Pharmaceutical Industry of India,

Industry Structure and the pattern of innovation: Pharmaceutical Industry of India, 2000 -2010 Prof. Pradip Kumar Biswas Dr Parthasarathi Banerjee Ms...
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Industry Structure and the pattern of innovation:

Pharmaceutical Industry of India, 2000 -2010 Prof. Pradip Kumar Biswas Dr Parthasarathi Banerjee Ms. Arundhati Choudhury Mr. Prateek Kukreja

CSIR – NATIONAL INSTITUTE OF SCIENCE TECHNOLOGY AND DEVELOPMENT STUDIES 2014

Published by : CSIR-National Institute of Science, Technology and Development Studies (CSIR-NISTADS) Pusa Gate Dr. K.S. Krishnan Marg New Delhi-110 012 Copyright © CSIR - National Institute of Science, Technology and Development Studies First Published 2014 All rights reserved. No reproduction of any part may take place without the written permission of CSIR - National Institute of Science, Technology and Development Studies. Disclaimer The findings, interpretations and conclusions expressed in this report are those of the authors and do not necessarily reflect the views of CSIR-NISTADS ISBN: 81-85121-42-7 Authors : Prof. Pradip Kumar Biswas*; Dr. Parthasarathi Banerjee**; Ms. Arundhati Choudhury** and Mr. Prateek Kukreja** This Report has been prepared under ISTIP (Indian S&T and Innovation Policy) Project- First Study of its kind focusing on various dimensions of innovation activity in India; aiming at providing valuable inputs for S&T and Innovation decision making. * Formerly with CSIR-NISTADS; presently with CVS, Delhi University ** CSIR-NISTADS

Contents i Summary Chapter 1: Introduction

1

Chapter2: Constraints and opportunities of the pharmaceutical industries in India in recent times

5

Chapter 3: Growth of number of enterprises, capital intensity and labour productivity: 2000 – 2010

13

Chapter 4: Industry structure and the performance of the pharmaceutical industry: A disaggregated analysis

18

Chapter 5: Technological Innovation in Pharmaceutical Industries

55

Chapter 6: Concluding Observations and policy recommendations

72

Summary Pharmaceutical industry is amongst the top science based industries in India. This sector is a highly organized sector and is estimated to be worth $4.5 billion, growing at about 8 to 9% annually. It plays a crucial role in technology development, particularly in the developing countries (“A Brief Report on Pharmaceutical Industry in India”, Competition Commission of India, May 2014). The Pharmaceutical industry has three main sub-groups: (1) Manufacture of medicinal substances used in the manufacture of pharmaceuticals (21001), (2) Manufacture of allopathic medicines (21002), (3) Manufacture of Ayurvedic medicines (21003). In general the contribution of informal sector is very low in pharmaceuticals industry. Based on the total GVA generated across all the informal sectors under group 21 one may note that microenterprises contribute majority of the share (91%) of total informal sector GVA. Ayurvedic sector is the only informal sector that outperforms other informal sectors in terms of GVA. Market concentration estimated using both ASI and CMIE data is found to be very high for various product categories (5-digit) within Pharmaceutical industry. A large part of the market is being captured by just a few enterprises, indicating that a high degree of monopoly power being enjoyed by the top pharma enterprises of the country. Andhra Pradesh contributes the maximum which is around 41% to the total GVA generated under group 21001. Maharashtra is the leading producer of allopathic medicines and contributes around 23% of the total GVA generated under group 21002. Uttaranchal is storehouse of different herbs, aromatic plant species and medicinal plants as a result of this it turns out to be a major producer of ayurvedic medicine. It contributes about 27% of the total GVA generated by group 21003. The number of microenterprises which contract in but do not contract out is higher in all the three sub-groups and ranges between 60 to 80%. Contracting in is much more for young enterprises while contracting out is very low and increases with age.

i

The young pharmaceutical enterprises generally do not enter into contracts easily, whereas the older enterprises have created a niche for themselves in the domestic and global market; thus lands up into collaborations and contracts with global and indigenous partners. The productivity, measured in terms of value added per labor is much higher in large firms as compared to the MSMEs in formal sector as well as informal sector. Also, the capital per labor or capital intensity is very low in case of MSMEs as compared to large firms for all product categories. To be more precise, productivity and capital intensity systematically increase with size classes. The labor productivity is higher for large firms manufacturing pharmaceuticals, allopathic medicines and ayurvedic medicines which contract out their job but do not contract in. The informal sectors do not contribute much to the total exports due to lack of market knowledge, quality of products in line with the international demands, lack of up to date technology etc. In the formal sector, micro enterprises hold an insignificant proportion of share in total exports made by the pharmaceutical group. SMEs as a group hold around 53% of the total exports made by the enterprises manufacturing pharmaceutical substances. This is followed by ayurvedic medicines and allopathic medicines with SMEs shares of 19% and 15% respectively. Maharashtra, Gujarat and Andhra Pradesh have a significantly higher proportion of Pharmaceutical enterprises which are engaged in export. The MSMEs in these states are also prominently active members in the export market. Combined index of technology levels suggests that most of the enterprises continue to use lower medium to higher medium levels of technology. Only a handful of enterprises are found to use high and advanced levels of technology, although their number has increased over the decade, particularly among medium and large size classes. However capital pillar index indicates significant improvement in technology made by the enterprises in this sector.

ii

Chapter 1: Introduction Pharmaceutical manufacturing is one of the highly important manufacturing sectors sharing a significant part of the total value added by the Indian manufacturing sector as a whole. Moreover it is strategically important because of its direct links with the health of our people. Involvement of the enterprises in the pharmaceutical manufacturing is also very diverse - enterprises of various size classes are involved and also both formal as well as informal sectors enterprises are found to operate. Products manufactured by the Indian pharmaceutical sector are also very diverse ranging from allopathic medicines, homeopathic medicines to Indian traditional medicines like Ayurvedic medicines, Unnani medicines etc. This industry has become globally competitive as it exports a significant amount of its products. Given its importance in the country, the present report seeks to analyse the pattern of growth of the industry, its size structure, inter-linkages, and innovativeness. An over view of the industry is given in the present chapter.

Based on NIC-2008, the pharmaceutical group of industries are further subdivided into following important five digit subgroups: 21001-Manufacture of medicinal substances used in the manufacture of pharmaceuticals, 21002- Manufacture of allopathic medicines, 21003Manufacture of Ayurvedic medicines, 21004-Manufacture of homeopathic medicines, 21005Manufacture of veterinary preparations,21006-Manufacture of medical impregnated wadding, gauze, bandages etc. As per the Organisation of Pharmaceutical Producers of India, Indian pharmaceutical industry is mainly dominated by the small and medium size units which constitute about 95% of the total number of existing units and 35% of the total output generated by the pharmaceutical sector. Most of these small and medium units mainly belong to the unorganized

sector

(http://www.pharmaboardroom.com/company/organisation-of-

pharmaceutical-producers-of-india-oppi).

The entire manufacturing process starting from raw materials processing to packaging finished products need not be done by a single enterprise or even by a single country; semi processed or intermediate products are also exported. The principal manufacturing steps are (a) preparation of 1

process intermediates; (b) introduction of functional groups; (c) coupling and esterification; (d) separation processes such as washing and stripping; and (e) purification of the final product. Additional product preparation steps include granulation; drying; tablet pressing, printing, and coating; filling; and packaging, as per PPAH of World Bank (Pollution prevention and abatement handbook, World Bank Group, July 1998). Manufacture of medicinal substances or active pharmaceutical ingredients (API) used in manufacture of pharmaceuticals has been one of the key business areas of the Indian manufacturers. The Indian API manufacturing operation can be divided into two segments namely, innovative or branded and generic or unbranded (http://www.dnb.co.in/SME_cluster_series2012_Indore/PDF/IndustryOverview.pdf).

India

accounts for 10% of the global pharmaceutical production and its generic drug industry amounting to approximately US$19 billion. China is dominant in the field of manufacturing APIs or bulk drugs due to the availability of large scale infrastructural facilities and high end technologies. The ICRA report on the trends and outlook of the bulk drug industry suggests that the Indian bulk drug manufacturing industry would definitely benefit from frequent instances of patent expiry which in turn would lead to a greater demand for the generic drugs and thus render opportunities to the API manufacturers to provide ingredients for the manufacture of such generic drugs. The Indian bulk drug manufacturers have gradually evolved in the global pharmaceutical supply chain mainly in the field of synthesis of later stage intermediates and APIs (Anjan Ghosh, Subrata Ray and Arvind, V. Subramanian, ‘Pharmaceutical bulk drug industry-trends & outlook’, ICRA, May 2011.).

Pharmaceuticals industry in India has passed through the various phases of development: Allopathic medicines are the most modern source of medicines used in the treatment of various diseases. It was first introduced in India under the British rule. The first indigenous production of allopathic medicine came into being with the initiative taken up by one of the renowned scientist P.C Ray in 1901. Initially the indigenous unit known as the Bengal Chemicals and Pharmaceuticals produced certain Galenicals which were mainly manufactured from plants and animal tissues. In fact, during the five year period, 1900-1905, quite a few important firms/institutions were set up that played a major role in the development of the pharmaceutical industry in India. These are Haffkine Institute in Bombay, Central Research Institute in Kasauli, Kings Institute in Madras, Pasteur Institute in Coonoor and Bengal Chemicals and 2

Pharmaceuticals. These institutes were involved in conducting research on Malaria, Typhoid, Cholera, Sera and Vaccines.(IKD Working paper No 8,”Development Policy and Practice Policy and Technology Co-evolution in the Indian Pharmaceutical Industry”, December 2005). In the year 1907 Alembics Chemical Works came into being and this was followed by Bengal Immunity in 1919. Important products like aspirin, barbiturates are produced by them. The first two decades after the beginning of pharmaceuticals industry in India, witnessed substantial growth of local R&D activities. The phase of First and Second World War resulted in decline of imports of various drugs and medicines as a result the domestic production of medicines gained a lot of importance and many allopathic medicine manufacturing units came into being. Important among them are Indo-Pharma, Indian Process, Chemical Laboratory, Unichem, Chem-Pharma, Biochemical and Synthetic Products, which manufactured products like quinine salt, ureastibamine and several other bio-chemicals and synthetic products (ibid). The growth momentum continued in the 1930s and 1940s with the new firms like Zandu Pharmaceuticals, Calcutta Chemicals, Standard Pharmaceuticals, CIPLA and East India Pharmaceuticals came into existence. During this period wide varieties of pharmaceutical products are manufactured in India. In fact it is estimated that around 13% of the domestic demand is met by the local production.(Ibid).

In the post-independence phase, till 1970 the domestic market of allopathic medicine used to be dominated by foreign players. Indian Patent Act was passed in 1970. Following this a number of domestic companies started operating. With the initiation of the liberalization process, several Indian companies launched/expanded their operations in foreign countries. India became a major exporter of generic drugs. Patents (Amendment) Act 2005 approval led to adoption of products patent in India. Following this increasing number of products are filed for patents by Indian companies (Indian Brand Equity Foundation, “Pharmaceuticals”, 2013).

As of 2013, the domestic pharmaceutical market in India for allopathic drugs accounts for US$13-14

billion (Health and

health

care

in India,

UCL

www.ucl.ac.uk/pharmacy/documents/.../healthcareinindiajuly2013).

school of pharmacy, Indian

medicine

manufacturing units witnessed commendable growth due to the liberal policies of the patent act of 1970 and other government policies that came into being in favor of the Indian pharmaceutical 3

sector. The emerging market report 2007 on health care in India by PwC notes the following: “Healthcare is one of India’s largest sectors, in terms of revenue and employment, and the sector is expanding rapidly. During the 1990s, Indian healthcare grew at a compound annual rate of 16%. Today the total value of the sector is more than $34 billion. This translates to $34 per capita, or roughly 6% of GDP... The private sector accounts for more than 80% of total healthcare spending in India.” (PwC (2007), “Health Care in India: Emerging Markets Reports 2007”.)

Given this brief introduction of the pharmaceuticals industry showing its evolutionary trajectory, the remaining part of the report is organized as follows: Next chapter, Chapter 2, makes an analysis of the constraints and opportunities of the pharmaceuticals industry in the recent times. Chapter 3 relates structure, including size structure, organizations, inter-linkages and capital intensity with labour productivity based on unit level (enterprise/ factory level) data of ASI and NSSO. Chapter 4 makes a detailed analysis of the nature of innovations made by the pharmaceutical industry based on the unit level data. Finally, concluding observations are made in Chapter 5.

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Chapter2: Constraints and opportunities of the pharmaceutical industries in India in recent times Pharmaceutical Industry is one of the rapidly emerging sectors in Indian economy. Of late, Indian pharmaceuticals have also gained a remarkable popularity among the global players who have realized the tremendous business potential that the Indian pharma industry upholds. The year 2005 marked the implementation of the landmark product patent regime.. However this sector faced several drawbacks and challenges which forced the closure of few of the small scale pharmaceutical manufacturing units in 2008 (www. pharmanewsprwire.wordpress.com). Few of these drawbacks are discussed below in detail.

