A REPORT ON

PHARMACEUTICAL
INDUSTRY

Submitted by:
GROUP – 4

Aakankshit Kar (2019124)

Aman Trivedi (2019133)
K S Sunil (2019148)
Mansi Kathuria (2019153)
Nikita Chawla (2019158)
Rabprit Singh (2019165)
Sohini Mukhuty (2019177)

DATE OF SUBMISSION: 01–Sept-2019

 EXECUTIVE SUMMARY

The following is our economic analysis on the pharmaceutical industry. We have looked at the number of
players operating in this industry, supporting industry, pricing mechanism, the entry and exit barriers, the
competition policies, externalities affecting the industry and many more points. Worldwide pharmaceutical
markets are amidst major discontinuities. While development in created markets will slow down, developing
markets will turn out to be progressively significant in the coming decade.

The Indian pharmaceuticals advertise, along with the business sectors of China, Brazil and Russia, will initiate
development inside these business sectors. The Indian pharmaceuticals market has qualities that make it
extraordinary. To start with, marked generics rule, compensating for 70 to 80 percent of the retail advertise.
Estimating controls and a monetary stoppage can wean away speculations and essentially discourage the
market, enabling it to arrive at just USD 35 billion by 2020. Then again, the market can possibly reach USD 70
billion gave industry places in too ordinary endeavors behind the five developing chances, and improves access
and worthiness as a rule.

The blend of treatments will keep on step by step move for strength what's more, super-claim to fame
treatments. Despite this move, mass therapies will establish a large portion of the market in 2020. Metro and
Tier-I markets2 will make huge commitments to development, driven by fast urbanization and more
noteworthy monetary improvement. Provincial markets will become the quickest determined by venture up
from current poor degrees of entrance. On equalization, Tier-II markets will get insignificantly crushed out.
The emergency clinic section will expand its offer and impact, developing to 25 for every penny of the market
in 2020, from the present 13 percent. At last, the five rising openings will develop a lot quicker than the market,
and will can possibly become a USD 25 billion market by 2020. In the course of recent years, the qualification
between nearby players and global organizations has progressively obscured. We accept that if advertise
authority is the yearning, the suggestions and goals will be basic for the two gatherings of players. The
administration should make ventures to grow access to medicinal services, while guaranteeing that industry
stays feasible and aggressive.
Patients are currently progressively mindful of medical problems all in all and educated regarding
the utilizations and symptoms of the medications they are exhorted and accordingly the pharma
organizations are required to think of better, explored forefront arrangements so as to back their cases and
fulfill the customer need. The pharmaceutical business over the world needs to address the difficulties .
 TABLE OF CONTENTS

INTRODUCTION

INDUSTRY STRUCTURE

SUPPORTING INDUSTRIES

COMPETITION AND OTHER GOVERNMENT POLICIES

PRICING MECHANISM

EXTERNALITIES

CONCLUSION

REFERENCES
INTRODUCTION
The pharmaceutical industry discovers, develops, produces, and markets drugs or pharmaceutical drugs for
use as medications to be administered to patients suffering from certain diseases, keeping the motto to cure
them, vaccinate them, or alleviate the symptoms arising from the diseases. A Pharmaceutical company also
deals in generic or brand medications and devices for medical purposes. They have to abide to various laws
and regulations that govern the patenting, testing, safety, efficacy and marketing of drugs produced or
marketed by the company.

The pharmaceutical industry comprises of companies involved in the research and development,
manufacturing, and commercialization & branding of new therapeutic products working to bring the right
treatments for the patients at the right time. There are variety of jobs for the discovery, developing,
manufacturing and promotion of new medicines and drugs which combines the talents of various individuals
for variety of fields.

HISTORY
The modern pharma-industry started with local apothecaries that expanded from the traditional role
distributing botanical drugs such as morphine/quinine to wholesale manufacture in the 1850s, and from
discoveries resulting from applied research in medicines. Indented drug discovery from plants began with the
isolation between 1803 and 1805 of morphine - an analgesic and sleep-inducing agent - from opium by the
German apothecary assistant Friedrich Sertürner, who named the compound after the Greek god of dreams,
Morpheus. By the late 1880s, German dye manufacturers had perfected the purification of individual organic
products from tar and other mineral sources and had also established initial methods in organic chemical
synthesis. The development of synthetic chemical methods allowed scientists in a systematic way to vary the
structure of useful chemical substances; and growth in the emerging science of pharmacology expanded
scientists’ ability to evaluate the biological effects of structural changes on the human body.

INDUSTRY STRUCTURE
The pharmaceutical industry is more of an oligopoly market. In an oligopoly, there few large firms that
command the business yet don't connive and have large entry barriers. A distinctive element is that any of
these huge firms can influence market shares and profitability. This sort of structure is frequently connected
with product differentiation which prompts brand loyalty enabling firms to charge high costs and earn margins
above what they regularly would.

