SWOT N PORTER 5 forces - indian pahrma

December 28, 2018 | Author: bhupendraa | Category: Pharmaceutical Drug, Pharmaceutical Industry, Clinical Trial, Generic Drug, Economic Growth
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Project-Report SWOT Analysis & Porter’s five force model analysis of  The Indian pharmaceutical industry

Introduction ______________________________  “The “The Indi Indian an phar pharma mace ceut utic ical al indu indust stry ry is a succ succes ess s stor story y prov provid idin ing g employment employment for millions millions and ensuring that essential drugs at affordable affordable  prices are available to the vast population of this sub-continent.”  sub-continent.” 

- Richard Gerster

The Indian Pharmaceutical Industry today is in the front rank of India’s science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. A highly organized sector, the Indian Pharma Industry is estimated to be worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the third world, in terms of technology, quality and range of medicines manufactured. From simple simple headache headache pills pills to sophis sophistic ticate ated d antibi antibioti otics cs and complex complex cardia cardiacc compound compounds, s, almost

every

type

of

medicine

is

now

made

indigenously.

Play Playin ing g a key role role in prom promot otin ing g and sust sustai aini ning ng devel developm opmen entt in the the vital vital fiel field d of  medicines, Indian boasts ts of qual qualit ity y prod produce ucers rs and and many many units units Indian Pharma Pharma Industr Industry y boas approved by regulatory authorities in USA and UK. International companies associated with this sector have stimulate stimulated, d, assisted assisted and spearheaded spearheaded this dynam d ynamic ic development in the past 53 years and helped to put India on the pharmaceutical map of the world.

The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registered units. It has expanded drastically in the last two decades. The leading 250 pharmaceutical companies control 70% of the market with market leader holding nearly 7% of the market shar share. e. It is an extre extreme mely ly frag fragme ment nted ed mark market et with with seve severe re pric pricee compe competi titi tion on and government

price

control.

The pharmaceutical industry in India meets around 70% of the country's demand for bulk  drugs, drug intermediat intermediates, es, pharmaceutic pharmaceutical al formulations formulations,, chemicals, chemicals, tablets, tablets, capsules, capsules, orals and injectibles. injectibles. There are about 250 large large units and about 8000 Small Scale Units, which form the core of the pharmaceutical industry in India (including 5 Central Public Sector Units). These units produce the complete range of pharmaceutical formulations, i.e. i.e.,, medic medicin ines es ready ready for for consu consump mpti tion on by patie patient ntss and about about 350 350 bulk bulk drug drugs, s, i.e. i.e.,, chemi chemica cals ls havin having g ther therap apeut eutic ic valu valuee and used used for for prod product uctio ion n of pharm pharmac aceu euti tical cal formulations.

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Following the de-licensing of the pharmaceutical industry, industry, industrial licensing for most of  the drugs and pharmaceutical products has been done away with. Manufacturers are free to produce any drug duly approved by the Drug Control Authority. Technologically strong and totally self-reliant, the pharmaceutical industry in India has low costs of    produc productio tion, n, low R&D costs, costs, innovat innovative ive scient scientifi ificc manpowe manpowerr, streng strength th of national national laboratories and an increasing balance of trade. The Pharmaceutical Industry, with its rich scientific talents and research capabilities, supported by Intellectual Property Protection regime is well set to take on the international market. The industry has achieved global recognition as a "low cost producer of quality bulk  drugs and formulations".

The phenomenal progress made by the industry over the years is depicted in Tables 1 & 2. Table 1. TEMPORAL PROGRESS OF THE PHARMA INDUSTRY

Year

Status

1950s

Formulations

Mostly imported MNC dominance

1960s

Formulations

Domestic endeavour on imported bulk drugs

1970s

Formulations

Some imports.