Major constraints: High expenses involved in manufacture of pharmaceutical drugs: Pharmaceutical industry usually requires huge expenses involving implementing good manufacturing practices in the production unit. Although the high end investment towards maintenance of high and acceptable standards of production results in production of high quality goods, it leads to an increase in the entry barrier and in the price of medicines. As a result the production of good quality medicines in India becomes limited and a majority of the population can not avail quality medicines. Total expenditure on health is 4.2% of the GDP in 2009 and the public spending on health is approximately

1.1%

of

the

country’s

GDP

(www.who.int/countryfocus/cooperation.../ccsbrief_ind_en.pdf). High investment required to be made in the Indian pharma sector is mainly because of the poor health infrastructures in the country and poor health delivery system. India is a huge country area-wise as well as population-wise. Due to the present economic scenario where a large section of the population still remains below the poverty line, India becomes a host of deleterious health problems and diseases. Consequently, Indian pharmaceutical industry needs to invest huge capital in order to innovate and manufacture drugs and medicines commensurate with the rising instances of health problems. Huge investment in quality control adds to the costs of production 5

by a huge margin. This makes the prices of various drugs, including generic and medicines available in the domestic market to be higher than what can be afforded by the majority of the population. An exigency to earn maximum profit coupled with the pressure from state and central government to reduce the price of drugs seems to be one of the major constraints that hover around the Indian pharmaceutical Industry at present. Pricing of the drugs innovated in India and patented thereof poses another critical threat to the development of Indian pharma sector. A lot of innovation and research is being carried out in India so as to provide people with access to modern medicines. But at the same time this sector faces the challenge to make these products available in affordable prices. Nonetheless one also cannot ignore that research and innovation in the pharma sector requires a heavy capital investment considering the significance of this sector. Consequently adjusting the market price of the innovated drugs to balance the profit earned remains a critical issue in the Indian pharma sector. The necessity to adhere to rigid regulatory norms: Indian pharmaceutical manufacture still faces various challenges such as inadequate infrastructure, insufficient capital, inadequate knowledge regarding the market demand for drugs, alleged casual behavior in terms of approvals made for certain drugs without proper test and trials, lack of advanced technology and availability of skilled workers. As a result the Indian medicine manufacturing units encounter a tough time in adhering to the good manufacturing and laboratory practice (GMP) as required by the WTO. Consequently entry of new firms, particularly MSMEs becomes very difficult. Further, the entry of Indian origin drugs into the global market faces severe hurdles. Quality of Clinical Trial: The large Indian population and the entire gamut of various diseases that affect the Indians make India a highly prospective location for performing the clinical trials. Recent directions from Indian court and the legal system and unfortunately owing to doubts about the quality of the clinical trials performed in India, and with concerns that the trials are not well regulated, and consequently since unethical issues erupt during various phases of clinical trials – the market for clinical trials and consequently clinical trials leading innovations in the pharmaceutical industry is a stillborn. Few of such instances include a lack of patient compensation for adverse events; approval of drugs without clinical trials and lapses in informed consent procedures. (Tailor, Karen (2014), Challenges facing the India’s pharmaceutical 6

Industry,

Mondaq,

January

21,

2014.

www.mondaq.com/.../

Challenges+Facing+Indias+Pharmaceutical+Industry)

The problem of counterfeit drugs: As per WHO study 30% of the drugs manufactured in developing

nations

are

said

to

be

counterfeit

(www.who.int/medicines/services/counterfeit/impact/.../index1.html). This has implication that the quality of drugs produced by India, which is the leading one among the developing nations, is doubtful. With respect to technology deployed in the medicine manufacturing units India lags behind countries like USA, China etc. Research and development initiatives have recently gained a lot of importance in the pharmaceutical sector in order to meet the rising demand for good quality medicines in the country and also to compete with the global peers. But it has not yet attained a level that provides the credibility of the quality of drugs produced indigenously. This is definitely hampering the performance of Indian pharmaceutical sector as the drugs manufactured and innovated indigenously in India fail to win the confidence in the global market. However, the issue of counterfeit drugs is not just related to technology, patent or product quality, but may also be related to prohibiting entry of cheaper drugs as some peers in advanced countries often allege against Indian companies. Lack of adequate indigenous technology of production: The pharmaceutical sector is highly technology intensive due to the particular nature of this sector. However, India is currently not self sufficient in high edge technologies that are used in the production of various pharmaceutical substances and therefore it imports technology primarily through foreign collaborations and buying licenses. In the course of time this sector ends up making huge investments towards importing technology and this leads to an upsurge in the production costs and thus of the prices of drugs and medicines. The IPR regimes played quite a significant role in bringing out a process revolution in the Indian pharmaceutical Industry (Amit Shovon Ray and Sabyasachi Saha,“India’s Tryst with Technology: The Way Forward” ,JNU Discussion paper 09-11, June 2009).The credit for some significant learning and technology upgradation in the pharmaceutical sector can be given to the Patent Act of 1970 which allowed only process patent for the pharmaceutical substance. The 2005 IPR regime also promoted technological innovation in the Indian pharmaceutical Industry albeit in a different direction. 7

Lower indigenous R&D productivity: The capacities of R&D activities in India are still smaller when compared to other global peers such as China, USA etc. Apart from this, first hand human studies are controlled in India through various regulations and the research and development activities are limited to few research organizations such as the contract research organization and few government laboratories.( Shoibal Mukherjee (2010) “Pharmaceutical R&D: India at the Crossroads”, Financial Chronicle, December 2010. (http://www.gvkbio.com/wp-content/uploads/ downloads/2012/03/FinancialChronicleDecember2010.pdf).

India is also backward in advanced throughput facilities and the animal testing is mainly done on smaller animals. Facilities for human volunteer studies are limited largely to routine plasma-level testing of drug levels in male volunteers, although some sites are venturing into higher-end work. All these factors together lead to a decline of in-house research and development activities. SMEs are quite popular in the pharmaceutical sector in India and these small scale industries face a lot of challenges and drawbacks in terms of capital, infrastructural facilities and technology including

the

Information

technology infrastructure

.Consequently these

manufacturing units lack in terms of the productivity in research and development. Recent Business trends in Indian Pharmaceutical Industry: Post liberalization Indian pharmaceutical industry witnessed an increase in the investments from various MNCs which realized the potential that India has in terms of abundantly available skilled workers and the market that India renders through its large population of over 1.2 billion. Due to the implementation of liberalization policy in India the New Drug Policy of 1994 and 2002 came into existence and this indeed had a positive impact on the pharmaceutical sector of India as according to these policies there ceased to be any licensing requirement in the expansion of firms. The 100% FDI inflow in the medicine industries of India has resulted in rise of technological collaboration and import of technology, bulk drugs and other pharmaceutical formulations and ingredients. This must have led to an improvement in the quality of products developed by the various manufacturing units in India. Subsequently the demand for Indian made drugs and active pharmaceutical ingredients would gain popularity in the international market. The issue of counterfeit/fake drugs has always remained a major hurdle for the Indian pharma sector which needs to be taken care of by the Government. Because of this Indian pharmaceutical sector has seen a rise in quality consciousness. With the rising concern for the 8

quality of medicines produced in the Indian manufacturing units the GoI has incorporated few rules and regulations with the new drug policy which endorses the adherence to good manufacturing practices as well as production of good quality products. Since the MSMEs are highly affected by the adoption of GMP, the ministry of MSME, Government of India, has announced subsidies for the purchase of specified machineries and equipment worth up to Rs one crore. The R&D activities carried out by various global drug manufacturers incur heavy investments. Apparently these manufacturing units have started outsourcing their clinical trials and research activities to India due to the lower costs involved in R&D and the higher scientific expertise available in our country. The post liberalization phase has also witnessed an increase in IT outsourcing to India as it is designated as one of the superpowers in Information technology due to the availability of highly competent software professionals. This leads to making India one of the profit earning destinations with respect to contract research in the pharmaceutical sector and drug discovery. Currently India is also considered as a promising hub for a talented pool of scientific and research professionals, technological innovation, cost effective in terms of workers and techniques and efficient and credible clinical data management. Companies like Pfizer India have entered into contracts with the biometrics division of Cognizant Technology Solutions; SIRO Clinpharm has contracted with Accenture for clinical trial data management (KPMG Report(2006)

The

Indian

Pharmaceutical

Industry



Collaboration

for

Growth.

https://www.in.kpmg.com/pdf/Indian%20Pharma%20Outlook.pdf) The various off shoring contracts in the Indian pharmaceutical sector is mainly due to the entire gamut of business effective and profit earning advantages that India provides to the MNCs. Few of these include the cost effective base for establishment of manufacturing unit, higher health consciousness among the people leading to a greater demand for high quality drugs, availability of good manufacturing practices, a high insight into the generic drug division and an appreciable manufacturing unit capacity. Indian pharmaceutical units have also entered into one or more of contract manufacturing agreements off late which primarily includes either of the three aspects namely: manufacturing outsourcing-supply of active pharmaceutical ingredients (APIs) and Intermediates, development outsourcing-conducting preclinical trials and development outsourcing-conducting clinical trials. Few such examples are illustrated in the table 1 below. 9

Table 1: Selected Contract Manufacturing Agreements

Source: KPMG Report (2006)

The government of India has also taken up few initiatives towards the development of Indian pharmaceutical Industry. Few of which as highlighted by the Union Minister of Finance, in union budget 2012-13, quoted in CCI’s report on pharmaceutical industries, is as under. §

It is proposed to extend concessional basic customs duty of 5 per cent with full exemption from excise duty/CVD to six specified life-saving drugs/ vaccines. These are used for the treatment or prevention of ailments such as HIV-AIDS, renal cancer, etc

§

Probiotics are a cost-effective means of combating bacterial infections. It is proposed to reduce the basic customs duty on this item from 10 per cent to 5 per cent

§

Basic customs duty and excise duty reduced on Soya products to address protein deficiency among women and children. Basic customs duty and excise duty reduced on Iodine.

10

Few of the profit earning investments as highlighted in the CCI report on Indian pharmaceutical sector are mentioned below: ·

Israel-based Teva Pharmaceuticals in collaboration with Procter & Gamble (P&G) plans to set up world's largest over-the-counter (OTC) medicine facility at Sanand, Gujarat

·

GlaxoSmithKline (GSK) and the Hyderabad-based Biological E Ltd have teamed up for early stage research and development (R&D) of a six-in-one combination paediatric vaccine against polio and other infectious diseases.

·

Claris Lifesciences Ltd has entered into joint venture (JV) agreement with two Japan based drug makers Otsuka Pharmaceutical and Mitsui & Co Ltd for its injectable

·

business in India and other emerging markets.

·

Nipro Corporation has set up India's first dialyser manufacturing facility at Shirwal near Pune, with an investment of Rs 700 crore (US$ 130.60 million)

·

Aurobindo Pharma Ltd has received approval from the US Food and Drug Administration (USFDA) to manufacture and market various medicines namely Oxacillin injections and Rizatriptan Benzoate tablets in the US, besides Nafcillin and Ondansetron injection

·

Eli Lilly and Strides Arcolab have inked a pact to increase delivery of cancer medicines in emerging markets. Agila Specialties, the specialties division of Strides Arcolab, will make cancer medicines and Eli Lilly will market them. ( Corporate catalyst India, “Brief report on Indian pharmaceutical Industry in India”, March 2013)

It is thus apparent that despite several constraints faced by the pharmaceutical industry there also emerged a kind of dynamism in the last decade or so in the form of entry of major global players, takeover of Indian firms by multinationals, several collaborations between domestic manufacturers and multinationals. Adoption of GMP and other regulatory measures on the one hand forced the domestic manufacturers to modernise technology through installing costly machinery and equipments, and on the other hand, made the survival of these manufacturers, particularly MSMEs, very difficult as the cost of entry and the cost of production rose sharply. Even for the small enterprises to make innovations is very difficult as it requires several costly testing and procedures to be followed to establish the innovations. Thus it is expected that innovations in pharmaceuticals industry are primarily carried out by the large firms in India. 11

There are other possibilities of innovation systems in which large firms contract out part of the innovation or manufacturing works to the smaller firms and provide the latter necessary resources. This trend is however noted in recent times; even foreign firms are found to contract out innovation works to small firms in India.

It is thus evident that some form of growth potentiality has already been created for the Indian pharmaceuticals industry and this must have been reflected in terms of growth and increased productivity. The next chapter makes an estimate of the growth of the firms, capital intensity and labour productivity in the pharmaceuticals industry over the last decade. Further, since the benefits of the dynamism are not uniformly distributed across size classes and regions, the industry performance across size classes and regions has also been analysed in the next chapter.

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Chapter 3: Growth of number of enterprises, capital intensity and labour productivity: 2000 – 2010 Changes in number and size distribution of enterprises, capital intensity and productivity: As already mentioned, recent policy changes in the pharmaceuticals industry facilitated the entry of new firms, modernisation, investments and R&D opportunities of the firms which would translate into rise in labour productivity. This has also added to cost escalation of the MSMEs as well as exposed them to the global competition and stringent restriction/regulation. Being technology intensive and capital intensive, modern pharmaceutical industry limits the scope for micro enterprises and the regions with poor infrastructure can hardly attract new high technology enterprises. Thus ability to respond and appropriate the opportunities differs across size classes and regions.

Source: ASI 1999-00 and 2009-10

Figure 1 clearly shows that there has been significant increase in the number of small, medium and large enterprises between 2000 and 2010. On the other hand, the number of micro enterprises declined by a sizeable amount which is quite obvious as the new policy, particularly GMP, raised the cost of production to a large extent and the micro firms usually cannot operate with high turnover and thin margin and thus can hardly survive with cost escalation. 13

Source: ASI 1999-00 and 2009-10

As illustrated in Figure 2 there has been a decline in the VAD/L over the decade among the existing micro enterprises. The labour productivity of pharmaceutical micro manufacturing units declined presumably due to loss of competitiveness of the micro-scale. Lack of infrastructural facilities and appropriate technologies of production that the micro units face in general may be another reason for their lower productivity. A decline in capital intensity of the micro enterprises further added to the reduction of productivity. Thus micro manufacturing units lack the facilities in terms of capital, technology and infrastructure which are required to manufacture competitive and better quality pharmaceuticals. In a sense the produce from micro units do not garner enough market hold and thus the units earn lesser profits as compared to the large scale units and global peers. Further these units fail to escape the high production costs. Consequently the micro units have not been able to raise enough productivity as compared to the investments made towards production.

