Pharma Industry Analysis

Pharma Industry Analysis

Today's business environment is extremely competitive and in economics parlance where perfect competition exists, the profits of the firms operating in that industry will become zero.

However, this is not possible because, firstly no company is a price taker (i.e. no company will operate where profits are zero).

Secondly, they strive to create a competitive advantage to thrive in the competitive scenario. Michael Porter, considered to be one of the foremost gurus' of management, developed the famous five-force model, which influences an industry.

In this article, we apply this model for the Indian pharma industry.

Industry competition

Pharma industry is one of the most competitive industries in the country with as many as 10,000 different players fighting for the same pie. The rivalry in the industry can be gauged from the fact that the top player in the country has only 6% market share, and the top five players together have about 18% market share.

Thus, the concentration ratio for this industry is very low. High growth prospects make it attractive for new players to enter in the industry.

Another major factor that adds to the industry rivalry is the fact that the entry barriers to pharma industry are very low. The fixed cost requirement is low but the need for working capital is high.

The fixed asset turnover, which is one of the gauges of fixed cost requirements, tells us that in bigger companies this ratio is in the range of 3.5 to 4 times. For smaller companies, it would be even higher.

Many smaller players that are focused on a particular region, have a better hang of the distribution channel, making it easier to succeed, albeit in a limited way.

An important fact is that pharma is a stable market and its growth rate generally tracks the economic growth of the country with some multiple (1.2 times average in India). Though volume growth has been consistent over a period of time, value growth has not followed in tandem.

The product differentiation is one key factor, which gives competitive advantage to the firms in any industry. However, in pharma industry product differentiation is not possible since India has followed process patents till date, with laws favouring imitators.

Consequently, product differentiation is not the driver, cost competitiveness is. However, companies like Pfizer and Glaxo have created big brands in over the years, which act as product differentiation tools. This will enhance over the long term, as product patents come into play from 2005.