Drug market structure (Pharma in Indian Scenario)

Pharmaceutical Industry in India

Module: Pharmaceutical Economics

By: Hemant Vyas (MBA)

Learning Objectives

Growth and Structure of Pharmaceutical Industry Global and Indian Scenario Research and Development Activities of Industry Promotional Expenses Profitability of the Industry Mergers and Acquisitions in the Industry

Growth of Pharmaceutical Industry

Since 1950s the drug multinational corporations have been riding the high wave of R & D driven growth backed-up by a high-profile promotional campaign aided by an industry-friendly patent regime. Closer home, the growth and performance of the industry is no less spectacular.

Global Pharmaceutical Industry

The Global pharmaceutical industry is characterized by global market dominance of the oligopolistic core of R&D based pharmaceutical companies.

However, there is heterogeneity in terms of firms’ orientations, size, innovative and production capabilities

Generic entry leads to price competition on off-patented drugs and by incremental innovations that may act as substitutes.

As of 2008, top 10 global R&D based companies held a consolidated global market share of 46.4% and the share of top 20 was 63.7%. Pfizer, top global pharmaceutical major alone had 7.6% of global market share

Drug Sales by Geographic Region, 2004

Global Sales - US $ 242,115 Millions - 2004

Africa0.4%

MiddleEast0.9%

Others2.7%

U.S.66.4%

Canada2.3%

India & Pakistan0.3%

Japan3.7%

Asia-Pacific1.6%

Europe18.2%

Australia & New Zealand

1.2%

Latin America2.3%

Source: PhRMA

Pharmaceutical Sales by Country

Top 20 Drug Companies by Sales

Global Top 15 Drug MNCs

Where does the Indian Pharmaceutical Industry Stand?

The Indian pharmaceutical industry has grown from a mere US $ 0.3 billion turnover in 1980 to about $19 billion in 2008 (USD 7.24 billion on exports).

It is among the top Five producers of bulk drugs in the world

3rd in (10% in global sales) terms of volume and 14th (1.5%) in terms of value.

After USA (169), India has the highest number of ANDA approved (132) plants in US in the year 2007

There are about 2389 bulk drug manufacturing units and 8174 formulations units spread across India. Total: 10563 units

Very insignificant level of aggregate R&D investments


One reason for lower value share is the lower cost of drugs in India ranging from 5% to 50% less as compared to developed countries.

Indian pharma industry growth has been fuelled by exports and its products are exported to more than 200 countries with a sizeable share in advanced regulated markets of US and Western Europe.

The total employment is about 340,000 in the sector and an estimated 400,000 doctors and 300,000 chemists are serving an over 1 billion customers market.


India, currently accounts for one out of every four Abbreviated New Drug Applications (ANDAs) (Generic products approvals) in the years 2007 & 2008.

More than one fourth of total Drug Master Files (DMFs) with US FDA, the largest share in registrations granted in the world including USA.

India has the highest number of USFDA approved plants outside USA.

Overview of the Pharmaceutical Industry in India: Changing dynamics

A Snapshot of Key Trends in Pharmaceutical Industry (Rs Crores)

Year 1965-66 1980-81 1994-95 1997-98 2001-02 2002-03 2005-06

Capital Investment 140 500 1200 1840 2150 2500 3200

Production Formulation 150 1200 7935 12068 13878 15960 18750

Bulk Drugs 18 240 1518 2623 3148 3777 5113

Import 8 113 2868 3128 3441 4267

Export 3 46 2184 5353 5959 6631 7980

R&D Expenditure 3 15 140 220 260 320 560

Source: PDRC Reports

Share of MNCs and Indian Domestic Industry

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Share of MNCs and Indian Companies in the Indian Pharmaceutical Industry

MNC 38 68 60 50 40 32 23

Indian 62 32 40 50 60 68 77

1952 1970 1978 1980 1991 1998 2004

Source: CMIE Prowess Sudip Chaudhuri, The WTO and India’s Pharmaceuticals Industry: Patent Protection TRIPS and

Developing Countries, New Delhi, Oxford University Press, 2005. pp 18


Production of Indian Pharmceutical Industry and their ratio

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Formulations 150 1200 7935 12068 13878 15960 18750