Bulk drugs

Indigenous manufacture by domestic companies

Formulations

Marginal imports ( imports)

GROWTH OF PHARMA INDUSTRY (Rs. in Million)

Compound growth over 94INDICATORS

1965-66

1994-95

1997-98

3

95 (%)

Investment

1,400

12,000

18,400

53.3

30

1,400

2,200

57.0

1,500

79,350

1,20,680

52.0

180

15,180

26,230

72.8

Formulations

30

9,240

28,050

32.9

Bulk Drugs

30

12,607

21,730

58.0

2,000

-

8,250

-

R&D Expenditure

Formulations Turnover 

Exports

Bulk Drugs

 No. of manufacturers

Source: published reports

The year 1994-95 was the turning point for the industry due to the advent of the WTO. The industry has since sought to reorient itself from looking inwards to being a player in the global arena. The thrust on R&D by the Indian pharmaceutical industry is reflected by the increased proportion of R&D expenditure exp enditure to both investment and turnover.

Current Scenario_______________________________ Scenario_______________________________________  ________  At a time when IT and entertainment entertainment stocks are turning out to be unpredictabl unpredictablee options, options, there is a safe sector that is solidly growing at around 18 per cent annually. And it's time an investor knew more about pharmaceutical stocks, which have been touching record highs in the current groundswell of appreciation app reciation on Indian stock markets.

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What makes the above statement stronger is that foreign institutional investors (FIIs) are gleefully gleefully returning to the Indian Indian bourses bourses with their recessionrecession-batter battered ed funds. Even nonresident Indians are investing heavily. Also, what is heartening to them is the fact that foreign investment by multinationals in the pharmaceutical sector has grown. The Indian pharmaceutical industry is the worlds 13th largest in terms of value and the 4th largest in terms of volume. With over 60,000 brands in over 60 therapeutic categories, the total market size is approximately USD 5bn. It represents 1.6% of global size and is growing at approximately 8 - 9%. India has world class facilities and expertise in manufacturing with the largest number of US FDA approved manufacturing units in the world outside the US. Ancillary industries are well developed with support available locally. Quality bulk drugs at competitive prices are assured. In R&D, basic research and  biology skills are weak, a legacy of the lax patent regime where basic research was neglected. But process chemistry skills – honed over ov er decades of reverse-engineering – are strong. The Indian pharmaceutical industry accounts for at least 35% of bulk drug filings in the US. The Indian pharmaceutical industry today is riding high on exports led growth. Brand acquisition, mergers and alliances and increased focused on the generic and specialty segments are some of the other current moves. While there is recovery of some sort in the domestic market and on the R&D front, industry is faced with mixed fortunes. The market is expanding and price levels are rising. This coupled with increased personal spending, fuelled by economic growth and greater access to medical care is helping the market

expand.

India could not have stepped into the limelight at a more opportune time. From January 2005, the country became TRIPS compliant and formally recognized product patents. Patent protection in India is now on levels comparable to developed nations (caveat). For  any Inte Intell llect ectua uall Prope Propert rty y (IP) (IP) sens sensit itiv ivee indu indust stry ry India India is now now a dest destin inat atio ion n to be considered – both as a market and for manufacturing and research & development (R&D)

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Post-TRIPS, the Indian pharmaceutical landscape is set to change permanently. Local  pharmaceutical majors are moving up the international value chain, focusing on generics marketing in Europe and the US to complement their already-strong presence in bulk  active pharmaceutical ingredient (API) supply, and to capitalize on the record number of  drugs set to go off-patent over the next five years. To leverage their experience in manufacturing, local companies are scouting for contract manufac man ufactur turing ing oppo opportu rtunit nities ies.. And to lev levera erage ge the their ir coun country try-wi -wide de net networ work k of ski skille lled d marketing personnel they are actively seeking in-licensing and marketing opportunities. Local pharmaceutical majors do not have the finances to take a product to market. With annual sales of a billion - less than the R&D budgets of Big Pharma – they are outlicensing their NME innovation , and focusing on cheaper Abbreviated New Drug Applications (ANDAs). And to ‘learn and earn’, they are positioning themselves as willing partners in global pharmaceutical knowledge networks. With cost and process skills working to their advantage, local companies are also scouting to grab a share of the international R&D outsourcing market. Of all the opportunities for global pharmaceutical companies in this scenario, outsourcing the clinical development development phase of the R&D process appears the most promising. promising. With With a large population and world class medical skills, this outsourcing service segment is developing rapidly and with patent protection no longer a hurdle, a fresh look at this segment is warranted. Including India in the clinical development outsourcing network   presents a four fold benefit – it is the most immediate opportunity with the greatest  potential benefit in the shortest possible time addressing the most pressing issue today.

