Indian Pharmaceuticals Industry- Ranbaxy

Indian Pharmaceutical industry is one of the most prominent global players. It is 3rd largest by volume and ranks 14th in terms of value. Total turnover of the industry is over US$21 billion whereas one-third of the revenue comes from foreign markets.

Exports of pharmaceuticals products from India are currently growing with a CAGR of 21.25%. According to PWC, Indian pharmaceutical market has immense potential and it is expected to enter the group of top ten global pharmaceuticals markets in terms of sales by 2020.

Drug manufacturing industry in India was backed by government in the early 1960s, and with the Patents Act in 1970. This act removed the product patents from drugs, and though it still kept process patents, these were shortened from a period of 7 years to 5 years. However with 1990s economic liberalization by the former Prime Minister Narasimha Rao and the then Finance Minister Manmohan Singh drug industry evolved to become what it is today.

MNCs lose interest in the Indian pharmaceutical market due to the lack of patent protection. So these dominant players gradually streamed out of the market. This void helped to grow indigenous Indian companies. These Indian players created a niche in both the domestic and global markets with their expertise in reverse engineering and thereby developing new processes for manufacturing drugs at significant lower costs.

Some major Indian pharmaceutical firms are Ranbaxy,Cipla,Sun, Cadila Healthcare and Piramal Healthcare. We will focus on Ranbaxy for our analysis.

CHALLENGES

Pharmaceutical companies as a whole have entered a difficult period where the market and regulators have created pressures for changes in the industry. The main issues concerning most of drug companies are declining productivity of R & D, patent expiration of number of famous drugs, increasing regulatory and legal concern, and pricing issue. As a result larger pharmaceutical companies are shifting to new business model, strategies with greater emphasis on outsourcing of services, research and manufacturing.

The Indian stock market is predicting a possible recession but Ranbaxy seems unfazed by the economic slowdown. Having confidence about increased sales in the domestic and export markets, Ranbaxy is expected to continue with its good performance. Main issues concerning Ranbaxy are:-

Work for getting new products patented. The effects of new product patent play an important role in Pharmaceutical companies.

• Due to presence of many players there is lot of pricing pressures in the industry.

• There are many regulatory issues present in US and European countries which inhibits the growth of the company.

• To meet with the future growth, infrastructure development is a major concern.

• The pressure of conformance to global standards quality management.

• Competition in the domestic market has increased considerably which is a issue of concern.

• There have been changes in top level management during 2012-2013 which has led to confusion in decision making.

• Rising burden on healthcare in Developed markets, especially during current challenging economic times.

• Fluctuating exchange rates cause a problem in the debt structure of the company.

• Competitive enough to meet the opportunity of the $141.1 bn in drugs patents which are expected to stay till 2015.

• Slowdown in the anti-infective market which holds the largest share for Ranbaxy.

• OTC product is dominantly dependent on India with its contribution being $66.2 mn. This division needs further diversification as other main markets such as US and Romania contribute only 25.1% of the OTC division.

External analysis:-

Now the third largest in volume globally, Indian pharmaceutical industry has not had a smooth sail. Most of the industry currently is dominated by foreign players operating subsidiaries in India owing to our low labour costs. "Worldwide, India is a country of very low drug prices while producing high quality medicines", Nihchal H. Israni, president of the Indian Drug Manufacturers’ Association (IDMA), states proudly. Almost all of this success can be attributed to Indian Patents Act, 1970. Product patents are done away with to curb monopoly and production processes could be patented for seven years. This incited a lot of reverse engineering to synthesize new pharmacologically active molecules by processes other than those patented. India’s membership of the WTO worked against the industry by necessitating product patents of at least 20 years though there is active campaigning for compulsory licences, etc. We have travelled a great deal in becoming a global hub of R&D. About $150 billion worth of patent protected drugs are due to be freed of their protection in 2010-2015 further boosting our export potential. Clinical trials are also an attractive element because of the large patient pool in our country.

Threat of Substitutes:-

1) Availability of close substitutes:

Traditional forms of medicine are little believed by the patient population. So, the threat of close

substitutes is very low & is attractive to an incumbent.

5

2) Switching costs :

Low because the investment is not high and can move to alternative forms of medicine easily. So, an

incumbent is threatened.2

3) Substitute price value:

Substitutes have almost equal value for price. So, an incumbent finds the industry neutral in this aspect.

3

4) Profitability of producers of substitutes:-

Threat of rivalry:-

1) No. of competitors: Huge. HHI is 0.0316 Moderately concentrated. Incumbent (2/5)

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2) Industry growth : High. Low rivalry. Good for incumbent (4/5) 4

3) Fixed costs: High fixed cost. High rivalry. Incumbent finds unattractive(1/5)

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4) Differentiation : Low. High rivalry. Incumbent less attractive (2/5)

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5) Switching costs: Low. High rivalry. (1/5) 1

6) Information asymmetry : High. High rivalry. Unatrractive(2/5) 2

7) Strategic stakes: No. Low rivalry. (4/5) 4

8) Barriers to exit:-i) Asset specialization

ii) Fixed cost of exitiii) Govt. restrictions

HighHighHighHigh rivalry. Unattractive to incumbent.

