Economic analysis of pharma sector

Pharmaceutical industry

 Develops, produces, and markets drugs licensed for use as medications 

These companies are allowed to deal in generic and /or brand medications and medical devices

They are subject to a variety of laws and regulations regarding the patenting, testing and ensuring safety and efficacy and marketing of drugs

Unique features of the sector

Research and development

Cost of innovation

Drug testing & development

Me-too drugs

Orphan drugs

Patents

Indian pharma industry

January 1, 2005, of a system of product patents was introduced

World's third-largest by volume and is likely to lead the manufacturing sector of India

 India's bio-tech industry clocked a 17 percent growth with revenues of rs.137 billion ($3 billion) in the 2009-10 financial year over the previous fiscal

Factors influencing the sector

The growing population of over a billion A huge patient base Increasing incomes Improving healthcare infrastructure An increase in lifestyle-related diseases such as

diabetes, cardiovascular diseases, and central nervous system

Penetration of health insurance Adoption of patented products Patent expiries and aging population in the US, Europe,

and Japan

Indian pharmaceutical evolution

Phase II

Government Control

• Indian Patent Act –1970

• Drug prices capped

• Local companies begin to make an impact

Phase III Development Phase

• Process development

• Production infrastructure creation

• Export initiatives

Phase IV

Growth Phase

• Rapid expansion of domestic market

• International market development

• Research orientation

Phase V

Innovation and Research

• New IP law

• Discovery Research

• Convergence

1970 1980 1990 2000 2010

Phase I

Early Years

• Market share domination by foreign companies

• Relative absence of organized Indian companies

Economic features of indian pharmaceutical industry

Demand is price inelastic(largely)

Supply is elastic

There is constant returns to scale

Capitalization requirements and return times rival

Product life cycle(dependent on patent norms)

Types of competition

Highly competitive

Top 5 players have mere 18% of market share

Lower fixed cost and high working capital

Concentration ratio is very low

High growth prospects

Entry barriers are very low

Types of competition

End user different from influencer

Govt. Plays important role in price regulation through NPPA

Low bargaining power of suppliers

Advances in biotechnology – threat to synthetic pharma industry

Top 10 Pharmaceuticals in India (as of 2010)

Rank CompanyRevenue 2010 (Rs

crore)Revenue 2010 (Rs

billion)

1 Cipla 4,198.96 41.989

2 Ranbaxy(Taken over by Daiichi Sankyo in 2008)

4,162.25 41.622

3 Dr. Reddy's Laboratories 3,763.72 37.637

4 Sun Pharmaceutical 2,463.59 24.635

5 Lupin Ltd 2,215.52 22.155

6 Aurobindo Pharma 2,081.19 20.801

7 GlaxoSmithKline(British company)

1,773.41 17.734

8 Cadila Healthcare 1,613 16.13

9 Aventis Pharma(Swedish company)

983.80 9.838

10 Ipca Laboratories 980.44 9.8044

The future trend of the market

Currently the market seems like a perfectly competitive market

Markets big players start to leverage on R&D and form cartels or merge

As large players begin to dominate, the competition takes the face of oligopoly with high entry barriers

Indian perspective

BIG BRANDS FORM CARTELS OR MERGE

MARKET IS DIVIDED BY ENTRY BARRIERS

AND R&D

SMALL FIRMS

Imports

The imports of pharmaceuticals are estimated at 10 to 12 percent of the total market.

The major suppliers are Switzerland, China, USA, Germany, Italy, Denmark, France, and UK

USA accounts for 14% of total world imports, followed by Switzerland (4.8%), Japan and Canada (3%)

Imports include raw materials and finished products.

Some major pharmaceuticals which are imported include provitamins and vitamins, cortisones, hydrocortisone, insulin, penicillin, oesetrogen, progesterone and other hormones, erythromycin and other antibiotics, antisera other blood fraction, and glycosides.

The imports from Switzerland, US and Germany primarily consist of finished medicament in dosage forms for retail sales

Exports

Indian pharmaceutical industry ranks 17th with respect to exports value of actives and dosage

Exports constitute nearly 40 per cent of the production, with formulations contributing 55 per cent and bulk drugs 45 per cent

The overall pharmaceutical exports are estimated to increase at a CAGR of 30-32 % and reach us$ 18.3 billion in 2011-2012

Patents amendment act-2005

This act is the third of three amendments to the patents act of 1970, to bring India’s patent regime into compliance with the WTO TRIPS agreement.

The patents (amendment) act, 2005 extends the product patent protection to the areas of pharmaceuticals and agricultural chemicals.

FDI in Pharma

Sought out destination for foreign players Industrial licensing has been abolished Ministry of Chemicals and Fertilizers permits 100% FDI Exemption from DPCO if product is patented under the Indian

Patent Act and developed through indigenous R&D in India

Trend of acquisition of indian companies by mnc’s

Indian Company MNC

Matrix Lab Mylan Inc

Dabur Pharma Fresenius

Ranbaxy Daiichi Sankyo

Shanta Biotech Sanofi Aventis

Orchid Chemicals Hospira

Piramal Health Care Abott

Negatives of acquisition

Reducing domestic availability of drugs Reduce competition Oligopolistic market and cartelization Cases of emergency Sustainable growth of economy

DPCO

The drugs price control order (DPCO), 1995 is an order issued by the government of India under section 3 of the essential commodities act, 1955 to regulate the prices of drugs.

The order inter alia provides the list of price controlled drugs, procedures for fixation of prices of drugs, method of implementation of prices fixed by government and penalties for contravention of provisions among other things.

Drugs and formulations have been subjected to price control for more than three decades now.