Pharmaceutical Industry

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Incumbent Company:
Dr. Reddy’s Laboratories

Indian Pharmaceutical Industry can be valued at around $20billion (2009). By Volume, India is world’s second largest producer of pharmaceuticals, while by value it is world’s thirteenth largest. It is expected to grow at CAGR of 12% for 2010-2012 (global average 6%).Around 95% of Domestic demand is catered by Indian Pharmaceutical companies. In Indian Pharmaceuticals Market, Formulations accounted for 65% while Bulk Drugs accounted for 35% by Value. Formulations consist of Generic as well as patented drugs though traditionally Indian Formulations industry has been strongly a Generics Industry. Industry Boundaries:

Vertical Scope: Value chain of Pharmaceutical Industry can be represented as Chemicals / Intermediaries >> API/Bulk Drugs >> Formulations. Since most of the Indian companies are into API as well as Formulations both the segments are considered. •Geographical Scope: Indian Pharmaceutical companies are considered for the purpose of this report. Barriers to Entry:-

Following factors determine the level of barriers of entry for a new player in the Indian pharmaceutical industry:- •Low Capital Requirement: An organization has an option of setting up a plant either approved or not approved by US FDA. The initial capital required to set up a manufacturing unit is pretty low in case of Non-US approved FDA plants. It goes up in case approval is sought from US FDA. The advantage of not getting the plant approved is that the company can’t sell its products in the US market, which is the biggest market in the world for drugs. •Product patent instead of Process Patents earlier: Earlier, prior to 2005, India followed a process-patent regime in which the manufacturers could change the manufacturing process and technique of any of the patented drugs and start manufacturing. It was easy to copy any drug under this mechanism. But in 2005, in order to adhere to WTO norms, India had to shift to the Product-patent regime. It ensures security to companies indulging in high R&D expenditures. Thus this prevent entry of new players in new drugs, though, it has no impact on the generic drugs segment. •Economies of Scale: Financial results of companies with high capacity show higher revenues, better growth rate and higher profitability. This is because of more quantity to be sold to the foreign countries which have high-margin markets. Large organisations have grown at an average of 23% over the past few years, while smaller organizations have grown at 10%. •Cost Advantage to Indian producers: Indian companies enjoy cost advantages over the foreign players due to cheap labour. Also, the cost of setting up plants in India is much lesser than that in foreign countries. To add to this, Indian companies can access the generic products market abroad, especially US, through Abbreviated New Drug Applications (ANDA). In 2009, Indian companies received 29% of all ANDAs issued by US FDA. To add to that, government has reduced the taxes on drug industry. Therefore, Indian companies have become major players in the global pharmaceutical industry. •Low Product differentiation in case of Generics: There is no differentiation in products in case of generics. The contents, mixtures, doses and specifications of all the industries are exactly the same. The only differentiating factor is the fact that how much a company is able to convince doctors and medical practitioners about the product. This job is done through Medical Representatives (MRs) of the company. •High regulations in terms of Price, Quality and Patents: The pharmaceutical industry is regulated on the basis of price, quality and patents. The government agencies keep a close check on all the companies in terms of quality. In case of prices, the rates of the scheduled drugs are decided by the regulators and all the companies have to abide by it. But these regulations are not deterrents to entry of new players. •No retaliation...
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