Biotechnology & Pharmeceutical

8/3/2019 Biotechnology & Pharmeceutical

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BIOTECHNOLOGY & PHARMACEUTICAL

Submitted by:

Saurabh Garg

Mridul Grover

Vikram Gulati

Yakshi Garg


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MarketingResearch/Development

Research Supplies Research Instruments

Venture Capital and Investment

Labor

FDA Approval

Instruments

Chemicals

Distribution

Pharmacies/Hospitals

Patient

Advertising

VeterinarianFarmers

Animals

BIOTECHNOLOGYNOLOGY/DRUG

PRODUCT VALUE CHAIN


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Define the industry

Description

The biotechnology industry as described by the Standard and Poors is both a product and

a service. Their category includes biotechnology drug developers and marketers,

diagnostic companies, firms in agricultural biotechnology and animal health, entities that

produce instruments, suppliers for drug research and global biotechnology issues trading

on U.S. stock markets. Biotechnology is focused under the biochemical science to

large-scale production, for the purpose of modifying human health, food supplies, or the

environment. The biotechnology industry involves alteration of genetic material.

Biotechnology larger focus involves production of medication and research that involves

new and improved drugs. The industry itself can be very profitable but as you will

discover there are many factors that involve becoming a major player.

Product Value Chain

The biotechnology industry has many raw material suppliers that function within the

industry but also marketers and research companies as well. Research and development

is critical to the success of a drug developer. In 2000, Ernst and Young estimated that the

public firms spent 10.2 billion dollars on research and development. Research can be

done on or off-site for the drug developers. Once a drug has been approved by the FDA,

companies such as Scios, which was recently bought out by Johnson and Johnson, will

market the new product. In some cases, developers of new medications or biological

advancements utilize outside companies to market for them so that to concentrate

resources elsewhere.

Industry Scope Chart

The scope for the biotechnology industry is biochemical science for improvements in a

variety of categories that I previously mentioned. The narrow scope of this industry is

the agricultural, pharmaceutical and animal health sectors which are the main focus of

biotechnology. Lastly, the broad range focuses on specific substitutes to the products and

services offered in the biotechnology industry. As the chart reveals, there are many

alternatives to modern medicine. All pose a fraction of threat to the survivability of the

biotechnology firms, but as sales have shown, it is nothing significant. The substitutes

pose more of a threat to smaller companies that dont have as high of sales as the top ten

do.

Identify the players

Rivals

The rivals in biotechnology are the 330 publicly traded firms that the Standard and Poor

analysis has mentioned. The top five companies are the big rivals to each other in the

drug-development sector.


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Buyers, Suppliers, Substitutes and Complementary

The direct buyers are the distributors, pharmacies and hospitals and the final buyers are

patients and farmers. The suppliers to the biotechnology industry are vast and include,

research, labor, marketers, instruments, chemicals, venture capital, research supplies, and

advertising. Substitutes consist of generic brands, forms of therapy, natural medicine,

hypnosis, vitamins, religion, organic farming and holistic medicine. Complementary are

instruments that administer drugs such as saline solution, injection needles and other

specialized equipment. Farming equipment and special tools used for genetic

engineering are also complementary.

Strategic Group Map and Mobility Barriers

We have chosen our strategic groups to be up and coming smaller firms and the five

largest firms within the biotechnology industry. The top five companies controlled forty-

one percent of the industry last year, equating to 15.1 billion dollars in sales. This creates

a big mobility barrier for smaller companies to enter their territory. Without entering the

industry with an economy of scale it would be almost impossible to compete with theselarger companies. If a new medication is released onto the market by a small firm then

the sales better increase rapidly otherwise they will most likely be bought out. Other

mobility barriers that dont allow the smaller companies to take moor market are because

they dont receive enough venture capital for extensive research and development.

Without large amounts of money it becomes a major challenge for the other 325 firms to

be innovative and advance ahead of the others. The top five firms choose not to enter the

other markets because its not worth their time when they can instead buy them out and

not have to worry. The bottom line is without heavy investing, a biotechnology firm will

either be bought out or go out of business.

Macro Environment

The governments including the FDA and many other organizations directly affect and

continue to enact laws that shape the industry. In specific, the government has allocated

money for certain companies to develop vaccines and medication for protection against

bio-terrorism. This has equated to hundreds of millions of dollars. The FDA has been

slow to approve new medications by an average of 15 months. This is a number that is

unacceptable to the new head of the FDA, Mark McClellan, and he hopes to establish

initiative that will expedite the process of approval. The longer it takes to approve a

medication, the more money drug developers have to pay and the longer it takes for the

medication to reach sick patients. The new head of the FDA wants to save thebiotechnology firms more money so that they can invest more money into research and

development.

The technological aspect of the industry is extremely advanced and continues to develop

year after year. Advancements had improved the health of our world and the quality of

drugs produced by biotechnology firms. Without continuous improvements and new

methods, the industry would be close to inexistent.


