Porter’S Forces In Pharmaceutical ind

PORTER’S FORCES IN

PHARMACEUTICAL

INDUSTRY

KEY CHARECTARISTICSOf INDIAN PHARMA Industry

HIGHLY REGULATED The industry faces PRICE, QUALITY & PATENT regulation.

RESEARCH ORIENTED Highly research driven, regularly invents NDDS along with new molecules & innovative production process.

KEY CHARECTARISTICSOf INDIAN PHARMA Industry

LOW PRICE ELASTICITY Consumers less sensitive to price movements for most drugs

LIMITED CUSTOMER CHOICE CONSUMERS are not decision makers, DOCTORS & medical representatives play major role.

HIGHLY DEPENDENT ON THE DEVELOPMENT OF HEALTH INFRASTUCTURE

Hospitals, health facilities, medical practitioners plays a key role in driving consumption.

The Indian pharmaceutical industry is estimated to have over 10,000 manufacturing units, as given by the Organisation of Pharmaceutical Producers of India.

PRICE EROSION IN INDIAN GENERICS due to:Price control imposed by governmentRise in number of domestic players

NATIONAL-LIST-OF-ESSENTIAL-MEDICINES-(NLEM) lists 354 DRUGS under cost based price control by NATIONAL PHARMACEUTICAL POLICY 2006.

ORGANISED SECTOR UNORGANISED SECTOR

5% of the industry 95% of the industry

65% of industry turnover 35% of industry turnover

19% turnover from MNC.81% turnover from Indian Companies.

KEY ISSUESOf The Industry

The field of discovery and developments of new chemical entity (NCEs), had more misses than hits.

Very few discoveries reach the final stages of approvals, and in most of the cases the claim for patent gets stuck in legal battles.

INDIAN COMPANIES spend 4% of SALES on R&D, where the GLOBAL practice is of 12-16%.

Leading INDIAN Pharma companies have been actively extending the frontiers of scientific knowledge & going global through mergers & acquisitions.

The European generics market have emerged as a major attraction for acquisitions by Indian companies as margin erosion in Europe is much less compared to the US when a drug or formulation becomes generic.

Consolidation is inevitable and is expected to bring in economies of scale and provide access to newer geographies to regional players.

FOREIGN ACQUISITIONS BY

INDIAN COMPANIES IN

“2006”

MAJOR PLAYERS IN INDIA

GLOBAL PLAYERS

INDIAN PHARMA INDUSTRY DO NO HAVE THIS PROBLEM !!

A paradigm shift occurred in the Indian pharmaceutical industry with India becoming a signatory to the WTO order,

ushering in the Product Patent Regime.

Earlier, with the enactment of The Patent Act, 1970, only process patent was applicable.In India, 97 per cent of drugs are off patent and are manufactured by a vast number of companies.The key therapeutic segments include

Anti-infective sCardio vascular and Central nervous system drugs.

Anti-infective comprise the largest therapeutic segment in India, accounting for about 26 per cent of the market.The INDUSTRY complies with the Good Manufacturing Practices set by World Health Organisation. These standards improve the quality and also act as potential entry barriers for new firms to enter

“MARKET SHARE of MNC & INDIAN Companies”EXPORTS constitutes 40% of TOTAL PRODUCTION.Out of which FORMULATIONS constitutes nearly 55%BULK Drugs rest 45%

Almost half of the Export Revenue generated comes from Dr REDDY’S

RANBAXYCIPLA

Indian Pharma companies are going for compliance withINTERNATIONAL REGULATORY AGENCIES like USFDA & MCC for their manufacturing facilities. INDIA has largest no of USFDA approved plants outside US

CONTRACT MANUFACTURING DEALS IN

INDIA

International Biotech

Companies

Top Indian Biotech

Companies

International Biotech

Companies in India

Genentech Inc. Biocon Monsanto

Amgen Inc. Shantha Biotechnics Pfizer

Gilead Sciences Inc. Bharat Biotech Astra Zeneca

Genzyme Corporation Wockhardt Unilever

Serono S.A Dr. Reddy's Laboratories Dupont

Biogen Idec Inc. Serum Institute of India Bayer

MedImmune Inc. Zydus Cadila Eli Lilly

Chiron Corporation Aventis Pharma Hoechst Roussel Vet

Amylin Pharmaceuticals

Inc.

