The Indian pharmaceutical industry is intensifying the value chain, marking a forward shift from the primary-reverse engineering industry limited to serve the domestic market. This has seen the industry embrace research driven operations, export-oriented to increase its global presence, alongside the provision of a broader portfolio of value added products and services. Besides, improving the quality of delivery of the latter constitutes a primary concern in the change. In light of this, the industry relies on the vital role played by supportive government policies in the reconstruction of the future reflection of the pharmaceutical industry. In particular, the emphasis of patenting the products, effected in January 2005, sets the entire industry on a path likely to transpire into long term growth.
The value growth rate of the entire industry has suffered in the past owing to a multi-fold of destructive factors. These factors include the widespread penetration of generic products, fierce competition, and a prolonged period of a fragmented industry. As a result, the domestic market has suffered a retrogressive phase to the contrary of growing pharmaceutical market in other emerging economies. For this reason, all pharmaceutical organizations have decided to unanimously incorporate a fundamental base of innovations, value added delivery and primary management over their product-life cycles. This is in an effort to serve an enlarged market reach.
The Indian pharmaceutical business marks an emerging sector that traces its growth from a diversified model of drugs and a broader export portfolio. In addition, the pharmaceutical market accounts for 10% consumption of drugs, compared to the international drug market. Essentially, the sector witnesses a growth in both domestic and international demands as reflected in its sound performance in the region. Equally, there are several factors accounting for the robust performance, including the ageing population, awareness of hygiene factors, growth in income, and campaigning towards wellness. Similarly, knowledge for healthier living amongst citizens,increased healthcare facilities and government incentives in pharmaceutical research, propel the sector to its remarkable performance. For example, the unveiling of the Pharma Vision 2020 by the Indian government places the sector on the track assuming the global leadership end-to-end manufacturing of pharmaceutical products.
How might (a) U.S. pharmaceutical companies and (b) U.S. consumers benefit from the rise of the Indian pharmaceutical industry?
The conclusion of this case obligates the initiating a brief description the Indian pharmaceutical industry, to reveal the journey towards its recent years of growth. Initially,the pharmaceutical industry was known for replicating most of the patented products from the Western and Japanese organizations. This regime arose prior to the signing an agreement with the World Trade Organization(WTO). In this regard, the Indian companies remained dependent on selling generic pharmaceuticals at a low cost. The aforesaid practice arose in the U.S. only , amongst the developed markets.However, the signing of the agreement with the WTO in 2005,drew the Indian industry into complete compliance of protecting the intellectual property rights (Hill, 2013).
While serving as the international arbitrator for trade-related transactions, the WTO has a global recognition for guiding agreements and transactions amongst nations. This reveals in the universal ratification by parliaments to honor negotiations signed by the international trading partners. The primary objective of the WTOentails assisting exporting manufacturers and importers to embrace fair and just operations, thus allowing them derive higher profits as repatriations. This draws it to perform an essential function of facilitating a free, smooth, transparent and flexible trading system. It is important to highlight that decisions taken on any matter by the WTO are not based on an individual country, but rather on a consensus reached by all member nations.However, each nation requires its parliament to ratify the treaty. Consequently, the WTO facilitates a negotiation forum where member countries settle their trade concerns.
As a confirmation that the WTO emerged from earlier inter-nations negotiations, India retracted manufacturing counterfeit products upon signing the agreement. This enabled the creation of a stronger partnership between the Indian firms and their Western counterparts. Secondly, the Western companies have been increasingly outsourcing manufacturing and packaging activities to India, while scaling back some of these activities at home. Equally, others opt to have their plants in places such as Puerto Rico, which historically has been a major manufacturing hub for firms serving the U.S. market (Hill, 2013). By outsourcing the packaging and manufacturing of pharmaceuticals, the United States benefits from India’s history with the generic drug business. Before the signing of the WTO agreement, India was only able to produce and sell generic pharmaceuticals, thus giving India a competitive advantage. The advantage emerged fromthe abundance of experience and competencies, easily leaving India as a global expert in the generic drug business. Outsourcing to India enables the United States to reduce the cost structure, and general pricing for the pharmaceuticals. The former offers the U.S. firms a cheaper manufacturing destination owing to lower labor costs, which in the process increases employment opportunitiesin India.
The U.S. placed two offices in India to oversee the compliance of Food and Drug Administration (FDA) standards. The FDA is responsible for protecting the public health by assuring safety, and quality of drugs, vaccines and other products. Nine hundred plants were placed in India in order to produce pharmaceuticals for the U.S. market. The compliance transpires into more consumer benefits, comprising lower pharmaceutical prices, lower insurance costs, smaller companies pay, lower out of the pocket expenses than domestically manufactured goods.
Furthermore, the pharmaceutical market has grown to manifolds under one roof. The reconstruction allows easier coordination across all the verticals important for global market segmentation while accommodating value-added sales and marketing too. Pharmaceutical companies have also opted for value chain segmentation with their operations spanning to several countries to increase their global presence. Likewise, the emergence of bio-technology and research and development, has risen in the off shoring pharmaceutical market segment, which has eventually benefited US consumers and Tax Payers. Considering that meeting the medical cost translates to higher expenses in the US, India firms exporting to the country has helped reduce the cost burden. It implies that declining prices for the drugs,leave the Americans with more disposable income to spend on other goods. Finally, this leads to a simultaneous increase in export income in India that allow the citizens purchase more imports from the United States. This trend generates additional employment vacancies for the Americans.