Bulk Drugs 18 240 1518 2623 3148 3777 5113

Ratio 8.3 5.0 5.2 4.6 4.4 4.2 3.7

1965-66 1980-81 1994-95 1997-98 2001-02 2002-03 2005-06

Source: PDRC Reports, Chaudhuri, 2005

Company Name OwnerSales

(Rs. Crore)Cipla Ltd. CIPLA Group 4295.24Dr. Reddy'S Laboratories Ltd. Dr. Reddy's Group 3615.35Lupin Ltd. Lupin Group 2661.62Sun Pharmaceutical Inds. Ltd. Sun Pharmaceutical Group 2427.35Aurobindo Pharma Ltd. Aurobindo Pharma Group 2409.28Piramal Healthcare Ltd. Piramal Ajay Group 2001.32Cadila Healthcare Ltd. Zydus Cadila Group 1758.5Glenmark Pharmaceuticals Ltd. Glenmark Pharmaceuticals Group 1408.71Aditya Medisales Ltd. Private (Indian) 1376.48Orchid Chemicals & Pharmaceuticals Ltd. Private (Indian) 1250.19Wockhardt Ltd. Wockhardt Group 1188.95Ipca Laboratories Ltd. Ipca Laboratories Group 1145.94Divi'S Laboratories Ltd. Private (Indian) 1047.56Alembic Ltd. Alembic Group 1027.35Torrent Pharmaceuticals Ltd. Torrent Group 1001.9Biocon Ltd. Private (Indian) 905.07

Top 15 Indian Firms in Terms of Sales, 2007-08 (Mar-08)

Source: CMIE PROWESS

Company Name Owner Sales (Rs. Crore)Ranbaxy Laboratories Ltd. Ranbaxy Group 3656.2

Glaxosmithkline Pharmaceuticals Ltd. Glaxo (F) Group 1761.39

Matrix Laboratories Ltd. Private (Foreign) 974.27

Aventis Pharma Ltd. Aventis (F) Group 961.13

Pfizer Ltd. Private (Foreign) 794.27

Abbott India Ltd. Private (Foreign) 639.27

Novartis India Ltd. Private (Foreign) 578.67

Strides Arcolab Ltd. Private (Foreign) 415.45

Wyeth Ltd. Wyeth (F) Group 361.89

Merck Ltd. Private (Foreign) 357.65

Astrazeneca Pharma India Ltd. Private (Foreign) 330.51

Solvay Pharma India Ltd. Private (Foreign) 183.18

Fulford (India) Ltd. Private (Foreign) 174.38

Organon (India) Ltd. Private (Foreign) 163.16

Bayer Polychem (India) Ltd. Private (Foreign) 47.21

Biddle Sawyer Ltd. Glaxo (F) Group 35.25

Global Remedies Ltd. Private (Foreign) 7.2

Top MNCs Operating in India (Mar-08)


Market Dispersion?:Share of Top Drug Companies

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IPM-99 IPM-2003 Global Market

Top 10 Companies Next 10 Companies Rest

Source: IMS-ORG

Homogenous Vs Hetrogenuous Drugs

A simple analysis of company-wise drug sales pattern is misleading because the market for drugs is not homogeneous single product category but a multi-product one. That is, the market for pharmaceuticals can be sub-grouped into a large number of independent sub-markets.

This is because medicine prescribed for cardiovascular disease cannot be administered to a patient suffering from cancer.

Consequently, one cannot observe drug manufacturers competing on an industry-wide basis.

Market Structure

Any study on structure of industry is normally predicated upon industrial organisation approach – essentially a neo-classical framework.

A careful analysis of market structure would then provide us with the nature of conduct of firms and consequently its performance.

A standard textbook analysis of structure of market can be identified by the following features: i) seller concentration; ii) barriers to entry (scale economies and product differentiation); iii) conditions of demand and iv) buyer concentration.

Market Structure of the Pharma Ind.

Industry concentration acts as a vital element in the determination of market structure.

The total industrial share accounted for by four or eight players in the market normally measures the concentration ratio. If the concentration is high, that is, number of sellers being few in a product category but their combined sales value accounts for a sizeable share, then the firms would be constrained to compete on price front.