There are two types of oligopoly. The pure oligopoly where products are homogeneous. The subsequent
structure is differentiated oligopoly which is the market structure found in the pharmaceutical industry. In this
structure, products are heterogeneous; the medications may be indistinguishable in usage however they are
differentiated from one another. By offering explicit plans, packaging and promotions, they develop brand
loyalty. Thus, every drug bears a downward sloping demand curve fusing effective differentiation which
prompts market control.
NUMBER OF PLAYERS

GLOBAL:

The worldwide pharmaceutical industry arrived at phenomenal statures in 2018, being evaluated at a
bewildering $1.11 trillion. By 2020, this figure is set to ascend to $1.43 trillion. With rising strain to create
medications to fulfill regularly expanding worldwide need, pharmaceutical organizations keep on working
enthusiastically to bring the most inventive and forefront medicines to patients.

In spite of the fact that the USA's piece of the overall industry of the worldwide pharmaceutical industry is
worth over $341.1 billion, the Chinese, South East Asian, Eastern European and South American markets are
starting to develop. For instance, the Chinese market is rich with preclinical and early-stage medicates, and is
a developing core of biotech movement. The following couple of years will see worldwide development on
account of the expanding riches around the world, just as expanding request to keep up abnormal amounts of
advancement to battle neglected therapeutic need.
Top 5 pharmaceuticals companies in the world

5. Merck and Co : US $37.7 billion

4. Sanofi : US $39.3 billion

3. Johnson and Johnson : US $40.7 billion

2. Roche : US $45.6 billion

1. Pfizer : US $53.7 billion

INDIAN CONTEXT:

Indian pharmaceuticals market is expected to be worth USD 33.18 billion and reach 9th position in the global
pharma market by 2023.

Based on the overall revenue (except for Piramal where only pharma business division revenue is considered)
the top 10 pharmaceutical companies in India are:

1. Sun Pharmaceutical Industries Limited : INR 273.28 Billion

2. Aurobindo Pharma Limited : INR 164.99 Billion
3. Lupin Limited : INR 159.55 Billion
4. Cipla Limited : INR 155.77 Billion
5. Dr. Reddy’s Laboratories : INR 144.36 Billion
BARRIERS TO ENTRY AND EXIT OF THE FIRMS
1. High Investment
2. Number of regulations
3. Market Access Barrier
4. FDI in pharmaceuticals projects

HIGH INVESTMENTS : There is a huge gestation lag in the pharmaceuticals industry. Companies have to wait
a long time before their investments are converted into returns. The big payoffs available in the pharmaceutical
industry lead to a steady flow of new companies being created. In fact, one of a start-up investor’s main exit
strategies is to sell out to a big pharma firm when new products are through the initial development phase.
This leads to a few big players dominating the market. Moreover, it takes on an average 1.3 billion to 4 billion
dollars to even bring the drug to the market (Investopedia, 2018). This is because FDA has a very strict
approval policy, because of which more than 93% drugs are not approved in the first cycle. Its after few
modifications are made to that drug, FDA gives an approval. Even after this out of the 93% which got rejected,
only 33% are approved in the second cycle.

NUMBER OF REGULATIONS : There are heavy regulations by the government bodies which approve the
medicines to be sold in the market. FDA regulations make it harder for new firms to enter the market. In India
however, the need for pharma companies are very high due to increasing demand of high-quality drugs, low-
to-moderate entry barrier to the new entrant, the presence of a number of various types of firms makes this
market is highly competitive.

MARKET ACCESS BARRIERS : Fixing of ceiling price for the essential drugs by NPPA, under the Drug Price
Control Order (DPCO) 2013, is cost based policy and it consider simple mean of all the lifesaving drugs which
have a market share of 1percent or more. The industry expects, it is more appropriate to adopt market-based
policy rather than cost-based policy (Sridharan , Chandra, & G., 2016). The contribution from the government
in the areas of health care is not satisfactory, which is only 1.2 percent of the GDP and healthcare infrastructure
development not up to the expectation in India. The pharmaceutical companies expect the government to
improve the systems in the public health care administration, so as to reach the medicines to the needy people,
which will improve overall health care of the country. Reaching the rural market, which is very large in India,
the pharmaceutical companies have to work with innovative marketing and sales tools to reach these markets.

FDI IN PHARMACEUTICALS PROJECTS : The investment in greenfield projects are much more than
brownfield projects. In order to develop the pharmaceutical companies which are already existing, it is
essential to have a good amount of FDI in those firms also (Sridharan , Chandra, & G., 2016).

TRADE BARRIERS
Trade barrier is a government-induced mechanism to regulate or restrict free international exchange of goods
and services. Trade barriers, for any industry, are primarily of three types – tariffs, non-tariffs and quotas. Let
us understand the impact of each in the pharmaceutical industry.

TARIFF
Tariff is an import duty imposed on the value of goods purchased from foreign countries. Tariffs have vital
implications on prices as they can raise the prices of imported pharma products as well as the locally produced
ones using imported inputs. The quantity of tariff levied is either on an ad valorem basis (percentage of value)
or on a specific basis (e.g. $6 per 100 kgs).

Tariffs are imposed by the government usually to fulfill any or both of the objectives :
(a) Generating government revenue
(b) Protecting the domestic pharmaceutical market
From the consumer’s standpoint tariffs essentially increase the domestic price of the pharmaceutical product
and hence restrict its demand.

