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MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 2.2

Define Pharmaceutical Industry

   Posted On :  06.11.2021 06:41 am

The industry has witnessed healthy growth in the recent past and investment in pharmaceutical industry is continuing. The product output is also increasing and operational and business management efficiency also seem to have improved. This is shown by the increase in the output of the industry as given in table

Growth of the Industry

The industry has witnessed healthy growth in the recent past and investment in pharmaceutical industry is continuing. The product output is also increasing and operational and business management efficiency also seem to have improved. This is shown by the increase in the output of the industry as given in table


Structure of the Industry

Pharmaceutical industry adopts high technology and produces high value added products. The process is very complex in nature. The processes are classified into primary and secondary. The primary process requires uninterrupted power supply, maintaining of conditions under which the molecules react and yield a new product, excellent manufacturing conditions and well-trained personnel. Specific plants costs less but, they have the risk of obsolescence. Multipurpose plants are expensive and have no risk of obsolescence but, they have the risk of cross contamination. The secondary process is the conversion of bulk drugs into formulations. The secondary process is not much technology intensive and has low capital cost. Hence, there are many players in the market.

Nature of the Product

The products of the pharmaceutical industry are broadly classified into bulk drugs, formulations and intravenous fluids. Bulk drugs are like Ciproflaxacin, Ibuprofen, Ranitidine, Ethanbutol, etc. The major manufactures of the products are Ranbaxy, Cipla, Cadilla, Dr.Reddys’ Lab and Lupin. Some companies manufacture formulations from bulk drugs and market them under brands. Companies also manufacture formulations for other companies. Some of the companies in the formulation segment are Ranbaxy, Cipla, Wockhardt, Lupin etc.

Intravenous fluids are preparations which aid in quick replenishment of body fluids. Bulk drugs and formulations companies produce intravenous fluids also. The formulations are produced by firms from all over the country. Andhra Pradesh stands first in the production of bulk drugs.

Demand for the Product

The Indian pharmaceutical market which was worth Rs90 billion in 1997, is growing at 13.7% rate. But only three out of ten Indians have access to allopathic drug. Even in this segment vast majority of them belong to urban area. Investments in medical and public health declined from 2% of the total capital outlay in the sixth five year plan to 1.75% in the Eighth five year plan. In the year 1996-97, the portion in the annual budget was of 1.7%.

The less than 15 age segment of the population is expected to grow at 0.5% but the fastest growth is expected in the 50-59 groups. This has led to a shift in the demand from the life saving drugs to life enhancing drugs. It is referred to as a shift from age old diseases to old age diseases.

Competition

The industry is having 2400 players within the organised sector and around 15,000 in small-scale sector. The low entry barriers, government’s encouragement given to small sector units and low capital cost are the reason for the presence of large number of units in the pharmaceutical sector. This has lead to price crash in the bulk drug.

Apart from internal competition, the industry is facing international competition too. There is a large import of bulk drugs from China. The Chinese products are a significant competitor for the Indian pharmaceutical industry. Multinational corporations like Pfizer, Abbot labs and Novartis also pose threat to the local producers.

Government Policy

The drug companies operate in a highly politicised environment. The product development, prices, safety are regulated by the government. The pharmaceutical industry functions under the Drug Price Control Order. The prices of drugs are regulated to make them available to the masses at affordable prices. The DPCO is issued from time to time to keep the policy in tune with the changing demands.

The Patent Law in India provides patent only for process and there is no product patent. But, with signing of GATT, India is required to amend the Patent Law. Once the product patent comes into force, the reverse engineering route to introduce new molecules will not be available to Indian companies.

Research and Development

The average sum spent by the 15 largest Indian pharmaceutical companies for R & D is around 2 percent of turnover. This is drastically low and research is mainly concentrated towards the area of process development rather than on new molecular searching.

Strength

Despite economic slowdown, the industry registered double digit growth rate.

Indian pharmaceutical market is growing at 13.7%.

Net exporter of bulk drugs and formulations.

Low cost in process development and R & D.

Third largest scientific pool in the world.

Weakness

Decline in plan investment in medical and public health.

Only three out of ten Indians have access to allopathic drugs.

Various price controls.

Opportunity

With increase in purchasing power, health care expenditure would increase.

Non Japan Asia’s share of world health care spends will double.

Patent law will lead to consolidation of industry.

Threat

Fall in the price of bulk drugs and imports from China.

60 major products may lose patent protection.

Ambiguity regarding the timing and content of the Indian Patent Act amendment.

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