6

There has been an overall positive effect of India complying with TRIPS norms on  product patents. Even before January 2005, a number of MNCs have set up R&D centers in India. Around 25 contract research organizations (CROs) and almost all multinational  pharmaceuticals companies have started full-fledged clinical trials there in the last three years. This move accelerated from up to January 2005 and afterwards. To prepare for the opportunity, reputed institutions for training such as the Academy for Clinical Excellence and Institute of Clinical Research have been established over the last decade to train   physicians in ICH-GCP guidelines and ethical trial requirements. The Clinical Data Inte Interc rcha hang ngee Stan Standa dard rdss Cons Consor orti tium um (CDI (CDISC SC), ), USA, USA, an NPO NPO comm commit itte ted d to the the development of clinical research organizations’ standards the world over, is looking at setting up a chapter in India. The Indian Society for Clinical Research launched in August 2005, aims to bring world-class clinical research organizations in India together, advise the government on clinical trials issues and foster the highest levels of ethics in the industry. While there seems to be an exciting time ahead, a few challenges still remain. As in all cases of successful outsourcing, three things are necessary – commitment, compliance and quality. The right partner selection can eliminate the hazards of outsourcing and the   potential pitfalls of a well. If high ethical standards are adhered to, clinical research studies help the poor in the country by giving them free access to the newest drugs and

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the highest levels of health care that even the middle class cannot afford to have access to. This should always be remembered and portrayed.

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Critical analysis of the pharmaceutical industry_____________  1. The marketplac marketplacee for the pharmaceu pharmaceutical tical industr industry y is the the human body – but but only for  for  as long as the body hosts diseases. Thus, maintaining and expanding diseases is a  precondition for the growth g rowth of the pharmaceutical pha rmaceutical industry. industry. 2. A key strat strategy egy to accompl accomplish ish this this goal is the developm development ent of drugs drugs that merely merely mask mas k sy sympt mptoms oms whi while le avoi avoidin ding g the cur curing ing or eli elimin minati ation on of dis diseas eases. es. Thi Thiss explains why most prescription drugs marketed today have no proven efficacy and merely target symptoms. 3.

To fu furt rthe herr ex expan pand d th thei eirr pha pharm rmac aceu euti tical cal ma mark rket et,, th thee dr drug ug co comp mpan anie iess ar aree continuously looking for new for  new applications (indications) for the use of drugs they already market.

4. Anothe Anotherr key strategy strategy to expand expand pharmaceutic pharmaceutical al markets markets is to to cause new new diseases diseases with drugs. While merely masking symptoms short term, most of the prescription drugs taken by millions of patients today cause a multitude of new diseases as a result of their known long-term side effects. For example, all cholesterol-lowering drugs currently on the market are known to increase the risk of developing cancer   – but only after the patient has been taking the drug for several years. 5. Wh Whil ilee th thee pr prom omot otio ion n an and d ex expa pans nsio ion n of di dise seas ases es in incr crea ease se th thee ma mark rket et of th thee   pharm pharmace aceuti utical cal inv invest estmen mentt ind indust ustry ry - pre prevent vention ion and roo roott cau cause se tre treatme atment nt of  diseases disea ses decrease long-t long-term erm profi profitabil tability ity;; theref therefore, ore, they are avoided or even obstructed by this industry. industry. 6. Wors orstt of all all,, the eradica eradicatio tion n of dis diseas eases es is by its very very nature nature incompati incompatible ble with with and diam diametr etrica ically lly oppo opposed sed to the int intere erests sts of the phar pharmac maceut eutica icall inv invest estmen mentt industry. The eradication of diseases now considered as potential drug markets will destroy billions of investment dollars and eventually will eliminate this entire industry.

