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An Overview of the Indian Pharmaceutical Sector

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Book cover Performance of Pharmaceutical Companies in India

Part of the book series: Contributions to Economics ((CE))

Abstract

This chapter presents an overview of the Indian Pharmaceutical Industry and traces its evolution and growth. From the review of policies and analysis of the aggregate data, we conclude that the Patent Act of 1970 and the knowledge spill-over from public sector units provided the necessary impetus for the growth of the industry. Presently, the industry is highly competitive with the top 20 firms capturing about 80 % of the market. However, contrary to conventional economic wisdom, evidence also suggests that it is one of the most profitable industries. The coexistence of low concentration and high profit earning is observed due to firm specific factors like its efficiency, returns from R&D and marketing related outlays and earnings from the global market.

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Notes

  1. 1.

    Concerned about the lack of domestic manufacturing facilities and the unequal pattern of trade, few scientists like Prafulla Chandra Ray, TK Gajjar and AS Kotibhaskar laid the foundation of Bengal Chemical and Pharmaceutical Work in Calcutta (BCPW) in 1892 (see, BCPW 1941 for its activities in the early days) and Alembic Chemical Works by in 1907 in Baroda. The establishment of the Bengal Immunity in 1919 by a group of notable scientists and physicians, namely Nilratan Sircar, Kailash Chandra Bose, Bidhan Chandra Ray etc was yet another landmark in the history of the evolution of the Indian pharmaceutical industry. The company was established with the sole objective of attaining self-sufficiency of the production of synthetic medicine and of sera and vaccines.

  2. 2.

    See Pharmaceutical Enquiry Committee 1954, pp 17–18.

  3. 3.

    See Pharmaceutical Enquiry Committee 1954, p 75.

  4. 4.

    Drug manufacturing in India has two important vertically linked processes: (1) production of bulk drug; and (2) the production of formulation. The Bulk drug production is essentially the production for the raw material or active pharmaceutical ingredients (API) for drugs, whereas production for formulation is achieved by synthesizing the bulk drug into final products like tablets, ointments, capsules etc.

  5. 5.

    IDPL has three major plants – the Rishikesh plant, which was established to produce a majority of the basic drugs and their product mix. The Hyderabad unit was established to produce 16 synthetic vitamins, analgesics, antipyretics and other varieties of drugs, and the Madras unit produced the surgical instruments. Subsequently, two more plants were established at Gurgaon and Muzaffarpur to produce nicotinamide and acetic acid manufacturing (Chaudhuri 2005).

  6. 6.

    Source CDRI website: www.cdriindia.org

  7. 7.

    For further details, see Chaudhuri (1999, 1997).

  8. 8.

    The Kefauver Committee of US in 1950 (see Jordan 1999), also noted that India was among the high priced nations in the world.

  9. 9.

    India has gained fame as a low-cost producer and supplier of anti-retroviral and supplier to international organizations and to needy patients in Africa. In a recent case of supplying anti-retroviral drugs to South Africa, the price quoted by Indian firm was the lowest at US $ 350 per year per person compared to $ 1679 quoted by US MNCs.

  10. 10.

    See The Hindu, September 2007.

  11. 11.

    About 20% of medicines in the country are fake or substandard, of these, 60% does not contain any active ingredient, 19% contain wrong ingredients and 16% have harmful and inappropriate ingredients.

  12. 12.

    It is worth mentioning here that many small scale units in India do not have adequate resources to upgrade their facilities at par with the GMP standard which requires investment worth 25 million for plants and machinery. Consequently, these companies might have to exit the market or may merge and grow in size.

  13. 13.

    The data relevant for the analysis has been collected from the financial balance sheets of the companies provided by the Prowess and the Capital-online data sources. The other sources of data are the ORG-MARG data on the pharmaceutical sector of India, the Annual Survey of Industries (ASI) and the annual balance sheets of the Bulk Drug association of India, Organization of Pharmaceutical Producer of India (OPPI), Ministry of Chemical and Petro-Chemical of India.