Tariffs may vary greatly across countries. Tariffs on pharmaceutical products are usually allowed a range of
national exemptions, waivers or reductions which differ significantly between countries, products and sectors.

A study was conducted by the World Health Organization (WHO), in 2005, on different categories of
pharmaceutical products including active pharmaceutical ingredients, finished products and vaccines for
human medicines. The analysis showed that many countries (41% for active pharmaceutical ingredients and
39% for finished products) for which data were available do not levy duties on pharmaceutical products. 59 %
of countries levy tariffs on pharmaceutical active ingredients while 61% of countries levy tariffs on finished
pharmaceutical products. An aggregate of 35% of countries continue to levy import duties on vaccine imports.
Less than 10% tariff rates are applied on medicines by ninety percent of countries. Overall, pharmaceutical
tariffs generate less than 0.1% of Gross Domestic Product (GDP) in 92% of countries for which the study was
carried out.

Another noteworthy observation was that pharmaceutical tariffs generally do not appear to be structured to
protect local pharmaceutical industries.

NON-TARIFF
Non-tariff trade barriers largely refer to the measures undertaken by the government to prohibit or restrict
trade other than through direct imposition of tariffs. These can be of legal, administrative, cultural forms. The
government can put in place certain documentation requirements, technical and safety standards or packaging
with specific language requirements in order to discourage the entry of foreign players in the market.
NTBs can take several forms and the lack of a comprehensive and uniform reference system further
complicates the classification and analysis of NTBs. When businesses or non-profit organizations try to import
pharmaceutical products the presence of NTBs can pose a strong hindrance .

• For instance, information on import rules, procurement processes, drug registration is hard to find,
especially for developing countries. It’s often not electronically available, is not comprehensive and
may not be translated into the producer’s language
• Cumbersome procedures related to approval of imported pharma products significantly add to the
costs as well as the time taken in the process
• Banking procedures for remittance of foreign exchange often ends up being tedious and time-
consuming thereby hampering business sentiments
 • The presence of more than one regulatory body (for e.g. drug registration authority and the health
insurance body) to enforce the approval of drugs entering the domestic market lengthens the process
and acts as a deterrent

In some cases, ambiguity in rules may also lead to a form of trade barrier. For instance, rules related to tariff
exemptions and waivers in national laws may lack transparency. In this scenario, the producer/importer
concerned may be unable to locate the rules pertaining to such exemptions or waivers or may be unaware of
the terms and conditions to exercise their right to waivers and exemptions. This is a situation of information
asymmetry which, in turn, leads to increased product prices.

QUOTA
Quotas look at restricting imports by imposing an upper limit on the quantity or monetary value of goods that
can be brought in to the country.
When considered globally, quotas ,as trade barriers, are rarely prevalent except for a few cases, like in the
Europian Union.

Because of the country-wise drug price controls in the Europian Union , some wholesalers often buy
prescription drugs in countries that keep their prices low and resell them in countries allowing higher prices
for those drugs. Sanofi-Synthelabo's Plavix, for example, costs $55 in France but is resold for $79 in England.
This kind of practice has long been prevalent and is known as parallel trade, costing the pharma industry an
estimated $3 billion in lost profits each year.

Given that European authorities did not help in blocking parallel trade the pharma companies took it upon
themselves to restrict supplies to meet local needs only, judging on prior demand and anticipated growth. The
idea is to ensure that countries receive just enough to meet their local demand and no more so that the surplus
can not be reused by wholesalers to resell.

Nonetheless the relief is that parallel trade has not come to be a global phenomenon. In the USA, for example,
it is illegal to import pharma products for resale.

OVERVIEW

Although countries may impose tariffs to protect the domestic industry, retaliate against trade measures by
other countries or boost government revenue, the global trend has been to lower or eliminate tariffs. The
General Agreement on Tariffs and Trade(GATT) and World Trade Organization(WTO) facilitates negotiation
of lower tariffs among its member nations, besides which there are several bilateral trade agreements like the
Free Trade Agreement(FTA) between Israel and the USA, regional trade pacts and other trade agreements
between groups of countries resulting in substantial reductions in drug prices globally.
From the health care perspective, lowering tariffs will lower the price of the drugs given that sales tax and
other drug price components are unchanged. Ideally this should lead to higher availability of essential
medicines for the health system. Also the revenue generated from tariffs in pharmaceutical products is
relatively low and the tariffs imposed on pharmaceutical inputs ultimately increases the local pharma
products. This further strengthens the argument for removal of tariff.

However local market players generally view this as non-beneficial since it implies competition with foreign
drug suppliers who may offer lower priced or advanced quality drugs.

While tariffs have been reduced , non-tariff barriers have seen a steady rise across countries. Non-tariff
restrictive measures, if imposed non-discriminatorily, to safeguard public health and prevent the inflow of
counterfeit products, are permissible by WTO. However ensuring non-tariff measures do not become non-tariff
barriers is crucial as the latter reduce the quantity and variety of products entering a country and can create
shortages of essential drugs and other medical supplies.

