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Review of Managerial Science
Published in: Review of Managerial Science 3/2020

19-08-2018 | Original Paper

Domestic market competitiveness of Indian drug and pharmaceutical industry

Authors: Varun Mahajan, D. K. Nauriyal, S. P. Singh

Published in: Review of Managerial Science | Issue 3/2020

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Abstract

This paper attempts to analyse the competitiveness of Indian drug and pharmaceutical industry in the domestic market where multinational pharma companies are entering and expanding in a big way, especially after enforcement of product patent regime in 2005. The study applied data envelopment analysis model to estimate relative efficiency and productivity changes in 141 Indian pharmaceutical firms during 2000–2001 to 2012–2013 which encompass pre- and post-product patent regimes. The present study found negative impact of Product Patent Act on the efficiency scores. The technological change factor is found to have played positive role in the growth of productivity, whereas technical efficiency change depicts the judicious utilization of input resources for improving performance. A sensitivity analysis with the inclusion of R&D expenditure in input variables, confirmed the validity of our selected variables. It found marginal bearing of new patent regime on the efficiency of R&D active firms, though it was found to have significantly impacted efficiency scores of large firms, R&D intensive firms, and group-owned firms. The study reported that large size, R&D intensive, private-foreign owned and those engaged in drug formulations exhibit better performance. Further, it is found that ownership, capital imports intensity and size have a positive and significant relationship with efficiency scores, whereas the age, time dummy and size square variables are inversely related. The results suggest that Indian firms need substantive improvements in efficiency by adopting best managerial practices, ensuring optimum utilization of resources, and investing significantly in the technology and products innovation.
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Footnotes
1
Generic drugs: Copies of off-patent brand-name drugs that come in the same dosage, safety, strength, and quality and for the same intended use. These drugs have received market approval based on proof of bio-equivalence to the originator’s product (Grace 2004).
 
2
According to this agreement, all the member countries had to grant 20-year patents on pharmaceutical products since January 1, 2005. This new product patent regime, outlawed the generic production of new patented medicines. It provided the freedom that all the approved generic drugs of India could still be sold in the market, after paying for the license fees. Under this Act, generic manufacturer after paying a reasonable royalty can apply to copy a patented drug, but only after it has been marketed for 3 years (Dhar and Gopakumar 2011).
 
3
DMUs are usually defined as entities responsible for turning input(s) into output(s), such as firms and production units. In the present study, DMUs refer to the Indian pharmaceutical firms.
 
4
Other popular techniques for measuring relative efficiency of DMUs are Stochastic Frontier Analysis (SFA), Thick Frontier Analysis (TFA), Distribution Free Approach (DFA) and Free Disposal Hull (FDH).
 
5
Koopmans (1951; p. 60) defined technical efficiency as ‘an input–output vector is technically efficient if, and only if, increasing any output or decreasing any input is possible only by decreasing some other output or increasing some other input’. This definition in economics is treated as a Pareto–Koopmans condition of technical efficiency.
 
6
Estimation of cross-period efficiency scores under a VRS technology may result in linear programming infeasibilities for some observations (Ray and Mukherjee 1996).
 
7
There are two orientations of DEA models viz., input-orientation and outputorientation. In an input-orientated model (input minimization), desired output is produced with minimum inputs. This model is preferred when inputs are more flexible than output. On the other hand, in an output-orientated model (output maximization), efforts are made to maximize the output with input level held fixed. The choice of orientation depends on the available flexibility either with the inputs or outputs (Coelli et al. 2005; Ramanathan 2003).
 
8
Prowess of CMIE provides data on a large number of manufacturing firms, including pharmaceutical ones. It is an online database provided by the CMIE and covers financial data for over 23,000 companies operating in India. Most of the companies covered in the database are listed on stock exchanges, and the financial data include all those information that operating companies require to disclose in their annual reports.
 
9
The figures have been arrived at by taking the ratio of the output manufacturing by the registered Indian pharmaceutical companies (provided by the CMIE Prowess database) to the total value of output produced by the sector (provided by the Department of Chemicals & Petrochemicals, Ministry of Chemicals & Fertilisers).
 
10
These results are not reported here to conserve the space however will be made available on a request.
 
11
PI firms having more than 0.90 mean PTE scores are: Ankur Drugs & Pharma Ltd., Divi'S Laboratories Ltd., Anuh Pharma Ltd., Hetero Drugs Ltd.and Arvind Remedies Ltd. PF category includes Novartis India Ltd., Martin & Harris Lab. Ltd., Merck Ltd. and Wyeth Ltd. In GO category, firms such as Elder Health Care Ltd., Aurubindo Pharma Ltd., Cipla Ltd., Ranbaxy Lab. Ltd. and Glaxosmithkline Pharma Ltd. have more than 0.95 mean efficiency scores.
 
12
Drug manufacturing in India has two important vertically linked processes: (1) production of bulk drug; and (2) the production of formulation. The Bulk drug production is essentially the production of the raw materials or active pharmaceutical ingredients (API) for drugs, whereas formulations are end-products of the medicine manufacturing process, and can take the form of tablets, capsules, injectables or syrups, and can be administered directly to patients (Greene 2007).
 
13
Most of the bulk drugs are imported from China due to cost advantage. The significant dependence of India on China is found to be in case of 12 essential drugs namely; Paracetamol, Metformin, Ranitidine, Amoxicillin, Ciprofloxacin, Cefixime, Acetyl salicylic acid, Ascorbic acid, Ofloxacin, Ibuprofen, Metronidazole and Ampicillin. The phenomenal growth of China as a bulk producer has already led to closer of many companies in India (Kallummal and Bugalya 2012).
 
14
The advantage of panel data is its ability to account for the unobservable firm-specific individual effects, like managerial skill, firm-specific capabilities and others. Not accounting for the firm-specific individual effects can actually lead to bias in the resulting estimates (see Baltagi 2005).
 
15
X-inefficiency was introduced by Leibenstein (1966). It is the difference between efficient behavior of businesses assumed or implied by economic theory and their observed behavior in practice caused by a lack of competitive pressure. The sources of X-inefficiency have been ascribed to things such as over-investment and empire building by managers, lack of motivation stemming from a lack of competition, and pressure by labor unionsto pay above-market wages.
 
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Metadata
Title
Domestic market competitiveness of Indian drug and pharmaceutical industry
Authors
Varun Mahajan
D. K. Nauriyal
S. P. Singh
Publication date
19-08-2018
Publisher
Springer Berlin Heidelberg
Published in
Review of Managerial Science / Issue 3/2020
Print ISSN: 1863-6683
Electronic ISSN: 1863-6691
DOI
https://doi.org/10.1007/s11846-018-0299-7

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