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Pestal analysis of
Pharmaceutical Industry

Submitted to:
Mr.lalit bhardwaj

Submitted By:
Navjot kaur
RS3807A04
10805687
b.com(p)
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Introduction

The environment under which the Indian pharmaceutical industry is operating is changing very
slowly at present, but is likely to change significantly - and significantly faster - in the future.

The Indian pharmaceutical industry grew at a very slow pace from 1947 to 1970, largely due to the
lack of incentives and the failure of the government to set-up a concrete regulatory framework.
Today, the industry is characterized by numerous governmental regulations and policy changes,
stifling price controls, rigorous controls on formulations, and an absence of international patent
protection. During 1970, the Indian Patents Act (IPA) and the Drug Price Control Order (DPCO)
were passed. Although the DPCO acted as a buffer against pharmaceutical companies making free
pricing illegal, it fulfilled the goal of providing quality drugs to the public at reasonable rates.

The introduction of the IPA - which did not recognize product patents but only process patents -
provided a major thrust to the industry and its companies, which, through the process of reverse-
engineering, began to produce bulk drugs and formulations at lower costs. This led to high
fragmentation in the industry, due to the emergence of a number of small firms.

The Indian Pharma Industry

Thus, there are today about 24,000 companies - big, medium and small - fighting for a USD 3.9
Billion market. The Indian pharmaceutical market is ranked 12th worldwide. About 300 firms are in
the organized sector, about 15,000 are in the small scale sector, and the rest are very small without
any economies of scale. India manufactures over 400 bulk drugs and around 60,000 formulations,
which are distributed by 5,000,000 chemists all over the country.

The Indian pharmaceutical industry is passing through a wave of consolidation, with the objective to
strengthen their brand equity and distribution in what is essentially a branded-generics market.
The Indian pharmaceutical sector has come a long way, being almost non-existent before 1970 to a
prominent provider of healthcare products, meeting almost 95% of the country's pharmaceuticals
needs. The domestic pharmaceutical sales have increased from Rs. 4 bn in 1970-71 to Rs. 214 bn in
2002, at a CAGR (Compound Annual Growth rate) of 13.7% per annum. The total Indian production
constitutes about 1.3% of the world market in value terms and, 8% in volume terms. The per capita
consumption of drugs in India, stands at US$ 3, is amongst the lowest in the world, as compared to
Japan - US$ 412,
Germany - US$ 222 and USA - US$ 191.

Climbing the value chain

Indian pharmaceutical industry is mounting up the value chain. From being a pure reverse
engineering industry focused on the domestic market, the industry is moving towards basic research
driven, export oriented global presence, providing wide range of value added quality products and
services. Government policies will play an important role in defining the future of the
pharmaceutical industry. The product patent regime which has come into effect from January 2005
will lead to long-term growth for the future.
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In the present scenario, the growth of a domestic pharmaceutical company is critically dependent on
its therapeutic presence. The old and mature categories like anti-infective, vitamins, and analgesics
are de-growing while; new lifestyle categories like Cardiovascular, Central Nervous System (CNS),
Anti-AIDS, Anti-Cancer and Anti Diabetic are expanding at double-digit growth rates.

The new trends

Increased generic penetration, intense competition, fragmentation of the industry has negatively
impacted the overall value growth of the domestic pharmaceutical market. In this scenario, to grow
in the domestic market, pharmaceutical companies are constantly eyeing for innovation, introduction
of new value added products, product life cycle management and enlarging their market reach.

Indian companies are putting their act together to tap the generic drugs markets in the regulated high
margin markets of the developed countries. The US market will remain the most lucrative market for
the Indian companies led by its market size and the intensity of blockbuster drugs going off patent.
An estimated US$ 45bn of drugs expected to go off patent by 2007 in US alone.

Outsourcing in the fields of R&D and manufacturing is the next best event in the pharmaceutical
industry. Spiraling costs, expiring patents, low R&D cost and market dynamics are driving the
MNCs to outsource both manufacturing and research activities. India with its apt chemistry skills
and low cost advantages, both in research and manufacturing coupled with skilled manpower will
attract a lot of business in the days to come.