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Demographic trends such as the concentration of diseased people and certain areas

around the world which experience more susceptibility to infection than others have

allowed firms to concentrate efforts in these specific areas. These trends help

government in dispersing money and funding to the correct companies and causes that

make improvements in health, such as HIV/AIDS.

The FDA has established relationships with the larger firms so it becomes a lot easier for

them to get new approval for medication. If there is a new up and coming firm trying to

get approval, the process may be delayed longer in a reliability issue. The FDA doesnt

know if the company is reliable and advanced enough to develop a medication suited for

human intake so they must run longer and more prolonged testing. It creates a threat to

the smaller firms survivability because if they only have one medication being tested by

the FDA and it takes them a year and a half or longer to approve, the company could go

bankrupt before it reaches the market. This allows the larger firms to step in and buy

them out before they make one sale. The FDA process is critical to how quick a new

medication reaches the market.Porters Five Forces Analysis of the Established Biotechnology Strategic

Group

Threat of New Entrants (Into the established biotechnology strategic group)

Economies of scale are high in the established biotechnology strategic group. Since

research and development is such a large part of biotechnology spending, it is difficult for

a small biotechnology firm to invest enough in R&D to develop products as effectively as

an established firm. The cost to develop a new drug is very high and cannot usually be

handled by smaller firms unless they form a partnership with a large firm that has an

interest in the smaller firm. The strength of this item, therefore, is high.Product differentiation in this strategic group is high because every drug produced by the

industry has a different effect. The production of a new drug that has the same or similar

effect to a previous drug would not be in the interest of a biotechnology firm because of

the cost of R&D and time requirements. Therefore, any new entry into the established

biotechnology strategic group would need to have completely new and innovative

products that are unlike any already in existence.

Capital requirements in the established biotechnology strategic group are very high

because it takes a great deal of equipment and funding to start and maintain an R&D

program in the industry. The smaller biotechnology companies can achieve the capital

for smaller R&D programs, but only with a partnership with a large biotechnology

company or pharmaceutical company. The large company would then request marketing

rights for the smaller firms product once it is released.

The large biotechnology firms control of distribution channels is high because their

products are purchased by pharmaceutical companies and distributed only after extensive

testing and approval by the FDA. New entrants are less likely to be able to get approval

for their products than a larger company that has released products in the past.


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Switching costs for customers are high because most products from the industry are

researched and designed with very specific intent. A certain drug, for example, will serve

a purpose better than any other drug and customers will have no reason to switch to a

drug that is less effective. If there is only one drug for a certain illness, switching costs

for a customer may be very high because the only alternative may be to not be treated.

Proprietary knowledge in the large biotechnology industry is very high because most

products are patented. This means that smaller firms will have to develop truly unique

products by using only their own expertise. Access to raw materials most likely is high,

but is not of significant importance. Securing a favorable location is not of significant

importance. Access to government subsidies is high, but not of significant importance.

Experience curve effects are high for large biotechnology because it sometimes takes 10-

13 years to develop a product and firms that have released products in the past have a

significant advantage over newer, smaller firms.

Government regulation on the biotechnology industry is very high. Products produced in

the biotechnology industry must undergo very lengthy testing processes. Firms that areestablished and have produced successful products in the past are more likely to pass the

testing processes than new firms. This is a large entry barrier because firms that produce

products that to not pass the stringent testing phase will not be able to become established

biotechnology firms.

Expected retaliation would probably be high, as the large biotechnology firms will likely

buy successful new entrants, eliminating them from any competition.

Each of the items that determine the threat of new entrants into the established

biotechnology strategic group shows that the threat of new entrants is low. The most

important items are economies of scale, capital requirements, switching costs, and

government regulation. Each of these items is high, preventing new entrants frombecoming established biotechnology firms.

Intensity of Rivalry

The number of competitors in the large biotechnology strategic group is medium. Their

size and power varies with Amgen being the most powerful. The diversity of the

competitors is fairly low in terms of mentality differences because they all spend a large

percentage of their revenue on R&D, have a similar drug development process and have

the same regulations.

The industry growth rate is high because they are continuously making new discoveries

and breakthroughs in areas of research such as DNA. Genetic engineering is a very largepart of the industrys research and is just beginning to produce marketable results. The

large amount of spending on R&D in the industry shows that they place a great

importance on discoveries being made because these are what fuel the industrys growth.

This is one of the largest determinants of the intensity of rivalry in the big biotechnology

strategic group.


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Fixed costs are high because a large investment is initially needed for equipment and

R&D. This item is not very important in determining intensity of rivalry, however,

because competitors will most likely be marketing to customers with a different problem

or ailment.

Storage costs are medium-high because some ingredients, drugs and products from the

industry are probably perishable. This, however, is not of great importance in the

intensity of rivalry in the industry.