In contrast to the micro units the group of small sized manufacturing units have witnessed around 13% increase in VAD/L and 7% increase in the capital intensity. Such a change could be owing to the impact of various initiatives and policy changes taken up by GoI in favour of the small scale units. The medium units however showed a decline in both capital intensity and VAD/L. The transition from medium to large category is not known definitively, however. The population of large units has suddenly increased and there is therefore a distinct possibility of transition and that 14

of growth. Such a trend could possibility be due to the scale up of the medium units to large units as we have seen in Figure 1 that there was a 38% increase in number of large enterprises involved in pharmaceutical manufacturing. The large units saw a 19% increase in the VAD/L over the decade while there appears to be a decline of around 6% in the overall capital intensity of the large units. It points to the fact that continuity of labor intensive technologies deployed in the larger firms stayed through and these firms could not bring in automated and high edged production technologies.

It therefore suggests that pharmaceutical sector requires more

investments towards advancement of technology. Regional variation of capital intensity, productivity and distribution of enterprises: Figure 3 illustrates the change in number of enterprises across size classes over the decade 200010.Uttar Pradesh and Madhya Pradesh witnessed an increase of 17-18% approximately in the number of micro units and these could possibly be the startups in this state. States of Andhra Pradesh, Himachal Pradesh and Uttar Pradesh registered a high growth in the number of small and medium scale units engaged in pharmaceutical manufacture. Such a high rise in the number of small and medium scale units indicates the importance of SMEs in this sector and also the benefits that the SMEs have probably gained from various promotional steps and initiatives taken by the government and other institutions. Large scale segment has seen a rise in number of units across all the states except Gujarat and Madhya Pradesh.

Source: ASI 1999-00 and 2009-10

15

States of Gujarat and Andhra Pradesh have witnessed some increase in capital intensity over the decade (Figure 4). In Gujarat there has been an increase in capital intensity in micro (19%), small (11%), Large (4.66%) while Andhra Pradesh saw an increase in K/L in smaller units (9%) and larger units (212%).This trend might be due to the introduction of new machinery and equipment partly for GMP and partly for technology upgradation or overall modernization. Some of these new techniques may be efficient and reduce cost of production of pharmaceutical units in these states.

Source: ASI 1999-00 and 2009-10

Source: ASI 1999-00 and 2009-10

16

As indicated in figure 5, the VAD/L increased in Maharashtra (42%) and Gujarat (133.7%) in case of small units and in Gujarat (61%), UP (273%) and MP (61%) in case of medium units. On the other hand, the micro firms in Delhi witnessed a 2% increase in VAD/L (not shown in graph) thus endorsing certain technological advancement in manufacturing process as noted in terms of rising capital intensity. Such a pattern of growth in the VAD/L together with rising capital intensity indicates that the manufacturing units in these states are slowly shifting from manual work to mechanised techniques and also depicts an industrialization trend in the states. In a sense these states are slowly adopting the technologically advanced manufacturing processes by using the capital, infrastructural assets and skills available to them. The large firms in all the states, except Maharashtra and Uttar Pradesh, have seen an overall increase in the VAD/L. The reason behind the decline in Maharashtra and Uttar Pradesh could be the lack of capital required to sustain large scale technology intensive firms. Nonetheless, the general increase in productivity points to the fact that the pharmaceutical manufacturing firms in India are slowly adopting high technology.

17

Chapter 4: Industry structure and the performance of the pharmaceutical industry: A disaggregated analysis It is mentioned in the beginning that there are six subgroups (5 digit) of the pharmaceutical industry. But the present study would consider only three of them, namely sub-groups 21001, 21002 and 21003, as the remaining three groups are insignificant. The unit-level data with respect to the formal and informal sectors for each of these categories have been taken from ASI 2009-2010, CMIE & NSSO 2010-2011.In this industry both the large enterprises as well as MSMEs operate side by side often maintaining collaborative relations enabling both to grow. We shall discuss MSMEs and large enterprises separately wherever possible. The MSME definition considered is the one adopted by government of India MSMED Act 2006: (i) Microenterprises: Enterprises investing up to 25 lakh in plant & machinery; (ii) Small enterprises: Enterprises investing more than 25 lakh but not beyond 5 crore in plant and machinery; (iii) Medium enterprises investing more than 5 crore but not beyond 10 crore in plant and machinery; (iv) Enterprises investing more than 10 crore in plant and machinery are large scale enterprises. In this chapter we shall study the following aspects of the pharmaceuticals industry: Industry structure covering the relative importance of informal and formal sectors, shares of MSMEs, concentration level and contractual relations; productivity of the MSMEs and their growth performance and contribution to exports; regional dispersion of the industries and government policies.

Structure of the pharmaceutical industry Formal and Informal sectors involved in manufacture of pharmaceuticals In general the contribution of informal sector is very low in pharmaceutical industry. According to our estimate, in the manufacture of pharmaceutical substances (code 21001) and ayurvedic medicines (code 21003) informal sectors hold a negligible share of 0.09% and 0.17% in the total GVA (generated by 18

formal as well as informal sector enterprises) of the pharmaceutical industry (group 21). .,Within the formal sector of the pharmaceutical industry, the GVA contributions of the production of pharmaceutical substances (code 21001) and ayurvedic medicines (code 21003) are 15% and 6% respectively. In case of manufacture of ayurvedic medicine about 2.56 % of the total GVA of the 5 digit group is generated by informal sector. It seems that in terms of informal sectors’ contribution, ayurvedic medicine manufacturing industries have the highest share of GVA than any other subsectors under group 21(Table1 and Table 2).

MSMEs in Informal sectors

It can be inferred from the above findings that the informal sectors, primarily consisting of the micro and small enterprises can be found in ayurvedic and to a small extent in manufacture of medicinal substances; Ayurvedic sector performs better than other sectors. It enjoys higher demand within particular vicinity in rural areas. Majority of the enterprises are microenterprises and mostly consist of petty ayurvedic practitioners such as hakims and vaids etc. The ayurvedic medicines have been traditionally used in certain rural areas where there was no access to allopathic medical facilities. Based on the total GVA generated across all the informal sectors under group 21, one may note that Microenterprises contribute majority of the share(85%) of total informal sector GVA(Table 1). Among the informal sectors, Ayurvedic sector outperforms other informal sectors in terms of GVA. Because of the present state of health consciousness among people, various legal and other restrictions, campaign by allopathic institutions; majority of the urban people and rural rich do not go to the petty ayurvedic practitioners, leaving apart the rural class which still trusts on Hakim and Vaid etc. The increasing demand for good quality herbal healthcare facilities and the competition threat posed by the large players in the field of allopathic and other pharmaceutical preparations facilitated the large scale production of ayurvedic medicines. Dabur for example was initially founded by Dr.SK Burman in Bengal in order to dispense medicines to the ordinary villagers. Dr Burman manufactured medicines for diseases like cholera and malaria. As the news spread he was known as a trusted doctor and therefore the brand name 19

Dabur came into picture. Today Dabur is one of the leading producers of ayurvedic medicines in Indian domestic market as well as in the international market. Thus present day big players like Dabur, Baidyanath, Himalaya etc initially started from a small scale and eventually developed as few of the top firms in this field. Quite a few ayurvedic medicine producing enterprises which were able to garner enough funds and other facilities required for a formal mode of production moved from informal to formal sectors and eventually moved from micro to medium and large scale levels of production. However remaining enterprises continued in the informal sectors and did not make any remarkable contribution towards Gross value added per enterprise. As stated by M.S.Harilal(1), developments in ayurveda through organized production of medicine, institutionalization of education and professionalization of clinical practice are actually the outcome of the development of biomedicine in India. Manufacturing in ayurveda has passed from small-scale physician outlet to petty/cottage production and later to industrial scale, emerging as a competing alternative to the biopharmaceutical market. Initially ayurvedic medicines were only produced by some households which distributed these ayurvedic drugs. The modern medicine systems were unable to cater to the medical needs of a large number of villages and this helped the indigenous manufacturing units to remain popular. During the mid nineteenth century, some of the ayurvedic practitioners started switching their mode of production from small scale to bulk mode of production in response to the spread of epidemics like cholera and small pox during this period. Thus big players emerged under this category. Table 1: GVAby MSME under each five digit code in Informal sector Product categories

Micro enterprises

Small enterprises

Total GVA generated (In Rs crores)

Total GVA generated (In Rs crores)

Pharmaceutical substance(21001) Allopathic medicines(21002)

18.40 14.30

18.08

Ayurvedic medicine(21003)

70.32

All Share in total GVA

Medium Enterprises Total GVA generated (In Rs crores)

Total Total GVA generated (In Rs crores) 36.48 14.30 70.32

103.02

18.08

0

85.07

14.93

0

Source: Compiled from NSSO 67th Round unit level data

20

121.10

MSMEs in Formal Sectors:

If we consider the total GVA generated by the formal sectors as a whole in group 21, we observe that micro, small and medium enterprises hold 0.95%, 21.14%, 9.69% respectively of the share of total GVA (Table 2). Within the formal sector the large scale enterprises contribute much more to GVA, which is around 68.%. It is further noted that in general MSMEs remain less advanced as compared to the large enterprises due to their inability to mobilise enough funds required for clinical trials, R&D, production of good quality medicines at par with the large enterprises. The MSMEs lag behind the large firms in terms of R&D intensity and the proportion of firms undertaking R&D. The MSMEs are rarely engaged in some or other kind of in-house technology development activities. The MSMEs are not in a position of employing new capital goods from abroad and undertaking advertising and marketing activities.(2)

Table 2: GVA fby MSME and large firms under each five digit code in formal sector Product categories

Micro enterprises

Small enterprises

Medium Enterprises

Large Enterprises

Total

Total GVA generated(In crores)

Total GVA generated(In crores)

Total GVA generated(In crores)

Total GVA generated(In crores)

Total GVA generated(In crores)

Pharmaceutical substance(21001)

52

1119

603

4698

6472

Allopathic medicines(21002)

156

6034

2841

21046

30077

Ayurvedic medicine(21003)

163

1138

357

1014

2672

All

371

8291

3801

26758

39221

Share in total GVA (%)

0.95

21.14

9.69

68.22

Source: Compiled from ASI 2009-10

21

Large Enterprises and their market concentration The concentration of firms under allopathic medicine measured in terms of shares in total GVA as per ASI data is not very high(Figure 6). Pharmaceuticals have an oligopolistic market structure where a small number of large players dominate the market. For example the allopathic medicine market is mostly dominated by Cipla, Dr. Reddy’s lab, Sun pharmaceuticals etc whereas the ayurvedic medicine market is mostly dominated by Dabur, Baidyanath etc. However there are opportunities for smaller firms to start their business. A large part of nonmetropolitan market and also the un-insured metropolitan market offers scope to the small enterprises offering unbranded generics. Further, the list of medicinal or drugs-options is getting wider over the time and as a result, small enterprises can continue to offer lower-profit margin unbranded generics. MSMEs in pharmaceuticals contributed a sizeable part of the total GVA generated by registered pharmaceutical industry as a whole. In a sense despite concentration pharmaceutical industry maintains somewhat healthy structure, as it paves way for the new and small firms to start their business, prevents monopolisation of market and in a way generates greater employment opportunities. However, over the recent period with increasing capture of the market by medical insurance firms and by the organized healthcare providers, as also with the increasing acquisitions of the previously domestic large generics-manufacturer by nondomestic global multinational companies (such as the acquisition of the Ranbaxy) the competition landscape as well as the ease of market entry are changing very fast. Concentration of pharmaceutical firms Figure 6 depicts the well known Lorenz Curve, describing the market concentration among enterprises under the three major five digit (5-digit) product categories (viz. Manufacture of medicinal substances used in the manufacture of pharmaceuticals: antibiotics, endocrine products, basic vitamins; opium derivatives; sulpha drugs; serums and plasmas; salicylic acid, its salts and esters; glycosides and vegetable alkaloids; chemically pure sugar etc.-21001, Manufacture of allopathic pharmaceutical preparations-21002 and Manufacture of `ayurvedic’ or `unani’ pharmaceutical preparation-21003) as per ASI unit level data. In other words, this Lorenz curve shows market concentration among the manufacturing units in terms of shares of the GVA of the respective 5 digit group. It may be mentioned that the concentration is measured in terms 22

of GVA shares. Further, only those manufacturing enterprises that are covered under ASI, are used for measuring concentration. Informal sector enterprises are not covered in this analysis. Horizontal axis represents the cumulative percentage of enterprises, whereas the vertical axis represents the cumulative percentage of GVA. The black colored 45-degree line represents the line of equality and the other three curves labeled 21001, 21002 and 21003 represent the respective product categories. The farther away a particular curve is from the line of equality, the more would be market concentration. One can clearly figure out just by looking at the figure that for all the three product categories, the total GVA is quite unequally distributed, as the three curves (21001, 21002 and 21003) sink fairly below the line of equality. Figure 6

Cumulative % of Gross Value Added .2 .4 .6 .8 1

Market Concentration (ASI)

B

C

0

A

0

.2

.4 .6 Cumulative proportion of enterprises 21001 21003

.8

1

21002

Source: Own estimate from ASI data

As per ASI, under the product category 21001, the lowest 85% (approx.) of enterprises contribute merely 20% (approx.) of the total GVA generated under this product category, and the rest 80% of the total GVA is being contributed by just the top 15% (approx.) of enterprises (see 23

Figure 6, point A). Thus, we may say that for the enterprises under 21001, there seems to be a monopolistic kind of a market structure present for this product category, because a large part of the market is being captured by just a few enterprises. Further, as we can see in Figure 6, the share of the lowest 40% of the enterprises’ in total GVA is almost negligible for each of the product categories. Thus the entire GVA, as per ASI data is contributed by just the top 60% of the enterprises, irrespective of the product category to which they belong. Under the product category 21002, the lowest 90% (approx.) of enterprises contribute merely 20% (approx.) of the total GVA generated under this product category, and the rest 80% of the total GVA is being contributed by just the top 10% (approx.) of enterprises (See Figure 6, point B). Thus, we may say that as per ASI, there seems to be a monopolistic kind of a market structure present for this product category as well, because a major part of the market is being captured by quite a few large enterprises. Under the product category 21003 the lowest 95% (approx.) enterprises capture merely 20% of total GVA (see Figure 6, point C), again leading us to the same conclusion for this product category as well, that there seems to be a monopolistic kind of a market structure present. In brief, for all the product categories relating to the ‘Manufacture of pharmaceuticals, medicinal chemical and botanical products’, we infer that a large part of the market is captured by just a few enterprises, indicating that a high degree of monopoly power is enjoyed by the top Pharmaceutical enterprises of the country.

