PEST ANALYSIS OF PHARMACEUTICAL

INDUSTRY:

DEFINITION:
A PEST analysis is an investigation of the important factors that are changing which
influence a business from the outside.

PEST stands for: Political changes e.g. a change in government, or a change in government
policy. Economic changes Relate to changes in the wider economy such as rises in living
standards or the general level of demand, rises or falls in interest rates, etc. Social changes
Relate to changes in wider society such as changes in lifestyles e.g. more women going out to
work, changes in tastes and buying patterns. Technological changes Relate to the application
of new inventions and ideas such as the development of the Internet and websites as business
tools.
1.POLITICAL/LEGAL FACTORS:

1. The recognition of the pharmaceutical industry as a knowledge-based industry has a

positive impact on this industry. As an example, import duty on the life-saving drugs
has been removed.

2. The finance minister of India announced a scheme, called Janaraksha, to improve

access to healthcare for rural communities, indicating that the government wants to
focus on the health of poor people by providing them adequate healthcare

3. 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.

4. DPCO came into existence in 1970. It controls the domestic prices of major bulk
drugs and their formulations. DPCO 1995 gives a uniform maximum allowable post
manufacturing expense (MAPE) of 100% as compared with earlier MAPE of 75%
for some of the drugs. The retail price (RP) of a DPCO formulation is calculated by
the following formula

RP = (MC+CC+PM+PC)*2+Excise Duty

in which MC is the material cost, including cost of bulk drugs/excipients and process
losses; CC is the conversion cost; PM is the cost of packing; and PC is the packaging
charges.
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.

5. 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 (in totality) 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, colours, flavours, 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.

6. 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 equalization account of inefficient units thereby unduly subsidizing them. On a
long term basis this has made practically everybody inefficient.

7. 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.

8. Clerical testing is done on animals. A number of scientists, animal welfare,

and animal rights organizations—such as PETA and BUAV—question the
legitimacy of it, arguing that it is cruel, poor scientific practice, poorly regulated, that
medical progress is being held back by misleading animal models, that some of the
tests are outdated, that it cannot reliably predict effects in humans, that the costs
outweigh the benefits, or that animals have an intrinsic right not to be used for
experimentation.

9. Warner-Lambert's anti-diabetes drug Rezulin is a glaring example of animal testing

methodology. Company press and officials also claimed that the drug was the first
anti-diabetic drug to target insulin resistance and that it was virtually free of side
effects. Soon after Warner-Lambert submitted for FDA review in the summer of
1996, Dr. John L. Gueriguian, the medical officer assigned to examine it, cited
Rezulin's potential to harm the liver and the heart. Gueriguian also questioned its
viability in lowering blood sugar for patients with adult-onset diabetes. Rezulin killed
hundreds of people and obliged many more to undergo liver transplants, Warner-
Lambert made over two billion dollars before it was withdrawn in 2000.
2. ECONOMIC FACTORS:

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

2. The incidence of Taxes is 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. The number of Registered Medical practitioners is low. As a
result the reach of Pharmaceuticals is affected adversely.

3. 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.

4. If good jobs were available locally, citizens would not feel the economic pressure to
migrate to the United States, Europe, or Japan. Development of clinical trial centers
would provide funding from private pharmaceutical industries to local hospitals. In
return, a staff of nurses and doctors would be maintained, which would benefit local
communities.

5. 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. It’s only during the last couple of years that good quality
highways have been constructed.

6. The development of the pharmaceutical industry would help the Indian economy
produce more national wealth. Foreign investment would increase, and Indian
companies would have the opportunity to collaborate with many companies from
around the world. Indirectly, developing the pharmaceutical industry would also help
other industries.

7. According to economics historian Walt Rostow, five stages of economic development

exist. The first two stages are traditional society and the preconditions for takeoff. The
 third stage is economic takeoff, which then matures in the fourth stage. The fifth stage
is high mass consumption. The Indian economy is most likely in the second or third
stage, according to Rostow’s model, and is expected to take off.As an indication of
this position, Indian pharmaceutical companies no longer have only domestic
operations—some companies now have enterprises in the United States and other
countries.

8. The World Bank estimated that five countries—Brazil, China, India, Indonesia, and
Russia—whose share of the world pharmaceuticals market is barely one-third of that
of the EU will have a 50% higher market share than will the EU by 2020.

3. SOCIAL FACTORS:

1. At a World Intellectual Property Organization (WIPO) conference in 1999, Dr.

P.V.Venugopal summarized the possible benefits to India of modernizing the
industry. The development of the IPI would create new jobs, but mainly it would
provide access both to modern technology in the field of medicines and to medicines
developed indigenously. As a result, it will be able to provide new drug formulations
and improved healthcare treatments to Indian patients.

2. Poor Sanitation and polluted water sources prematurely end the life of about 1million
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. Cattle-rearing encourage diseases communicated by animals.

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

9. Ignorance of inoculation and vaccination has prevented the eradication of diseases

like polio, chicken-pox, small-pox, mumps and measles.

4. TECHNOLOGICAL FACTORS:

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

2. Newer drug delivery systems are the innovations of the day.

3. The Indian computer industry is on par with its American counterpart, and many
companies in the world depend upon Indian programmers to develop complex
software. The use of computers in the pharmaceutical industry is increasing, and in
particular they are being applied to data management and drug discovery program .
Thus, collaboration between the computer and pharmaceutical industries will help
drug discovery and development programs prosper.

4. 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.

5. Ayurveda translates as the “science of life.” It encompasses fundamentals and

philosophies about the world and life, diseases, and medicines. The knowledge of
ayurveda is compiled in Charak Samhita and Sushruta Samhita. The curative
treatment lies in drugs, diet, and general mode of life. This has given India a pioneer
stage.

6. Biology and chemistry are changing as a result of high-powered computers, chemical

information software tools and new database-searching algorithms. Technological
advances in high-throughput screening hardware, combinatorial chemistry and
information technology, in combination with high-value targets in the pharmaceutical
industry, have created a cost- and time-efficient technology platform to screen a large
number of compounds. 
7. The Indian pharmaceutical industry exports generic drugs to CIS (Commonwealth of
Independent States) countries, Africa, and recently to the highly regulated US and
European markets. The Indian pharmaceutical industry is characterised by a low
degree of concentration; a large number of firms with similar market shares, a low
level of R&D intensity ratios with a high level of brand proliferation.

8. New drug delivery system (NDDS) involves the development of technology to

introduce a drug at diseased site in a novel way. New drug delivery system research
has definitive and well defined boundaries of complexities. It represents an advance
level of capability in terms of formulation research part of the process R&D.