Product differentiation is very high in the industry because drugs, for example, are

usually completely unique in each firm. Firms are investing more in developing

improved versions of existing drugs, which will ultimately result in the less effective drug

becoming obsolete. Customers who require a certain treatment will usually purchase

only the best product that is designed specifically for their problem. This item is also a

large determinant of intensity of rivalry.

Switching costs for customers are medium. This is because it is relatively easy for a

customer to stop using a certain drug and begin using a different one, but the medicaleffects of doing so may or may not be severe for the customer. This depends largely on

the problem for which the industry products in question are designed.

Capacity increases are in increments that are small-medium. This is because to produce

more, the industry basically just needs to purchase more ingredients for their products.

This, however, is not of great importance in determining intensity of rivalry.

Strategic stakes in the industry are high because there are many opportunies to develop a

breakthrough product. Firms are willing to take high risks by spending a large

percentage of revenues and years on R&D. The risks of reaching a dead-end in R&D or

producing a product that does not get approved always exist. The possibility reaching a

breakthrough in treatment of a large-scale problem, such as cancer, drives the industry totake these risks.

Exit barriers in the established biotechnology strategic group are medium-high. This is

because assets are specialized, there is a high cost of exit because usually there are R&D

efforts on-going, strategic inter-relationships are relatively high, emotional barriers may

or may not be high, and government/social restrictions are high. This item is of medium

importance in determining intensity of rivalry.

The overall strength of the intensity of rivalry force is medium-low. Many items that

determine the strength of the force are conflicting, but the high industry growth rate and

high product differentiation are the main items that push the strength of the force more to

the low side. The industry growth rate is very high and is expected to continue, and firms

are generally not competing for the same customer base. There are some life-threatening

diseases, such as AIDS and cancer, for which many biotechnology firms are researching

treatments, but the growth rate of the industry and large amount of customers mean that

the intensity of rivalry is still limited. The intensity of rivalry trend is that it is staying the

same at medium-low.


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Power of Buyers

The concentration of buyers relative to the industry is low. There is a very high demand

for treatments to life-threatening diseases and other ailments, and a large number of

customers. The baby-boomer generation will require an increasing amount of

biotechnology drugs as it ages and develops more health problems. Many life-

threatening diseases still have an unmet demand for treatments, vaccines, and cures.

The volume of purchase is high because biotechnology therapeutics is usually bought in

large quantities. When the product of a biotechnology firm is a treatment for a life-

threatening disease, which it often is, the completed product will be purchased in large

quantities so that it can be distributed to as many customers as possible as quickly as

possible.

The percentage of total buyers cost spent on the industrys input is medium-high. This is

because the products are bought in large quantities at a time usually as soon as the

product development is finished.

Product differentiation of the industry is very high because most products produced bythe industry are unique due to the long development cycle and patent protections. A

customer with a life-threatening disease will want only the best treatment available and

will pay a very high price if the only treatment is a biotechnology drug. This is one of the

most important determinants of buyer power.

Buyers switching costs are high because there may be no other treatment available for a

certain ailment. In the case of a life-threatening disease, one of the switching costs may

be death if there are no other similar treatments. This is another important item in

determining buyer power.

The extent of buyers profits is medium but does not necessarily apply to buyers from the

biotechnology industry. This is because direct buyers are clinics and hospitals that arenot necessarily for-profit organizations.

Threat of backward integration by buyers is low and almost non-existent. This is because

it takes a great deal of capital and expertise to research and develop biotechnology

products. When buyers are clinics and hospitals, it is extremely unlikely that these

organizations will integrate backwards to include biotechnology research and

development efforts.

Cost savings from the industrys product are low, but this does not significantly affect the

industry because customers will be willing to pay a very high price for biotechnology

products.

The importance of the industrys input to the quality of the buyers final product is high

because it is very important that the treatment that the industry produces works well in

treating the ailment for which it was designed. If the biotechnology treatment works

better than other types of treatments, the buyer will be willing to pay more for the

industrys product.

The buyers knowledge of the industrys cost structure is medium-low. These is because

buyers generally know that the biotechnology industry spends a large percentage of


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revenue on R&D, but are not knowledgeable on how costs are distributed throughout

R&D and on other efforts.

The overall power of buyers is low, mainly due to high product differentiation, high

switching costs, and the high importance of the industrys input to the quality of the

buyers final product. The trend is that the power of buyers will remain low for a period

of time, but will eventually start to climb slowly as they become more knowledgeable

about the biotechnology industry. As they gain understanding of the way biotechnology

products work and how they are priced, they will be in a better position to determine

what to buy and what not to buy.

Power of Suppliers

The concentration of suppliers relative to the biotechnology industry is medium-low.

This is because there are many suppliers for some requirements of the industry and fewer

suppliers for others. Suppliers of equipment and components may be many and suppliers

of some rare raw materials, few.

The availability of substitute supplies is medium. This is because some substitutesupplies are widely available, but others are not, such as certain ingredients to drugs that

cannot be easily found.