Regional distribution of enterprises: Manufacture of medicinal substances used in the manufacture of pharmaceuticals: For the group 21001 Andhra Pradesh contributes the maximum which is around 41% to the total GVA generated under the product group (Table 3a).This might be because of large domestic market for health care, availability of skilled man power from a large number of life science related institutes, setting up of infrastructural development funds, greater connectivity to national and international destinations, higher capacity plants approved by key regulatory authorities like 24

FDA,TGA etc, support from the AP government through creation of SEZs.(5) Andhra Pradesh is followed by Maharashtra(22%),Gujarat(10%), Punjab(5%),Karnataka(4%) and Goa(4%) etc. Table 3a: State wise Distribution of shares across different size classes in the total GVA generated under 21001

State Andhra Pradesh

Share Micro Firms(%) 0.52(11)

of

Share Small Firms(%) 4.08(79)

of

Share Medium Firms(%) 1.80(11)

of

Share large Firms(%) 35.01(28)

of

Maharashtra

0.03(15)

6.19(83)

3.06(9)

12.66(31)

21.95(138)

Gujarat

0.02(15)

2.21(57)

1.18(17)

7.18(10)

10.59(99)

Punjab

0

0

0

5.38(3)

5.38(3)

Karnataka

0

0.26(12)

1.08(1)

2.77(2)

4.11(15)

Goa

0.08(5)

0.08(8)

1.75(4)

2.48(2)

4.39(19)

Total share(%) 41.41(129)

Note: Parenthesis shows number of firms; Source: Compiled from ASI 2009-10

Maharashtra’s contribution is the maximum in case of the GVA generated by MSMEs under group 21001,which is around one third. From this it can be inferred that the MSMEs are relatively better placed in this industry in Maharashtra as compared to other states. This is possible because of the supportive state policy towards SMEs.. The Maharashtra Small Scale Industries Development Corporation (MSSIDC) assists the SMEs by support services such as consultancy, training, marketing knowledge, entrepreneurship development programmes etc. Apart from this there are also a large number of other agencies such as Maharashtra State Financial Corporation (MSFC), The State Industrial & Investment Corporation of Maharashtra Limited etc which aid the growth of SMEs.(6). Maharashtra is followed by Andhra Pradesh (23%), Gujarat (12%), Goa (7%), Karnataka (4.9%) and Kerala (3.54%).

Manufacture of allopathic medicines: Maharashtra is the leading producer of allopathic medicines and contributes around 23% of the total GVA generated under group 21002(Table 3b). Noteworthy export potential and high quality standards, large and expanding domestic markets, proximity to international market, large base of APIs and bulk manufacturing units, availability of skilled man power, R&D centers and training institutes, strong infrastructure and abundant natural resources are few of the reasons due to which Maharashtra is a hub for the production of allopathic medicines.(7) Maharashtra is followed by Himachal Pradesh (15%), Andhra Pradesh (11%) etc. 25

Table 3b: State wise Distribution of shares across different size classes in the total GVA generated under 21002

State

Share of Micro

Share of Small

Share of Medium

Share

Firms(%)

Firms(%)

Firms(%)

Firms(%)

of

large Total share(%)

Madhya Pradesh

0.01(16)

0.20(27)

0

4.43(14)

4.64(57)

Andhra Pradesh

0.04(30)

0.66(70)

0.33(12)

9.98(25)

11.01(137)

Maharashtra

0.04(21)

6.12(100)

0.81(5)

15.66(49)

22.64(175)

Tamil Nadu

0.021(25)

0.41(26)

0.18(4)

1.50(24)

2.13(79)

Sikkim

0

0.03(4)

0.03(1)

5.32(5)

5.39(10)

Goa

0

0.26(4)

0.36(3)

4.47(11)

5.39(18)

Himachal Pradesh

0.01(1)

3.29(155)

2.24(17)

10.1(31)

15.68(204)

Uttaranchal

0.00(6)

1.36(143)

2.54(17)

2.14(12)

6.04(178)

Note: Parenthesis shows number of firms Source: Compiled from ASI 2009-10

In case of MSMEs also Maharashtra is the leading producer of allopathic medicines, contributing about 23% of the total GVA generated by the MSMEs under 21002. As discussed above this state has certain policies and supporting organization which are in favor of SMEs. As a result they boost the growth of SMEs. Followers of Maharashtra are Himachal Pradesh, Uttaranchal and Gujarat contributing about 18%, 12% and 12% respectively.

Manufacture of Ayurvedic medicines: Uttaranchal is storehouse of different herbs, aromatic plant species and medicinal plants as a result of this it turns out to be a major producer of ayurvedic medicine. It contributes about 27% of the total GVA generated by group 21003(Table 3c). Next in the order we have Maharashtra, Karnataka, Uttar Pradesh which contribute about15%, 12% and 10% respectively. In case of MSMEs Uttar Pradesh holds about 52% of the total share generated by MSMEs in this field. It is followed by Kerala which holds about 30% of the share. Both of these states are rich in biotic resources and have a considerable number of MSMEs operating in this sector. Ayurvedic practitioners like Vaid and hakim still operate as micro enterprises in these two states in the countryside and contribute a significant proportion of GVA.

26

Table 3c: State wise Distribution of shares across different size classes in the total GVA generated under 21003 Share Share State

of

Micro

Firms(%)

of

Share of Small

Medium

Share of large

Firms(%)

Firms(%)

Firms(%)

Total share(%)

Uttaranchal

0.30(9)

2.52(18)

0.00

24.33(3)

27.16(30)

Kerala

0.43(43)

3.42(22)

2.12(1)

0.00

5.98(66)

Karnataka

0.02(5)

0.73(15)

0.00

11.62(1)

12.37(21)

Assam

0.04(4)

0.52(4)

7.70(1)

0.00

8.26(9)

Uttar Pradesh

1.14(45)

6.02(5)

3.07(1)

0.00

10.22(51)

Madhya Pradesh

1.18(25)

1.17(13)

0.00

0.00

2.34(38)

Maharashtra

0.38(25)

15.21(18)

0.00

0.00

15.59(43)

Note: Parenthesis shows number of firms Source: Compiled from ASI 2009-10

Business linkages between Large scale enterprises and MSMEs facilitating growth of MSMEs It is discussed above that the MSMEs both in formal as well as informal sectors have been performing well in case of codes 21001 and 21003. It is further discussed that the remaining GVA shares, which are the major part, in both of the five digit codes are contributed by the large scale enterprises. The large scale enterprises in all respect however outperform the MSMEs and at the same time also help in the growth of MSMEs by one or more ways as discussed below. A large number of medicines are now off the patents and there has been an increasing emphasis on the use of generic drugs in the developing countries. India being one among these has opened up opportunities for the small and the medium enterprises mainly in the production of bulk drugs. Off late the MSMEs in pharmaceutical sectors have also been involved in the clinical trials of the new drugs either on their own or on contract basis from the large scale enterprises involved in the manufacture and launch of a new drug. The Large players also help the SMEs in acquiring contracts for manufacturing and opportunities to supply API’s and related chemicals(3). Therefore one can clearly establish a business link between the large players and the MSMEs in the pharmaceutical industries. Formulation & implementation of Drug Price Control Order (DPCO) Act, concentrated on maintaining minimum possible price of the medicine in order to make it affordable in the Indian market(4) The Patent Act 1970 fostered the development of indigenous pharmaceutical industry so as to produce low cost medicines for 27

Indian population. This act helped Indian companies to formulate their brands using patented drug molecules of other MNC’s through reverse engineering process without paying royalty or any license fees to other companies. Hence it helped in the growth of the SMEs which already suffer from lack of funds(4). The MSMEs devised few strategies like Toll manufacturing, Bottom finishing, In-licensing, Niche plays & Contract manufacturing, in order to fight the new patent regime and these were successfully implemented and have brought out good results(4).Large enterprises like panacea outsource few of the manufacturing jobs to the SMEs. Indian Pharmaceutical companies like Lupin and Piramal health care have a rural field force of around 300 people. This was probably done with the motive of improving health care infrastructure in rural areas. In a way these companies outsourced a part of manufacturing activities to small scale industries in the rural areas which generated employment and also made essential drugs and medicines easily accessible to the rural class of people(9). The Department of Pharmaceuticals has launched the Indian Pharmaceutical Innovation Fund (IPIF) to provide financial aid to the early stage discovery of drugs. Small Business Innovation Research Institute (SBIRI) started by the department of biotechnology along with. public-private partnership initiative of the Department provides assistance to innovators and entrepreneurs with a science background as well as supports R&D efforts in SMEs (10).These initiative all together turned out to be a boosting factor for the growth of MSMEs. Open source drug discovery (OSDD) introduced by the Council of Scientific & Industrial Research, is a remarkable example of cluster approach which has proven useful in the growth of small firms. OSDD was introduced with the motive to take up R&D activities with regards to some common deadly diseases like TB, malaria etc and to promote innovation at the grass root level mainly by MSMEs. This approach of drug discovery could be designated as a common platform that invited researchers, students, entrepreneurs and innovators to contribute to the drug discovery in a collaborative manner. The CSIR also developed a strategic partnership with national innovation council with the aim of setting up cluster innovation centre focusing on the promotion of innovation at the grass root level mainly the MSMEs; as a part of this initiative pharma cluster was set up in Ahmedabad, Gujarat. Our estimates based on ASI data reveal that the number of microenterprises which contract in but do not contract out is higher in all the three product categories and ranges between 60 to 80% (Table 4a). This might be due to the fact that the micro enterprises are not self sufficient at this 28

stage to take up all the manufacturing related activities at its end and therefore enters into contractual relations with other enterprises which may be for marketing its products, financial aids, technology R&D etc. The competitive pharmaceutical market does not let microenterprise flourish at its own credit instead it requires some or the other help from the medium or large enterprises to fulfill its requirements. Micro enterprise faces several challenges in spite of various policies in its favour this probably leads to a stagnation of micro enterprises and thwarts contracting out activities of such enterprises. As regards outsourcing, 30%, 55% and 45% of small enterprises engaged in manufacture of the pharmaceutical substance, allopathic medicines, ayurvedic medicines respectively are being outsourced different manufacturing related activity either by MNCs or by the large domestic firms (Table 4b). This might be due to the low labour involved in getting the work done in small scale units. The growth of small manufacturing units has attained priority in the recent years. As a part of various strategies of promotion of small scale units certain manufacturing related activities are outsourced to them. Pharmaceutical small units being one such prospective small scale unit is popular in terms of contract manufacturing. The number of small units which contract in as well as contract out is also significantly higher than the micro units. This could perhaps mean that small units are outsourcing a part of their activity to either medium or large firms as they are not self sufficient at their end or are outsourcing a part of their activity to the micro units in the vicinity in a way helping the micro units to grow, although no such facts or data has been recorded. A significant section of the micro as well as small enterprises involved in the manufacture of pharmaceuticals do not engage into any kind of contract this could probably be due to the risks involved in contract manufacturing or due to insufficient trust in the market. About 60% of the medium firms manufacturing pharmaceutical substance and 52% of the firm manufacturing allopathic medicines contract in manufacturing activities but do not contract out (Table 4c). Also 37% of firms manufacturing pharmaceutical substance and 28% of the firms manufacturing allopathic medicines contract out as well as contract in manufacturing related activities. This could be the result of various merger, acquisitions and joint ventures that have been taking place among the pharmaceutical enterprises, which intensified the contract manufacturing process. Medium scale enterprises which only contract out their activities is significantly low across all 29

product categories, whereas the number of firms which neither contract in nor contract out is abysmally low in case of medium enterprises. This happens may be due to the noteworthy niche that medium scale pharma units have carved out in the market. Medium scale units are to some extent self sufficient with respect to infrastructure, funds, equipments, raw materials etc as compared to their small and micro counterparts. This might be a provocative factor for other enterprises to enter into some or the other form of contractual agreement with this category of enterprises. The number of medium scale ayurvedic manufacturing firms which are not engaged in any form of contractual agreement is significantly high. This might be due to the fact that ayurvedic mode of medicine is still at a very nascent stage with only a few enterprises operating in the country which enter into contractual agreement with other firms like Dabur, Himalaya, Baidyanath etc. The emergence of ayurvedic medicine has begun after the allopathic system of medicine had flourished in the market. The competition posed by biopharmaceuticals in a way hinders the growth of the ayurvedic medicines. Although gradually the trend is changing and people have started switching form allopathic to ayurvedic mode of treatment, it has still a long way to go before it is able to create a strong hold in the pharmaceutical market domestically as well as internationally. AYUSH in India and WHO are taking various steps to promote this system of medicine world-wide and may be in the future the scenario would change. The number of large enterprises which contract in as well as both contract in and contract out is significantly high in case of all the category of pharmaceuticals and ranges between 30 to 50 % in the former and 40 to 67% in the later (Table 4d). The reason behind this could again be attributed to the increasing popularity of contract manufacturing practices in pharma sector. It can also be observed in the table that an insignificant proportion of large enterprises are involved in contracting out manufacturing activities in case of pharmaceutical substances and allopathic medicines. This could be due to the dominance of large enterprise in the market or due to the self sufficiency of the enterprises in all respect of manufacturing related activities. The number of large enterprises which do not engage into any form of contractual agreements is again trivial as the present pharmaceutical believes in contract manufacturing and considers it a way to enhance productivity and profits.

