India currently represents just US$ 6 billion of the US$ 550 billion global pharmaceutical industry but its share is increasing at 10% a year, compared to 7% annual growth for the world market overall. The Indian sector represents 8% of the global industry total by volume, putting it in fourth place worldwide. But it accounts for 13% by value, and its drug exports have been growing 30% annually.
The “organized” sector of the Indian pharmaceutical industry consists of 250 to 300 companies, which account for 70% of the market, with the top 10 firms representing 30%. India is among the top five emerging pharmaceutical markets. It has grown at an estimated compound annual growth rate (CAGR) of 13 per cent during the period FY 2009–2013. The Indian pharmaceutical market is poised to grow to US$ 55 billion by 2020 from the 2009 levels of US$ 12.6 billion, according to research by McKinsey & Co.
The Indian pharmaceutical market is dominated by branded generics, accounting for about 70% to 80% of the retail market. Local players have enjoyed a dominant position driven by formulation development capabilities and early investments. There is intense monopolistic competition in the Indian pharmaceutical space, putting a downward pressure on prices.
Evolution of Indian Pharmaceutical Space
Growth drivers of Indian Pharmaceutical Industry
Growing Indian Economy
The Indian economy has been on a fast growth track. This is likely to create several opportunities for investments and expansion.
Growing middle class with higher purchasing power
There has been a high growth in middle class segment rapidly acquiring greater purchasing power. Also, Indian population spend 7% of its disposable income on healthcare in 2005, number expected to rise to 13%.
Changing Disease Profile
Traditionally, acute disease segment held a significant share of the Indian pharmaceutical market. This segment is likely to continue to grow at a steady rate due to issues relating to public hygiene and sanitation. With increase in affluence, rise in life expectancy and the onset of lifestyle related conditions, the disease profile is gradually shifting towards a growth in the chronic diseases segment. For example, India has the largest pool of diabetic patients in the world and this number is expected to be on the rise. IMS Health surveys indicates that chronic-disease related segments are the fastest growing therapeutic segments in the Indian Pharmaceutical space. The growth in the Indian geriatric population is a key factor in influencing the growth of the chronic segment. Another development in the Indian pharmaceutical space has been a rebound in the acute diseases segment. As companies widen their reach to tap newer markets, this trend is likely to continue, on the back of a high number of treatment naïve patients requiring basic treatment creating new demand for drugs.
Source: IDFC Institutional Securities (June2010)
The governmental policies have been proactive toward improving the healthcare segment in India. Several policies have been launched by the government aimed at building more hospitals, boosting local access to healthcare, improving the quality of medical training and on increasing public expenditure on healthcare to 2-3% of GDP, up from a current low of 1%.
A significant government allocations on healthcare spend made in the 2008-09 Union Budget include a five year tax break for opening hospitals anywhere in India, with an added focus on tier II and tier III markets.
Another development is the screening of patients suffering from diabetes, hypertensions and non- communicable diseases under the National Programme for Prevention & Control of Cancer, Diabetes, Cardiovascular Disease and Stroke (NPCDCS).
According to research by PWC, India's healthcare insurance industry is currently very small and limited, but is expected to grow at a CAGR of 15% till 2015.
The research states that around 80% of India's healthcare expenditure is financed out of pocket. Thus, the propensity of Indians to spend on healthcare, particularly in lower and middle income groups comprising around 95% of population is lower.
Source: ISI Analytics, Healthcare Industry (2010)
A key factor to take into consideration is that the spread of health insurance could lead to a market wherein there is minimal differentiation between branded generics. An important success factor for generic makers is differentiation of their products. Increased health insurance coverage may benefit generic drug manufacturers by increasing the market's affordability for medicine.
If we compare the expected growth to actual, this has been in line with expectations. This is based on the estimates made by McKinsey & Co in the India Pharma 2015 – Unlocking the Potential of the Indian Pharmaceutical Market.