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SWOT Analysis________________________________________  It is often said that the pharmaceutical sector has no cyclical factor attached to it. Irrespective of whether the economy is in a downturn or in an upturn, the general belief is that demand for drugs is likely to grow steadily over the long-term. True in some sense. But are there there risks? risks? This perspe perspecti ctive ve of the Indian Indian pharmace pharmaceuti utical cal indust industry ry can be explained by carrying out a SWOT analysis (Strength, Weakness, O pportunity, Threat). Befor Beforee we star startt the the analy analysi siss lets lets look look a litt little le back back in the the indus industr try y’s last last six six years years  performance. The Industry is a largely fragmented and highly competitive with a large number of players having interest in it. The following chart shows the breakup of the growth of Indian pharmaceutical industry in last six years.

*Volume growth of existing products

The SWOT analysis of the industry basically reveals the position of the Indian pharma industry in respect to its internal and external environment.

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Strengths_____________________________________________  1  Large untapped market: Indian with a population of over a billion is a largely untapped market . In fact the   pene penetr trat atio ion n of mode modern rn medi medici cine ne is less less than than 30% 30% in Indi India. a. To put put thin things gs in  perspective, per capita expenditure on health care in India is US$ 93 while the same for countries like Brazil is US$ 453 and Malaysia US$189.

2 Growth of middle class: The  growth of middle class in the country has resulted in fast changing lifestyles in urban and to some extent rural centers. This opens a huge market for lifestyle drugs, which has a very low contribution in the Indian markets.

3 Competent workforce: Indian manufacturers are one of the lowest cost producers of drugs in the world. India has a pool of personnel with high managerial and technical competence as also skilled workforce. It has an educated work force and English is commonly used. Professional services

are

easily

available.

With a scalable labor force, Indian manufactures can produce drugs at 40% to 50% of  the cost to the rest of the world. In some cases, this cost is as low as 90%. 90 %.

4 Cost-effective ost-effective chemical synthesis: Indi Indian an

pharm pharmac aceu euti tical cal indus industr try y

poss posses esse sess

exce excell llen entt

chemi chemist stry ry and proc proces esss

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

11

The strength in chemistry skill help Indian companies to d evelop processes, which are cost effective.

5 Legal & Financial Framework: India has a 53 year old democracy and hence has a solid legal framework and strong financial markets. There is already an established international industry and business community.

6 Information&Technology: It has a good network of world-class educational institutions and established strengths in Information Technology.

7 Globalisation: The country is committed to a free market economy and globalization. Above all, it has has a 70 mill millio ion n midd middle le clas classs mark market et,, whic which h is cont contin inuo uous usly ly grow growin ing. g.

8 Consolidation: For the first time in many years, the international pharmaceutical industry is finding great opportunities in India. The process of consolidation, which has become a generalized phenomenon in the world pharmaceutical industry, has started taking place

in

India.

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Weaknesses___________________________________________  1 Price regulation: The Indian pharmaceutic pharmaceutical al companies companies are marred marred by the

price

regulation. regulation.

Over a period of time, this regulation has reduced the pricing ability of companies. The NPPA (National Pharma Pricing Authority), which is the authority to decide the various pricing parameters, sets prices of different drugs, which leads to lower   profitability for the companies. The companies, which are lowest cost producers, are at advantage advantage while those who cannot produce produce have either to stop production production or   bear losses.

2 Lack of product patent: Indian pharmaceutical sector has been marred by lack of product patent, which  prevents global pharmaceutical companies to introduce new drugs in the country and discourages innovation innova tion and drug discovery. discovery.