30

Age wise pattern of contractual linkages The pattern of contractual linkages based on age groups substantiates the fact that the new comers in pharmaceutical do not enter into many contracts, whereas the older enterprises have created a niche for themselves in the domestic and global market; thus lands up into collaborations and contracts with global and indigenous partners. Microenterprises as such are not self sufficient with regards to funds, infrastructure, raw materials, technology, labour etc and hence cannot thrive without collaborating with other enterprises. Therefore all the pharmaceutical microenterprises land up entering into one or more of contracts with other enterprises to support their manufacturing activities. The number of microenterprises which contract in but do not contract out is higher than the number of enterprises belonging to other categories of contractual linkages (table 4a); across all the three product categories namely pharmaceutical substances, allopathic medicines and ayurvedic medicines, with the middle aged and older enterprises contributing the majority of the total number of enterprises under this category. The new entrants contribute an insignificant proportion to the total number of enterprises in all the four categories of contractual linkages. Therefore it can be inferred that the new entrants probably do not enter into business linkages with other enterprises. This might be due to the fact that these enterprises are new to the market and are yet to foster sufficient trust with respect to quality and timely service assurance which is required to seize new contracts from the pharmaceutical MNCs globally. Maharashtra is a leading producer of pharmaceutical substances and allopathic medicines in case of MSMEs. The ayurvedic and allopathic medicine sectors witnessed a few new entrants within the age group of 0-4 years involved in contractual agreement. Uttaranchal and Himachal in case of allopathic medicines, Uttaranchal and Jammu and Kashmir in case of ayurvedic medicines include few of such new entrants. Many pharmaceutical plants have been set up in Uttaranchal and Himachal Pradesh due to excise benefits. Hence, these firms contract in various manufacturing activities and services which help in generating employment and also help in the growth of the micro enterprises. Availability of surplus raw materials in the form of the natural resource treasure of these states attracts investors to set up ayurvedic medicine plants in these places.

31

The number of microenterprises which contract out but do not contract in is the lowest when compared to the enterprises of the other categories of contractual linkages. This could be probably due to the fact that there are a large no of microenterprises which are yet to create a niche for themselves through building up trust and confidence in the market such that other enterprises could enter into contractual agreements with these enterprises. Enterprises which have been operating since last 30 to 50 years mostly land up entering into this category of contracts. Gujarat, MP, Rajasthan and UP are few of the states where microenterprises contract out their manufacturing activities, with Gujarat being the most popular in this respect when compared to other states. As stated in the analysis by KPMG (12) Gujarat has well established allied industries. The state’s strong linkage with the chemical sector, machinery and engineering sector, large number of contract research organization and an emerging health sector could possibly be the reason behind the appearance of a large number of outsourcing enterprises. The micro enterprises which contact out as well as contract in their manufacturing activities are mostly concentrated within the age group of 11-30 and a very few are within the group of new entrants. This category of enterprises is concentrated in the states of Gujarat, AP and Maharashtra. There are also a few micro enterprises which do not enter into any contractual agreements with other enterprises in case of pharmaceutical substance, allopathic medicines and Ayurvedic medicines. Such companies are popular in the states of UP, Assam, West Bengal and Chhattisgarh with a very few of such enterprises in Maharashtra and Andhra Pradesh. In the states of West Bengal, Chhattisgarh, Assam and UP a few of the risk factors particularly, quality concerns, intellectual property loss, capacity constraint, lack of accessibility to updated technology, lack of raw materials, poor financial state

etc associated with contract

manufacturing come into picture in these states. As a result these states all together have a significant proportion of enterprises which are not engaged into any kind of contractual linkages. New entrants, approximately those enterprises which are 5years or less by age mostly come under this category across all the three product categories

32

Small and Medium enterprises engaged in manufacture of pharmaceutical substances and allopathic which contract in but do not contract out are also concentrated in the states of Uttaranchal, Himachal Pradesh, Gujarat and Maharashtra. Considering the age aspect in the distribution of SMEs it was found that there were around 251 new entrants (upto 5 years of age) in total in Himachal Pradesh and Uttaranchal which contracted in manufacturing activities. The reason behind such high concentration SMEs engaged in pharmaceutical manufacturing has been discussed above. Since UP, Himachal Pradesh and Kerala are a storehouse of abundant natural resources, these states become profit earning and prospective destination for investors seeking good opportunities to set up ayurvedic firms. Hence these states house new entrant SMEs involved in ayurvedic medicine production which contract in manufacturing activities. The SMEs, which are older than 10 years or so are mostly concentrated in the states of Andhra Pradesh and Maharashtra. The SMEs which contract out the manufacturing activities are concentrated in the states of Gujarat and Maharashtra and fall within the age group of 6years and above in case of pharmaceutical and allopathic manufacturing; and a few new entrants (upto age of 5 years) in the states of Himachal Pradesh engaged in manufacture of allopathic medicines. There aren’t any ayurvedic medicine manufacturing SMEs which contract out their manufacturing activities. The reasons behind this could probably be the risk factors associated with contract manufacturing. SMEs contracting in as well as contracting out in case of pharmaceutical substances, allopathic medicines and ayurvedic medicines are concentrated in the states of Andhra Pradesh, Gujarat, Maharashtra and to some extent Himachal Pradesh and Uttaranchal. Hyderabad in Andhra Pradesh is the one of the major drug manufacturing centers. The R&D facilities in this state are quite prospective to various global pharmaceutical companies and therefore attract foreign investments in terms of drug discovery and R&D activities (13). This state is home to many pharmaceutical companies like Aurobindo pharmaceuticals, Dr Reddy’s lab, Gland pharma limited etc, which offer contract manufacturing and services and also outsource few of their manufacturing activities to other partners in collaboration. A few instances of contractual linkages of these firms have already been mentioned above. Under this category of contractual linkage we also observe a few new entrants in the states of Andhra Pradesh and Gujarat in case of pharmaceuticals; Maharashtra and Kerala in case of ayurvedic medicines. Ayurvedic medicine 33

firms as already mentioned above are concentrated in the states of UP, Kerala and from our study it can be marked that in these states there exists a few enterprises which contract in as well as contract out their manufacturing related activity. There are a few small enterprises mostly concentrated in the states of Himachal Pradesh, Gujarat, Maharashtra in case of all the three product categories being discussed which do not enter into any form of contracts with other enterprises. Although Gujarat and Maharashtra have significantly higher proportion of pharmaceutical enterprises yet few of these enterprises consider not to enter into any sort or contract or agreements with other enterprises. The probably this could be due to self sufficiency of the enterprises on account of in house manufacturing and R&D facility or due to the risks of contract manufacturing as already mentioned. The pharma firms in the states of Sikkim, Daman and Diu and Goa do not have business linkages with other firms possibly because the industrialization in these states is still not so advanced and needs to improve before it enters into collaboration with other domestic or global firms. Large pharmaceutical firms which are involved in the four categories of contractual linkages discussed are mostly concentrated in the states of Gujarat, Maharashtra, Andhra Pradesh and Karnataka. Majority of the firms in any of the contractual linkages belongs to the age group of 6 years and above whereas a few new entrants (upto 5 years of age) producing allopathic medicines which contract in their manufacturing activities are located in Himachal Pradesh, Jammu and Kashmir and Uttaranchal. There also exist quite a significant number of new entrants which contract in as well as contract out their manufacturing activities in the states of Gujarat, Maharashtra, Andhra Pradesh and Uttaranchal due to one or more of the favourable conditions that exist in these states. The number of large ayurvedic firms is insignificant in our study hence no evidences regarding the contractual linkages of these firms discussed here.

34

Table4a:Agewise distribution of contractual linkages of Micro enterprises across Five digit product categories

Product Category

Age(In years)

Contracting in but not

contracting

out(In numbers)

Contract

out

Both contract

but

not

out

and

contract in(In

contract in(In

numbers)

numbers)

Neither contract in or contract out(In numbers)

Pharmaceutical

0

0

0

0

0

substance(21001)

1

0

0

0

0

2

0

0

0

0

3

5

0

0

0

4

5

0

0

3

5

0

0

0

0

6-10

15

0

5

0

11-15

10

0

0

0

16-20

7

0

0

0

21-30

0

0

0

6

31-50

15

0

0

0

>51

0

0

0

0

All

57

0

5

9

Allopathic

0

0

0

0

0

medicines(21002)

1

6

0

0

0

2

0

0

0

0

3

6

0

5

0

4

0

0

0

0

5

6

0

5

5

6-10

20

0

13

0

11-15

35

0

5

10

16-20

34

5

5

5

21-30

36

5

27

12

31-50

42

0

10

16

>51

15

6

0

0

All

200

16

70

48

Ayurvedic

0

4

0

0

0

medicine(21003)

1

5

0

0

0

2

7

0

0

0

3

4

0

6

0

35

4

11

0

0

0

5

12

0

0

0

6-10

5

0

0

6

11-15

26

0

0

1

16-20

27

0

0

1

21-30

22

0

0

6

31-50

28

5

5

6

>51

36

5

10

10

All

187

10

21

30

Source: Compiled from ASI 2009-10

Table4b:Agewise distribution of contractual linkages of Small enterprises across Five digit product categories

Contracting in but Product Category

Age (In years)

not

contracting

out(In numbers) 0

Contract

out

Both contract

Neither

but

not

out

and

contract in or

contract in(In

contract in(In

contract out(In

numbers)

numbers)

numbers)

1

1

1

2

14

3

6

4

15

10

4

5 6-10

5

31

16

11-15

15

2

27

0

17

10

16-20

10

15

8

25

21-30

11

5

11

6

31-50

5

5

17

5

Pharmaceutical

>51

1

5

1

substance(21001

All

94

111

58

0

2

Allopathic

1

12

11

medicines(21002)

2

34

11

41

36

12

3

71

21

17

4

78

8

6

5

42

6

7

6-10

42

2

46

11

11-15

62

5

32

21

16-20

32

6

37

10

21-30

26

15

27

6

31-50

23

12

6

>51

18

18

6

All

442

229

102

0

0

1

1

5

10

2

1

10

38

6

3

12

4

1

5

5

6

5

6-10

15

16

11-15

8

7

16-20

11

21-30

6

1

31-50 Ayurvedic

>51

12

medicine(21003)

All

61

1

0

Source: Compiled from ASI 2009-10

37

2

1

2

6

4

5

46

42

Table4c:Agewise distribution of contractual linkages of Medium enterprises across Five digit product categories

Contracting Product Category

Age (In years)

but

in not

contracting out(In numbers)

Contract out

Both

Neither

but

contract out

contract

contract

and contract

or

in(In

in(In

out(In

numbers)

numbers)

numbers)

not

0 1 2

5

3

6

1

4 5

1

1

6-10

10

6

11-15

7

6

16-20

1

1

21-30

2

31-50

2

Pharmaceutical

>51

1

substance(21001

All

31

1

1 1

18

2 1

0 1

7

1

2

2

1

3

4

2

4

3

5

4

6-10

12

1

1

5

11-15

1

1

6

2

16-20

5

21-30

6

31-50

2

Allopathic

>51

5

1

1

medicines(21002)

All

51

10

29

5

1

11 2

2

1

2

0 Ayurvedic medicine(21003)

1

9 1

1

38

in

contract

2 3

1

4 5 6-10

1

11-15 16-20 21-30 31-50

1

>51

1

All

1

0

1

3

Note: Parenthesis shows number of firms Source: Compiled from ASI 2009-10

Table4d:Agewise distribution of contractual linkages of Large enterprises across Five digit product categories

Product Category

Contracting in but not contracting out(In numbers)

Contract out but not contract in(In numbers)

2

2

1

3

2

Age years)

(In

Both contract out and contract in(In numbers)

Neither contract in or contract out(In numbers)

2

7

0 1

4

1

5

1

7

6-10

1

2

3

11-15

2

1

5

16-20

9

21-30

11

7 3

31-50

18

1

1

Pharmaceutical

>51

1

substance(21001

All

29

2 7

39

46

8

0

1

1

2

2

1

3

16

4

12

5

2

1

11

6-10

22

1

11

2

11-15

22

1

17

1

16-20

17

1

10

1

21-30

9

31-50

2

1

12

Allopathic

>51

4

1

2

medicines(21002)