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Threat of entry:-

1) Economies of scale: High economies of scale. Incumbent finds it attractive.

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2) Product differentiation: Low. Less attractive to incumbent. 2

3) Brand identity: Moderate. Expenses required to create brand identity. Attractive to incumbent.

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4) Customer switching cost: Low. Less attractive to incumbent. 1

5) Access to channels of distribution:

Access is not easy. Need to incur heavy distribution costs. Attractive.

4

6) Capital requirement: High 5

7) Access to technology: Easy. Incumbent finds it unattractive. 1

8) Access to raw materials: Easy. Less attractive to incumbent. 2

9) Government policy: Government is encouraging growth of industry. Incumbent finds it less attractive.

2

Bargaining power of buyers:

1) Number of buyers: High. No threat. Attractive 5

2) Availability of substitutes: Little. No threat. Atttractive 5

3) Switching costs: Less. Incumbent finds it less attractive.

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4) Buyers’ threat of backward integration:

Little. Attractive to incumbent. 5

5) Quality : Moderate. 3

6) Contribution to cost: Low. Attractive to incumbent. 4

7) Buyers’ profit: Moderate 3

Bargaining power of suppliers:

1) Number of suppliers: Low. Not attractive to incumbent.

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2) Availability of substitutes to suppliers:

Low. Less attractive to incumbent.

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3) Switching cost: Moderate. 3

4) Threat of forward integration:

High. Less attractive to incumbent.

1

5) Industry threat of backward integration:

High. Attractive of incumbent. 5

6) Quality: Moderate. 3

7) Industry importance to suppliers:

Low. Less attractive to incumbent.

2

8) Govt. actions: Fixed minimum price. So, less attractive to incumbent.

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Generics Drug Market

The financial turmoil that seized the world in 2008 improved the opportunities in pharmaceutical sector in Asia. A wave of pro - generic reforms swept across US and Europe benefiting generic drug manufacturers. As a result of this, manufacturers of generic drugs in India registered high sales demand as investors all over, concentrated on Asia due to market opportunities and raw materials that were lower in cost as compared with developed markets.

Patent rights played an important role in the development of pharmaceutical industry. Patent Act (Act 39 of 1970) came in effect in 1972 according to which only process patents were applicable for pharmaceuticals. This enabled the manufacturers to produce copies of patented drugs at lower cost. The industry also comes under the purview of TRIPS an international agreement on intellectual property administered by WTO.

The drugs made in India cost almost 5%-50% lesser than those of developed countries and surveys suggest that approximately $300 billion worth of prescription drugs go off patent by 2015 creating a huge opportunity for generics market in India.

Ranbaxy Laboratories

Mission-Enriching lives globally with quality and affordable pharmaceuticals.

Incorporated in India in 1961 Ranbaxy went public in 1973.It took first major step in becoming an MNC by setting up a Joint Venture plant in Nigeria (Lagos).

It follows a strategy of prioritizing on-

a) Focus on base businesses that would give it a profitable and sustainable growth. It followed this strategy by launching Anti malarial molecule for P.Falciparum.

b) Monetizing high value opportunities - Bringing high value products post exclusivity before its competitors e.g. Atorovastatin that registered sales of almost $12 billion

c) Strengthening R&D and manufacturing capabilities-Presence of State of Art R&D facilities in Gurgaon involving more than thousand scientists. It spends annually on R&D highest among Indian Pharmaceutical companies and has recently launched Synriam which cures Malaria. It has eight world class manufacturing facilities spread across US, South Africa, Nigeria, Morocco, Malaysia, India Ireland and Romania, new facilities have been added to those locations that would give them cost advantage.

d) Pursuing high standards of compliance and fulfilling its obligations regarding Degree of Consent-42 inspection were conducted by 18 different regulatory bodies across different sites(18) with zero critical findings, signing Consent Decree with FDA in 2011.

VRIO Analysis-

Resources Valuable Rare Difficult to imitate Without Substitutes

Organizational support

1. State of the art R&D facilities in India (Gurgaon). Highest R&D spending in India.

Yes Yes Yes Yes Yes

2. 8 Manufacturing locations worldwide

Yes Yes No Yes Yes

3. New facilities added in cost effective locations like Nigeria, Malaysia, Morocco, India, etc.

Yes Yes Yes Yes Yes

4. Many alliances since 2006 like Terapia, Be-Tabs, Allen, Zenotech.(>$500mn spent on M&A)

Yes No No Yes Yes

5. Strong presence in emerging markets like India, Nigeria,

Yes Yes Yes No Yes

Malaysia, etc.6. Compliances with

global regulating authorities.