3 Least penetrated: Indian pharma market is one of the least penetrated in the world. However, growth has been slow to come by. As a result, Indian majors are relying on exports for growth. To put things in to perspective, India accounts for almost 16% of the world population while the total size of industry is just 1% of the global pharma industry.

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4 Highly fragmented: Due to very low barriers to entry, Indian pharma industry is highly fragmented with about 300 large manufacturing units and about 18,000 small units spread across the country. This makes Indian pharma market increasingly competitive. The industry witnesses price competition, which reduces the growth of the industry in value term. To put things in perspective, in the year 2003, the industry actually grew by 10.4% but due to price competition, the growth in value terms was 8.2% (prices actually declined by 2.2%).

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Opportunities_________________________________________  1 Innovation: The migration into a product patent based regime is likely to transform industry fortunes in the long term. The new patent product regime will bring with it new innovative drugs. This will increase the profitability of MNC pharma companies and will force domestic pharma companies to focus more on R&D. This migration could result in consolidation as well. Very Very small players may not be able to cope up with the challenging environment and may succumb to giants.

2 Drugs going off-patent : Large number of drugs going off-patent in Europe and in the US between 2005 to 2009 offers a big opportunity for the Indian companies to capture this market. Since generic drugs are commodities by nature, Indian producers have the competitive advantage, as they are the lowest cost producers of drugs in the world.

3 Impact of the Health Insurance Sector: Opening up of health insurance sector and the expected growth in per capita income are key growth drivers from a long-term perspective. This leads to the expansion of  healthcare industry of which pharma industry is an integral part.

4

Glob al outsourcing hub:

Being Being the lowest lowest cost cost produce producerr combine combined d with with FDA approved approved plants plants,, Indian Indian companies can become a global outsourcing hub for pharmaceutical products.

15

Threats_______________________________________________  1 Patents: There are certain certain concerns concerns over the patent regime regarding regarding its current current structure. structure. It might be possible that the new government may change certain provisions of the  patent act formulated by the preceding government.

2

Oth er low cost countries:

Threats from other low cost countries like China and Israel exist. However, on the quality front, India is better placed relative to China. So, differentiation in the contract manufacturing side may wane.

3

V  AT:

The shortshort-ter term m threat threat for the pharma pharma indust industry ry is the uncerta uncertaint inty y regard regarding ing the implementation of VAT. Though this is likely to have a negative impact in the shortterm, the implications over the long-term are positive for the industry.

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Michael Porter’s Five Forces (5f) Model_ Of Indian_________  Pharmaceutical Industry________________________________  Today's business environment is extremely competitive and in economics parlance where  perfect competition exists, the profits of the firms operating in that industry will become zero. However, this is not possible because, firstly no company is a price taker (i.e. no compa company ny will will opera operate te wher wheree prof profit itss are are zero) zero).. Secon Secondly dly,, they they stri strive ve to creat createe a competitive advantage to thrive in the competitive scenario. Michael Porter, considered to  be one of the foremost gurus' of management, developed the famous five-force model, which influences an industry. industry. Here, we apply this model for the Indian pharmaceutical industry. industry.

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Industry Competition___________________________________  Pharmaceutical industry is one of the most competitive industries in the country with as many as 10,000 different players fighting for the same pie. The rivalry in the industry can  be gauged from the fact that the top player in the country has only 6% market share, and the top five players together have about 18% market share. Thus, the concentration ratio for this industry is very low. High growth prospects make it attractive for new players to enter in the industry. industry. Another major factor that adds to the industry rivalry is the fact that the entry barriers to  pharmaceutical industry are very low. The fixed cost requirement is low but the need for  working capital is high. The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us that in bigger companies this ratio is in the range of 3.5 to 4 times. For smaller  companies, it would be even higher. Many smaller players that are focused on a particular region, have a better hang of the distribution channel, making it easier to succeed, albeit in a limited way. An important fact is that pharmaceutical industry is a stable market and its growth rate generally tracks the economic growth of the country with some multiple (1.2 times average in India). Though volume growth has been consistent over a period of time, value growth has not followed in tandem. The product differentiation is one key factor, which gives competitive advantage to the firms in any industry. However, in pharmaceutical industry product differentiation is not  possible since India has followed process patents till date, with laws favo ring imitators. Consequently, product differentiation is not the driver, cost competitiveness is. However, companies companies like Pfizer and Glaxo have created created big brands brands in over the years, which act as

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 product differentiation tools. This will enhance over the long term, as product patents come into play from 2005.