SUPPORTING INDUSTRIES
❖ CHEMICAL INDUSTRY
Indian pharmaceutical business is the third largest in
the world and is one of the foremost developed
industries. Pharma industry is directly dependent on
the chemical industry. The chemicals supplied are
used for the production of various drugs and
medicines. A lot of chemical industries are in
business these days and will boost the
manufacturing of pharmaceutical formulations, i.e.,
medicines prepared for consumption by patients.
There are more than 350 bulk medicines, i.e.,
chemicals having therapeutic worth and used for the
production of pharmaceutical formulations. In
comparison with other industries pharmaceuticals
are the major consumers of the chemical industry.

At Pure chem, the leading suppliers of chemical in India, there is a supply of chemicals to different types of
pharma industry. The chemicals supplied acts as active ingredients in toothpastes, shampoos as well as many
reagents. Many are used as a catalyst for various drug preparations.

Simultaneously, income growth, improving affordability, rising healthcare awareness and changing life-styles
leading to growing incidence of chronic ailment would drive demand for Indian Pharma Sector. Increasing
penetration of healthcare services too are leading to an increase in spending on medicines. Growing healthcare
spending would support the long-term pharma sector growth.

Thus, D&B expects the Chemical and Pharmaceutical sector to strengthen in future and the gross value added
of the sector expected to grow from an average of 11.4% during FY16- FY20 and further to 13% during FY21-
FY25.

❖ BEVERAGE INDUSTRY
The pharmaceutical industry is a global one with multinational companies carrying out research and
development activities, clinical trials and production on different continents and supplying the products to
virtually every country of the world. The industry is relatively unaffected by the “bear” and “bull” markets that
typically exert a dramatic effect on other high-technology industries, such as electronics. The market for
pharmaceutical products continues to grow as new drugs are developed to treat more and more previously
untreatable conditions. This development is being sustained or even accelerated by the new biotechnology-
based products passing through clinical trials and coming onto the market.

A pharmaceutical company uses water for many different purposes, many of these being unrelated to the
pharmaceutical activities of the company. For such general applications for water, such as for boiler feed, heat
transfer, toilet flushing, showering, laundering, fire control, etc., recycle and reuse considerations are no
different to those within other industrial sectors: they are applications that require a water feed and generate
an effluent stream, and may or may not be suitable applications for utilising recovered water based on water
quality, quantity and processing costs.

Water is used extensively in the pharmaceutical industry and it is the most frequently used ingredient of
pharmaceutical preparations. There are a wide range of products that require a reliable supply of water during
their manufacture such as:
• bulk pharmaceutical compounds/active pharmaceutical intermediates (APIs),
• over-the-counter (OTC) products – cough medicines, paracetamol, contact lens cleaners,
etc.,
• prescription medicines (tablets, ointments, creams, liquids),
• “health” foods (vitamin tables, energy drinks),
• “cosmaceuticals” (antiseptic ointments, concealers),
• aerosols/inhalers, and
• injectable drugs.
The importance of water and water quality was increased enormously by the introduction of parenteral
(injection and intravenous infusion) therapy. Water can be a raw material, a process intermediate, a product
ingredient or even the product itself. Its wide use in many areas related to the production and control of
medicine demands that manufacturers pay very close attention to process water quality. Further, apart from
“mechanical” errors such as mistakes in labelling of products, final product recalls for problems which can be
related back to the water used in production of the drug accounts for the next largest group of product recalls.

In planning and operating a pharmaceutical water system the following are a few of the areas that must be
considered:
• overall requirements for water,
• specifications and purification methods to be adopted,
• installation and validation of water systems,
• routine quality monitoring requirements, and
• capital and operating costs.

❖ PACKAGING INDUSTRY
The India pharmaceutical packaging industry was estimated
at USD 2.107 billion in the year 2017. This market is
expected to reach USD 3.57 billion by the end of 2023, at a
CAGR of 9.2% during 2018-2023 (the forecast period). The
Indian packaging market constitutes about 4% of the global
packaging industry. The per capita packaging consumption
in India is quite low (at around 4 kg), compared to countries
like Taiwan and Germany (with consumption at 19 kg and
42 kg, respectively). However, the spurt in organized retail
and e-commerce boosts the packaging sector. Coupled with
the economic growth in the country, the purchasing power
of India’s middle-class population in terms of healthcare
services, particularly medicines, has increased. Key
indicators such as total % of population more than 65 years
of age, GDP, healthcare per capita expenditure,
pharmaceutical demand, and net pharmaceutical exports
are expected to influence the market in the forecast period.

Nanotechnology in the Packaging Market

Nanotechnology, the science of very small materials, has a huge impact on pharmaceutical packaging, as it
enables the introduction of innovative and new-generation packaging solutions to the market, thus, driving the
growth. Improved barrier properties in plastics and enhanced functionality for nanotechnology helps in the
growth of the pharmaceutical packaging market. Hence, innovations in nanotechnology facilitates the growth
and expansion of the plastic pharmaceutical packaging segment.