Indian companies have started investing more and more into R&D activity at home which is bound
to one day give birth to new products invented in India and patented worldwide. This will enhance
the bottom-line of Indian Pharma companies. Contract R&D is another offshoot of this phenomenon
where MNCs set Indian companies to undertake research in the specified areas of their large
Research projects. India offers cost advantages and skilled manpower for the purpose.

The Fields of Bio-technology and stem-cell Research has already produced wonderful results.
Humuno-insulin and Hepatitis-B vaccines are producing wealth for India although in its infancy.

FMHG (Fast Moving Health Goods) is a new term introduced into the advertising world. Many a
company has taken the direct route to the consumer’s home just like consumer product. This has led
to an increase in the incidence of self-medication and rising sales volumes for the industry.

Non-allopathic medication is another field which is showing good promise in terms of people’s
acceptance. With new and modern technology and standardization in the manufacturing and
formulating practices, the therapeutic results with alternate systems of medicine are becoming more
predictable. This has led to the emergence of a totally new field of therapeutics. Many MNCs have
also adopted these forms and reaped the benefit of a ready market.

Exports of bulk-drugs, formulations and API (Active Pharma Intermediates) have of late become
the fashion. A company worth its salt has an export unit. The Government provides many fiscal
incentives for exports such as Excise duty exemption, Exports subsidy, packing credits; export
Financing, IT advantages, exemptions from Local laws etc. There are a number of examples where
the companies started as a 100% EOUs (Export Oriented Units) and later diversified into local sales.
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The Key Players

The Key Players in the Indian Pharmaceutical Industry are:

- Aarti Drugs
- Abbott India
- Ajanta Pharma
- Alembic
- Alkem
-Anglo-French Drugs
- Aristo
- Astrazeneca Pharma
- Aurobindo Pharma
- Aventis Pharma
- Cadila Health
- Cipla
- Concept
- Dr. Reddy
- Elder Pharma
- Franco-Indian
- Fulford India
- FDC
- German Remedies
- Glaxo Smithkline
- Ind Swift Lab
- Ipca Laboratories
- J B Chemical
- Jagson Pharma
- K D L Biotech
- Kopran
- Krebs Biochem
- Lupin
- Lyka Labs
- Maker
- Medicorp Tech
- Merck
- Natco Pharma
- Nicholas Piramal
- Novartis
- Orchid Chemicals
- Organon
- Panacea Bio
- Pfizer
- Pharmacia
- Ranbaxy
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- Raptakos Brett
- R P G Life Sciences
- Shasun Chemicals
- Siris Limited
- Sterling Biotech
- Strides Arcolab
- Sun Pharma
- Suven Life Sciences
- Torrent Pharma
- Unichem Lab
- Wockhardt
- Wyeth Ltd
- Zandu Pharma

The future

In India, medicines represent between 10 to 15% of total health care costs. This will not rise
substantially when product patents are introduced, for two reasons. First, over 90% of the medicines
in the Indian market are now off-patent globally. Second, for most of those that would be
patentable, there are close alternatives available which provide effective competition. The real
reason for the lack of access to medicines and other forms of healthcare is the prevailing
stranglehold of Governmental regulation of the Healthcare sector.

This dismal picture can, however, change dramatically if the Government takes prudent steps such as
easing the DPCO and other regulations, provide adequate budgetary provision for Healthcare (Govt.
spends a miserly 1% of GDP on healthcare), allow Indian companies to buy technology, allows
Indian companies to buy finance, set up subsidiary companies abroad, allows FDI into the sector,
freely allows tie-ups with MNCs, takes away restrictions on exports to some countries.

The industry on its own must take steps to increase its commitment to R&D, quality, manpower
development, exports, market development and consolidation for economies of scale. The
development of traditional system of medication like Ayurveda, Herbal and other systems of
treatment must be researched into and standardized. Documentation on their therapeutic benefits
must be generated and put open for one and all to study and analyze. Ayurveda can give India the
cutting edge that the Pharma industry needs against a Patented regime dominated by MNCs.

The industry has a bright future.

PESTAL ANALYSIS

To understand the implications of the environment on any industry it is imperative to study

the four cardinal influencers on the industry namely Political, Economic, Social and
Technological factors. It is rather unfortunate that in India these factors have a rather
disproportionate influence on the functioning of a commercial organization. From the days
of independence the business environment has been overly regulated by a handful of
bureaucrats, middlemen, businessmen and politicians. Its only a decade since the country
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has seen an emergence of a political thought that encourages free enterprise. A welcome
change indeed!