Bargaining Power Of Buyers_____________________________  The unique feature of pharmaceutical industry is that the end user of the product is different from the influencer (read doctor). The consumer has no choice but to buy what doctor says. says. However, However, when we look at the buyer's power, power, we look at the influence influence they have on the prices of the product. In pharma industry, the buyers are scattered and they as such does not wield much power  in the pricing of the products. However, government with its policies, plays an important role in regulating pricing through the NPPA NPPA (National Pharmaceutical Pricing Authority).

Bargaining Power Of Suppliers___________________________  The pharmaceutical industry depends upon several organic chemicals. The chemical indus industr try y is again again very very compet competit itiv ivee and fragm fragmen ente ted. d. Th Thee chemi chemical calss used used in the the  pharmaceutical industry are largely a commodity. The suppliers have very low bargaining bargaining power and the companies in the pharmaceutic pharmaceutical al industry can switch from their suppliers without incurring a very high cost. However, what can happen is that the supplier can go for forward integration to become a  pharmaceutical company. Companies like Orchid Chemicals and Sashun Chemicals were  basically chemical companies, who turned themselves into pharmaceutical companies.

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Barriers To Entry______________________________________  Pharmaceutical industry is one of the most easily accessible industries for an entrepreneur  in India. India. The capital capital requireme requirement nt for the indust industry ry is very very low, low, creati creating ng a region regional al distribution network is easy, since the point of sales is restricted in this industry in India. However, However, creating creating brand awareness and franchisee franchisee amongst doctors is the key for longterm survival. survival. Also, quality regulations regulations by the government may put some hindrance hindrance for  establishing new manufacturing operations. Going forward, the impending new patent regime will raise the barriers to entry. But it is unlikely to discourage new entrants, as market for generics will be as huge.

Threat Of Substitutes___________________________________  This is one of the great advantages of the pharmaceutical industry. Whatever happens, demand for pharmaceutical products continues and the industry thrives. One of the key reas reason onss for for high high compet competit itiv ivene eness ss in the the indu indust stry ry is that that as an on goin going g conce concern rn,,  pharmaceutical industry seems to have an infinite future. However, in recent times, the advances made in the field of biotechnology, can prove to  be a threat to the synthetic pharmaceutical p harmaceutical industry. industry.

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Conclusion____________________________________________  This model gives a fair idea about the industry in which a company operates and the various external forces that influence it. However, it must be noted that any an y industry is not static in nature. It's dynamic and over a  period of time the model, which have used to analyze the pharmaceutical industry may itself evolve. Going Going forwar forward, d, we forese foreseee increa increasin sing g competi competitio tion n in the indust industry ry but the form form of  competition will be different. It will be between large players (with economies of scale) and it may be possible that some kind of oligopoly or cartels come into play pla y. This is owing to the fact that the industry will move towards consolidation. The larger   players in the industry will survive with their proprietary products and strong franchisee. In the Indian context, companies like Cipla, Ranbaxy and Glaxo are likely to be key   players. Though consolidation within the current big names is not ruled out. Smaller  fringe players, who have no differentiating strengths, are likely to either be acquired or  cease to exist. The barriers to entry will increase going forward. The change in the patent regime will see new proprietary products coming up, making imitation difficult. The players with huge capacity will be able to influence substantial power on the fringe players by their  aggressive pricing which will create hindrance for the smaller players. Economies of scale will play an important part too. Last but not the least, in a vast country of India's size, government too will have bigger role to play.

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