Drugs and Pharmaceuticals

The firms in the Indian pharmaceutical sector can be broadly grouped into three categories. The first group of firms comprises large scale pharmaceutical firms that are both subsidiaries of MNCs in India or wholly owned Indian firms. Firms having a turnover of above Rs 300 crore can be categorised into this group.

The second group of companies comprises medium sized firms which are either generic producers or specialists in niche areas of contract research. Many of the firms in this category manufacture drugs for the bigger firms in India. Firms with a turnover between Rs 100-300 crore are in this group.

The remaining vast majority of the firms are mainly manufacturing units form the third group of pharmaceutical firms. These firms would typically have an annual turnover of less than Rs 100 crore.

Of the 6000 active pharmaceutical units, only 100 firms belong to the group of larger companies and only around 200 firms belong to the second group of medium sized companies. The remaining vast majority of the firms, about 5700, fall into the third group. The Indian pharmaceutical industry is thus characterised by a high level of fragmentation with many small players manufacturing a variety of generics, APIs, formulations, finished dosage products and contract services.

The above categorisation of firms in a way, also present the value chain of the Indian pharmaceutical industry. The large pharmaceutical firms serve as benchmarks for the rest of the industry in terms of process maturity and responding to global opportunities and challenges.

The firms in the pharmaceutical cluster in Ahmedabad also show similar variance in industry structure with around only ten large pharmaceutical units and the remaining vast majority being medium and small sized firms. As a part of the Project Vikas, Microsoft assigned PricewaterhouseCoopers (PwC) the task of undertaking cluster specific studies of different SME clusters. PwC studied the drugs and pharmaceutical manufacturing units in Ahmedabad, Gujarat. The objective of the project was to study the business processes of the drugs and pharmaceutical cluster, understand their current business process pain points, assess the current level IT maturity and usage, identify solution opportunities, and recommend a solution roadmap for the identified solution opportunities for the cluster. The various types of small and medium sized pharmaceutical units differing in revenue sizes and with different business models have been categorised into individual cluster segments for this report.

Contract Manufacturing Organization: This is usually a pure job worker under a loan license (LL), or a pure third party (TP) manufacturer, or a job worker performing both LL and TP manufacturing, and job-workers involved in merchant exports. This segment requires IT support in the areas of material management, finance and production with the ability to handle exports in certain cases. These firms could tend to move up the value chain through Propaganda cum Distribution (PCD).

Sales and marketing firm: These are involved in Ethical Marketing (EM), PCD, exports or a combination of all of these. These players outsource all manufacturing activities to a TP or LL player. They focus only on marketing the product to the domestic or international markets and retain ownership of the brands.

Mid sized manufacturing and marketing firm: In these firms,marketing is done through EM in at least one state and PCD in most. They own the manufacturing for some products. Larger players go for LL and TP manufacturing. They could be engaged in exports mostly through the merchant route. A firm for this segment would have revenues not in excess of Rs 30 crore.

Vertically integrated firm: Such companies handle sales and marketing largely through the EM route. They manufacture their own products and outsource some of the products also. They have multiple product lines and manufacturing facilities. Exports are done through direct and merchant routes. They have mature support processes such as HR, payroll and plant maintenance. Firms in this segment would have revenue of over Rs 50 crore.

Key Environmental Challenges

What are the key business environment challenges which affect the entire cluster? They can be summarised as follows:

Regulations: The pharmaceuticals industry is highly regulated through a number of laws regulating the import, manufacture, distribution and sale of drugs. This poses a big challenge for any business and market expansion in the industry.

Price Control of Drugs:The drugs price control order (DPCO), 1995 regulates the prices of many of the generic drugs. In addition to the existing 74 drugs and their formulations, 354 drugs in the National List of Essential Medicines, 2003, has been included in the draft pharmaceutical policy for price control currently under the consideration of a group of ministers of the government.

Tax and Duties Imbalance: North Indian states such as Uttaranchal have deployed a set of fiscal incentives towards promoting investments in the state. This has directly resulted in the shift of the manufacturing base from Gujarat to these regions.

The above environmental challenges have caused an unfavourable business environment resulting in higher pressure on the margins and profitability of the firms. This has also shifted the focus of the firms towards compliance rather than trying to improve business processes and investing in IT. 

Key Business Process Challenges

While the business environment challenges are in the realm of external influences to the cluster, the firms in the pharmaceutical cluster are also facing a number of business process challenges.One common challenge in front of all the companies is the lack of integration of finance with other functions like sales, production and material management.

Contract Manufacturing Organisations: The areas where these companies need to improve are capacity utilization and quality control and documentation.

Sales and marketing firm:In these companies, the critical areas of improvement are sales force tracking, inventory tracking and attrition of medical representatives.

Mid sized manufacturing and marketing firm:For these firms, along with the issues faced by the sales and marketing firms, the other areas that constrain the business are quality control and documentation, API procurement, and production planning.

Vertically integrated firm: These firms need to focus on almost the areas that the other firms have to struggle with.

How Can IT Interventions Help?

The PwC report says that by deploying the IT solutions, there are significant benefits. The report includes the benchmarking of such deployments to measure the impact.

Inventory Turnover Ratio:An integrated inventory planning and tracking system would provide visibility in inventory across the factory warehouse and C&F agents helping in optimising the inventory levels. A more advanced IT system would have integrated sales forecast, production planning and inventory planning which would help in bringing down the inventory levels. According to conservative estimates by benchmarking against leading players in the market, PwC says, the inventory turnover ratio can be brought up by 20% using integrated inventory management and tracking systems.

Fixed Assets Turnover Ratio:The capacity utilisation can be improved by export. Some firms in Ahmedabad have already started export, but it is still perceived as highly complex business route due to export documentation complexity and lack of information about export regulations. Having an export portal would boost the pharmaceuticals export improving capacity utilization for firms. According to conservative estimates, the FA turnover ratio can be improved by 20-25%.

Current Ratio:This is the ratio of current assets and current liabilities. This reflects the financial picture of the firm. An integrated financial management system would help in improving the efficiency of financial operations and ensure timely collection of receivables. Such integrated system would ensure better utilisation of funds hence improving working capital arrangement.

The current ratio can be improved by 10-15% by better financial management and monitoring.

Operating Profit Margin:Various factors influence the profitability of the firm. Increased sales through exports, less inventory blockages and better financial management would have a positive impact on firm’s profitability. In addition vendor management and quotation management system would help in ensuring best RM prices and effective vendor management. Similarly, IT systems for product costing would increase the net margins. Such deployments can lead to an increase by 16-18% in the margins, says the study.

Conclusion

Currently the use of IT is limited to automating specific functional areas which have a restricted impact on the operations. An integrated system that would enable seamless information flow between different functional areas would have a far greater impact on the firms’ operations. This would also provide the necessary platform for firms to scale up their operations.

Due to the exemptions in the Northern regions of the country, low capacity utilisation is a problem faced by the production oriented units of Ahmedabad. This has led many units towards reorienting themselves and focusing on exports. These firms need to comply with different policy and rules of the importing countries. Access to the production and quality related information towards performing the requisite documentation acts as a barrier to overseas markets for many firms. This is an area where IT could help in managing the production process in a more systematic manner and ensure easier generation of the required documents. Moreover a central information repository of country specific information would also be of significant utility.

Thus, many of the key business pain points of the firms in cluster can be addressed through the effective use of IT solutions. However, while implementing solutions would provide immediate benefits, a proper support structure is required for sustaining these gains over the long term. A robust IT ecosystem that can support the adoption of IT in the cluster needs to be nurtured for extracting maximum value out of IT investments.

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