Reliance Life Sciences Millipore

Invitrogen Corporation - Novozymes

“STRENGHTS”

The primary STRENGTHS OF THE INDIAN PHARMA INDUSTRY are:

INDIAN pharma industry is COST COMPETITIVE. It’s a well developed INDUSTRY with strong manufacturing base. Access to pool of highly trained scientist from INDIA & ABROAD. Strong marketing & distribution network. Rich BIO DIVERSITY Competent I chemistry & process development.

“WEAKNESS”The primary WEAKNESS OF THE INDIAN PHARMA INDUSTRY are:

Low investments in innovative R&D and lack of resources to compete with MNCs for new drug discovery research. Lack of strong linkages between INDUSTRY and ACADEMICIANS. Low medical expenditure on healthcare in INDIA. Production of spurious & low quality drugs tarnishes the image of INDUSTRY at home & ABROAD. Shortage of life saving medicines containing psychotropic substances .

“OPPERTUNITIES”

The OPPERTUNITIES OF THE INDIAN PHARMA INDUSTRY are:

Significant EXPORT POTTENTIAL. Licensing deals with MNCs for new chemical entity (NCE) & new drug delivery systems (NDDS). Marketing alliances to sell MNC products in domestic markets.

“OPPERTUNITIES”

The OPPERTUNITIES OF THE INDIAN PHARMA INDUSTRY are:

Contract manufacturing arrangements with MNC s. Potential in developing INDIA as the centre for INTERNATIONAL CLINICAL TRIALS. NICHE player in global pharma R&DSupply of GENERIC drugs to developed markets.

“THREATS”

The Threats OF THE INDIAN PHARMA INDUSTRY are:

Product patent regime poses serious challenge to DOMESTIC industry unless investment happens in R&D. R&D efforts are hampered by lack of enabling regulatory equipment, Ex restrictions on animal testing.

“THREATS”

The Threats OF THE INDIAN PHARMA INDUSTRY are:

Drug Price Control Order put unrealistic ceilings on product prices, profitability & prevents generating investible surplus. Lowering of TARRIF protection. NEW MRP based excise duty in AP & MAHARASHTRA threatens existence of many small scale units

“THREAT FROM CHINA”Competitor in the exports of Active Pharmaceutical Ingredients , with an export growth of 20% per year.

COMPETITIVE ADVANTAGE OF CHINA

Lower Electricity costs (Rs 1.5 to 2.5 per KWH) than (Rs 4.5 to 6 per KWH) of INDIA.

Labour charges are 40% lower, with favorable labour policies.

Implemented clear intellectual property laws and data exclusivity rules, a step ahead to attract Foreign players.

“THREAT FROM CHINA”Competitor in the exports of Active Pharmaceutical Ingredients , with an export growth of 20% per year.

COMPETITIVE ADVANTAGE OF CHINA

Established profit oriented R&D organizations independent of Govt. funding.

Chinese Govt. allows 100% income tax holiday for first 2 profit making years & 50% for next 3 years.

Companies are allowed duty free import of Capital requirement.

“CHEMICAL EXPERIENCE”

SPECIALIZED SECTORS

“STEPS REQUIRED”The steps required for boosting

competitiveness are

Extension of R&D expenses deduction by 150%

The Govt should increase the earmarked Rs 150 Crore for R&D to about Rs 2000 Crore.

Rationalization of Drug price control order (DPCO).

“STEPS REQUIRED”The steps required for boosting

competitiveness are

Industry-academic relationship can be further explored.

Income tax exemptions should be given on Clinical trials & Contract research done outside the company & abroad.

Spurious drug problem should be tackled

India should exploit its age old know how on traditional & herbal medicines.

Govt. should provide TAX holidays for some specific periods, so that Indian companies can exploit the opportunity arising from patented Drugs & take up marketing of GENERICS to US.

Four strategiesBig Indian pharma or big global pharma needs to reorient themselves to newer strategic models.There have been four shifts. As a result, big pharma companies will have to develop their own models.

FOUR STRATEGIES

The first is a shift from an opportunistic strategy to one of focus. Market forces are driving Pharma companies to concentrate their efforts and to abandon the practice of investing in a broad array of compounds on the premise that nearly every opportunity is worth exploring.

Second, companies will shift from a fully integrated pharma company model to one that uses partnerships to manage risk and return. Today, each company handles its own discovery, development, manufacturing, marketing and sales. But trying to do everything internally carried a high risk with increasingly significant investments.

Third, companies will shift from science-driven provision of specific drugs to providing customer solutions. Historically, the pharma industry has sold therapeutics that addresses diseases but don't necessarily cure them or meet patients' full needs in managing their conditions.

