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A witness to 24000 players fighting in the same field; the number
of players in the Indian Pharmaceutical Industry is growing. The fierceness of
the competition is apparent from the fact that the topmost company in the
industry has only 6% market share while the combined share of the top 5
companies is around 18%. The industry has great growth opportunities for new
entrants. The pharmaceutical industry is capital intensive although the fixed
costs requirements are low and the entry barriers are few. In larger
organizations, the fixed cost asset turnover ratio is usually in the range of
3.5 to 4 times; while for the smaller companies it is higher.

The smaller companies focus their efforts on a particular region
and thus are better able to manage their distribution channels. An industry
with a steady growth and stable market; the industry contributes commendably to
the economic growth of the country.

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Product differentiation as a competitive strategy does not work in
the Indian Pharmaceutical industry because of the Patent laws which do not put
many restraints on the imitators. In fact, the industry thrives on imitations
of medicines available as a cheaper alternative; which is a result of a huge
population which needs healthcare but at lesser expenditure. The resultant
competition is driven thus not by differentiation but by the cost. However,
brands like Pfizer and Glaxo Smithkline have carved a niche for themselves in
this competition. However, the amendment in the Patents Act in 2005 has started
to bring about favorable conditions for brand enhancement through R&D and
innovation for companies.

Bargaining power of buyers

The influencer and the consumer in case of the Indian
Pharmaceutical industry are different unlike in many other industries. A
consumer of the pharmaceutical industry has no choice or ability to decide on
the product to be bought, and buys what the doctor recommends. The prevalent
scenario in the industry is that the buyer has no significant power on the
prices of the products; although the scenario is gearing up for a change with
technological evolutions like android applications educating consumers about
the alternatives available. However, the National Pharmaceutical Pricing
Authority plays a vital role in regulating prices.

Bargaining power of suppliers

The industry depends on many organic chemicals; which again is a
very competitive and fragmented industry. The suppliers are able to wield very
less bargaining power as it is very easy for pharmaceutical companies to change
their suppliers. But, the suppliers also can integrate themselves forward into
a pharmaceutical company. Orchid Chemicals and Shasun Chemicals are examples of
such companies who were initially chemical suppliers but evolved into
Pharmaceutical Companies. 

Barriers to entry

The pharmaceutical industry is one of the easiest industries to
get into in India. The fixed costs are low but the working capital is very high
because of being a human intensive or talent intensive industry. Setting up
distribution channels in regions is easy although forging relationships with
the influencers (i.e. Doctors) is a time consuming but essential activity for
survival. Quality regulations can be looked upon by many new entrants as a
encumbrance but the market for Generics is coming up as a huge opportunity for
both new and existing companies. The impending Patent regime is set to create a
barrier to entry though.

Threat of substitutes

Pharmaceutical industry is an industry which will thrive and grow
in any scenario. This is because it provides products which save and improve
human life.  The competitiveness
increases due to the fact that the industry has a future which is unbounded.
Recently though, the advances in biotechnology are coming up as a threat to the
synthetic pharmaceuticals.

 

The Porter’s model provides a bird’s eye view of the environment
in which the industry or company operates and the forces influencing it. It
must be understood that no organization is stagnant and thus the dynamicity
will result in the industry to evolve.

In Indian scenario, companies like Cipla, Ranbaxy and Glaxo are
likely to emerge as strong players in the field because of their
differentiating strengths. The smaller players might consolidate their
strengths or collaborate their efforts namely in research and innovation; but
time would tell as to how the scene turns out. Whatever the scene, the smaller
players might either acquire strength or cease out.

The barriers will increase with the amendments in the Patents Act,
which would see the rise of proprietary drugs & preparations. Bigger
players would be able to influence aggressive pricing because of their
operational abilities posing a danger to smaller companies. Economies of scale
would be the most important aspect of the competition. And the Government too
would have an important role in the growth and dynamics of the Indian
Pharmaceutical industry.

Future
of Indian Pharmaceutical Industry:

The assimilation of the
Indian industry with the global markets, new issues have surfaced and the
companies are finding their way through these problems. The earlier issues with
the IPR and DPCO would continue haunting the industry but the innovations in R
& D and foreign interest in the Indian markets seems to be here for a
while. In spite of the legal and market an issue, the industry is expected to
grow exponentially would continue to be an attraction for foreign investors.
Besides the local markets, Indian companies have a lot of revenue coming in
from exports as many have concentrated efforts in the generic markets of US,
Europe etc. while others focus on innovative products.

India with 16% of world
population has 18% of worldwide mortality and 20% of worldwide morbidity. The
investment on healthcare, however, is only 1% of the world healthcare
investment. Moreover, allocation on healthcare in five-Year Plans has declined
to 1.4% of total plan outlay during 10th Five Year Plan (2002-03 to 2006-07)
from 3.3% in the 1st Five Year Plan (1951-52 to 1955-56). Hardly 3.5% of the
population (mainly public service and industrial employees) are covered by
health insurance. India carries a mixed disease burden – age-old infectious
diseases; re-emergence of diseases like T.B. and malaria; dreaded diseases like
cancer, AIDS as also lifestyle diseases like cardiovascular, diabetes and depression.
Ageing population, focus on preventive aspects such as vaccination and
immunization and shifting disease patterns will create new opportunities and
drive robust growth of pharmaceutical companies. People are naturally looking
forward to lead longer, healthier and more productive lives. This opens up new
vistas of research into newer and better medicines. All these constraints and
opportunities give birth to the need to study the financial statement data of
these companies to understand aspects like earnings, solvency and growth of the
companies.

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