The importance of the industry to the supplier is medium. Most supplies to the

biotechnology industry are from suppliers whose products have a wide range of uses;

however the biotechnology industry may be a large buyer of these products.

Differentiation of the suppliers products/services is low because their products and

services may have a wide range of uses of which biotechnology is just one. These

supplies are products such as water, chemicals, and laboratory supplies. These products

are very similar from different suppliers.

Switching costs of the industry are low because the products supplied to the

biotechnology industry are basic products such as water, chemicals, and laboratory

supplies. It would not cost the industry much to switch to different suppliers of these

products.

The threat of forward integration by the supplier is extremely low due to the equipment,

expertise, and time required in the biotechnology industry. It would be very difficult for

a supplier of materials and equipment to gain understanding of biotechnology products,

purchase the required capital, hire the expertise, and spend the development time to

produce a biotechnology product.

The overall power of suppliers is low. Most of the items that determine power ofsuppliers were based on assumptions, but low differentiation and low switching costs will

most likely be the main items that determine the low power of suppliers.

Power of Substitutes

The rate of improvement in price performance of substitutes is low because the main

substitute to biotechnology products is pharmaceutical products. These products will


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improve, meet growing demand, and command higher prices along with biotechnology

therapeutics.

The profitability of the substitutes industry is medium-high. This is because the main

substitute to the biotechnology industry is the pharmaceutical industry, which is almost as

profitable as the biotechnology industry.

The overall power of substitutes is medium-low. This is because for ailments such as

life-threatening diseases, biotechnology products are more effective than substitutes such

as pharmaceutical drugs.

Porters 5-Forces Analysis of Up and Coming Biotechnology Firms

Threat of New Entrants

In the Biotechnology Industry, while analyzing the Up and Coming or Smaller

biotechnology firms, new entrants isnt a major issue. Due to the fact that the overall

factors that create an environment where the threat of new entrants is high, does not exist.

Economies of scale are very high since the ability to survive in this industry takes largeamounts of up front money to finance research and development of a new product.

Product differentiation is also very high. All drugs that are created are more or less for

very different reasons. Once that need is met by a drug, the consumer will tend to be

fairly brand loyal.

Capital requirements are also very high. To financial needs of producing a new product

in the research and development end, as well as surviving during the testing phases by the

FDA force a company to have large amounts of available money in order to maintain

itself. A smaller biotechnology company can also have major issues with trying to

survive during a period where one of its products does not pass the testing.

Government regulations on the biotechnology industry have also hindered the possibilityof new entrants. The FDA and other government regulatory comities have such strict

policies on the practices and methods of a biotechnology industry, that it hinders the

possibility of new entrants.

Other factors which are likely to dissuade a new entrant, would be the fact that access to

financing and subsidies is minimal due to the large amounts of funding required to start a

biotechnology firm. Also the experience curve effects are very high as well. The

established firms with large amounts of money to spend on research and development

will dwarf the abilities of a smaller company trying to break into the market.

Intensity of Rivalry

The intensity of rivalry in this industry is very high. There are 330 publicly traded firms.

Among these firms, there are five companies that dominate the market, but amongst the

up and coming firms, the rivalry to survive is intense.

Since the up and coming firms number at about 325 firms, the number of companies

competing is relatively high. With all these companies competing to survive in an

industry where a limited amount of funding is going to be available, it is difficult for


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them to survive for long, unless they are able to quickly develop something that will

bring in money. On average a small company needs to have three years of capital to

support operating expenses.

Each of these 325 smaller companies, most of them are of equal size and power. With

this equal distribution of strength, there is an increased sense of rivalry among the firms.

Costs such as fixed and storage costs are also a major factor in increased rivalry. With

chemicals and developed products having a limited shelf life, it makes it more likely for

these firms to be more competitive in the market. With the fixed costs of keeping experts

in the field on staff, and the company running being so high, if you are not competitive

and successful you will not last long.

To increase capacity in increments in this field requires large outputs financially, so if a

company does decide to do this, it needs to be willing and able to compete more

aggressively. And finally, government regulations on the market being so strong, plays a

roll once again in the forces of business, but this time in rivalry. Such restrictions placed

on the firms forces them to operate in a more similar pattern as one another, and also in amore set to standard time scale. This similarity of operations forces an increase in rivalry

amongst the firms.

Power of Buyers

The power of buyers in the up and coming, or smaller firms of the industry is the same as

that of the larger firms mentioned before. Since buyers for the larger firms are also

buying from any of the smaller firms that are successful. Some things that may be

slightly altered are that the potential for buyers to be even more powerful with the smaller

firms may be an issue. The smaller companies are less likely to be able to put up a battle

of any kind with the buyers due to their lack of financial stability when it comes time to

product dump.

Power of Suppliers

Like the power of buyers, the powers of suppliers for the smaller fish in the

biotechnology pond have a similar level as that for the bigger more powerful companies.