All

110

7

97

1 1

5

1

9

1

3

1

17

8

0 1

1

2 3 4 5

1 1

6-10

1

11-15 16-20 21-30

1

31-50 Ayurvedic

>51

medicine(21003)

All

1 2

0

4

0

Source: Compiled from ASI 2009-10

Productivity of MSMEs and large enterprises The productivity, measured in terms of value added per labor is much higher in large firms as compared to the MSMEs in formal sector as well as informal sector (Figure 7a &7b). The reason behind such low productivity in MSMEs could be the use of more labor intensive techniques instead of up graded machine technology. MSMEs often do not have access to up 40

dated technologies, as a result continue manufacturing goods using conventional and labor intensive technologies. They also fail to switch to modern technologies due to their inability to mobilise sufficient funds. MSMEs are mostly owned and managed by single individuals or family members many of whom are ignorant about the IPR and trade related policies, which might lead to a fall in the productivity of the enterprises. Concentration of demand for products and supply of raw materials (with adverse terms of exchanges), delay in payments and wide fluctuation of prices could also lead to low productivity of MSMEs. (8) The capital/labour ratio is also less in MSMEs as compared to the large firms (details of capital labour ratio for different types of contracts across size classes are shown in Figures 8a, 8b, 8c and 8d. This probably happens because the skilled man power in India work at very low wages as compared to US or any other developed country. The lower capital-labour ratio thus leads to a lower productivity in terms of value added per unit labour. As mentioned by

Pradhan , Indian pharmaceutical

industries focus on low end of value chains in pharmaceuticals like generic drugs rather than opting for branded products or supply bulk drugs to global players rather than marketing their own formulations. (14)

Source: Compiled from ASI 2009-10

41

Source: Compiled from NSSO 67th data

Productivity of Formal enterprises and business links The VAD/L is higher in large firms manufacturing pharmaceuticals, allopathic medicines and ayurvedic medicines which contract out their job but do not contract in. Therefore outsourcing could be a reason of higher productivity in the above case. Many Indian firms like Ranbaxy Laboratories, Lupin Laboratories, Nicholas Piramal, Dishman Pharmaceutical, Diviʹs Laboratories, Matrix Laboratories, Shasun Chemicals, Jubilant Organosys outsource their manufacturing activities & Ranbaxy Laboratories adopted the strategy of contract manufacturing and collaborative research. As Pradhan observes, in the process of outsourcing Indian pharmaceutical companies contract out their production related activities to firms which can carry out the production cost effectively and also qualitatively. Outsourcing and strategic alliances not only bring in substantial economic gains to India but also exposes Indian firms to modern technology, global marketing network and best business practices. All these put together lead to an increase in the productivity of the company. The strategy of contract manufacturing can be substantiated with the example of Ranbaxy laboratories which in June 2002 entered into a licensing deal with Schwarz Pharma AG of Germany, according to which Schwarz Pharma AG acquired the exclusive rights of developing, marketing and distributing Ranbaxyʹs New Chemical Entity RBx‐2258 for the treatment of Benign Prostate Hyperplasia in USA, Japan and Europe. 42

In February 2006, Lupin entered into a joint venture agreement with Aspen Pharmacare Holdings of South Africa for the development, manufacture and global marketing (except US, South Africa & India) of selected Anti‐TB products. This joint venture was motivated to derive synergies from Lupin’s strengths in Anti‐TB formulations and Active Pharmaceutical Ingredients and Aspen’s a range of MDR‐TB products. Few other examples of contracting out activities can be cited considering for Dr. Reddy’s lab which developed an anti-diabetic molecule (DRF 2593), which the company out-licensed to Novo Nordisk in 1997 for preclinical and clinical development. Similarly, Ranbaxy out licensed its first compound (RBx 2258, for the treatment of benign prostate hyperplasia) in 2002 to Schwarz Pharma. The productivity of the MSMEs is also high in case of firms that contract out their jobs. This might be due to the outsourcing of R&D, manufacturing and marketing activities by the smaller firms. The reason behind outsourcing by the smaller firms could be probably due to the lack of funds, proper infrastructural facilities and sufficient marketing knowledge. Kremoint Pharma Pvt. Ltd , Medipaams India Private Limited, Kosher Pharmaceuticals, Anmol health care, MediCare Remedies Private Limited etc are names of few SMEs engaged in contract manufacturing. MSMEs and few of the large enterprises manufacturing allopathic medicines and pharmaceutical preparations which contract in certain manufacturing and related activities but do not contract out also have a low productivity, which is possibly due to the use of labour intensive technologies instead of modern and updated technologies. But in case of Ayurvedic medium and large enterprises that contract in manufacturing activities the productivity remains high because, the total number of such an enterprise is very few with a remarkably lesser number of workers working in the enterprise (ASI data 2009-10). The productivity of MSMEs and large enterprises which contract in as well as contract out, across all the three categories is of moderate level. This category of business link comes into picture as the large number of enterprises entering into Custom research and manufacturing services (CRAMS).CRAMS is beneficial as it brings in economic gains to the country but also provides an exposure to new and upgraded production technologies/equipments. Further, many enterprises in India have been outsourced for manufacturing/marketing/packaging activities by MNCs in case of allopathic medicines as well as pharmaceutical substances Companies such as 43

Pfizer, which has entered into a contract with Aurobindo and Claris for offshore marketing of their products(9). At the same time Aurobindo pharmaceuticals has also opened a subsidiary Aurosource which would take up custom R&D and manufacturing services for large mid-sized and emerging pharmaceutical entities globally. Hence Aurobindo pharmaceuticals can be cited as an example of an enterprise which contracts in as well as contracts out manufacturing related activities. Another enterprise in this category could be Ranbaxy labs for which one of the contracting out instances of this has already been mentioned above. An evidence of contracting in by Ranbaxy lab can be its agreement with Penwest pharmaceuticals USA to get exclusive rights of marketing Nifedipine XL in selected Asian markets such as China, Malaysia, Thailand, Singapore, Srilanka and South Africa. The productivity of MSMEs and large enterprises which neither contract in nor contract out their manufacturing activities does not give a consistent picture. It is low in case of microenterprises across all categories. This could be due to the fact that these enterprises employ labour intensive techniques for their manufacturing activities. On the other hand small, medium and large enterprises under this category have comparatively higher productivity. This could be probably because only a handful of enterprises fall under this category with a lower number of workers working in these enterprises. The limited number of enterprises under this category is probably due to few of the risks such as quality concerns, intellectual property loss, capacity constraints, outsourcing risks and loss of flexibility and responsiveness are associated with contract manufacturing. (11)

44

Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

45

Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

46

Export Scenario The informal sectors do not contribute much to the total exports due to lack of market knowledge, quality of products in line with the international demands, lack of up to date technology etc. Figure 9 illustrates the contribution of Pharmaceutical preparations, allopathic medicines and ayurvedic medicines to total exports by the formal enterprises under group 21. It can be clearly noted that allopathic medicines hold the highest export share which is around 75%. Pharmaceuticals constitute 2.65% of India’s export share. Therefore it can be inferred that most of the exports under pharmaceuticals come from allopathic medicines. Ayurvedic medicines hold a negligible share of 2.71% while pharmaceutical preparations hold around 18% of the total exports under group 21. Micro enterprises hold an insignificant proportion of share in total exports made by the pharmaceutical group. SMEs as a group hold around 53% of the total exports made by the enterprises manufacturing pharmaceutical substances. This is followed by ayurvedic medicines and allopathic medicines with SMEs shares of 19% and 15% respectively (Figure 10). Thus, MSMEs performs better than the large scale enterprises in terms of total exports of pharmaceutical substances, whereas in case of ayurvedic and allopathic medicines large firms outperform the SMEs. As regards direct involvement of firms in exports, 80% and 76% of the firms engaged in manufacture of pharmaceutical substances and ayurvedic medicines contribute to exports whereas only 55% of the firms engaged in the manufacture of allopathic medicines participate in exports. However the volume of exports in case of allopathic medicines is higher than the rest. From the above statistics it is likely that only a small number of large allopathic producing firms dominate the global market. On the other hand a large number of players often smaller in size operate in case of pharmaceutical substances and ayurvedic medicines. As already mention, there has been a shift in demand from conventional allopathic biopharmaceuticals to ayuvedic medicines which could have probably been an advantage for the Indian ayurvedic manufacturers to thrive in the global market and has likely increased the number of enterprises engaged in export of ayurvedic medicines to a significant proportion. Pharmaceutical manufacturing enterprises presently involve in contract manufacturing with other MNCs globally either by merger and acquisitions, joint ventures, licensing or franchising. In the

47

course of time it enters into agreement with other firms worldwide for marketing its products globally wherein manufacturing units in India produce the drugs and API’s and export it in other countries. India has been playing a significant role in case of contract manufacturing of API‘s and generics due to its comparatively low manufacturing costs, availability of skilled talent and large patient pool. Therefore the overall export figures in case of pharmaceuticals are considerably high. As pointed out by Anand Choudhary and Neetu Singh, Indian Ayurvedic system of medicines is gaining popularity globally by the virtue of its qualitative strength, essential elements of health and important clues for consistent functioning of life. Due to lack of cure for chronic ailments by conventional medicines and the side effects associated with it many developing countries are switching to ayurvedic mode of treatment. ( Anand Choudhary and Neetu Singh (2011) ‘Contribution of world health organization in the global acceptance of Ayurveda’, Journal of Ayurveda Integrated Medicine, 2011 Oct-Dec; 2(4): 179–186. doi: 10.4103/0975-9476.90769)

Considering the proportion of firms involved in exports (Fiure 10) we observe a significantly higher proportion medium and large enterprises manufacturing pharmaceuticals contributing to total exports than small and micro enterprises. Such a scenario is probably because the micro and small enterprises primarily focus on the national market, have comparatively a lower grade infrastructure as compared to their medium and large counterparts and their competitive strategies would have been only sufficient enough to help their sustainable development within the domestic market vis-à-vis various policy interventions. The large and medium firms are relatively in a better state and take up R&D activities and follow rigorous marketing strategies in order to carve out a niche for themselves in the global market. Micro and small enterprises also in general do not have enough funds to spend on good manufacturing practices; this might be a hindrance in its ability to compete with the world class products in the global market. From the perspective of the different contractual agreements in which an enterprise is involved, it can be said that the percentage of medium and large enterprises engaged in various contractual agreements is higher in case of pharmaceuticals as a whole; and this might be one of the primary reasons due to which the large and medium enterprises contribute a significant share in the total

48

exports. A large number of pharmaceutical firms follow either direct investment in the global market or merger and acquisition with the pharmaceutical MNCs. This not only allows the Indian pharmaceutical enterprises to gain access into the international market but also equips it with internationally accredited manufacturing units, R&D infrastructure, market synergies etc. It can also be observed that the trivial contribution of the microenterprises towards the total exports in case of allopathic and ayurvedic medicines come from only those enterprises which contract in. In a way we could argue that contractual manufacturing acts as a supporting factor in export earnings. Maharashtra, Gujarat and Andhra Pradesh have a significantly higher proportion of Pharmaceutical enterprises which are engaged in exports. The MSMEs in these states are also prominently active members in the export market. These outcomes are primarily due to the Industrial policies of these states which encourage the growth of MSMEs. As already mentioned, good infrastructure, effective R&D activities, access to financial aids from government, excellent marketing strategies, focus on the international market demand etc could be one or more of other reasons leading to higher pharmaceutical exports from these states. In case of ayurvedic medicines Karnataka, Assam and Uttaranchal play vital roles in total exports. This could be attributed to the abundant natural resources availability in these states.

Source: Compiled from ASI 2009-10

49

Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

50

Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

51

Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

52

Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

53

Source: Compiled from ASI 2009-10

54

Chapter 5: Technological innovation in pharmaceutical industries Technology innovations are usually associated with changes in the level of technology. On many occasions it becomes difficult to directly measure/capture changes in technology or innovations. There are however several ways of measuring the technology levels; such measurement is informed by and also determined by for example, what type of machinery is being used and hence what level of embodied knowledge is employed; what are the components with which the machine as well as the product is made of, what are the material inputs, and labour inputs or the skills engaged and what kind of energy source or motive force is required to operate the machineries, and what are the outcome of the use of the technology embodied machine/product in terms of output per labour or per unit of material inputs, what is the grade of product quality, and the export performance or market share of the products or types of contractual or quasi-contractual linkages of the enterprise.