Yes Yes Yes Yes Yes

7. Portfolio of new drugs like Synriam TM (cure for Malaria) and branded generics, Revital.

Yes Yes Yes Yes Yes

8. Effective management handles issues in many countries

Yes Yes Yes Yes Yes

Value Chain Analysis:-

Primary Activities

Inbound Logistics-Information on movement of inventory is transmitted from point of sale terminal to manager at regular intervals the inventory management being followed is perpetual. Ranbaxy has the most efficient in pharmaceutical sector in managing inventory with only 241 days of COGS being tied up in inventory

Operations-In manufacturing “Kaizen” was introduced to improve quality productivity and reduce ‘Out of Specification’ rate of products.

Outbound Logistics-

Ranbaxy Global consumer healthcare follows a differentiated strategy for distribution by engaging, FMCG distributors for its products

The distribution infrastructure has about 600 Distributors and Distributor Sales Representatives in India

Marketing and Sales-Ranbaxy and Daiichi are using their synergies to successfully market its products. Presence of strong distribution and sales force of Ranbaxy is being used to introduce Daiichi innovator products in Italy Singapore.Ranbaxy is further planning to recruit 1000 more ales personnel this coming fiscal from its already existing sales force base of 1500 personnel in India

Support Activities:-

Procurement-

Lupin, Aurbindo pharmaceuticals, Zydus, Orchid and Ranbaxy has formed a collaborative team to share information on procurement of raw materials like crude oil and solvents to drive cost efficiencies. Ranbaxy uses e-procurement driving transparency and further cost advantages to its procurement

Human Resource Management-Considered critical component of growth at Ranbaxy. Developed specially structured management program to form team driven by ethics motivation innovation. Follows practice of rotating employees through various departments to equip them to deal with complex and interrelated business activities

Technology Development-Ranbaxy uses SAP,R/3 ,Pharma co vigilance, Sales force automation to drive productivity & efficiency. It pays high importance to information security and makes use of IT to ensure business continuity and Disaster planning

Comparison with Pharmaceutical Industry

Indian pharmaceutical industry was worth of $ 21 billion in 2011 and had been growing at an average rate of 9 %.

The industry is a fragmented one with around 20k registered units and 33% of market was controlled by top ten companies and the rest of 67% by small companies.

In the domestic market Ranbaxy enjoyed a share of 5.32% with nine brands in the Top 100 list in 2011.

Company Name Sales in Rs. Cr. Year EndCipla 6172.55 31

st March 2011

Ranbaxy Lab 5266.71 31st

December 2010

Dr Reddy's Labs 5253.68 31st

March 2011

Sun Pharma 5721.43 31st

March 2011

Lupin Ltd 4767.84 31st

March 2010

Aurobindo Pharma 3319.60 31st

March 2010

Piramal Health 2509.86 31st

March 2011

Cadila Health 2468.40 31st

March 2010Matrix Labs 2776.82 31

st March 2010

Wockhardt 3751.2 31st

March 2011

The R & D expenditure by Ranbaxy is around 1.9 per cent of the company’s turnover, which is a little low as compared to foreign research based pharmaceutical companies.

W i t h India entering the Patent protection area, Ranbaxy i s p l a n n i n g t o s p e n d more on R & D.

With market share of 5.32% (as on January 2012), the company is positioned as the fifth largest player in the domestic formulations market.

The Indian pharmaceutical market reached US$ 10 billion in size, with a value-wise growth rate of 19.9 per cent over the previous year's corresponding period on a Moving Annual Total (MAT) basis for the 12 months ended July 2010.

Cipla maintained its leadership position in the domestic market with 5.29 per cent share, followed by Ranbaxy.

The highest growth in the domestic market was for Mankind Pharma which grew 36.9%. Sun Pharma(25.9%),Abbott(24.8%), Zydus Cadila (24.3 %), Alkem Laboratories (22.9%), Pfizer (23.6 %), GSK India (18.9 %), Piramal Healthcare (18.3%) and Lupin (19.2 %) had impressive growth during July 2010.

RECOMMENDATIONS/SUGGESTIONS

Sales should be increased R&D costs should be decreased. Open exclusive Retail Outlets. Form alliances with companies like Pfizer for outsourcing which is the world’s leading firm in this

industry. Outsourcing, when it is done in countries like India, proves to be very cost-effective. Tie ups with media houses and multimedia companies due to their large role in the marketing of

the products which involves advertising etc. Develop exclusive drugs to tackle epidemic diseases like Swine Flu. Develop drugs for diseases like cancer, AIDS and Brain Tumor. Tie-ups with Government Hospitals. Exclusive MRs