  14. 14.

    The four firm concentration ratio C4 is computed by ranking firms with respect to their market share in the industry. It is the industry sale accounted for by the four largest firms in the industry. Values of the C4 may range from Zero (0) to the limit, to one (1). The selection criteria of “Four – firm” in determining the concentration of the industry is done on an ad hoc basis and there is no reason to believe that one has to consider only four firms to determine the concentration in the industry. A better measure of concentration is the Herfindahl index for concentration.

  15. 15.

    The Herfindahl index (H) is measured as the sum of the square of each firm’s market share; thus \( H = \sum\limits_{{i = 1}}^n {s_i^2} \) where \( {S_i} = \) share of the i th firm. H index utilizes the size distribution as well as the total number of firms in the industry and is therefore a more appropriate measure of concentration. Moreover, the H Index is constructed from a theoretical framework under the assumption of the Cournot – Nash equilibrium (see Stigler 1964, pp 201–220) and satisfies all the criteria of the good measure of concentration (see Stephen 1979, pp 67–75). The range of the value of H is from 1(monopoly case) to 1/n (for n equal sized firm).With perfect competition when n → ∞ the value of H is zero. The general norm is that the H-index with a value of less than 0.1, between 0.1 and 0.18 and above. Eighteen indicates an un-concentrated to moderately concentrated to highly concentrated market structure.

  16. 16.

    These ratios are computed using information about firms as per CMIE data base.

  17. 17.

    The figure is arrived at by calculating the percentage change in the concentration indices from 1991 to 2000.

  18. 18.

    The average cost is measured by the total expenses for production which is the sum of the cost of labor, capital, raw material and fuel and also the total operating expenses, which includes the administration and selling cost, and other manufacturing expenses divided by the sales volume of the companies (all units measured in Rs crore).

  19. 19.

    Scale economies is a phenomenon that is observed for a cross-section of firms. Hence, the analysis is done for the year 2002, which has the maximum number of observation (280 firms) for all the years considered in the study.

  20. 20.

    M.E.S is defined as the output level at which the average cost curve attains the minimum value. If M.E.S is achieved for a large plant size or larger value of output then a company can enter the market only after investing heavily in plant and machinery.

  21. 21.

    The following functional form was used by Silberston Aubrey (1972) to measure scale economies of the industry in the U.K. We have also applied the same form to measure scale economies for a cross-section of 280 pharmaceutical firms in 2002. We have conceptualized the size of the firms in terms of the sales volume (value of output).

  22. 22.

    Firms with a sales volume of Rs. 8 crore is defined as: tiny firm, firm within the range of Rs. 9–100 crore as small sized firm, firm within the range of Rs. 100 crore to 300 crore as medium sized firms and firms with sales volume of more than Rs. 300 crore as large firms. The classification of firms as tiny, small, medium and large-sized is arrived at by dividing the sales distribution into four groups: firms with sales up to 25th percentile are taken as tiny firms, firms having sales greater than 25th percentile and up to 50th percentile are classified as small firms, firms having sales greater than 50th percentile and up to 75th percentile are classified as medium sized firms and those having sales greater than 75th percentile are designated as large-sized firms.

  23. 23.

    The Wald test computes the test statistic by estimating the unrestricted regression without imposing the coefficient restrictions specified by the null hypothesis. The Wald statistic measures how close the unrestricted estimates come to satisfying the restrictions under the null hypothesis. If the restrictions are in fact true, then the unrestricted estimates should come close to satisfying the restrictions.

  24. 24.

    The Herfindahl index (HD) for diversification for a firm is measured as the sum of square of the share for the ith commodity in the total revenue earned by a firm. Thus, \( H = \sum\limits_{{i = 1}}^n {s_i^2} \) where \( {s_i} = \) share of the ith commodity in the total revenue earned by a firm. The Herfindahl index takes a value of one (1) for firms producing single output and for a highly diversified firm the value of H-Index of Diversification falls.