Concentration in Indian Drug Industry - 2002Therapeutic Group Leading Products No. of No. of

Amount of Sales

Percent Products Companies

Tonics 25.76 31 2 2

Laxatives 22.81 32 2 2

Anti-coagulants 21.61 32.43 2 1

All Other Antibiotics 39.22 35.62 2 2

Vaccines 66.96 74.65 3 3

Anti-Epiletptics 64.05 44.27 4 4

Rubs, Other Inhalents 100.19 83.41 4 4

Anti-Diabetic Therapy 108.78 38.34 4 4

Antispasmod, etc.. 51.18 41.3 4 4

Antiseptic, Disinfectant 71.47 78.63 4 4

Other Penicillins 52.97 86.53 4 3

Sex Hormones 73.71 31.23 5 4

Topical Corticosteroids 115.22 42 6 5

Cough Preparations 73.05 41.23 6 6

Tuberculostatics 153.58 44.69 6 4

Hypotensives 92.56 36.84 7 7

Anti-asthmatics 119.61 45.88 7 4

Vitamins 296.91 38.87 8 6

Cardiac Therapy 135.96 31.64 8 8

Cold Preparations 197.3 41.65 8 8

Anti-inflammatory, Anti-Rheumatics 255.04 41.09 8 8

Analgesics 150.17 51.28 8 8

Pharma Market Structure

The grouping and illustration presented offers only a rough idea.

The actual structure is still more complicated.

For instance, the sub-market categories can be grouped into roughly 13-14 major segments.

Pharma Market Structure

Again each major segment can be divided into 3-10 sub-categories.

For example, under the category of Infections and Infestations, the following are sub-categories: a) antibiotics, b) Sulphonamides and other antibacterials, c) Antituberculous drugs, d) Antileprotics, e) Antifungals, f) Anti-amoebics, antigiardiasis, g) Antimalarials, h) Antihelmintics and other anti-infestive drugs, i) Antivirals and j) Vaccines and anti-toxins.

Furthermore, each of these sub-categories comprises different chemical entities and finally, each of the chemical entities produce varieties of brands and generic products.

Global Top 15 Therapeutics

Leading Therapeutic Segments - 2007

High Profitability in Pharma Industry

A noteworthy feature of the pharmaceutical industry is that the industry was most profitable among all the leading sectors of Indian industry.

Interestingly, profitability ratio of pharmaceutical industry increased almost consistently over the last few decades.

Pharmaceutical industry had out-performed other sectors of industry despite facing an additional dose of uncertainty arising from changes in patent regime and price control.

Profitability in Indian Industry Sectors Dec-95 Dec-97 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04

Chemicals 5.8 4.8 4.8 4.2 3.5 4.4 5.8 6.3

Food & beverages 4.8 4.1 4.9 4.8 5.1 4.2 3.6 5.2

Machinery 5.5 3.7 3.5 2.6 1.5 2.7 1.7 3.1

Textiles 5.6 0.6 -1.9 -1.0 -2.4 -2.9 0.9 -0.4

Transport equipment 5.8 7.3 3.1 3.3 1.0 3.3 5.0 6.3

Drugs & pharmaceuticals 8.8 7.5 6.6 7.5 10.0 12.4 11.3 13.4

Source: CMIE, Prowess database

Price Control & Profitability A relative comparison of ratios to all-industry average

shows that drug companies have all along been exhibiting a higher growth in profitability.

A higher profitability for pharmaceutical industry is being justified on the ground of significant contribution towards R&D.

But a casual observation of R&D expenditure among Indian companies in the 1990s point to an insignificant contribution made by drug companies in India, both by wholly owned subsidiaries and private domestic players.

On the contrary, higher profitability in this sector seems to have been sustained by notably tall marketing and advertising expenses ensured under a brand-name.

This is mainly made possible by a high concentration ratio of firms competing under product competition rather than price competition.

Research and Development Effort of the Industry

The unusually extraordinary profit earned by drug firms is largely justified on the grounds of its heavy commitment towards drug research spending.

An “Industry of Discovery” – the label earnestly goes to the pharmaceutical industry for its major medical breakthroughs.

The chemical based invention of medical products can be traced to decades of 1930s & 1940s, made possible by sustained effort involving public sector laboratories, public research hospitals and academic institutions across the globe in basic research.

Later, business enterprises, particularly, transnationals seizing the opportunity perfected the art of developing, testing, manufacturing, marketing and patenting of basic research in developed market economies.


In fact, the intensity and coverage of infectious diseases which has been vital cause for wrecking the lives of millions by inflicting disease and death in the world, inspired the big drug companies to make bacterial medicine research a central research agenda.