Political Factors

1. Today there is political uncertainty in the air. A combination of diverse political thought
have got together to cobble together a rag-tag coalition, that is riddle with ideological
contradictions. Therefore, any consistent political or economic policy can not be expected.
This muddies the investment field.

2. The Minister in charge of the industry has been threatening to impose even more stringent
Price Control on the industry than before. This is throwing many an investment plan into the
doldrums.

3. DPCO which is the bible for the industry has in effect worked contrary to the stated
objectives. DPCO nullifies the market forces from encouraging competitive pricing of goods
dictated by the market. Now the pricing is determined by the Government based on the
approved costs irrespective of the real costs.

4. Effective January, 2005 the country goes in for the IPR (Intellectual Property Rights) regime,
popularly known as the Patent Act. This Act will impact the Pharmaceutical Industry the
most. Thus far an Indian company could escape paying a patent fee to the inventor of a drug
by manufacturing it using a different chemical route. Indian companies exploited this law
and used the reverse-engineering route to invent a lot of alternate manufacturing methods. A
lot of money was saved this way. This also encouraged competing company to market their
versions of the same drug. That meant that the impurities and trace elements found in
different brands of the same substance were different both in qualification as well as in
quantum.

Therefore different brands of the same medicine were truly different. Here Branding actually
meant quality and a purer brand actually had purer active ingredient and lesser or less toxic
impurities.

Product patent regime will eliminate all this. Now, a patented drug would be manufactured
using the same chemical route and would be manufactured by the inventor or his licentiates
using the chemicals with same specifications. Therefore, all the brands of the same active
ingredient would not have any difference in purity and impurities. The different brands
would have to compete on the basis of non input-related innovations such as packaging,
color, flavors, Excipients etc.

This is the biggest change the environment is going to impose on the industry. The
marketing effort would be now focused on logistics, communications, economy of operation,
extra-ingredient innovations and of course pricing.

5. In Pharma industry there is a huge PSU segment which is chronically sick and highly
inefficient. The Government puts the surpluses generated by efficient units into the price
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equalization account of inefficient units thereby unduly subsidizing them. On a long term
basis this has made practically everybody inefficient.

6. Effective the January, 2005 the Government has shifted from charging the Excise Duty on
the cost of manufacturing to the MRP thereby making the finished products more costly. Just
for a few extra bucks the current government has made many a life saving drugs unaffordable
to the poor.

7. The Government provides extra drawbacks to some units located in specified area, providing
them with subsidies that are unfair to the rest of the industry, bringing in a skewed
development of the industry. As a results Pharma units have come up at place unsuitable for
a best cost manufacturing activity.

Economic Factors

1. India spends a very small proportion of its GDP on healthcare ( A mere 1% ). This has
stunted the demand and therefore the growth of the industry.

2. Per capita income of an average Indian is low ( Rs. 12,890 ), therefore, spending on the
healthcare takes a low priority. An Indian would visit a doctor only when there is an
emergency. This has led to a mushrooming of unqualified doctors and spread of non-
standardized medication.

3. The incidence of Taxes are very high. There is Excise Duty ( State & Central), Custom Duty,
Service Tax, Profession Tax, License Fees, Royalty, Pollution Clearance Tax, Hazardous
substance (Storage & Handling) license, income tax, Stamp Duty and a host of other levies
and charges to be paid. On an average it amounts to no less than 40-45% of the costs.

4. The number of Registered Medical practitioners is low. As a result the reach of

Pharmaceuticals is affected adversely.

5. There are only 50,00,000 Medical shops. Again this affects adversely the distribution of
medicines and also adds to the distribution costs.

6. India is a high interest rate regime. Therefore the cost of funds is double that in America.
This adds to the cost of goods.

7. Adequate storage and transportation facilities for special drugs is lacking. A study had
indicated that nearly 60% of the Retail Chemists do not have adequate refrigeration facilities
and store drugs under sub-optimal conditions. This affects the quality of the drugs
administered and of course adds to the costs.