Methodology of indexing technology Biswas and Banerjee (2014) has developed a simplified approach to measure technology levels of enterprises, distribution of enterprises across technology levels for industry, sector, region or size class of enterprises in a given year.(15) Temporal changes in the distribution, as suggested by Biswas and Banerjee (2014), would reflect innovations. Methodology used by these authors to measure innovations is summarized below: The relevant parameters for identifying technology level of manufacturing units have been clubbed into three broad groups; namely (1) those related to inputs, (2) those related to capital and (3) those related to output. (1) Input related parameters as available from our dataset, are about the extent of the use of white collar managerial and supervisory staff, contract labour, use of imported inputs and wage-rates paid to workers; (2) similarly, the capital related parameters are about the 55

extent of land and building assets, capital per unit labour, number of manufacturing units owned by a firm and share of productive non-land assets such as plant and machinery, tools and equipment, ICT capital etc in total assets; and (3) output related parameters are about output per labour, value added per labour, contract work, export orientation of production and sale of others' products. Each parameter represents a scale for technology commitment levels and on one such point of this scale resides the value of the particular dimension of technology of the manufacturing unit/ enterprise under consideration. It is being assumed that since all parameters reflect investment, which is homogeneous and therefore scalar additive, the summation of such values of all the parameters constituting a group, for a manufacturing unit, denotes the unit's technology commitment level for the particular group of technology indicators. Thus each group of technology parameters represents a pillar of technology and the pillar is indexed corresponding to seven levels of technology, namely, very low, low, lower medium, medium, higher medium, high and advanced technologies. Combining the values of all the three pillars, namely input pillar, capital pillar and output pillar, and through simple averaging a consolidated index of technology is formed4. For the consolidated index also the same seven point technology scale is used. These three pillars of technology together with the consolidated index help us to understand the status of the present level of commitment to technology and the degree of technological advancement that has happened in Indian manufacturing over a decadal period. 1. Input Pillar: This index is created taking into account the share of contractual labour, share of employees involved in managerial work and supervision, share of imported input in a factory unit and the wages per employee. For each of these four parameters appropriate scale is set denoting technology levels. A detailed description of the scaling is given below: i. Share of contractual workers: It measures the percentage of total workers employed through contractor, and not directly by the factory. An index denoting technology level is assigned to a range of values. An enterprise with no contractual worker is assigned a value of 7; an enterprise with a share of

56

contractual workers up to 15% is assigned a value of 6, in the range 15-30% is assigned a value of 5, 30-45% a value of 4, 45-60% a value of 3, 60-80% a value of 2 and more than 80% the value of 1. An enterprise with fewer contractual workers is expected to be technologically more advanced than an enterprise with larger number of contractual workers because in general an advanced technology would require machine/process specific skill/ knowledge and hence retained longer-tenured and thus more dedicated skilled workers. Often advanced technology reduces demand for labour hands while however, knowledge-intensity increases and such knowledge/skill are unlikely to be available in a local spot market readily. Shorter job duration or frequent change in job does not allow a worker to accumulate enough work experience or skills. Further, with retained long-term worker an enterprise pays for and most often, higher wages including on social security. In other words, an enterprise commits in general higher investment on regular/permanent worker. Thus higher the level of technology of an enterprise, the higher would be the percentage share of permanent employees. ii. Share of employees involved in managerial work and supervision: It measures the percentage of total employees involved in non-shop floor managerial and supervisory work or the white collar jobs of a factory unit. Different indices are assigned to different range of values in this case as well. Enterprises with a share of white collar employees up to 10% of employees are assigned an index value of 1, with a share of 10-20% a value 2, 20-30% a value 3, 30-40% a value 4, 40-50% a value 5, 50-60% a value 6 and more than 60% a value 7 is assigned. An enterprise using advanced technology is likely to emphasise on design, quality control and maintenance, and marketing and distribution, servicing including provisioning for spare parts of products, accounting and finance, and thus such an enterprise employs more designers, supervisory, managerial and marketing staff. Managerial and supervisory staff are important for coordination and smooth functioning of various departments of the manufacturing unit.

57

iii. Share of imported inputs: It measures the proportion of imported inputs in total inputs used by a factory unit. An enterprise with a share of imported inputs up to 10% is assigned an index value 1, with a share of 10-20% a value 2, 20-30% a value 3, 30-40% a value 4, 40-50% a value 5, 50-60% a value 6 and more than 60% a value 7 is assigned. An enterprise with a higher share of imported input is more likely to produce specialized high quality product by using high technology. iv. Wage per employee: This figure is obtained as the ratio of the total amount of wages paid in an enterprise and the total number of employees in the enterprise in a year. Indices of technology levels are assigned to enterprises corresponding to the different range of values of this parameter. An index 1 for values less than Rs 25000, 2 for values between Rs 25000-50000, 3 for Rs 50000-100000, 4 for Rs 12 lakh, 5 for Rs 2 -5 lakh, 6 for Rs 5 -10 lakh and 7 for values above Rs 10 lakh. A firm which is technologically advanced is likely to employ more skilled people and pay higher wages. Higher wage also reflects higher productivity. Input Pillar: It may be seen the four different parameters indicate technology in different ways and although all the parameters may not be equally important while denoting technology level of different size classes or industry sectors, we have combined them by taking their simple average. Combination of the four parameters, however more accurately captures the technology commitment level in so far as the use of inputs is taken into account. Thus, simple averaging the values of all the four indices for a manufacturing unit would provide the group index for the input technology commitment pillar. For convenience, we set scales from 1 to 7 as follows: average value 1 is very low technology (level 1); average value more than 1 up to 2 is low technology (level 2), more than 2 up to 3 is lower medium technology (level 3), more than 3 up to 4 is medium technology (level 4), more than 4 up to 5 in higher medium technology (level 5), more than 5 up to 6 is high technology (level 6) and above 6 is advanced technology (level 7).

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2. Capital Pillar: This index is created taking into consideration the values of land and building assets of a firm, share of plant & machinery, tools & equipment, ICT capital etc in total asset, number of factory units owned by the firm and capital per unit labour. For each of the four parameters relevant technology scale is assigned. A detailed description of the scaling is as under: i. Land and Building assets of a firm: Possession of high valued land and building assets shows creditworthiness or solvency of the enterprise capable of installing latest machinery and equipment, and investing in R&D activities leading to modernization of technology. Thus larger the value of land and building, the larger is the probability of installing higher technology equipment. Corresponding to different ranges of values of land and building assets unique index numbers have been assigned to denote commitment to the technology level. An index value of 1 is assigned to land and building asset values less than Rs 1 lakh, 2 for values ranging between Rs 1–5 lakh, 3 for values ranging between Rs 5-25 lakh, 4 for values between Rs 25-100 lakh, 5 for values from Rs 1-5 crore, 6 for values between Rs 5-25 crore, and 7 for values exceeding Rs 25 crore. ii. Capital per labour: Value of productive assets, consisting of plant and machinery, tools and equipment, etc, per unit of labour indicates capital intensity, and higher is the capital intensity the higher is the expected level of technology. Higher capital intensity is generally assumed to be associated with higher labour productivity. Index values are assigned corresponding to different ranges of the productive assets per labour. Index value of 1 is assigned for capital labour ratio upto Rs 25000, 2 for Rs 25-50 thousand, 3 for Rs 50-100 thousand, 4 for values ranging between Rs 1-5 lakh, 5 for values between Rs 5-25 lakh, 6 for values between Rs 25-100 lakh and 7 for values greater than Rs 1 crore. Here capital includes all the fixed assets other than land and building. iii. Number of factory units: An enterprise with more than one operating factory units is usually large in size, and cater to several markets and therefore, in Schumpeterian sense of the technology which includes organizational and

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managerial knowledge, such an enterprise is likely to be committed to advanced technology. This might be also due to the fact that such an enterprise uses economy of scale with upgraded technologies and is likely to manufacture better quality and larger quantity or large varieties of products catering to larger markets facing increased competition. Index values corresponding to number of factory units have been created as follows: Index 1 is assigned if number of factory units is 1, index 2, 3, 4, 5, 6 are assigned to firms having 2, 3, 4, 5 and 6 factory units respectively and index 7 is assigned to firms with factory units equal to or greater than 7. iv Share of non-land assets in total assets: The percentage share of non land assets in total assets also proves to be useful in assessing the technological level of a manufacturing unit. Compared to asset category of land and building whose value does not increase owing to labour or technology, other assets like plant and machinery, tool and equipment, ICT capital, and other instruments whose value can be enhanced with intensified labour and technology, the latter group of asset is industrially productive and the technology is embodied in these assets rather than in land and building. Thus a firm with a higher share of non land assets is assumed to be better off technologically than its counterpart. Different index values were assigned to the share of non land assets in total assets. An index value of 1 is assigned for the factory unit/enterprise with a share of non land assets in total assets less than 15%, 2 for the shares between15-30%, 3 for the shares between 30-45% and 4 for with the shares between 45-60%, 5 for the shares between 60-75%, 6 for the shares between 75-90% and 7 for the shares greater than 75%. Capital Pillar: Combining all the four indices into a single index, generates the group index relevant for the capital pillar. Here as in the input pillar, each of the four different parameters indicates technology level in a different way and all the parameters may not be equally important while denoting technology level of manufacturing units belonging to different size classes or industry sectors. But their combination captures the technology level of a manufacturing unit from 60

multiple perspectives of technology commitment as appreciated through use of capital, such as the amount of productive assets like plant and machinery, tools and equipment used by a labour, possession of necessary mortgage-able assets like land and building to buy costly machinery, share of productive assets in total assets, etc. Simply averaging the values of all the four indices for a manufacturing unit would provide the group index necessary for the capital pillar. Similar to input pillar index, we set scales from 1 to 7 for the capital pillar index as follows: average value 1 is very low technology (level 1); average value more than 1 up to 2 is low technology (level 2), more than 2 up to 3 is lower medium technology (level 3), more than 3 up to 4 is medium technology (level 4), more than 4 up to 5 in higher medium technology (level 5), more than 5 up to 6 is high technology (level 6) and above 6 is advanced technology (level 7).

3. Output Pillar: The level of technology used by a factory may be guessed indirectly through the outcome of the technology. Such outcome may be output per labour, value added per labour ratio of the value of goods sold at the same condition as purchased to total output, proportion of output exported, proportion of output produced under contract. Depending on the availability of information in the ASI database, following parameters are selected for the construction of the output pillar: i. Value added per labour: Higher value added per labour reflects higher level of technology commitment, such as investments made on modern machinery with latest technology or capital intensive technology. Index values corresponding to different ranges of VAD/labour are assigned to reflect technology levels as under: For the value added per labour less than Rs 25000 an index of 1 is assigned, for the range Rs 25-50 thousand index of 2 is assigned, for Rs 50-100 thousand index of 3 is assigned, for values ranging between Rs1-5 lakh index of 4 is assigned, for values in the range of Rs 5-25 lakh index of 5 is assigned, for values ranging between Rs 25-100 lakh index 6 is assigned, and an index of 7 for values greater than Rs 1 crore.

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ii. Output per labour: Although this indicator is similar to value added per labour, there is a major difference for the smaller sized producers who operate with less margin but higher turnover. High competition especially from the large producers often compels them to sell their products at lower price and with lower margin of profit. But they survive with larger volume of production relative to their size. In this situation output per labour may be high despite their low value added per labour. Index values corresponding to different ranges of output per labour are assigned in order to reflect technology levels. For the output value per labour less than Rs 25000 an index of 1 is assigned, for the range Rs 25-50 thousand index of 2 is assigned, for Rs 50-100 thousand index of 3 is assigned, for values ranging between Rs1-5 lakh index of 4 is assigned, for values in the range of Rs 5-25 lakh index of 5 is assigned, for values ranging between Rs 25100 lakh index 6 is assigned, and an index of 7 for values greater than Rs 1 crore. iii. Contracting in work/work for others: An enterprise contracting in work from other enterprise probably uses a better technology than its counterpart contracting-out enterprise or from those who are not contracting-in similarly. Possibly an enterprise that regularly generates a good amount of revenue from contracting in manufacturing related activities may have set up specialized and dedicated plant and machinery to meet the quality standard of the buyer enterprise. Higher the percentage share of the revenue generated through contracting in of manufacturing activities to the total revenue, the higher would be the probability of having dedicated and specialized plant & machinery, skilled workforce, advanced process technology and other set up and so the technology level would be high. Different index values were allotted to the different ranges of these percentage shares of revenue. An index of 1 is assigned if the share is upto 5%, 2 is assigned if the share lies between 5 to 15%, 3 between 15-25%, 4 between 25-40%, 5 between 40-60%, 6 between 60-80% and 7 for values exceeding 80%. iv. Value of goods sold in the same condition as purchased: This category of product includes the goods that an enterprise buys from a third party vendor and 62

markets the same together with selling own products. (It also includes some raw materials sold on the same condition as purchased. All sales of a factory can be classified according as to whether the sale is (i) of the product of the factory, (ii) of goods incidental to manufacturing, and (iii) other items not connected with manufacturing. The present parameter will relate sum of the goods of (ii) and (iii) above, which are sold in the same condition as purchased, i.e., without any transformation. It further includes the value of sales of goods normally consumed by the factory when sold as purchased as well as the sale value of goods brought expressly for resale). The reselling is probably done in order to overcome diseconomies of smaller scale transactions of own goods and the enterprise is not in a position to raise own production. An enterprise which holds less share of such goods in total output is probably technology efficient; this is because an enterprise if technologically self-sufficient and advanced would seldom involve in marketing goods manufactured by other. Various index values are allotted to the different ranges of percentage share of this category of goods in total output. An index value of 7 if the share is 0%, 6 if share is up to 10%, 5 for 10-25%, 4 for 2535% , 3 for 35-50%, 2 for 50-75% and 1 for shares exceeding 75%. Output Pillar: Combining all the four indices into a single index generates the group index relevant for the output pillar. Here, as in the previous two cases, four different parameters indicate technology level in different ways from each other and further all the parameters may not be equally important while denoting technology level of manufacturing units belonging to different size classes or industry sectors. But they together capture the technology level of a manufacturing unit from a variety of perspectives of output, such as the amount of output per labour, amount of value added per labour, proportion of contracting in work in relation to total output, or proportion of others' products sold to total own production. Taking average of the values of all the four indices for a manufacturing unit would provide the group index necessary for the output pillar. Similar to the previous two cases, we set scales from 1 to 7 for the output pillar index as follows: average value 1 is very low technology (level 1); average value more than 1 up to 2 is low technology (level 2), more than 2 up to 3 is lower 63

medium technology (level 3), more than 3 up to 4 is medium technology (level 4), more than 4 up to 5 in higher medium technology (level 5), more than 5 up to 6 is high technology (level 6) and above 6 is advanced technology (level 7). Combined Index: After obtaining the indices for input pillar, capital pillar and output pillar for each factory unit a combined index is generated by taking simple average of the index values of the three pillars of technology. The criteria of indexing technology levels is the same as used for the individual pillars: average value 1 is very low technology (level 1); average value more than 1 up to 2 is low technology (level 2), more than 2 up to 3 is lower medium technology (level 3), more than 3 up to 4 is medium technology (level 4), more than 4 up to 5 in higher medium technology (level 5), more than 5 up to 6 is high technology (level 6) and above 6 is advanced technology (level 7).