Key Players in Indian Pharmaceutical Market
The Indian pharmaceutical market is highly fragmented. There are over 10,500 firms in the market, of which 200 control approximately 70% of the market.
SWOT Analysis of the Indian Pharmaceutical Industry
Source: PwC Research, Industry & Company Interviews
Market Structure & Competition
Even though the Indian pharmaceutical space is highly competitive, and hence the drug price should be at low level, that is not the case since consumer demand is highly supplier-induced. Market mechanisms do not stabilize prices in the pharmaceutical space. Unlike the consumer goods segments, pharmaceutical purchases are not driven by preference, but by prescriptions given by doctors. Drug companies build a market by collaboration with medical practitioners to prescribe certain drugs over others, and this drives the pricing in the Indian pharmaceutical space.
Generic Drugs & Price Effects
According to the U.S. Food and Drug Administration (FDA), generic drugs are identical (or within an acceptable bioequivalent range) to the brand name counterpart. Hence, generics are considered identical in all respects and substitutes for the branded drugs. Driven by rising healthcare costs, a rapidly ageing population, generics have been promoted as a cost-containment measure. This was further supported by passing of the Hatch-Waxman Act which standardized U.S. procedure for recognition of generics drugs. The steps for recognition of generic drugs are as follows:
1. File Abbreviated New Drug Application (ANDA) with FDA
2. Demonstrate therapeutic equivalence to a specified, previously approved reference listed drug
Thus, FDA granted an exclusivity period to a generic manufacturer, wherein only one generic manufacturer had rights to sell product for 180 days. This was granted in specific cases where sufficient proof existed that a patent was invalid or was not violated in the generic production of a drug. Effectively, this incentivized generic company willing to risk liability in court and the cost of patent litigation with the original manufacturer. But the benefits outweighed the possible risks. The exclusivity period caused a change in consumer preferences and caused surge in purchases made at discount stores.
Changing Business Model
Another important development is the changing business model in the pharmaceutical space. Industry has been traditionally dominated by large pharmaceutical companies manufacturing blockbuster drugs. The consolidation phase in pharmaceutical industry was driven by declining research productivity, rising costs of R&D, reduced revenues of block buster drugs due to upcoming patent expiry and government concerns over rising healthcare costs. The three strategies for global innovator companies then were:
1. Continue block buster model, with a focus on blockbusters in biotech instead of conventional chemistry products
2. Continue chemistry based products, with a reduction in R&D costs by outsourcing R&D or setting up R&D centers in low cost countries
3. Create a hybrid model to combine and derive from the strengths of branded products & generics
Indian Patent Act was passed in 1970 and several domestic players started their operations. In 1990 after liberalisation domestic players expanded aggressively. In 2005 India amended its Patent Act, 1970 bringing them in conformance with the WTO TRIPs (Trade related intellectual property agreement). Under the new patent act Indian drug companies could no longer manufacture and market reverse-engineered versions of drugs patented by foreign drug companies. To replace sales lost to TRIPs; Indian companies increasingly launched operations in foreign countries. Major pharmaceutical producers entered into mergers and acquisitions with foreign pharmaceutical firms and India major destination for generic drug manufacture.
This led to increase in number of players in pharmaceutical industry and also to intense competition among the players for generic medicines; making it a monopolistically competitive market structure. When generic products become available, market competition often leads to substantially lower prices for generic forms. Profit-maximizing price generally falls to the on-going cost of producing the drug, which is usually much lower than the monopoly price. This is another
important feature of monopolistic competition.
By definition, monopolistic competition refers to a market in which there are a large number of buyers and sellers. The sellers sell differentiated products which are close substitutes for one another. It is a market structure in which there are many competing producers in an industry, each producer sells a differentiated product, and there is free entry into and exit from the industry in the long run. The element of monopoly in a monopolistic competition arises from the fact that each firm has an absolute right to produce and sell a branded product. This gives the firm a monopoly power over production, pricing and sale of its own branded product.
