Value Drivers Of The Pharmaceutical Industry Essays

Value Drivers Of The Pharmaceutical Industry Essays Value Drivers Of The Pharmaceutical Industry Essay Value Drivers Of The Pharmaceutical Industry Essay The size of the global pharmaceutical industry was estimated at US$362.8 billion (December 2000) with North America being the largest market (44%), followed by Europe (24%), Latin America (6%) and Asia, Africa and Australia having a combined share of 26%. With a size of Rs. 231 billion in FY2001, and growing at a compounded annual growth rate (CAGR) of around 17% per annum, the Indian pharmaceutical industry is one of the largest among developing countries. It contributes 8% in volume terms but only 1% in value terms to global pharmaceutical sales. The domestic companies meet about 90% of the countrys total bulk drugs requirement and almost the entire demand for formulations. There are over 20,000 players in the industry, with a large number of them involved in the production of unbranded products. The structure of the Indian pharmaceutical industry (as that of its global counterpart) is characterized by fragmentation, with over 20,000 players-a large number of which are in the small-scale sector, competing for market share. However, a trend of consolidation is visible at the top with the 5 players in the Indian pharmaceutical industry account for 22% of the retail formulations market. Evolution. The evolution of the Indian pharmaceutical industry can be explained in terms of six broad phases, as discussed here. Period up to 1947 The industry was almost non-existent in this period and despite the existent need, demand was limited due to low-income levels and lack of access to medicines. 1947-1970 In 1954, Government established Hindustan Antibiotics Limited (HAL), followed by Indian Drugs and Pharmaceuticals Limited (IDPL) in 1961. These companies emerged as major producers of critical drugs such as penicillin and other anti-infectives. The Government also provided incentives to multinational companies so that they were encouraged to set up manufacturing bases in India. 1970-1979 In 1970, two major policy initiatives were taken by the Indian Government to strengthen the domestic pharmaceutical industry. Drug Price Control Order (DPCO) was issued to control the prices of drugs and make them affordable to consumers and Indian Patent Act was enacted to provide legal recognition to process patents for pharmaceutical products. The Government also provided incentives to small-scale pharmaceutical units which led to the surfacing of many such units in the formulations segment, where technology was not the most important criteria. 1979-1995 Government made amendments to the DPCO in 1979 reducing the number of drugs under DPCO from 347 to 163. Moreover, higher margins were permitted on the production cost. Further, the export incentives and the advantage of low production costs combined to provide a substantial boost to exports (especially of bulk drugs). The DPCO was again amended in 1987, resulting in a reduction in the number of drugs under price control from 163 to 146. 1995-2001 Government reduced the number of drugs under DPCO further from 146 to 74. It also signed the General Agreement on Tariffs and Trade (GATT) and was expected to introduce the system of product patents (as opposed to process patents) and provide legal protection to Trade Related Intellectual Property Rights (TRIPS). The signing of the GATT induced a series of changes in the business strategy of the existing pharmaceutical companies. The focus of the companies shifted, and research emerged as the inevitable driver of long-term growth. A large number of companies underwent restructuring and quite a few mergers and acquisitions were witnessed; consolidation at all levels in the industry-brands, assets and acquisition of companies-took place. The move also augmented the interest of multinationals in India. During 2001, at the Ministerial Conference held at Doha (Oman), a declaration on Public Health was signed by the member countries of the World Trade Organisation (WTO the successor to GATT). This declaration clarifies that the TRIPS agreement would not prevent WTO members from taking measures to protect public health and provides them the right to determine what constitutes a national emergency or circumstances of extreme urgency. The WTO members would be allowed to determine the grounds on which such licences are granted and grant such compulsory licences. 2002 Pharmaceutical Policy 2002 was announced, wherein the number of drugs under price control has been reduced from 74 (under DPCO 95). Also, both the houses of Parliament have recently cleared the Patents Amendment Act, 2002. The main features of this Act are the extension of patent term to 20 years from the date of application, incorporation of a provision relating to right of import and changes in the provisions relating to compulsory licensing. High Cost Process with Long Time Lead The average length of time required to develop a drug is estimated at 12-15 years, increasing over the years, mainly because of the tightening of the regulations associated with drug approval in different countries. The rate of failure is relatively high. Typically, out of 10,000 compounds synthesised, only around 20 reach the animal testing stage. Of these 20, only around 10 reach clinical trials, and finally, just about one attains the approval of the drug regulatory authorities. Moreover, only around three out of every 10-drug products recover their RD costs. Therefore, companies have to rely on highly successful products to fund their RD activities. Clinical trials account for about half the total time involved in new drug discovery. This phase is of crucial importance and over 40% of the total cost is incurred in this phase. Growth pattern of the sector Growth in the pharmaceutical industry is linked to the introduction of new drugs and increase in prices, among other factors. It is characterized by relative immunity to economic cycles in the short to medium term. However, extreme situations like prolonged recession may affect the growth rate of the industry. The size of a pharmaceutical market increases as a result of various factors, the most prominent among which are discussed here. * Increase in prices: Demand is relatively price- insensitive implying that the market size increases along with an increase in prices. * Increase in volume: With the demographic profile changing following the increase in the number of people in the old age segment, the volume of sales of pharmaceutical products is also expected to increase. * New product introduction: A new product broadens the existing market in terms of its reach and drive growth in the following manner: o Drugs that serve unmet needs for a relatively small patient base. The selling expenses for these drugs are also lower as they are cheaper to launch than blockbusters. o Drugs that increase demand in existing markets o Drugs that create demand for products that did not exist earlier: A recent example of this is Pfizers Viagra. Declining Share of Multinationals Initially, Government policies for the pharmaceutical sector encouraged multinational companies to establish manufacturing bases in India, leading to the dominant control of the Indian pharmaceutical market by these MNCs (market share of over 80% ). With the introduction of the Indian Patents Act and the Drug Price Control Order in 1970, Indian players discovered new avenues of growth, and consequently, the share of the multinationals declined. The Patent Act, 1970, provided opportunity to Indian players by allowing reverse process engineering of known molecules (under and off patent). Thus, the multinationals felt discouraged to introduce their latest products in the Indian market even as the Indian companies increasingly took up the manufacturing of formulations. Cost structure. The three important cost heads for the Indian pharmaceutical industry are: material costs; marketing selling costs; and employee costs. This is in contrast to the cost structure of the global majors, for whom the key costs are: selling costs, general and administration costs; manufacturing costs; and RD expenses. The companies that are present The Indian pharmaceutical industry, estimated at Rs 231 billion, is the fourth largest in the world in terms of volumes. The industry has been growing at a CAGR of 17% over the last 5 years. The industry has around 20,000 players and is characterized by an increasing concentration at the top. It is this segment that we are analyzing in the project. Hence, Large Indian companies like Ranbaxy, DRL etc who are members of both the OPPI and the IDMA will form the basis of our study. There is also a large segment of unbranded drugs in the market. The introduction of regulatory norms by the Government of India favoring process patents coupled with the high import tariff and low prices of the domestic drugs has gone a long way in the development of the domestic industry against the multinationals operating in the country. Today, India is not only self sufficient in drugs and formulations, we also export to different countries in Europe and North America.