Estimates of technological change Considering the values of input index one may find that about 92% of the pharmaceutical manufacturing units in 2009-10 used lower medium to higher medium levels of technologies. This number was close to 94% during 1999-2000. However there was a slight increment in the proportion of enterprises using high to advanced technology in 2009-10 as compared to 1999-2000 (Figure 13).This probably happened due to the liberal government policies with reduced regulations with respect to technology import and the dire necessity to produce better quality medicines. It is also evident from the data that the number of pharmaceutical manufacturing units has increased over the decade. Consequently the year 2009-10 witnessed several start ups and ideally it is not possible for the start ups to deploy high end technologies of production within a short span of time after their establishment, due to various challenges these units face particularly, infrastructure, technology, capital and skills. Therefore we see that 3.63% of the units in 2009-10 still depend on the very low to low edge technologies of production in contrast to 2.14% of the units in 1999-2000.

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The output index values suggest that approximately 97% of the medicine manufacturing firms deployed lower medium to higher medium technology of production in 1999-2000 as well as in 2009-10 (Figure 14).The decade appears to have witnessed no perceptible technological innovation. The capital index figures notwithstanding show some kind of technological up gradation as we see a decline in the number of firms using low level of technologies over the decade and also a rise in the fraction of manufacturing units employing higher to advanced technologies of production. The increase in health consciousness among people and the demand for superior quality of medicines have been two of the prime factors that must have instigated the advancement in technology usage. Apart from this, the practice of contract manufacturing that prevails within the pharmaceutical sector plays a significant role in bringing out technology improvement. As an impact of contract manufacturing indigenous manufacturing units gain access to superior techniques of production by signing in contracts with various renowned and established medicine manufacturing MNCs. In turn these indigenous firms help in marketing or carrying out pre-clinical and clinical trial of drugs manufactured by these MNCs. India is considered to be storehouse of highly expertise scientific professionals, this coupled with the cheaply available skilled workers and lower costs of R&D in the country makes India one of prime targets of various global players in the field of pharma. In the course Indian firms land up signing various mutual contracts with these firms and subsequently gain access to advance technology. The practice of importing technology is also highly acclaimed in the pharmaceutical sector of India. To further enhance easy imports of advanced techniques of production GoI has made various amendments in the trade policies with respect to phrama sector and this has definitely been a boosting factor towards advancement of technology usage. The combined index values also illustrate a similar scenario wherein 98% of the manufacturing units mainly use lower medium to higher medium technologies of production. Despite an increase in the number of firms no significant change is marked in technology usage over the decade based on combined index values. Hypothetically it can be said that though some sort of improvement in technology is noticeable in the pharmaceutical sector but the change is not of much significance; paradoxically we also cannot rule out the use of imported technology that is being used in manufacturing of drugs and active pharmaceutical ingredients and might be 65

one of the vital reasons of having a very small fraction of firms that incorporate high and advanced techniques of production.

Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

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Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

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The data involving size and various indices of technology levels depict the fact that the decade 2000-2010 is marked by a fall in the number of micro units whereas there has been an increase in the number of small and medium units of manufacture in the pharmaceuticals sector. The fraction of large manufacturing units has also undergone a significant transition with 38% rise in their count. Three plausible explanation can be given for this pattern of distribution of firms across various size classes-i) The scaling up of micro production units across various pharmaceutical manufacturing sectors to small or medium units which is however unlikely to happen because of the intensified competition and increased cost of production in order to comply with GMP, ii) The closure of few micro units due to one or more of the drawbacks that such units commonly face in our country, and.iii)Rise in the number of large scale manufacturing units due to an upsurge in the demand for good quality drugs and medicines and the various supports obtained due to liberalization of trade, particularly from the GoI in terms of amendments of drug related rules and regulations and allowing FDI. It is quite evident from the data that the micro manufacturing units mainly used lower medium to higher medium level of technology of production. As per the input index values approximately 98% of the micro firms in 1999-2000 and 96% of the firms in 2009-10 depended primarily on medium technology for manufacturing drugs (Figure 17). However it is also noted that around 3.2% of the micro units used very low to low level techniques of manufacturing in 2009-10 and this number was lower in 1999-2000. Possibly the fledgling firms in this sector which apparently could afford only lower edge technologies as these were still in the developing stage constituted this fraction (3.2%) of manufacturing units in 2009-10.It is also noticed that a negligible fraction of micro manufacturing units deploy high to advanced technologies. The capital index figure with respect to the micro manufacturing units suggests that 89-90%of the firms used lower to higher medium technology while around 10% of the firms used low edged technologies of production.

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For the small scale units the majority depended on lower to higher medium techniques. The values ranged between 93-100% during the decade. Supposedly, the small scale pharmaceutical manufacturing units did not make much of an improvement towards technology advancement. The data relevant to the medium sized units illustrate that a major chunk of firms used lower to higher medium level of technology in general. However the statistics with respect to input and output index indicate that there has been a decline in the fraction of medium sized pharmaceutical units which used high end technologies for over the decade from close to 7% in 1999-2000 to 3% in 2009-10 (Figure 17 and Figure 18). The decline in technology levels of production may be due to the loss of market value of the various active pharmaceutical ingredients and drugs leading a decline in the profits earned, which is caused by the availability of alternative high quality products manufactured by the global peers. The data also reveal that the number of large enterprises have increased during the decade. On the whole it can be summarized that most of the pharmaceutical manufacturing industries either rely on lower to higher medium levels of technology. Being quite fragile in nature due to the risks involved and the precautions to be taken during the manufacturing activities and freight in pharmaceutical, most of the capital available is diverted towards achieving a hassle free production and transportation, getting various approvals. Due the heavy peer pressure most of the smaller units and start up may adopt cheap techniques of production with a motive to earn substantial amount of profit. In the course of time such firms fail to address the call for cost effectiveness, time efficient and quality controlled techniques of producing medicines. The limited capital available to these small units and upcoming firms prevents these firms from investing a significant proportion of capital towards research and development limiting their innovativeness.

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Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

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Source: Compiled from ASI 2009-10

Source: Compiled from ASI 2009-10

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Chapter 6: Concluding observations and policy recommendations There has been a sizeable growth of the Indian pharmaceuticals industry over the first decade of this century. This is commensurate with the expanding global trend. Moreover, India enjoyed some favourable situation, particularly reserves of skills and talents and several enterprises eager to take up R&D. The domestic enterprises have proven capability in the innovation, production and marketing of the generics, and partly also of the ayurvedic compositions. Indian market for pharmaceuticals is potentially very large and expanding. The domestic generic manufacturers have established credibility and global competitive footprints especially in the USA, and partly in Japan, Europe, and African and Latin American countries. This attracted multinationals to acquire domestic large firms or collaborate with the domestic firms either through joint venture or through contract manufacturing. Prevalence of the practices of contractual relations (including contract manufacturing) among different size classes of Indian enterprises provided a boost to the MNCs to operate in India. In addition to this, favourable government policies on patents and allowing imports of technology, FDI, and collaboration with MNCs made investment in pharmaceuticals industry quite attractive to the MNCs while challenging the domestic enterprises especially for non-large sizes. Domestic enterprises additionally experienced increasing regulatory pressures during this period. Such regulatory challenges being global in nature were by way of increasing burdens of proving quality at both the manufacturing process and at the product levels, at the level of clinical trials and at the increased burden and cost of data generation on trials as well as on manufacturing. Negative media campaigns added further hurdles to these domestic entities. The MNC large firms were expected to bring in technology led innovation and expertise directly, through business relations and by way of spill over. The common belief and the arguments in favor of M&A, the FDI and the liberalized IPR regime has been that such practices would induce bringing in new technology and the technology-led innovations while also reducing the cost of medicines as well as upgrading quality of produce. In order to comprehend well this study used a very wide measure of technology encompassing the inputs dimension, the capital invested dimension and the output dimension of the pharmaceutical enterprises. Such a measure of 72

technology could capture all sunk-in investments in technology as well as most intangible dimensions including the networked-related dimension of technology. In contrast to the prevailing view that technology and modern managerial capability and innovativeness can be brought in through M&A and the FDI, our estimates of technology levels do not suggest changes in the technology that is more than incremental, at least among the majority of the enterprises. The decade studied here has experienced large scale acquisitions and the entry in several other forms by the non-domestic MNC. The technological progress as measured in terms of sunk-in investments and also in terms of relational contracting or in terms of other embedded and dis-embedded technologies unambiguously establishes that in all sizeclasses of enterprises there has not been nearly any technological progress. Given that acquisitions and the FDI have directly impacted the large-size enterprises the most it is observed that the large enterprises have not progressed technologically at least in any significant manner. This study thus breaks away from the common belief of technological progress brought-in through M&A or FDI. Such enhanced presence of MNCs failed to induce technological progress. Further and since Indian pharmaceutical enterprises are thickly networked with wide prevalence of both contracting-in and contracting-out, any technological progress brought at a large enterprise should get transmitted with ease over to the medium and micro and small enterprises through contractual relations. Such transmission would be in the form of either spill-over or indirectly transmitted. This study indicates that first the large size did not experience technological progress and there has not been any technological spill over or even indirect transmittal through contractual and network relations to the smaller size classes. The literature is replete with positions that spill-over is a major follow-up of FDI, however, this study fails to notice such spill-over. In fact out of all the dimensions of technological changes, the input dimension alone shows little progress. This shows that imported inputs have increased while failing to enhance the process and other production technologies as well as the outputs dimension of technology including the exports in any significant manner. The status of technology in Indian manufacturing is most often lower than ‘high’ technology and definitely lower than ‘advanced’ technology. The micro units often have low end technologies. 73

Some of the small, most of the medium and large enterprises use technologies primitive in vantages to the high and advanced. Overall, and despite the fact that Indian enterprises have proved to be globally competitive and that they are capable of delivering lowest-cost medicines the general states of technological affairs indicate that technological investments are very low. Considering the current technology usage trend in the pharmaceutical manufacturing it is quite evident that this sector requires to invest significant proportion of their resources as well as institutional resources towards developing high end techniques of production. The existing policy regime did not help induce deepening and advancement of technology through joint ventures and collaborations and import of technology as well as the knowledge related to the use of updated techniques of production. Further, in contrast to policies based upon endogeneity of technological progress what this study observed that Indian pharmaceutical enterprises are less restricted within the boundaries of firm and are thus less endogenous and these enterprises are contractually and in terms of exchange of resources very thickly connected and dependent. Hence Indian policy must take advantage of such networked relatedness towards bolstering the technological and innovative capabilities. A corollary of missing endogeneity is that firm-targeted policies would not bring in effects that might have been observed in countries with endogenous firms enjoying strong boundary. Public policy for Indian pharmaceuticals manufacturing should target a group of enterprises comprising of multiple size-classes but are thickly networked and spatially well distributed beyond the standard boundaries of a physical cluster. Strengthening large enterprises technologically can be an attractive policy because the thriving contractual relations if supported by supportive policies can ensure a systemic change. Such a policy approach thus needs to take care of strengthening the large while also supporting ease of flow of technology and other resources across contractual networks. The public policy has to ensure easier access to capital and technology to the large firms and through them to the smaller firms and reduce hindrance to contract manufacturing. The large enterprises do not need credit alone. Flow of fruits from publicly supported R&D and availability of trained human resources, as well facilities for clinical trials, and infrastructural support to establish domestic and global

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footprints will help establish a handful of strong large firms each leading a pack of medium, small and micro enterprises. Finally quality regulations have to be managed strategically and globally through an active policy. The arguments in favor of domestic manufacturers must include the cost of healthcare access, equity and health for all as well as dependability and reliability of therapeutics.

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and

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9. Pricewatercoopers(2010),” Global pharma looks to India: Prospects for Growth”, Asia pacific news letter,Issue 3 10. Pricewatercoopers(2010),” Innovation:Chaniging the MSME landscape”, Confederation of Indian Industries-Pricewater copper’s Publication 2010 11 .Bhavini lad B.et al.(2012),” Contract manufacturing a new era in pharmaceutical manufacturing”, International journal of pharmaceutical development and technology Vol2(2),93-95 12.” Gujrat Pharma Industry striding into future(2008) “Report submitted by KPMG 13.”Indian states economy and Buisness-Andhra Pradesh”,report by Indian brand equity foundation 14. Jaya prakash pradhan(2006),”Global competitiveness of Indian Pharmaceutical industry:Trends and Strategies”,working paper submitted to Institute for Studies in Industrial Development 15. Pradip Kumar Biswas and Parthasarathi Benerjee (2014) “Analysis of MSME Sector: Opportunity, Policy Gaps and Action”, CSIR-NISTADS, New Delhi.

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