In the pharmaceutical industry, paracetamol is available in various names like Calpol by GSK,
Redimol by Dr. Reddy's Laboriories, Pyrexon by Wockhardt Healthcare Ltd., Fepanil by Pfizer Ltd., Panacip by Cipla Ltd., Malidens by Abott India Ltd. and Pactel by Novartis Pharmaceutical Ltd. No two companies can produce the same product and hence each one is a monopolist. However, the demand for paracetamol is limited and each firm has to compete with the others. Thus, though no other firm will name its product as ‘Calpol'. This feature of many sellers producing close substitutes is the competition aspect of monopolistic competition. Thus, in a monopolistic competition, sellers have some degree of control on price as each has a unique product. But this control is not as high as it would be under a monopoly because rival firms market close substitutes.
Monopolistic Competitive Structure
The Indian pharmaceutical is a monopolistic competition, due to the following characteristics:
I. Large number of buyers and sellers
Over 1,00,000 drugs, across various therapeutic categories, are produced annually in India. The domestic formulations industry is highly fragmented in terms of both, number of manufacturers and variety of products. There are 300-400 organised players and about 15,000 unorganised players.
However, organised players dominate the formulations market, in terms of sales. In 2012-13, the top
10 formulations companies accounted for 42.6 per cent of total formulation sales. MNC pharmaceutical companies have steadily gained a foothold in the Indian formulations market. As of March 2013, they enjoyed a market share of 26-28 per cent.
Chart 1: Domestic market share of top 10 players in 2012-13
*Source: Crisil database
As depicted by the bar chart above, there are top players in the market but each one of these big players have a small market share. This feature qualifies pharmacuetical industry to be called as monopolistic competition.
II. Free Entry and Exit
There are virtually non-existent barriers to entry of new firms in India. This is due to a number of reasons. Firstly, economic reforms since 1991 substantially relaxed barriers to business and trade and have progressively induced the new entry of firms and plants into the pharmaceutical industry. Secondly, FDI is permitted up to 100% for the manufacture of drugs and pharmaceuticals. Under the WTO-compatible intellectual protection regime introduced in 2005, multinational pharmaceutical companies are creating research centres and manufacturing plants in India. They are
also outsourcing drug discovery operations and clinical trials to Indian companies. The degree of price control on drugs has gradually been reduced. These factors contribute to increases in the competitive pressure on surviving firms and the rise in number of entering firms.
Table 1: Large Entry of Foreign Players in the Market due to Mergers and Acquisitions
*Source: IBEF, Ernst & Young, The Economic Times, individual company web pages
India complies with the WHO Certification Scheme for Good Manufacturing Practice (GMP) on the quality of pharmaceutical products. According to official estimates, in 2001, 327 pharmaceutical manufacturing plants closed or had their licenses suspended or may have shifted to some other state. A total of 370 plants were not in a position to comply with GMP. This data indicates that it is relatively easy for a firm which is unproductive or noncompliant to exit from the industry.
III. Product Differentiation
Though traditionally, consumers of drugs were driven by necessity rather than brand consciousness, leading drug manufacturers have tried to differentiate their products by incorporating additional value to the branded version of a generic product. They do this by modifying the products in terms of method of intake, availability, taste, etc. For example, a drug that is traditionally available as a tablet can be offered as a spray or as syrup by a manufacturer in order to differentiate their product.
An example can be the branded versions of the generic Diclofenac which is used as a painkiller. It is available in the Indian market by a variety of companies like Ranbaxy (Volini), Novartis (Voveran) and Obsurge Biotech Ltd (Seradic). While all three are commonly available in the form of gels, Seradic is also available as tablets. Apart from this Volini is also available in the form of sprays and as a specialized gel called ‘Volini Activ' which Ranbaxy uses as a means to differentiate its offering.