Finally, companies will shift from a functional to an integrated business organisation model.Traditionally, Big Pharma has had separate functional units for each stage of the drug development and marketing process. But the industry should study companies such as Dell and General Electric to assess the advantages of organisation models based on discrete business units. These companies grow profitably by pushing responsibility for profits down to smaller business units.

PORTER’S Competitive

Forces

PORTER’S Competitive Forces

Porter's five forces analysis is a framework for the industry analysis and business strategy development developed by Michael E Porter of Harvard Business School in 1979. It uses concepts developed in Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition".Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally requires a company to re-assess the marketplace. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competences, business model or network to achieve a profit above the industry average. A clear example of this is the airline industry. As an industry, profitability is low and yet individual companies, by applying unique business models have been able to make a return in excess of the industry average.


Strategy consultants occasionally use Porter's five forces framework when making a qualitative evaluation of a firm's strategic position. However, for most consultants, the framework is only a starting point or 'check-list' they might use.Porter's five forces include three forces from 'horizontal' competition: threat of substitute products, the threat of established rivals, and the threat of new entrants; and two forces from 'vertical' competition: the bargaining power of suppliers, bargaining power of customers.According to Porter, the five forces model should be used at the industry level; it is not designed to be used at the industry group or industry sector level. An industry is defined at a lower, more basic level: a market in which similar or closely related products and/or services are sold to buyers. Firms that compete in a single industry should develop, at a minimum, one five forces analysis for its industry. Porter makes clear that for diversified companies, the first fundamental issue in corporate strategy is the selection of industries (lines of business) in which the company should compete; and each line of business should develop its own, industry-specific, five forces analysis. The average Global 1,000 company competes in approximately 52 industries (lines of business).


THE THREAT OF SUBSTITUTE PRODUCTS

The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).

buyer propensity to substituterelative price performance of substitutesbuyer switching costsperceived level of product differentiation


THE THREAT OF THE ENTRY OF NEW COMPETITORS

Profitable markets that yield high returns will draw firms. This results in many new entrants, which will effectively decrease profitability. Unless the entry of new firms can be blocked by incumbents, the profit rate will fall towards a competitive level (perfect competition).

the existence of barriers to entry (patents, rights, etc.)economies of product differencesbrand equityswitching costs or sunk costscapital requirementsaccess to distributionabsolute cost advantageslearning curve advantagesexpected retaliation by incumbentsgovernment policies


THE INTENSITY OF COMPETITIVE RIVALRY

For most industries, this is the major determinant of the competitiveness of the industry. Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.number of competitorsrate of industry growthintermittent industry overcapacityexit barriersdiversity of competitorsinformational complexity and asymmetryfixed cost allocation per value addedlevel of advertising expenseEconomies of scaleSustainable competitive advantage through improvisation


THE BARGAINING POWER OF CUSTOMERS

buyer concentration to firm concentration ratiodegree of dependency upon existing channels of distributionbargaining leverage, particularly in industries with high fixed costsbuyer volumebuyer switching costs relative to firm switching costsbuyer information availabilityability to backward integrateavailability of existing substitute productsbuyer price sensitivitydifferential advantage (uniqueness) of industry productsRFM Analysis


THE BARGAINING POWER OF SUPPLIERS

Also described as market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm. Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.

supplier switching costs relative to firm switching costsdegree of differentiation of inputspresence of substitute inputssupplier concentration to firm concentration ratioemployee solidarity (e.g. labor unions)threat of forward integration by suppliers relative to the threat of backward integration by firmscost of inputs relative to selling price of the product.

That buyers, competitors, and suppliers are unrelated and do not interact and collude.That the source of value is structural advantage (creating barriers to entry).That uncertainty is low, allowing participants in a market to plan for and respond to competitive behavior.An important extension to Porter was found in the work of Brandenburger and Nalebuff in the mid-1990s. Using game theory, they added the concept of complementors (also called "the 6th force"), helping to explain the reasoning behind strategic alliances. The idea that complementors are the sixth force has often been credited to Andrew Grove, former CEO of Intel Corporation. According to most references, the sixth force is government or the public. Martyn Richard Jones, whilst consulting at Groupe Bull, developed an augmented 5 forces model in Scotland in 1993, it is based on Porter's model, and includes Government (national and regional) as well as Pressure Groups as the notional 6th force. This model was the result of work carried out as part of Group Bull's Knowledge Asset Management Organisation initiative.It is also perhaps not feasible to evaluate the attractiveness of an industry independent of the resources a firm brings to that industry. It is thus argued that this theory be coupled with the Resource-Based View (RBV) in order for the firm to develop a much more sound strategy.