Challenging Environment for Plastic Packaging in the Country

India is a thriving market for plastic, and consumes about 12.8 million metric ton (MMT) of plastic annually.
The plastic and polymer consumption is increasing at an average rate of over 10%. About 30,000 processing
units, with 113,000 processing machines have led to a manufacturing capacity of 30 MMT per annum in the
country. The investment in making plastic safer has led to a growing dependency for more sturdy and strong
packaging. Sustainable plastic packaging has immense potential to grow in the near future.
❖ TRANSPORT AND LOGISTICS INDUSTRY
The current pharmaceutical supply chain scenario in India is very complex. One of the main reasons pertaining
to this environment is the presence of more than 55,000 retail pharmacies which are spread across India. Large
number of medicines and other facilities are required to be transported to the distant areas through poorly
connected routes. Due to the poor transport facilities, the cost of drugs is much higher than the USA or Europe.
About 1/3rd of the revenues generated by the companies is spent on the transportation only.

The disadvantage of poor supply chain management

becomes even worse when the temperature sensitive
drugs such as Polio vaccines, lifesaving drugs, etc. are
required to be transported to the far-flung areas. Hence the
presence of proper supply chain management which also
includes the temperature-controlled vehicles and store
houses have become extremely important for the
pharmaceutical industry. Companies as well as the
government have started taking measures to transport the
drugs in a manner that they reach the target location
without losing their efficiency. Currently the market value
of temperature-controlled vehicles which are deployed for
the transportation is more than USD 3.8 Million, which is
estimated to reach at around USD 17.1 Million in next five
years. Under the 12th Five Year Plan (2012-2017), The
Department of Pharmaceutical has asked for the assistance of around INR 50 Crore (USD 9.2 Million) for setting
up the cold chain facilities across India. The market value of vaccine market in India is approximately USD
180.5 Million, which is growing at a pace of around 25%-30% on an annual basis. Vaccines require the support
of temperature-controlled environment right from the start of their production to final distribution. This
shows an unexplored potential for both domestic as well as the international companies present in the cold
chain management system.

Overseas Example for Transport Industry

Noatum Maritime delivers customised transport and logistics solutions for the pharmaceutical industry,
providing high standards of quality and service that is required for management of pharmaceutical products
supply chain. With offices strategically located in Spain, Portugal, France, Turkey, Morocco, Algeria, Chile and
China, Noatum provides global coverage through a large number of agents.
Having well-acknowledged experience in this sector, delivering the highest quality and control standards and
working according to GDP standards for transport and storage, Noatum Maritime offers a wide variety of
services, covering every need that this industry requires:
 • Supply chain management for temperature-controlled products in LTL, FTL and double decker
• Guaranteed cold chain for +2ºC / +8ºC and +15ºC / +25ºC shipments
• Land connections with the whole of Europe.
• Carriers, that have been previously selected, homologated and certified with GDP standard, know the
required regulations to transport pharmaceuticals.

COMPETITION AND OTHER GOVERNMENT POLICIES

Why is there a need for competition policies in the Pharmaceutical Industry?

The role of competition policies in the Pharmaceutical Industry is:

• Competition is important in this industry because it makes the industry provide higher quality goods
and services at lower prices. In this industry, competition can motivate brand companies to create new
and improved medicines and can motivate the generic companies to offer low price alternatives.
• To strike a balance between the rights of consumers and inventors by intervening in pre-grant and
post-grant procedures related to intellectual property and competition advocacy.
• To avoid any misuse of public funds and facilitate consumers’ access to affordable and effective
medication by working together with the anti-corruption policies.
• Competition policies help in empowerment of consumers through consumer education, through
facilitating consumer access to information and through enhancing the capacity to accurately assess
information so as to make optimal decisions.
• Competition policies help to build a consumer friendly, transparent, anti monopoly, anti-corruption
and consumer-friendly environment.

Competition policies are related to the following:

HORIZONTAL MERGERS: Competition policies related to horizontal mergers aim to identify and challenge
the mergers which are competitively harmful before they occur. The policies aim to avoid any unnecessary
interference with the mergers that are competitively beneficial. Some common enforcement actions in the
cases of mergers include divestment of some assets, returning joint venture rights to a partner, or not
continuing with the suspect transaction at all.

Example: The merger of two makers of ultrasonic non-destructive testing (NDT) equipment that were used for
quality control and safety purposes in many industries was challenged by The Federal Trade Commission. The
evidence showed that the two firms were frequently head-to-head rivals and for many customers, the products
of the merging firms were their first and second choice. This merger would have eliminated the beneficial
competition on innovation and pricing. The companies agreed to divest the buyer's NDT business to settle the
Federal Trade Commission's claim that the proposed merger was illegal.

MONOPOLIZATION ISSUES: In the pharmaceutical industry, Patents are necessary to incentivize innovation,
and the regulatory requirements prior to market access are necessary to protect the safety of patent and avoid
any wasteful expenditures. These legitimate entry barriers, however may be abused at times and antitrust laws
and authorities can play an important role in preventing the patent abuse. Frivolous patenting raises the costs
of health care for consumers and reduces timely reviews of patents by patent offices. For example -Product
hopping. Product hopping refers to a situation when a pharmaceutical firm launches product reformulations
which are minor, that barely offer therapeutic benefit, but because they are different they block generic
competition. This is usually done prior to expiry of patent and generic entry on the original formulation. The
physicians and patients are then persuaded by the originator firm to switch to the new formulation and they
do this by raising the price of the original product above the new formulation. All of these switches all the
marketing efforts to the new formulation and sometimes the original formulation is removed from the market.
Under EU and US substitution laws, since pharmacies may only substitute generic products of exactly the same
formulation as the patent-expired originator formulation, shifting prescriptions to the new formulation blocks
generic competition. Prosecuting such cases under anti-trust law is relatively recent in the US and the EU.