Due to the commonality of the products that are supplied to this industry, and that the

expertise of the biotechnology industry is so specialized suppliers can be easily replaced,

and are unable to integrate forward.

Power of Substitutes

The substitutes to the biotechnology field are fairly medial currently, but growing. As far

as the agriculture aspect of this market, substitutes would be organic foods and natural

preservatives. With these becoming more popular as time goes on, power of substitutes

is also increasing.

On the pharmaceutical end, this is also the case. As natural medicines and alternative

medicines are increasing in popularity, pharmaceuticals have to improve as well. As

diseases and illnesses change and become more and more powerful, people are looking

for more effective drugs, as well as looking to alternative medicines. There will always


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be a demand for the products of the biotechnology field, but as times change so do the

demands for alternatives.

Attractiveness and Trends of Established Biotechnology Strategic Group

The established biotechnology industry is attractive based on the Porters five forces

model. Every force in the model was determined to be either low or medium-low. Thismeans that established segment of the industry is in a good position to maintain a high

profit potential. The industry currently does not have any forces that are truly

threatening; however some have the potential to rise in the future.

The intensity of rivalry and the threat of new entrants may grow in strength in the future

as the industry begins to mature. Once the industry growth rate slows down, rivalry

between firms in the industry segment will begin to intensify. There is also the chance

that one of the many small new entrants to the biotechnology industry will develop a

breakthrough product that will accelerate its size and ability to close to that of the

established firms. This will raise the threat of new entrants to the established

biotechnology segment.

Attractiveness and Trends of Up and Coming Biotechnology Strategic Group

The industry of the up and coming firms is fairly attractive and profitable. The major

force of concern in the industry is the threat of rivals. However, the threat of new

entrants is low, power of buyers is low, and power of suppliers is low, as is power of

substitutes. The major hindrance to the market is the need of large amounts of capital to

survive as a smaller biotechnology firm.

Currently the threat of rivalry is high in this market and will increase as more firms

enter. The power of substitutes is a force that is most likely to increase over time. As

these threats increases the market will become less attractive. The power of the largerfirms in the industry also makes this economy less attractive.

Industry Attractiveness, as a whole

The industry as a whole is only attractive for those involved. The smaller companies, if

they survive can make large amounts of money, or be bought up by the bigger

companies. The large established firms are controlling the market and able to gain large

amounts of profit. Overall, those firms in the market are going to be likely to stay.

General Lessons

The general lessons learned from this industry analysis are that by doing a five forces

model and the different charts, we have determined that this is a classic industry that iscurrently in its growth stages. Porters five forces are fairly low, and the overall

attractiveness of the industry is high. This analysis has shown that in this field, without

money and the availability of research and development, it is virtually impossible to enter

the market.

IRME


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This industry has similar attributes to the economy of the beer and cigarette industry. All

three of these industries have large established companies, as smaller up and coming

companies. They are different however because the cigarette and beer industries have

matured, and are not growing at the same rate as the biotechnology field. This will create

an environment where the five forces have less of an effect on the biotechnology

industry, relative to the beer and cigarette industry.

Pharmaceutical

The Indian pharmaceutical industry is a success story providing employment for

millions and ensuring that essential drugs at affordable prices are available to the vast

population of this sub-continent.

Richard Gerster

The Indian Pharmaceutical Industry today is in the front rank of Indias science-based

industries with wide ranging capabilities in the complex field of drug manufacture and

technology. A highly organized sector, the Indian Pharma Industry is estimated to be

worth $ 4.5 billion, growing at about 8 to 9 percent annually. It ranks very high in the

third world, in terms of technology, quality and range of medicines manufactured. From

simple headache pills to sophisticated antibiotics and complex cardiac compounds,

almost every type of medicine is now made indigenously.

Playing a key role in promoting and sustaining development in the vital field of

medicines, Indian Pharma Industry boasts of quality producers and many units approved

by regulatory authorities in USA and UK. International companies associated with this

sector have stimulated, assisted and spearheaded this dynamic development in the past 53

years and helped to put India on the pharmaceutical map of the world.

The Indian Pharmaceutical sector is highly fragmented with more than 20,000 registeredunits. It has expanded drastically in the last two decades. The leading 250 pharmaceutical

companies control 70% of the market with market leader holding nearly 7% of the market

share. It is an extremely fragmented market with severe price competition and

government price control.

The pharmaceutical industry in India meets around 70% of the countrys demand for bulk

drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules,

orals and injectibles. There are about 250 large units and about 8000 Small Scale Units,

which form the core of the pharmaceutical industry in India (including 5 Central Public

Sector Units). These units produce the complete range of pharmaceutical formulations,

i.e., medicines ready for consumption by patients and about 350 bulk drugs, i.e.,chemicals having therapeutic value and used for production of pharmaceutical

formulations.

