health insurance will be
favourable for the pharmaceutical industry.
Niche Markets:
Specialty care markets (Eg: oncology, immunology) are likely to become more
attractive since they have the greatest unmet needs and R&D efforts,
particularly through the biotech stream, are likely to be more productive in these
areas
India’s pharmaceutical market has grown reasonable pace during the
past decade. The market has the potential to transform itself over the next 10
years and play a crucial role in countering the growth burden of disease, this
depend on three vital conditions. Firstly that India maintains a relatively high
rate of growth of 7 to 8 percent. Secondly the public and private sectors continue
to invest in the development of healthcare-related infrastructure and creating a
thriving labour market and lastly the international pharmaceutical industry
finding great opportunities in India. Thus the process of consolidation, which has
become a generalized phenomenon in the world pharmaceutical industry,
continue increasing in India.

Bibliography
• http://www.mckinsey.com
• http://www.cci.in/
• www.expresspharmaonline.com
• http://www.slideshare.net/
• http://knowledge/webopac/
• http://site.securities.com/ch.html?pc=IN
• http://www.ey.com/
• Retail BIZ January 2011

Retailers Starting Pharmacy Chains