ABUSE OF DOMINANT MARKET POSITION: Competition policies to prevent abuse such as price
discrimination among customers and charging excessive prices from the customers, driving out competitors,
preventing entry of new firms are there in each country’s competition policies.

GLOBAL COMPETITION POLICIES

❖ EUROPEAN UNION ANTITRUST LAWS:
European antitrust policy was developed from two central rules set out in the Treaty on the Functioning of the
European Union:

• Article 101 of the Treaty prohibits agreements between two or more market operators that are
independent which restrict competition. This provision covers both vertical agreements as well as
horizontal agreements. Only limited exceptions are provided in this respect.

• Article 102 of the Treaty prohibits firms which hold a dominant position on a given market to abuse
that position by limiting the production, by charging unfair prices, by refusing to innovate to the
prejudice of consumers.

Since 2009, the European competition authorities have adopted 29 antitrust decisions against pharmaceutical
companies. To remedy the anti-competitive behavior, these decisions have either imposed sanctions or made
binding commitments. Some of these decisions addressed anti-competitive practices that had previously not
been addressed under EU competition law. The Commission reviewed more than 80 transactions during 2009-
2017 to ensure that pharmaceutical markets do not get too concentrated due to mergers. Concerns related to
competition were detected in 19 merger cases, and these mergers were cleared by the Commission only after
the companies had offered to address such concerns and modify the transaction.

The originator companies often implement strategies which can extend the commercial life of their older
medicines in order to mitigate the impact of generic entry in this industry. Some of these strategies that could
have impacted price competition have attracted scrutiny of the competition law. European competition
authorities have investigated and sanctioned such practices which lead to higher prices. The authorities have
targeted such conduct that curbs the market entry or expansion of generics. An example of such conduct are
the deals in which the incumbent originator company pays the generic company to give up or delay its plans
to enter the market. In addition, the competition authorities have also prosecuted some classical forms of
misconduct such as bid rigging cartels or strategies to cut off rivals from access to key inputs.

❖ ANTI-MONOPOLY LAW OF CHINA:

The Anti-Monopoly Law came into effect on 1 August 2008. The purpose of this Law was to prevent and
restrain monopolistic practices, enhance economic efficiencies, protect fair competition in the market,
safeguard the interests of consumers and the public at large and promote the development of the socialist
market economy. It regulates the following monopolistic practices:
• Monopoly agreements entered into by business
• Abuse of dominant market positions by business
• Concentrations of business that exclude or limit competition.

In November 2011, the National Development and Reform Commission announced its decision to impose a
fine of nearly 7 million yuan on two private pharmaceutical companies for violating the Anti-Monopoly Law by
abuse of dominant position. The penalised companies are both pharmaceutical distribution companies which
sell a key ingredient for a drug that cures hypertension. According to the NDRC, the pharmaceutical
distribution companies entered into exclusive sales agreements with the only two manufacturers of the
ingredient in June 2011 and thereby gained full control of the domestic supply of the key ingredient. Both of
them then raised the sales price of the ingredient significantly and required the medicine manufacturers to
raise their prices as well. As a result, the medicine manufacturers could not afford the excessively high cost of
raw material and were forced to suspend the production that caused a shortage of supply of the pharmaceutical
product in the market.

❖ THE COMPETITION ACT, 2002 OF INDIA:

The Competition Act, 2002 contains provisions related to:

• Regulation of Combinations
• Anti-competitive Agreements
• Abuse of Dominance

The Competition Commission of India enforces antitrust rules in the pharmaceutical sector via its instruments
of enforcement and advocacy. The focus areas for enforcement include activities and practices of trade
associations related to delaying or hampering the introduction of generic medicines on patent expiry. The
instrument of competition advocacy is employed to address the causes related to non-competitive market
conditions.

If any drug manufacturer or concerned party is victim of any anti- competitive practice, it may notify the CCI
which shall take appropriate action as required which will usually be in the nature of criminal proceedings
against the manufacturer and will involve imposition of heavy monetary penalty.

❖ MONOPOLY REGULATION AND FAIR-TRADE ACT, KOREA

The Monopoly Regulation and Fair-Trade Act is Korea’s general competition law enforced by the Korea Fair
Trade Commission. All the Pharmaceutical manufacturers, distributors and pharmacies are subject to the
application of this Act.The MRFTA and the corresponding Enforcement Decree provide general rules specifying
what conduct is permitted or prohibited. The industry associations can also implement fair competition codes
with with the approval of Korea Fair Trade Commission.

The codes prohibit pharmaceutical companies from providing any economic benefits to healthcare
professionals or medical institutions other than the economic benefits specifically permitted by the codes. The
codes provide permissible limits on the amount, prerequisites and procedures relating to each type of
economic benefit. The KFTC monitors and severely sanctions the pharmaceutical companies which enter into
agreements to prevent or delay the entry of generic drugs into the market.