Following the de-licensing of the pharmaceutical industry, industrial licensing for most of

the drugs and pharmaceutical products has been done away with. Manufacturers are free

to produce any drug duly approved by the Drug Control Authority. Technologically

strong and totally self-reliant, the pharmaceutical industry in India has low costs of


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Research and development has always taken the back seat amongst Indian

pharmaceutical companies. In order to stay competitive in the future, Indian companies

will have to refocus and invest heavily in R&D.

The Indian pharmaceutical industry also needs to take advantage of the recent advances

in biotechnology and information technology. The future of the industry will be

determined by how well it markets its products to several regions and distributes risks, its

forward and backward integration capabilities, its R&D, its consolidation through

mergers and acquisitions, co-marketing and licensing agreements.

Comparative Analysis of the Competitive Strength of the Indian

Pharmaceutical Industry

With the arrival of global patent regime and widespread liberalization measures at the

individual country, bilateral, regional and multilateral levels, the issue of

competitiveness is critical for understanding the strengths and weaknesses of a country in

the global market place. The discussion in the previous section provides strong support

for the view that strategic government policies can have a long term impact on the

growth and structure of an industry. This view is known as the strategic trade theory in

international economics. The relevance of government policy continues to be critical

even in an era of liberalization and this holds for knowledge based industries in

developing countries. For example, the government promotion of local technological

activities through fiscal or other incentives is always needed when free market forces are

not capable of scaling up the developing countrys capabilities in high technology

intensive industries. Once it is known where a country lacked in competitiveness vis

vis

others, then the concerned government can take facilitating policy measures to address

the inadequacy. In what follows, an assessment of the competitiveness of Indian

pharmaceutical industry is presented.

The competitive strength of an industry in the global market can be seen in several ways.

One simple way is to compare the relative size and growth performance in valueadded.

A stronger growth performance exhibited by a particular industry in cross country

comparisons indicates rising level and strength of production, which may drive the sector

to emerge as a global player. Most of the studies on crosscountry and industry level

comparisons of competitiveness also emphasized on the productivity level. In order to

achieve a relatively higher growth performance among countries, one country in theparticular sector is required to produce relatively more output per input combination over

time and among competing countries. Innovation is an important source of crosscountry

differences in the productivity performance. This is especially true in the case of

knowledgebased industries like pharmaceuticals. Hence, a comparison of the level of

innovation can also, to a certain extent, measure the competitive strength of the sector.

The export market share and import coverage of the export (i.e. import to export ratio)


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are also important indicators of competitive strength. An industry doing very well in the

international market suggests that it is scaling up its supplier position visvis other

competitors and in fact possesses a strong comparative advantage in the product. The

present section looks into the trends in above mentioned indicators to examine the global

competitive strength of the Indian pharmaceutical industry.

Productivity

The relatively rapid growth of output may not be sufficient to ensure competitiveness of a

country in the long run unless there is sustained increase in the efficiency with which

resources are employed in valueadded activity. Productivity is a key determinant of

competitiveness, especially in a technologyintensive industry like pharmaceuticals.

Those countries that produce increased valueadded per unit of inputs overtime visvis

other countries are sure to perform better in the international market. Table 4 presents

intertemporal performance of a group of countries with respect to labour productivity,

which measures the amount of valueadded generated for per person employed.

Innovation

Several studies on the economics of technological change and technology gap approach

to international trade (e.g., Fegerberg 1987, Verspagen 1991) have brought out that

growth performance and competitive advantages of countries go together with their

activities of technological innovation and imitation. They have shown that technological

development measured by patent and R&D expenditures have significant impact on the

trade performance of the countries. The pharmaceutical industry being one of the most

technologyintensive industries, the extent and nature of innovation is crucial for

countries to prolong their productivity growth and competitiveness in the long run. In

broad terms the process of technological change can occur through improvements in the

products, production process, raw material and intermediate inputs, and through

enhancements in the efficiency of the management system (Stoneman, 1983). Indian

domestic pharmaceutical companies are known for their innovative costeffective

processes, discovery in novel drugs delivery system, selfreliance in producing quality

raw materials and production led by quality management. However, these technological

strengths are confined to a few large Indian pharmaceutical companies. As the Indian

industry is dominated by a large number of companies, both medium and smallsized,

the research activities in the sector are quite limited and inadequately focused on

development of new drugs. Majority of the Indian companies suffered from limitation offinancial, technical and skill resources to undertake any kind of R&D activities. A recent

study found that in a sample of 223 firms, about 62.3 per cent of firms are not engaged in

innovative activities and another 21.1 per cent firms undertake R&D, which is even less

than 1 per cent of their sales in the year 19992000 (Pradhan, 2002b).

