Potential of Survival after Entering the Pharmaceutical industry

A Presentation in Managerial EconomicsBy Sanjay Krishna

Entry-History and Current Context

At the time of independence in 1947, India’s pharmaceutical market was dominated by Western MNCs that controlled between 80 and 90 percent of the market primarily through importation. Approximately 99 percent of all pharmaceutical products under patent in India at the time were held by foreign companies and domestic Indian drug prices were among the highest in the world. Indian pharmaceutical industry has taken a quantum leap thanks to The Patents Act, 2005 (Amendment to The Patents Act, 1970). The Patent Act of 1970 saw the exodus of the multinational companies (MNCs) as it recognized only process patents. Indian companies had the freedom to copy drugs manufactured by patent holding companies without paying any kind of royalty. They were protected by the patent act to legally reverse-engineer internationally patented drugs and sell it within India and also in those markets that did not conform to drug patents.

Entry-History and Current Context- II

. Because these measures lowered barriers to entry, thousands of medium and small Indian pharmaceutical companies entered the market challenging the MNCs for control. These actions laid the foundation for today’s highly competitive domestic industry that is capable of offering some of the lowest drug prices in the world. These policies ended India’s dependence on expensive foreign drugs, fostered the development of a competitive pharmaceutical industry, and guaranteed the Indian public access to inexpensive drugs. Nonetheless, the Indian pharmaceutical industry also became one of the country’s most heavily regulated industries.

Power of the Customer

Power of the Customer

As seen in the diagram, pharmaceutical products have an inelastic demand especially in the case of life saving medicine and medicine for critically ill. Even though there are substitutes in the market most of the quality products by noted Indian and foreign manufacturers are unaffected by demand falling eg. Cipla or Pfizer.

Substitutes

Substitutes II

An example here shows how many drugs are manufactured by so many manufacturers there are substitutes in the market. However as the risks of fakes in India are so high genuine medicines have limited substitutes and are often not risked to be substituted for cheaper products as fake drugs are highly dangerous.

Bargaining power of Suppliers An industry that produces goods requires raw

materials. This leads to buyer-supplier relationships between the industry and the firms that provide the raw materials. Depending on where the power lies, suppliers may be able to exert an influence on the producing industry. They may be able to dictate price and influence availability. With there being almost an abundance of chemical companies supplying to various companies, the bargaining power is virtually non- existent. Also, most Indian companies are leaders in production of API (Active Pharmaceutical Ingredients), which are used in almost all pharmaceutical products worldwide.

Bargaining power of Suppliers II

Some features are: Volume Benefits Occur Inputs Standard, available locally. Numerous suppliers are available, so

the switching cost is low for the drug companies which help develop a cost advantage.

Suppliers can go for forward integration

Raw material cost constitute more than 50% of the total expenses

Industry Rivalry Pharma 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 Rivalry II

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

Industry Rivalry III

The product differentiation is one key factor, which gives competitive advantage to the firms in any industry. However, in pharma 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. However, companies like Pfizer and Glaxo have created big brands in over the years, which act as product differentiation tools. This will enhance over the long term, as product patents come into play from 2005.