Heart diseases, cancer, diabetes, etc., along with communicable diseases took its toll on a large-scale in developed as well as third world economies, the later bearing the brunt of such development.

By 1940s & 1950s communicable diseases in industrialised market economies have started falling quite significantly.


Since 1960s, drug companies in developed countries have tended to divert research agenda & efforts towards these degenerative disease & newly emerging diseases, such as, HIV/AIDS and hepatitis.

Falling rate of death and disability was not attributed in any significant way to the invention of anti-bacterial medicine rather could be traced to secular decline captured since the mid-19th century in Industrialised countries.

For a detailed account of secular decline of communicable diseases in Great Britain, see Mc Keown (1989), pp. 91-109.

Global R & D as Percent to Sales Turnover

Year Percent to SalesR&D

Spending

(In %) (In Billions)

1980 8.9 2.0

1990 14.4 8.4

2000 16.2 26.0

2005 15.8 39.4

Source: PhRMA

R&D Intensities of Global Pharmaceutical Majors, 2004-05

Rank(in terms of sales turnover)

Firm R&D to Sales (%)

1 Pfizer Inc, USA 14.6

2 GlaxoSmithKline, UK 13.9

3 Sanofi-Aventis, France 15.6

4 Johnson & Johnson, USA 11.0

5 Roche, Switzerland 16.3

6 Novartis AG, Switzerland 14.9

7 Merck Inc, USA 17.5

8 AstraZeneca, UK 17.7

9 Eli Lilly and Company, USA 19.4

10 Bristol-Myers Squibb, USA 12.9

Public-Private Share of R&D

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Source: World Medicine Situation, 2006

Global R&D Expenditure Allocation by Therapeutic Segment

Therapeutic Segment Percentage Allocation

Central Nervous System Drugs 22.7

Neoplasms (Cancer), Endocrine System & Metabolic Diseases

20.9

Cardiovascular Drugs 14.2

Anti-Infectives 14.2

Respiratory Drugs 7.1

Biologicals (Vaccines) 4.3

Alimentary and Genito-Urinary Drugs 3.3

Others 13.1

Total (%) 100.0

Total Amount (US $ Billion) 48.0

R&D Intensity of Pharmaceutical Companies in the 1990s

Year 1992 1993 1994 1995 1996 1997 1998

R&D Intensity 0.220 0.744 1.154 1.233 1.478 1.637 1.406

No. of Units 117 155 209 264 271 231 170

Company Name Owner R&D R&D as % SalesDr. Reddy'S Laboratories Ltd. Dr. Reddy's Group 333.45 9.2

Cipla Ltd. CIPLA Group 232.3 5.4

Lupin Ltd. Lupin Group 193.37 7.3

Cadila Healthcare Ltd. Zydus Cadila Group 161.8 9.2

Sun Pharmaceutical Inds. Ltd. Sun Pharmaceutical Group 144.39 5.9

Wockhardt Ltd. Wockhardt Group 126.74 10.7

Aurobindo Pharma Ltd. Aurobindo Pharma Group 117.51 4.9

Torrent Pharmaceuticals Ltd. Torrent Group 113.17 11.3

Panacea Biotec Ltd. Panacea Biotec Group 107.67 12.9

Piramal Life Sciences Ltd. Private (Indian) 99.03 N.A.

Orchid Chemicals & Pharmaceuticals Ltd. Private (Indian) 70.9 5.7

Glenmark Pharmaceuticals Ltd. Glenmark Pharmaceuticals Group 65.91 4.7

Biocon Ltd. Private (Indian) 64.65 7.1

U S V Ltd. Private (Indian) 59.02 8.4

Alembic Ltd. Alembic Group 46.24 4.5

Sun Pharma Advanced Research Co. Ltd. Sun Pharmaceutical Group 44.71 N.A.