Using R&D as an indicator of technological activities, Table 5 presents the growth rates

of pharmaceutical R&D in selected countries. It can be seen that India had consistently


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pushed up its pharmaceutical R&D expenses since 1987. The Indian pharmaceutical

R&D has grown by 17 per cent during the period 198791. The growth rate has gone up

to 26 and 83 per cent over the periods 199296 and 19972001 respectively. This high

growth rate of India in pharmaceutical R&D seems to be due to the low base of

pharmaceutical R&D in the base years. In the period 19972001, India turned out to be

second highest

R&D growing pharmaceutical sector among the selected countries. Moreover, Indias

R&D relative to the US is also observed to be increasing. For each PPP $100 worth of

R&D expenditure incurred by the US pharmaceutical sector in 1990, Indian

pharmaceutical sector had incurred just PPP $2 and 40 cents. The relative R&D spending

of India in terms of the US spending has gone up to PPP $4 and 80 cents in 2000.

Although, there is a vast gap in the amount of pharmaceutical R&D expenses undertaken

by the US and India, the relative gap in R&D spending is falling modestly over the years.

The growing trends of R&D expenses may be a good sign but not a sufficient condition

to ensure a rising competitiveness for Indian pharmaceutical sector. Unless the sector setsaside an increasing proportion of its valueadded for the R&D activities over time and

across countries, expanding global position would be difficult. The R&D intensities, the

percentage of the valueadded devoted for the R&D activities, for a group of countries is

furnished. Two important points can be deduced from it. First, Indian pharmaceutical

industry as compared to global peers incurs a very small fraction of its valueadded for

research and innovative activities. In 1990, its R&D spending is not even one per cent of

the valueadded and is the lowest in the crosscountry comparison. Second, Indian

pharmaceutical industry has significantly improved its R&D intensity in the 1990s.

Between 1990 and 2000, its R&D intensity has increased by more than ninetimes from

0.91 per cent to 8.7 per cent. In 2000, the R&D intensity of India is higher thanthat of Korea, Italy and matches that of Spain.

Trade Performance

The pharmaceutical exports of India and its growth rates over the periods 199094,

199599 and 200004. It can be observed that India has increased its pharmaceutical

exports at a rapid pace in the 1990s. The total pharmaceutical exports in 2004 stood at US

$2.2 billion, nearly five times the figure pertaining to 1990. The exports have

consecutively achieved higher growth rates, 14 per cent in 199094, 23 per cent in

199599 and 44 per cent in 200004. In relation to a group of selected twenty nine

countries, India is much ahead of fifteen countries in terms of growth performance inpharmaceutical exports during 200004. Indias 44 per cent growth rate is higher than

that of the US, China, Italy, Indonesia, Malaysia, Mexico, Brazil, Rep. of Korea,

Portugal, Japan, Thailand, South Africa, Argentina, Singapore and Hong Kong. However

irrespective of its impressive export growth rates, Indias share in the global

pharmaceutical exports has not shown any improvement. In fact, it is hovering around 1

per cent of market share. Indias recent export growth rate has not yet translated into


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gains in export share as Indias growth performance is much lower when compared to the

60 per cent growth rate of world pharmaceutical exports during 20002004 and also

its contribution to the global sum is minimal.

Brownfield Overseas Investment

Last ten years or so have seen Indian pharmaceutical firms progressively adopting brownfield investment as an alternative strategy for trans border growth through

acquisitions of business enterprises abroad. The number of investments for overseas

acquisitions increased significantly from just 1 in 1995 to 21 in 2005 (Table 19). Between

1997 and 2005, the amount of consideration involved in overseas acquisitions has

increased by 71 times from just $7.5 million to reach $532.9 million. At the end of March

2006, Indian pharmaceutical companies have undertaken $1663 million worth of

investments in acquiring overseas pharmaceutical companies, brands and R&D

laboratories. Most of these acquisitions, nearly 76 per cent of the overseas acquisition

cases, are directed at developed markets like Europe and North America. Developing

countries accounted for just about 18 per cent and Central and Eastern Europe about 5.6

per cent . This shows that overseas acquisition activities of Indian pharmaceutical

companies are largely developed market oriented and apart from being a market entry

strategy, such activities are motivated to acquire foreign research capabilities, skills and

intellectual properties.

Contract Manufacturing and Strategic Alliances

Very recently contract manufacturing emerged as a new growth strategy for many Indian

pharmaceutical companies, besides offering contract services like marketing, research

clinical trials, data management and laboratory services to global pharmaceutical

companies39. The process of outsourcing brings substantial economic gains to large

global firms as they contract the production of their products to those who can work cost

effectively and qualitatively and thus relieve them to focus on their core competencies

and high valueadded operations like research and marketing. Indian pharmaceutical

companies with their low cost manufacturing capabilities meeting international

regulatory standards, expertise in process research and easy availability of qualified

workforce in India are better placed globally to get real boost from this global trend of

outsourcing. For Indian firms, outsourcing and strategic alliances not only provide

additional sources of revenues, but also access to new technologies, marketing networks

and best business practices abroad.A large number of Indian companies diversified into the business of contract

manufacturing in the 1990s. A few names can be mentioned like Ranbaxy Laboratories,