CRITICISM of 5 Forces

y

Expenditure on R&D is 2835 lakhs.By the increase R &D investment company try to penetrate of patent products.

Company handle its suppliers under section 16 of MSMED acts

Company has increased focus on launchingnew brands. Four new brands were launched in 2008 viz.,Champix, Cyclokapron, Acupil and Trulimax. A new indication ofLyrica in Fibromyalgia was also launched.

Increase new territorial expansions,new

therapeutic areas and building strong sales operations system

Total capital of campany is 89956 lakhs.Its market share is 2.2% . Its recent

growth is 12%

Torrent

Total expenditure 11.28 crore.588 patents filed for NDDS technology, drug discovery projects and innovative process of API &formulations for various markets and 163 have been granted so far.`

``````````````

The Company has initiated the process of obtaining information from suppliers who have registered themselvesunder the Micro Small Medium Enterprise Development Act, 2006 (MSMED Act, 2006).

The Company introducing new molecules brands and also line extensions of existing brands. During the year, 52 (as compared to 49 in the previous year) new products were launched in the market.

Growth of market like organized buyer group,

pharmacy chain, corporate hospitals.

Increase coverage of new doctors &specialist.

Net worth of company is 585.25 crores.Its recent

growth is 7%.

THE THREAT OF NEW ENTRANTS

Profitable markets that yield high returns draws Firms. This results in many new entrants, and effectively

decrease profitability.

Unless the entry of new firms can be blocked by incumbents, the profit rate

will fall towards a competitive level (perfect competition).

THE THREAT OF NEW ENTRANTS

Existence of barriers to entry (patents, rights) Economies of product differences Brand equity Switching costs Capital requirements Access to distribution Absolute cost advantages Learning curve advantages Expected retaliation by incumbents Government policies

THE THREAT OF SUBSTITUTES

The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand).

Buyer propensity to substitute

Relative price performance of substitutes

Buyer switching costs

Perceived level of product differentiation

THE INTENSITY OFCOMPETITIVE RIVALRY

For most industries, this is the major determinant of the competitiveness of the industry.

Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc.

THE INTENSITY OFCOMPETITIVE RIVALRY

Number of competitors Rate of industry growth Intermittent industry overcapacity Exit barriers Diversity of competitors Informational complexity and asymmetry Fixed cost allocation per value added Level of advertising expense Economies of scale Sustainable competitive advantage through improvisation

Buyer concentration to firm concentration ratio Degree of dependency upon existing channels of distribution Bargaining leverage, particularly in industries with high fixed costs

BARGAINING POWEROF CUSTOMERS

Also described as the market of outputs. The ability of customers to put the firm under pressure and it also affects the customer's sensitivity to price changes.

Buyer volume Buyer switching costs relative to firm switching costs Buyer information availability Ability to backward integrate Availability of existing substitute products Buyer price sensitivity Differential advantage (uniqueness) of industry products

BARGAINING POWEROF CUSTOMERS

Also described as market of inputs. Suppliers of raw materials, components, labor, and services (such as expertise) to the firm can be a source of power over the firm.

Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for unique resources.

BARGAINING POWEROF SUPPLIERS

Supplier switching costs relative to firm switching costs Degree of differentiation of inputs Presence of substitute inputs Supplier concentration to firm concentration ratio Employee solidarity (e.g. labor unions) Threat of forward integration by suppliers relative to the threat of backward integration by firms Cost of inputs relative to selling price of the product

BARGAINING POWEROF SUPPLIERS

During the year, the Company invested Rs. 6,293 million on manufacturing, R&D facilities and othercapital expenditure

Company not faced temporary problems with thirdparty suppliers to both its German subsidiary,betapharm and its CPS (Custom PharmaceuticalServices)operations in Mexico

Company try to increase more penetration in market tie up with hospital and pharmacy chains.

2007–08, Company has increased its revenues at 27 %

Company launches new products like simvastatin, finasteride, Merck, Ondansetron, Fexofenadine

Company invest 42 billion US Dollar in R&D

Supplier Relationship Management initiatives in key categorieshelped your Company avail of better service and improvement in on-time supplies. The company is the

market leader in most of the therapeutic categories .It also offers a range of vaccines, for the prevention of hepatitis A, B, influenzae, chickenpox, diphtheria, pertussis, tetanus and others.

Company try to increase new territory and contact with specialist doctors.

Company has turnover of Rs. 1500 crore and a share of 6.2 per cent* * [Source: IMS Indian Purchase Audit (IIPA), August 2008]

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Porter’S Forces In Pharmaceutical ind