Ind-Swift Laboratories Ltd. Ind-Swift Group 44.69 2.3

Ipca Laboratories Ltd. Ipca Laboratories Group 42.92 3.7

Piramal Healthcare Ltd. Piramal Ajay Group 35.28 1.8

Unichem Laboratories Ltd. Private (Indian) 32.71 5.5

R&D Spending of top Indian firms in 2007-08 (Rs in Crore) & (As % of Sales)


Company Name Owner R&D R&D % Sales

Ranbaxy Laboratories Ltd. Ranbaxy-Daiichi Group 460.51 13

Glaxosmithkline Pharmaceuticals Ltd. Glaxo (F) Group 5.81 0

Matrix Laboratories Ltd. Private (Foreign) 119.7 12

Aventis Pharma Ltd. Aventis (F) Group 4.53 0

Pfizer Ltd. Private (Foreign) 24.58 3

Abbott India Ltd. Private (Foreign) 3.55 1

Novartis India Ltd. Private (Foreign) 0.76 0

Strides Arcolab Ltd. Private (Foreign) 37.5 9

Wyeth Ltd. Wyeth (F) Group 0.79 0

Merck Ltd. Private (Foreign) 1.48 0

Astrazeneca Pharma India Ltd. Private (Foreign) 2.46 1

R&D of MNCs Operating in India (2007-2008) (In Rs. Crore) & (As % of Sales)


Source: Chaudhuri, 2007

Mergers & Acquisitions

Source: Pradhan, Jaya Prakash, (2008)

Indian Pharmaceutical Greenfield OFDI,

1977-March 2007 (USD Million) YearNo of Overseas

Acquisitions

1995 1

1996

1997 1

1998 1

1999

2000 1

2001 1

2002 6

2003 7

2004 12

2005 20

2006 14

2007 14

Mergers and Acquisitions

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Flow of FDI in various sub-sectors

Year FDI Inflows

2002-03 40

2003-04 109

2004-05 292

2005-06 217

2006-07 51

2007-08 181

Cumulative April 2000-Feb 2009 1457

Inflows of FDI in Pharmaceuticals Industry from 2002-03 to February 2009 (USD Million)

Source: DIPP

Source: DIPP

Mergers and Acquisitions

Very little public information on Mergers and acquisitions in India and relevant data. Currently no law requires review of combinations to ascertain possible impact of Mergers and acqusitions. Competition Act, 2002 (Section 5&6) have not yet been notified.

Ranbaxy Mergers and concerns raised: In November 2008, Daiichi Sankyo of Japan acquires Ranbaxy Laboratories at US $4 billion for a controlling stake of 63.92% of Ranbaxy’s equity shares.

As per the Company’s 2009 annual report “…[t]he coming together of Ranbaxy and Daiichi Sankyo is a path-breaking confluence that, in one sweep, catapults the new, empowered entity to the status of the world's 15th largest pharmaceutical Company. Individually, the two pharmaceutical giants are formidable - one, India's largest generics Company and the other, among the largest innovator companies in Japan”.

Aging of Brands – 1980-2004

Launch Year No. of BrandsValue in Rs.

Crs.Market

Share

Before 1980 544 3388.9 16.9

1981 to 95 2856 7392.0 36.9

1996-2000 3597 4627.1 23.1

After 2001 6807 3702.4 18.5

Others 1198 943.3 4.6

Grand Total 15002 20053.7 100Source: IMS-ORG


Summary Indian pharmaceutical industry grew out of active policy interventions by the Government,

initially by keeping health care as central focus; Changing strategies since 1990s among top visible: Recent growth in the Industry is driven

by export orientation; Around 250 companies hold 70% of the market share; Small scale industry is a still major source of employment. However, there are increasing

threats to their competitiveness; Witnessing a phase of Outward FDI: Increase in number of Foreign acquisitions; Industry is witnessing increasing consolidation- visible through acquisitions and mergers in

India; Renewed interest by MNCs to increase their market shares, generally through acquisitions-

Major change in market structure witness after Ranbaxy’s acquisition by Daiichi Sankyo; The awaiting generic opportunity: off patented drugs to constitute a $ 67 billion market

worldwide (Economist, June 2007). IMS Health estimate show that the world wide pharmaceutical industry in 2006 saw record $18 billion drop in branded sales

Global average R&D is around 18.5% & Indian average is around 2-3%: Without high R&D intensity it would be difficult for Indian companies to move up R&D value chain.

Branded Generics & Generics-Generics Branded generics are a different version of

branded drug, marketed directly through chemists. To pharmaceutical trade and to institutions, they are sold at low prices in high volumes as generics, but to consumers they are made to appear as branded drugs & sold at prices which approximate the price of branded drugs.

They are generics as far as trade is concerned, but branded as far as the patient is concerned;

G-G: These drugs are those which are marketed under their chemical name.

Health & Medicine

Drug market structure (Pharma in Indian Scenario)