Table 2: Product Differentiation on the Basis of Medium of Application
Volini Spray by
Ranbaxy Voveran Gel by
Novartis Seradic pills
Another example is the generic Azithromycin which is an antibiotic. It is available in the market in the form of a liquid solution and as tablets called Azee from Cipla and as Azithral
from Alembic. To differentiate its product from Cipla's, Alembic has upgraded the taste of Azithral Liquid formulation through a unique Thixotaste technology. This has masked the bitter taste which is normally associated with Azithromycin and effectively differentiated its offering.
Table 3: Product Differentiation on the Basis of Taste
Azee from Cipla Azithral from Alembic
IV. Pricing of Drugs Principles and Laws
The Drug Policy Control Order (DPCO) in 1995 has introduced three parameters to ensure proper market conditions – Turnover, Market monopoly, Market competition.
Under this, prices of 74 bulk drugs and their formulation are being controlled representing approximately 20% of the pharmaceutical market. Bulk drugs, with a turnover of over Rs40 million, are under the purview of the DPCO, excluding those drugs with sufficient market competition. Moreover, price controls have been waived for a period of five years for drugs which have been
developed indigenously there is a price controls under DPCO, still a majority of drugs in the market are not regulated and the price rise during this period is still considered to be minimal. Manufacturers that venture into new territory are less certain of what they will find and less confident of what it will be worth when they find it—they face new uncertainties over both supply and demand.
Determination of Price for the Drugs
Reference pricing is the most common international cost-containment tool, adopting a European drug pricing.
Patents and Generic Drugs
If a government sets the same price for generic and patented medicines, consumers naturally tend to choose the more advanced product, since it provides better value or greater quality assurance. Accordingly, demand for unbranded generics in price controlled markets tends to be artificially reduced. It is universally acknowledged that drug discovery is an extremely expensive process. That for every molecule that finally makes it into a product, there are several that are abandoned on the road to discovery. Thus the patenting system provides an opportunity to recover developmental costs over the patent period. The new research environment has added important new elements to the risk environment of pharmaceutical research as a by-product of the dramatic exploration of entirely new areas of application. Manufacturers that venture into new territory are less certain of what they will find and less confident of what it will be worth when they face new uncertainties over both supply and demand.
Infeasibility of Price Controls
Price controls on pharmaceutical products produce a variety of negative consequences for national health systems and reduce social welfare by depressing the number of new drugs added to the global pharmacopoeia. It can also reduce the availability of some innovative medicines in foreign countries, with the effect of limiting competition and requiring national health system to forgo the benefits of those innovations in reducing health care costs. The economic models also indicate that benefits of lower prices to consumers were less than the benefits to society of new drugs foregone.
Price Fixing and Controls for Pricing
The new pharmaceuticals pricing policy envisaged that all patented drugs that would be launched in India after 1 January 2005 would be subject to price negotiations before granting them marketing approval, and that the Drugs and Cosmetics Act 1940 would be suitably amended to provide for this. The Department of Chemicals and Petrochemicals in consultation with the Department of Health would lay down necessary guidelines for determining the negotiated prices - an approach was one that would determine the price premium enjoyed by the drug in the lowest price market abroad compared with the closest therapeutic equivalent in the same country, and to apply that same premium to the closest therapeutically equivalent prevailing in the domestic market. That is to say, the same premium factor prevailing in the domestic market would become one of the markers.
Given the high number of pharmaceutical firms in the informal/unorganized sector, domestic and foreign drug companies in India also run a large risk that their patented drugs will be pirated even with protected product patent system. Price controls benefit health delivery in countries that have a well regulated public health delivery system. Public health expenditures in Indian states continue to be low, with a wide disparity in effectiveness of delivery between states. There is a large private sector and unorganized access to medicines. In these circumstances, price controls would lead to market distortions, excessive regulation and the development of grey markets.