Lupin Laboratories, Nicholas Piramal, Dishman Pharmaceutical, Divi s Laboratories,

Matrix Laboratories, Shasun Chemicals and Jubilant Organosys. Ranbaxy Laboratories

was one of the first Indian companies to adopt the strategy of contract manufacturing,

licensing and collaborative research to strengthen its competitive strength in India and


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overseas markets. It entered into a joint venture with Eli Lilly of USA in 1992 to market

selected Lilly products in India and in 1993 Eli Lilly started sourcing Cefaclor

intermediates from Ranbaxy. In 2002 Ranbaxy entered into two overseas agreements for

reverse outsourcing. In June 2002, Schwarz Pharma AG of Germany announced a

licensing deal with Ranbaxy to acquire the exclusive rights of developing, marketing and

distributing Ranbaxy s New Chemical Entity RBx2258 for the treatment of Benign

Prostate Hyperplasia in USA, Japan and Europe40. As per the agreement Ranbaxy would

manufacture and supply finished formulations of the product to Schwarz Pharma. Adcock

Ingram formed a joint venture with Ranbaxy to obtain exclusive selling and distributing

rights of Ranbaxy s range of anti retroviral products in South Africa41. In February

2002, Ranbaxy Laboratories concluded an agreement with Penwest Pharmaceuticals of

USA to get exclusive marketing rights of Nifedipine XL in selected markets such as

China, Malaysia, Singapore, Thailand, Philippines, South Africa, and Sri lanka.

Conclusions and Policy OptionsIt has been a long journey for the Indian pharmaceutical industry from being merely an

import dependent to emerge as a selfreliant producer and later as an innovationdriven

developing country competitor in the global market. The government of India has

employed a variety of policy tools to develop the domestic pharmaceutical sector and to

protect it from large multinational firms operating in and dominating the industry. The

starting of public sector pharmaceutical companies for indigenous production of drugs

has been the initial form of government intervention. Later, a soft patent regime was

adopted since 1970, which led the domestic sector on a new technological trajectory and

as a result, a technologically vibrant domestic sector with remarkable technological

capabilities to develop new costeffective processes and new drug delivery systems has

emerged. This technological growth has also been contributed partly by the progress that

India achieved in building its scientific, managerial, and general skills, which are readily

and cheaply available to the industry for productive purposes. These national policies,

thus, have contributed to the rise of the Indian pharmaceutical industry and to make it

competitive in the world markets as among the cheapest producers of drugs

internationally.

While the Indian policy regime has succeeded in bringing out its pharmaceutical sector as

among the fastest growing in the world, but it has also created its own limitations in

pushing forward its productivity and technological activities. The fragmented nature ofpolicy that had encouraged a large number of small and mediumsized pharmaceutical

firms appears to have placed a constraint on the scale of production and capabilities to

further upgrade the technological strength. Due to these factors, productivity and R&D

intensity of the Indian pharmaceutical industry is lowest among countries. Although,

India has consistently enjoyed a favourable trade balance in pharmaceutical products, its

export share is still hovering around just one per cent.


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The policy liberalization of the past decade or so like liberalization of foreign investment,

trade and industrial policy and shift towards a strong patent regime postulated by the

TRIPs at the global, regional ,bilateral levels and across individual countries has opened

up new competitive challenges for the Indian pharmaceutical sector. Many Indian

pharmaceutical firms are adopting new internationalization strategies for meeting such

challenges and achieve their goal for global growth. They are strengthening their

geographical presence by starting their own subsidiaries and affiliates in different

strategic overseas markets. Apart from undertaking greenfield investments, they are also

aggressively acquiring overseas business enterprises, brands and research facilities.

Strategic alliances with and contract manufacturing, R&D and marketing for

pharmaceutical companies from developed countries are also being employed by Indian

pharmaceutical companies. For financing their global expansion, Indian pharmaceutical

firms have been increasingly entering into global securities and finance markets. The

Indian government can take several policy measures for enhancing the nations

competitiveness in the pharmaceutical sectors. A fragmented domestic market marked bya lower degree of domestic competition is not conducive for global competitiveness.

Hence, policy measures are needed to encourage mergers and acquisitions among

domestic firms to offset the scale disadvantage and to overcome the trap of low R&D

intensity. Increases in average firm size through M&As until the concentration index of

the Indian pharmaceutical industry rises significantly, may result in improving Indias

competitive advantages in the pharmaceutical sector. Government policies that encourage

overseas acquisitions by the Indian companies for brands, technology and market access

can also be important for strengthening firms technological capabilities.

Incentives and facilitation policies for encouraging global pharmaceutical companies to

outsource their production and R&D works to Indian firms shall be put in place. Dataprotection, investment and tax allowances for the outsourced production and R&D works,

etc can be useful policies. The provision of low cost finance for research with subsidy

facilities for indigenous research activities continues to be a key to competitive strategy.

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Biotechnology & Pharmeceutical