8. India has poor roads and rail network. Therefore, the transportation time is higher. This
calls for higher inventory carrying costs and longer delivery time. All this adds to the
invisible costs. Its only during the last couple of years that good quality highways have been
constructed.
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Socio-cultural Factors

1. Poverty and associated malnutrition dramatically exacerbate the incidence of Malaria and
TB, preventable diseases that continue to play havoc in India decades after they were
eradicated in other countries.

2. Poor Sanitation and polluted water sources prematurely end the life of about 1 million
children under the age of five every year.

3. In India people prefer using household treatments handed down for generations for common
ailments.

4. The use of magic/tantrics/ozhas/hakims is prevalent in India.

5. Increasing pollution is adding to the healthcare problem.

6. Smoking, gutka, drinking and poor oral hygiene is adding to the healthcare problem.

7. Large joint families transmit communicable diseases amongst the members.

8. Cattle-rearing encourage diseases communicated by animals.

9. Early child bearing affects the health standards of women and children.

10. Ignorance of inoculation and vaccination has prevented the eradication of diseases like polio,
chicken-pox, small-pox, mumps and measles.

11. People don’t go in for vaccination due superstitious beliefs and any sort of ailment is
considered as a curse from God for sins committed.

Technological Factors

1. Advanced automated machines have increased the output and reduced the cost.

2. Computerization has increased the efficiency of the Pharma Industry.

3. Newer medication, molecules and active ingredients are being discovered. As of January
2005, the Government of India has more than 10,000 substances for patenting.

4. Ayurveda is a well recognized science and it is providing the industry with a cutting edge.

5. Advances in Bio-technology, Stem-cell research have given India a step forward.

6. Humano-Insulin, Hepatitis B vaccines, AIDS drugs and many such molecules have given the
industry a pioneering status.
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7. Newer drug delivery systems are the innovations of the day.

8. The huge unemployment in India prevents industries from going fully automatic as the
Government as well as the Labor Unions voice complains against such establishments.

OPPORTUNITIES AND THREATS OF PHARMACEUTICAL INDUSTRY:

The pharmaceutical industry is entering a period of substantial change in 2009. Most of the names in
the industry are facing significant patent challenges in the years to come. U.S.-based firms are facing
foreign exchange headwinds, as well. Revenue growth is non-existent, and earnings growth is being
driven primarily by mergers, cost-cutting and share buybacks.

Knowing that investors rarely pay-up for this type of manufactured earnings growth, we struggle to
see a broad-based out-performance for the large-cap pharmaceutical sector in 2009

OPPORTUNITIES:

We have three Buy-rated names within the large-cap space: Bristol-Myers (NYSE:BMY), Johnson
& Johnson (NYSE:JNJ) and Abbott Laboratories (NYSE:ABT).

For growth funds, we recommend Bristol and Abbott. Bristol is expected to grow earnings by 12%
CAGR through 2012. That’s tops in the industry. Growth is sustainable with a product suite heavy in
attractive areas such as biologics, cancer and cardiovascular drugs. The late-stage pipeline includes
two very promising candidates: apixaban and saxagliptin – both of which could be blockbusters if
approved.

Growth at Abbott is being driven by blockbuster drugs such as Humira for rheumatoid arthritis and
the company’s drug-eluting stent, Xience. Abbott has also been highly acquisitive over the past few
years, most recently paying $175 million to pick up Ibis Biosciences, a subsidiary of Isis
Pharmaceuticals, to enhance the company’s position in molecular diagnostics for infectious disease.

Our top-pick for value focused portfolios is Johnson & Johnson. The company is trading around 1X
growth (PE/G) and sitting on $16 billion in cash. Much like Abbott, J&J has been highly acquisitive
over the past year, most recently paying $1.1 billion to acquire medical product maker Mentor Corp.
in December 2008. We expect that J&J will continue to look for acquisition targets in both pharma
and medical devices throughout the year.

The big opportunity to out-perform in 2009 is to own the names that are going to be acquired. We
have no crystal ball, but names that certainly look attractive and fit the model for a large
pharmaceutical company to gobble them up include Biogen-Idec, Amylin Pharmaceuticals, Vertex
Pharmaceuticals, Acorda Therapeutics, Osiris Therapeutics, Auxilium Pharmaceuticals, OSI
Pharmaceuticals, and Elan Corp. All of these companies have what big pharma is looking for – novel
compounds with potential blockbuster sales levels at reasonable valuations.

