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Sector Overview

According to CCI report, Indian pharma industry is estimated to be about 4.5 billion US dollars, growing at about 8-9% annually. Suppliers: Organic and Inorganic chemicals form key raw materials in manufacturing bulk drugs and chemical compounds. The industry is high fragmented with 40000 large and small scale sectors. API manufacturers: The industry is highly fragmented with the top 10 players commanding only 30% of the market. In order to maintain profitability, many of them have forward integrated into manufacturing formulations. Setting up a bulk drugs plant is low capital intensive. Formulation manufacturers: Indian companies dominate the domestic formulations market by occupying seven of the top ten spots. Top 5 companies have 22.5% of the total formulations market share. Many of the top multinational companies are entering in this segment. Competition in generics is intensifying due to increase of focus of many players on generics exports because of huge generics opportunity opening for next 5 years. Distribution channel: Long channel of distribution and incidence of brand substitution make all SKUs to be available 24*7. Clearing and Forwarding Agents (CFAs) are primarily responsible for maintaining stock and forwarding SKUs downstream. The retail pharmacy obtains products from the stockist or sub-stockist through whom it finally reaches the consumers. 100 percent foreign direct investment is allowed under the automatic route in the drugs and pharmaceutial sector including those involving use of recombinant technology Govt plans to set up a US$ 639.56 milliojn venture capital (VC) fund to give a boost to drug discovery and strenghthen the pharma sector in the country

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The threat of new entrants: 1) Economies of scale: As observed in the pharmaceutical industry, economies of scale exists as when one company grows, the total assets increases more on every small increase in investment. So it is difficult for new entrants to enter. 2) Product differentiation: There exists a brand association in the domestic market but such thing does not exist in the exports market. On a whole there exists product differentiation, and reduces the threat of new entrants and increases incumbents attractiveness. 3) Capital Requirement: Though the capital requirement is low in setting up a plant but it is very high in producing an innovator drug. Overall low capital requirement increases the threat of new entrant and decreases incumbents attractiveness. 4) Access to technology: Existence of process and product patents makes the industry moderately attractive for the incumbents. 5) Access to suppliers: Getting access to the chemicals/ intermediates and APIs is relatively easy as there are many suppliers. So there is threat of new entrants. 6) Access to distribution channels: Getting access to medical representatives, distribution warehouses, doctors prescription and stores. So there is threat from the new entrants. 7) Government policy/ Protection: Government gives a lot of push to encourage new players in the industry increasing threat of new entrants and decreasing incumbents attractiveness. The bargaining power of buyers: 1) Number of buyers: Patients are the end users but mostly doctors prescription have considerable power. This considerably reduces the number of buyers and increases their bargaining power. 2) Product differentiation: There exists product differentiation reducing bargaining power of buyers. 3) Availability of substitutes: Use of biosimilars and generics is considerably increasing and pose as a proper substitute in the long run. So currently influence of substitutes is less and reduces the bargaining power of buyers. 4) Switching costs: There are switching costs reducing bargaining power of buyers. 5) Contribution to Buyers quality: Effectiveness of medicines prescribed by a doctor will determine the quality of service provided by doctor and the API molecule supplied by bulk drug manufacturer forms core of formulations preparation. This reduces the buyers bargaining power. 6) Contribution cost: Contribution of medicines to the health care costs and bulk drugs to formulations cost is high. This provides reason for buyers to bargain and increases their bargaining cost. The bargaining power of Suppliers: 1) Number of suppliers: Chemical companies and API producers form the key suppliers of pharma industry, and they are in abundant. So, bargaining power of suppliers is less. Also most of the top pharma firms make their own APIs completely eliminating the supplier power. 2) Availability of substitutes: There are no substitutes available. This leads to high bargaining power of suppliers. 3) Industry importance to the supplier: Many chemical companies and bulk drug makers produce their products exclusively for pharma industry, so industrys importance is very high for suppliers. This reduces the bargaining power of suppliers. 4) Contribution to quality: Suppliers contribution to the quality of product produced is high. For this reason all top pharma companies either produce APIs themselves or implement strict supplier code of conduct. This results in increase of suppliers bargaining power. 5) Contribution to cost: Raw materials cost 40-50 %. So it reduces the bargaining power of suppliers. Threats of substitutes:

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Availability of close substitutes: Biosimilars can pose as a proper substitute in the long run. Generics are also close replace. So availability of substitutes is high and the threat is high. 2) Substitutes price-value: Generics, Homeopathy and ayurvedic medicines are considerably cheaper than the branded medicines. This might pose a threat of substitutes. 3) Profitability of producers of substitutes: Profitability of substitute producer is high as the generic drugs are cheap. So there is high threat of substitutes. Intensity of rivalry among competitors: 1) Product differentiation: There is product differentiation and perceived brand image for some companies. This reduces the intensity of rivalry. 2) Switching costs: In the domestic formulations market, there are switching costs in terms of side effects from switching drugs. Switching costs make the intensity of rivalry low. 3) Excess capacity levels: As capital requirement and gestation period are low, all top players add new capacities as demand grows. However presence of many small players creates excess capacity levels and intensifies the rivalry. 4) Exit Barriers: Low exit barriers in the industry make it easier for the unprofitable firms to quit. This lowers intensity of rivalry.

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Political Factors The political environment in India has been changing with time; today no single party overpowers other political parties. Due to this governments are moving towards a coalition approach. Therefore, any consistent political or economic policy cannot be expected when such uncertainty is in the air. This influences the investment in the industry. Ministry has been imposing more price control on the industry. DPCO (drugs price control order) nullifies market forces from encouraging competitive pricing of goods dictated by the market. Amendments have been made to IPR Act (Intellectual Property Rights Act) in 1999, 2002, 2005, 2006 which were necessitated by TRIPS. Thus far an Indian company could escape paying a patent fee to the investor of a drug by manufacturing it using a different chemical route. Indian companies reduced their costs by reverse engineering to invent alternate manufacturing methods. But due to amendments in IPR a patented drugs needs to be manufactured using same chemical route. This would lead to competition on the basis of branding, sales promotion, marketing efforts and increase the cost to operate. In Indian Pharma industry there is a huge PSU segment which is highly inefficient, government puts surplus cash from other efficient sectors into its Pharma sector and subsidises it. Government excise policy has been unpredictable. To give an example, in 2005 Excise Duty was shifted from cost of the manufacturing to the MRP. Government provides subsidies to manufacturing units located in specific areas where the cost of manufacturing is high, bring in skewed development of the industry. Economic Factors Indias healthcare budget is very small (mere 1% of GDP). This has resulted in poor infrastructure and investments in the sector. Per capita income in India is very low and to add to it the healthcare spend is very low. The taxes levied in the sector are numerous and very high, there is excise duty (State and Central), custom duty, service tax, profession tax, license fees, royalty, pollution clearance tax, hazardous substance license, income tax, stamp duty, etc. Introduction of GST would result in abolition of all other indirect taxes like Entry Tax, Cess, Additional Tax, Octroietc; bringing the cost down. The number of registered medical practitioners is low, this has affected the reach of pharma industry adversely. Due to high inflation interest rates in India are higher than the global average, this leads to higher cost of funds. Due to inefficient transportation facilities, the cost of transportation is high this leads to high inventory carrying costs and longer lead time.

Social Factors Poverty and malnutrition aggravate the occurrence of diseases like TB, Malaria, Diarrhea. Poor sanitation facilities and missing inland sewage system is still prevalent throughout the country. Clean drinking water is not available to all across the country. In India so called Desi-Dawa is prevalent, wherein people do not prefer to visit certified doctors rather they visit Hakims and some even take home-made medicines which have been passed along from generations. Homeopathy is capturing village market as people have a perception that it is safer than the allopathic medicine. Smoking, drinking and use of gutkais abundant. Joint family culture leads to faster spreading of communicable diseases. Cattle rearing in villages encourage diseases communicated by animals. Technological Factors Computerization has increased efficiency across the value chain. Advanced machines have increased output and automation has reduced the cost of operation. Discovery of newer molecules have been made easier through the use of new technology. Doctors are using technology to monitor patients remotely and prescribe medicines, though this is used only in case of minor diseases at present but it is expected to grow with improvement in technology.

Life expectancy has increased with rapid advancement in technology; this has resulted in increased demand for medicines for old population.