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Profitability of Indian Pharmaceutical Firms

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Performance of Pharmaceutical Companies in India

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

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Abstract

Using an imbalanced panel of over 2,372 firms, in this chapter, we have examined the determinants of the profitability of Indian Pharmaceutical firms for the period 1991–2005. Our study indicates that industrial structure does not favorably create any entry barrier for firms to insulate its high profit earning from the incumbents. The analysis also indicates that firm-specific strategies like marketing or R&D intensity do not have any favorable impact on the profitability of firms. However, the interaction between R&D and marketing is one of the most successful strategies for firms. In other words, if firms can come out with new products that have some therapeutic qualities and successfully market the product , they can earn higher profit. We also find that firms that have more niche products under their commands are more profitable.

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Notes

  1. 1.

    In our book, we have, however, measured the efficiency and productivity of firms in value terms. In a sense, the productivity and efficiency measures of firms are revenue earned per unit of input expenditure incurred by firms. Consequently, the efficiency and productivity of firms are also influenced by the prices for the product or the demand side factors. However, there was no consideration for the cost of production in our efficiency or productivity related analysis.

  2. 2.

    In the spirit of efficiency analysis one could also compute the profit efficiency of the firms. However, in the context of our study, there are two major difficulties in estimating the profit efficiency of firms. The first is the non-availability of data on input and output prices at the firm level. The second is conceptual; in particular, the framework for profit efficiency is developed in a competitive scenario where firm faces competitive input and output prices. Apart from incorporating technical efficiency, one has to take into consideration the allocative efficiency while estimating the profit efficiency of a firm. The question of allocative efficiency arises because firms try to produce their output and employ factors of production in light of the prevailing market prices and in accordance with the marginalist principle while they maximize their profit. Thus, a firm is profit efficient when it is technically as well as allocatively efficient. However, in a monopolistic market it is optimal for a firm to remain allocatively inefficient in the product market. If a firm is monopsonist, it also remains allocatively inefficient even in the input market. Though competitive, the Indian pharmaceutical industry resembles a differentiated monopolistic market condition and firms have some degrees of market power for various product groups. Consequently, for a profit-maximizing firm it is optimal to remain allocatively inefficient. It, therefore, makes little sense to compute the profit efficiency of firms.

  3. 3.

    Porter has also suggested that the simultaneous pursuit of both strategies is not possible on the ground that each of these involves a different set of resources and organization arrangements. Firms should therefore emphasize any one of the generic strategies instead of getting “stuck-in-the-middle”, which is characterized as a lack of distinctive emphasis on any particular strategy.

  4. 4.

    For good surveys the empirical findings in SCP see Schmalensee (1989), Scherer and Ross (1990), Hay and Morris (1991), and Martin (2002).

  5. 5.

    See Hay and Morris (1991), pp. 236–239 for an excellent review on this issue.

  6. 6.

    The price for plant and machinery is taken as a proxy for capital goods

  7. 7.

    While computing the output efficiency of firms, we noticed that firms capturing 75% of the market share are the most efficient firms in the industry with an average efficiency of around 75 to about 80%. Further, the total number of firms from this group is consistent over the years and varies from 25 to 30.

  8. 8.

    We have also considered different lag length in our model. However, there are no qualitative differences in our estimated result.

  9. 9.

    Insights about the marketing and R&D strategy of the firms were gained during our field survey.

  10. 10.

    While conducting profitability analysis, it is necessary to check for the possible presence of simultaneity among the dependent and the independent variables. The presence of simultaneity may arise specifically for the firm specific strategic variables and the profit margin of firms, because optimum-spending R&D, marketing and the profit margin of firms are derived simultaneously as a profit maximization exercise of firms. Further, there can bi-directional causality between the profitability in an industry and the structure of the industry (see, Martin 2002; Hay and Morris 1991 for a theoretical discussion on this issue) Disregarding such simultaneous relationship between the profit margin of firms and its R&D or advertisement or trade relationship may lead to the serious problem of simultaneity bias. In the context of our study, we have conducted the Hausman test for simultaneity taking into consideration all industry specific structural variables as well as firm specific strategic variables like marketing intensity, R&D intensity, export intensity. The result of the Hausman test, however, rules out any simultaneity among the variables considered in our model. Therefore, given the data point and the time framework for which we are conducting our analysis we do not notice any presence of endogenity among variables.

  11. 11.

    While calculating the age of the firms, we noticed that 27 new companies have entered the market between 1995 and 2002.

  12. 12.

    We have mentioned that we have tried different lag lengths like 2, 3, 4 and even 5 years lag length. However, there are no qualitative differences in our estimated results.

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  1. Centre De Sciences Humaines (CSH), New Delhi, India

    Mainak Mazumdar

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Mazumdar, M. (2013). Profitability of Indian Pharmaceutical Firms. In: Performance of Pharmaceutical Companies in India. Contributions to Economics. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2876-4_6

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