  25. 25.

    HD is estimated for registered pharmaceutical companies based on the information provided by the CMIE database.

  26. 26.

    Computed from the prowess database using the aggregated data of the industries.

  27. 27.

    The co-existence of high profit and low concentration for the pharmaceutical industry is also observed in other parts of the globe see for example the studies by Santerre and Stephen 2004, p 467; Viscusi et al. 2000, p 820; Schweitzer 1997, p 25.

  28. 28.

    Presentation of such data cannot establish a causal relation. However, such data no doubt provides certain indicators. Relations have been examined in subsequent chapters in a statistically rigorous manner.

  29. 29.

    Available at http://www.nihcm.org/~nihcmor/pdf/innovations.pdf

  30. 30.

    Generally, innovating companies not only obtain patent on the NCE in the drug invented but also “ring-fence” their product with other secondary sources of patent. These secondary sources of patent are obtained (1) on specific formulation (2) for methods to cure the diseases and (3) process of manufacturing the product. The presence of the secondary sources of patent assists the company to extend the monopoly period of the product even after its patent expiry (Chaudhuri 2005). In such cases, generic companies cannot enter the market even with patent expiry.

  31. 31.

    In NDDS a commonly quoted example is the noteworthy success of Ranbaxy. The firm has come up with an improved version of antibiotic ciprofloxacin which is developed by the American company Bayer AG. The Ranbaxy formulation proved to be much more effective with better patient – compliance. Recognizing the potential benefit of the product, Bayer entered into a licensing agreement with Ranbaxy and agreed to market the product world-wide against a payment of US $ 65 million. Other Indian companies like Dr.Reddys Laboratory, JB Chemicals, Cadila Healthcare, Zydus Cadila, Morepen Labratories, FDC Limited are also in this NDDS business.

  32. 32.

    The Boston Consulting Group estimated that the contract research market for global companies in India would touch US$ 900 million by 2010 and industry estimates suggest that the Indian companies bagged contract research worth US$ 75 million in 2004.

  33. 33.

    For example, the Amoxicillin groups have 100 and 36 brands in the market. But this is available at different prices and the price differences can be as high as Rs. 308.50 through use of brand name and advertising.

  34. 34.

    Apart from removing the trade barrier for the free flow of medicinal products the Government of India also relaxed the limit for outward investment from a meager US $ 4 million in 1993–1994 to any amount up to the net worth of US $ 199 million in 2003–2004. In other words, firms have more flexibility to export their product and also to establish any overseas production unit.

  35. 35.

    There has been a phenomenal rise in the number of firms exporting their products in the international market.

  36. 36.

    Export Intensity =\( \frac{{E{\text{xport earning in the Year }}}}{\text{Total revenue in the th Year }} \)

  37. 37.

    Presently, India has about 75 U.S. FDA approved plants. This is the highest number of U.S. FDA approved plants outside the U.S.

  38. 38.

    The cost of establishing a dedicated bulk drug facility for a simple bulk drug can be as high as US $ 3–5 million in India; most of the Indian companies have, however, invested up to US $ 10 million for bulk drug facilities (Chaudhuri 2005).

  39. 39.

    The first case of overseas investment was undertaken by Sarabhai M. Chemicals in Indonesia and Malaysia in 1976 followed by Ranbaxy. A total of 15 Greenfield investments took place by 11 companies from the late 70s to the early 1980s.

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Correspondence to Mainak Mazumdar .

Appendix A

Appendix A

Table A.1 Market share of MNCs and Indian companies
Table A.2 Production units in the pharma sector
Table A.3 Growth rate in the Indian pharmaceutical sector
Table A.4 Proportion of diversified firms
Table A.5 New chemical entities invented

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Mazumdar, M. (2013). An Overview of the Indian Pharmaceutical Sector. In: Performance of Pharmaceutical Companies in India. Contributions to Economics. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2876-4_2

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