PRICING MECHANISM
Pharmaceutical pricing is controlled by a blend of factors, including incomes, government policies, competition
in market, health care systems, patenting, tariff and no-tariff barriers.

In developing nations, pharmaceutical expenditures make a prominent part of health-related expenses, in the
wake of staffing costs, containing 40-60% of complete health costs (World Bank 1993). The costs include
expenses before arriving at patients and incorporate the base costs with procurement costs, import levies and
taxes, mark-ups along the value chain, staff payments and the stock loses. These concealed expenses can
frequently more than twofold the manufacturer's price.

Pricing rarely depends on demand but host of other factors. The uniqueness of the drug is considered that is,
how many other drugs are already available that treat the same condition. Drug companies got to see if new
drugs have the prospective to change the current practice of medicine used to treat the conditions the drugs
target. The companies must also consider if the drugs can replace certain medical treatments or the necessity
for surgeries or other procedures. Drugs that can cut down on expensive surgeries, hospital trips, and doctor
visits are often priced higher because of the savings they offer customers on the back end. Drugs which can
extend or even save lives are priced higher.

Newly launched drugs can be categorized into four:

• High price/high value
• High price/low value
• Low price/high value
• Low price/low value

High price/high value drugs incorporate healing treatments, for example, the all-oral hepatitis C regimens and
prescriptions that give a stage change in the standard of care. These medications are of high incentive to
stakeholders at the same time, in light of the up-front costs increases affordability concerns.

High value/low drugs incorporate drugs undifferentiated with respect to the standard of care or me-too drugs
that offer gradual enhancements in viability or certifiable results. This classification may likewise incorporate
chronic sickness drugs that treat wide populaces however are not all around targeted. Along these lines, in
spite of the fact that the therapeutic might be exceptionally successful in a sub-section of the populace, the
observed efficacy in the expansive populace might be disappointing on the grounds that a greater part of
patients are non-responders. Drugs in this class are most in danger for pushback from payers and incredulity
from suppliers and patients since advantages accomplished in respect to their expenses are relatively harder
to decide.

Low price/high-value drugs incorporate vaccines and generics and are seen by partners as having the best
utility on the grounds that the advantage/cost proportion is most astounding. Indeed, even drugs in this
classification, nonetheless, might be powerless to up-front affordability concerns, contingent upon the
macroeconomic states of the market and the number of patients influenced.

Low value/low-value drugs, which incorporate over-the-counter (OTP) prescriptions and topical
ointments/lotions, customarily hold the least value on the grounds that their remedial benefits can't be
extensively ascribed over the populace. For pharmaceutical manufacturers, these drugs have been seen as the
most minimal advancement need in light of the fact that the feasible returns are lower with respect to their
development and commercial risks.

Another factor is Competition that affects pricing. Drug companies must consider the popularity and success
of the drug’s competitors and additional benefits over competing drugs attract higher prices.

The research and development (R&D) involved in creating a drug is of huge importance while setting the price
of a drug. The price takes in to account the time, money and effort involved in R&D. This often leads to higher
prices to ensure that the revenue generated will exceed the expenditures behind the drug's development. The
expense of capital for R&D compensate investors for the enormous timeframe it takes to develop a
pharmaceutical drug, the dollar uses that must be brought about to create and test the new drug, and the perils
that the investors must bear in regards to whether the pharmaceutical research program will be fruitful. The
patent cycle has two noteworthy advantages for patients and the healthcare system. It enables investors to get
a return on their capital, incenting innovation.

If the drugs and/or inputs used in a drug are internationally traded then other factors come into play as well.
These incorporate; manufacturer or importer costs, price contrasts emerging from inter-country differences
in import duties and non-tariff barriers and contrasts in procurement costs, for example, freight, delivery costs,
wholesaling, domestic taxes and other mark-up costs which can vary significantly starting with one nation then
onto the next.

The patent law and health insurance systems in the United States are in concept similar to those in other
developed countries. The United States, however, differs from most other nations with respect to the ability of
the government to limit the prices of prescription drugs charged by manufacturers. Also in places where
health insurance is mandatory, like in the States, the reimbursement system is designed to reward the
companies for increasing the list prices of medicines and medical facilities and then offering deep discounts
through tie-ups with different health insurance providers. The sum you pay for a brand-name medication
will rely upon your insurance plan; the arrangement's model, or list of drugs it covers; the size of your
deductible; and the arrangement your insurance agency has worked out with the medication's
manufacturer, among many different factors. How such limits are arranged is restrictive, painstakingly
protected by the system's different players. There's a great deal of blame dealing over who is at fault at
increasing costs, especially between medication organizations and PBMs, or the brokers that arrange refunds
and discounts for health plans.
Price components change among nations, among parts of the health-care framework and among medications.
For instance, certain classes of medications (for example essential medications) may be absolved from mark-
ups or the public sector may be excluded from certain duties and levies. Some countries administer originator
brand and conventionally identical drugs in an unexpected way. The following price components are normally
found in the prescription value chain:
- MSP plus Insurance and freight
- Port and inspection charges
- Pharmaceutical import duties
- Mark-ups by importers, wholesalers and retail distributors
- Goods and Services Tax
- Dispensing fees.