Pharmaceutical companies commonly spend a large amount on advertising, marketing and lobbying. Advertising is common in healthcare journals as well as through more mainstream media routes. They generally employ sales people (often called 'drug reps' or, an older term, 'detail men') to market directly and personally to physicians and other healthcare providers. A pharmaceutical representative will often try to see a given physician every few weeks.
Representatives often have a call list of about 200–300 physicians with 120–180 targets that should be visited in 1–2 or 3 week cycle. Commercial stores and pharmacies are a major target of non- prescription sales and marketing for pharmaceutical companies. Since the 1980s new methods of marketing for prescription drugs to consumers have become important.
Direct-to-consumer media advertising was legalised in the FDA Guidance for Industry on Consumer- Directed Broadcast Advertisements. Internationally, many pharmaceutical companies market directly to the consumer rather than going through a conventional retail sales channel. Pharmaceutical companies also employ lobbyists to influence politicians.
Apart from this gifts, textual and audio-visual promotional materials, samples, hospitality, sponsorship & meetings have also served the purpose of advertising the drugs. Generally about three to seven percentage of the company's total expenditure is attributed towards advertisement spendings (Refer chart 2).
Chart 2: Advertisement Expenditure of Pharma companies
Short Run and Long Run Equilibrium
In the short run, it is possible for a monopolistic competitor to make economic profit—profit over and above the normal rate of return or beyond what is necessary to keep that firm in that industry. Thus, the pharmaceutical companies operate with the motive of profit maximization in the short term.
With the given demand, marginal revenue, and cost curves, a monopolistic competitor maximizes profit or minimizes loss by equating marginal revenue and marginal cost.If firms are earning economic profit in the short run, other firms will enter and produce the product, and they will continue to enter until all economic profits are eliminated.
In the long run, a monopolistic competitor achieves neither productive nor allocative efficiency. Productive efficiency is not realized because production occurs where the average total cost exceeds the minimum average total cost. Allocative efficiency is not realized because the product price exceeds the marginal cost. The result is an under allocation of resources and excess production capacity.
Long-run equilibrium in a monopolistically competitive market is attained when the demand curve for each producer is tangent to the long-run average cost curve. Unrestricted entry and exit lead to this equillibrium. At the equillibrium output, price equals long-run average cost and marginal revenue equals long-run marginal cost.
Chart 3: Short run and Long run equilibriums
EFFICIENCY / INEFFICIENCY OF MONOPOLISTIC COMPETITION
Monopolistic competition is exemplified by the monopoly power of individual firms as well as the production of firms below the ideal capacity. But the pharmaceutical industry was a special case as there were government regulations on the price. However, after the Patents (Amendment) Act, 2005 a significant number of foreign pharmaceuticals entered the industry through mergers and acquisitions with Indian companies. As a result, prices have shot up as illustrated by the example below.
Abbott increased the prices of medicines produced by Piramal immediately after its takeover. For example, the price of Haemaccel was INR 99.02 in May 2009; by May 2011 it had gone up to INR 215 - a 117% increase in the space of two years. In another instance, the epilepsy drug Gardenal registered a price hike of 121% during the same period.
As a result, the current industry looks like that in given figure. As a result of this, the market is highly competitive with more and more players trying to get into the industry, so as to reduce the monopoly power of individual companies until there is only normal profit present.
It should be noted, however, that the Government still has a huge role to play in the Pharmaceutical Industry and steps in to regulate whenever it feels that there is conflict of interest between company profits and societal good.
Chart 4: Monopolistic Competition In Pharmaceutical Industry
Sources: Productivity Dynamics in the Indian Pharmaceutical Industry: Evidence from Plant-level Panel Data by Atsuko Kamiike, Takahiro Sato, Aradhna Aggarwal
 Third World Resurgence No. 259, March 2012, pp 9-14
Thus we have seen how the Indian pharmaceutical industry, with various firms producing similar products and competing for market share, exhibits monopolistic competition. Despite the fact that pharmaceuticals industry is highly regulated, due to various factors discussed above the product is differentiated in various aspects.
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