Our top-pick for biotech continues to be Biogen-Idec (NASDAQ:BIIB). Rituxan and Avonex
continue to dominate the top-line, but with Tysabri expectations significantly lowered and a late-
stage pipeline that boasts seven phase III candidates, we think Biogen is set to out-perform
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expectations in the years to come. Biogen also possess an enormous biologic manufacturing
footprint – a key asset that could help attract an interested suitor during the year.

THREATS:

We continue to recommend avoiding names that offer little growth or opportunity for a take-out.
These include companies developing “me-too” type drugs on hanging on the hopes and prayers of an
FDA approval. Now is not the time to be taking on unnecessary risk. The number of new entity
approvals was 24 in 2008, up from 18 in 2007, but the number of rejections and delays was also up.

Throughout 2008 it seemed as though just about every FDA action (PDUFA) date was pushed back
and delayed. In 2008 we saw our share of surprise rejections and clinical failures as well. Drug
development is a risky business; the success rate on new drugs from preclinical to approval is less
than 5%.

Stay away from companies that are all ideas and no assets. Above, we discussed some key measures
to hang your hat on: cash, dividends, pipelines and strategic assets like biologic manufacturing. If
your target company has none of these, now is probably not the best time to roll the dice.

Run from any company looking for money or looking to raise money in the next year. Interest rates
on direct financing loans are going to be through the roof, and stock prices are down so big that
share offerings will be painfully dilutive. Unless the company is looking to partner with large-cap
pharma, expect out-of-cash small-cap biotech to remain out-of-favor.

Above we listed several names that could potentially be taken out by large-cap pharmaceuticals at
some point during the year. In contrast, owning the name doing the acquiring is often a sure-fire way
to see quick under-performance. Pfizer’s stock dropped by 25% shortly after announcing the Wyeth
acquisition. We would be cautious on three names in particular: Sanofi, AstraZeneca and Eli Lilly,
as these are the three largest players in the sector that are likely to “go shopping.”

OPPORTUNITIES AND THREATS OF RANBAXY:

Ranbaxy Pharmaceuticals Inc. (RPI) is a product-driven pharmaceutical company with

diversified expertise. As a wholly owned subsidiary of Ranbaxy Laboratories Limited,
India’s largest pharmaceutical company, RPI offers an advantage of having a global
presence with experience in more than 125 international markets. The company’s
advanced product development and manufacturing capabilities, combined with a global
sales and marketing network, make RPI an attractive business partner. A key part of RPI’s
business strategy is to collaborate with partners with complementary skills – a mutually
beneficial strategy for both parties.
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OPPRTUNITIES:

Growing economy

Growing attention to health and globalization

New therapy approaches

New diagnoses and new social diseases

Saturation point of the market is far away

Ageing of the world organization

Threats:

High entry cost in new markets

High cost of sales and marketing

High cost of discovering new products and ,few discoveries

More potential new drugs and efficient therapies

Emerging trend in biotechnological and genetically modified products

OPPORTUNITIES AND THREATS OF GLAXOSMITH KLINE

GlaxoSmithKline plc often abbreviated to GSK, is a global pharmaceutical, biologics, vaccines and
consumer healthcare company headquartered in London, United Kingdom. It is the world's third largest
pharmaceutical company measured by revenues It has a portfolio of products for major disease areas
including asthma, cancer, virus control, infections, mental health, diabetes and digestive conditions.[4] It also
has a large consumer healthcare division which produces and markets oral healthcare products, nutritional
drinks and over-the-counter medicines, including Sensodyne, Horlicks and Gaviscon. Its primary listing is on
the London Stock Exchange and it is a constituent of the FTSE 100 Index. It has a secondary listing on
the New York Stock Exchange.
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OPPORTUNITIES:

LICENSING

JOINT VENTURE

FURTHER MERGER

DIRECT MARKETING

ORGANIC GROWTH

NEW DRUG DEVELOPMENT

CONVERSION TO GENERICS

THREATS:

COMPETITION

REGULATORS

RISING DRUG COST

GROWTH IN GENERICS

DRUG SIDE EFFECT