STAGE 1: MSP plus insurance and freight: For locally produced drugs, MSP and transportation cost. For
medicines that are imported, MSP and international freight charges are included.

STAGE 2: Landed price: This incorporates price components that emerge during prescription procurement and
conveyance to the acquisition office. This incorporates banking expenses for foreign currency purchases,
inspection charges (either pre-or post-shipment), port expenses (docking, stockpiling, and administration,
insurance in port), customs clearance, import duty, and importer’s mark-up. Any expenses gathered halfway
are recorded here.

STAGE 3: Wholesale selling price: This cost depends on the landed cost, and incorporates either the
wholesaler’s extra costs or the warehouse’s overhead costs, for example, quality control, stockpiling,
administration, overhead costs, (for example, payments, security, and lease) and overall revenue just as local
transport to the retailer/health office. A significant number of this might may be incorporated in mark-up but
should be made sure that it is not added up twice.

STAGE 4: Retail price: This component depends on the wholesale selling price and incorporates the
dispensary's extra costs, for example, warehouse, administration, overhead costs, and profit. A large number
of these costs may be incorporated into the retailer's mark-up, it is significant not to incorporate them twice.

STAGE 5: Dispensed price: This price includes the dispensing price plus the tax component i.e. GST in India.
Where there is no added tax then there is no stage 5. Evidently in any public wellbeing programs where the
patients don’t pay, the cost at this stage reflects the charge to healthcare system and insurance company.

Government intervention effecting pricing:

• Price controls on manufacturer:

- Large purchasers on behalf of communities
- Regulating markups along supply chain

• Eliminating tariffs and taxes – Since tariffs and non-tariff components significantly raise the prices of
finished drugs or inputs in drug making , lowering or eliminating these will have a considerably reduce
the list prices of internationally traded drugs and its components. Government can also reduce or
eliminate taxes on important medications to encourage supply of generic medicines.
EXTERNALITIES
POSITIVE EXTERNALITIES
The positive externalities of this industry are spread across all possible sectors in the world. Pharmaceutical
industry plays a vital role for the safe keeping and providing cure for the ailments for the individuals who work
in all sector around the world. Manufacturing sector is injury prone and the workers are under constant threat
of work related injuries and diseases. White collar jobs are also prone to stress, anxiety and blood pressure
related issues. Pharma Industry provides remedies for all these ailments and keeps the workers fit and healthy.
This maintains their productivity and the sector remains profitable. Availability of drugs for various diseases
helps the employees of various segments to remain fit and perform to their actual capacity.

Many developing and under developed countries around the world lack potable drinking water. The air
pollution is high for the developing countries. Major water borne and air borne diseases like tuberculosis,
diarrhea, etc. are endemic to these countries and can severely affect the health of the people. These ailments
are treated by the drugs produced by the pharmaceutical industries preventing spread of endemic diseases.

NEGATIVE EXTERNALITIES

Patenting of a new drug:

Patenting of a drug or the method for producing the drug hinders the chances of new competitors to enter the
market. As the drug is already patented most of the companies do not wish to spend money on R&D on an
already patented drug as they will have no rights over it. This in turn, reduces the possibility of developing a
more effective drug. Moreover, pharmaceutical companies are given patent for over 20 years, which implies
that other competitors cannot produce this drug for that time period. Although, a slight positive lie in the fact
that the companies are motivated for doing the R&D for new drugs and in the process discover new and better
drugs for curing the diseases.

Impact on society due to drug abuse:

Drugs although are beneficial for curing the diseases but their disadvantage arises when people start abusing
drugs. Thousands die due to drug overdose; many antidepressant drugs are misused by the youth for
recreational purpose which leads to long term neurotic disorders which can be beyond cure. One such example
is:

“In the past few months the Economist and Time Magazine have reported that there have been steps taken to
develop Ketamine as an antidepressant. This drug is a schedule III-controlled substance in the US that is usually
used to start and maintain anesthesia. The drug could be helpful in the fight against depression, but what could
be the risks of using Ketamine as a pharmaceutical drug has properties of mental and physical addiction. Opioid
abuse has led many individuals to develop a strong addiction as they start with prescribed painkillers and turn
to heroin after they can’t find a legal opiate.”
 CONCLUSION
As per reports although the pharmaceutical industry has been growing somewhere around 5.8% the
overall trend has been sluggish owing to a number of factors. A primary reason is the exorbitant prices of
drugs in recent times which led to low volume growth in the emerging markets across the globe. Another
trend shifter has been the increased focus toward patient-centric healthcare largely driven by technology as
seen by the use of wearable biometric devices. Patients are now more aware of health issues in general and
informed of the uses and side-effects of the drugs they are advised and as a result the pharma companies are
required to come up with better, researched cutting edge solutions in order to back their claims and meet the
consumer demand. The companies also face more stringent regulatory norms.

In terms of market size , US holds its spot as the world’s largest pharmaceutical market, driving 53% of most
forecasted growth. It is followed by China which is expected to contribute around 12% to the industry.
The pharmaceutical industry across the world needs to address the challenges which hinders its growth and
find innovative solutions to keep itself “healthy”.
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