Who might have lost out as a result of the recent rise of the Indian pharmaceutical industry?
After India signed the WTO agreement, partnerships arose in the U.S. While the U.S. outsourced packaging and services to India, the country cut back on some activities in places such as Puerto Rico. Puerto Rico certainly lost its advantage to partner with the U.S. solely on the pharmaceutical distribution or services. As the FDA issued approvals to produce drugs for sale in the United States, India witnessed the addition of more plants. In addition, it gave validity to the Indian companies that lacked in China, though considered a rival in the pharmaceutical industry.
As the U.S. outsourced manufacturing and services to India, manufacturing employment fell five percent between 2008 and 2010.
Do the benefits from trade with the Indian pharmaceutical sector outweigh the losses?
A Large market capitalization, the pharmaceutical industry is also one of the most profitable within the sector, and within all economy industries. In the US, the Pharmaceutical industry has a return on equity of 15.8%. This figure is extremely attractive for investors and companies looking to enter the pharmaceutical market, although, this is not easily accomplished. In addition, the US Pharmaceutical industry has a net profit margin of 16.7, one the most attractive within all industry sectors. These high profitability figures are just an overview of the industry, and should not be taken into account just by themselves. The pharmaceutical industry, although extremely profitable, also requires extremely high investments and carries a high operation cost. In addition, although the cost of entering the market might not be high if you have a patent or a similar competitive advantage, it is usually practically impossible for firms to exit, since it is a very specialized industry.
It has been estimated, the number of companies operating within the industry has been constantly increasing, as well as the number of employees working within the industry. This constant growth has contributed to make the pharmaceutical industry more and more competitive, forcing the companies. To underline the constant growth trend and revenue potential that the industry has the revenue graph shows a constant annual increase in revenues despite the adverse economic conditions, increased competition and strict regulatory laws being approved. In the period of 10 years, from year 2000 to year 2010, the pharmaceutical industry revenues almost tripled, the same as the number of companies operating within the industry, which grew from less than 700 to more than 2,000 in the space of ten years.
The US pharmaceutical market represents opportunities for almost all members of the industry. Total US pharmaceutical sales reached almost US $329bn in 2010, over three times the size of its nearest rival. The US boasts the largest individual markets across the three core subsectors, which will be analyzed later on. These subsectors are the patented, generic and over-the-counter (India is the generator of drugs but not regarded as the innovator and due to cheap labor and raw materials availability several pharmaceutical companies have noted their center in India. With this aspect India has not got the status to export to original innovator. While indulging into global trade of pharmaceutical sector thus the company is not allowed to export its drugs to participating nations. Before any of the drugs in these subsectors can be marketed to the consumer, first they must be approved by the FDA, the Food and Drug Administration. The US FDA is widely regarded as one of the most developed regulatory agencies in the world. As a result of this, US FDA product appraisals are used as a benchmark in many foreign countries, meaning that success in the US can have major repercussions on a product’s commercial viability anywhere else.
Although the FDA is known for some of its strict criteria one of the US’s almost unique advantages, that competitors elsewhere are not allowed to do, is the allowance of direct-to-consumer advertising for prescription drugs. This, as mentioned before, has resulted in marketing becoming an even more crucial tool in the US, with vast budgets used to influence consumers. Another key issue that has strong influence on the sector is politics. In light of President Obama’s healthcare reform efforts, the US operating environment is undergoing considerable change. New policies on topics such as biosimilars, generic drugs and universal healthcare will have a major effect on the future of the US drug industry.
Another way to demonstrate the vast scale of the US market is to calculate the value of its state level pharmaceutical markets. Using personal income data from the Bureau of Economic Analysis, a report from Business Monitor International compared several US states with their equivalents in medicine consumption applied to other countries. For example, the state of Florida (US $19.27bn) consumes a similar value of medicines to Brazil (US $20.95bn). This can also be seen in comparisons between Russia (US $17.92bn) and Illinois (US $14.45bn), India (US $13.37bn) and Pennsylvania (US $13.64bn), and Mexico (US $11.74bn) and New Jersey (US $11.65bn). This report gives a good idea of the scale and potential of the US market in the bio-pharmaceutical field.
What international trade theory (or theories) best explain the rise of India as a major exporter of pharmaceuticals?
India certainly had an absolute advantage over competitive countries producing generic type drugs. India had experienced the production of generic drugs for so long; the country was an expert in the generic drug business. Absolute advantage is the production of a product when it is more efficient than any other country to produce it. The book details the that countries should specialize in the production of goods for which they have an absolute advantage and then trade these goods for those produced by other countries, according to Adam Smith (Hill,2010).
The Heckscher-Ohlin Theory suggest comparative advantage arises from the difference in national factor endowments; meaning the extent to which a country may be endowed with resources such as land, labor, and capital. India included a much lower cost within the production and packaging of drugs, therefore displayed a national factor endowment pertaining to labor. The United Sates, which lacks plentiful low-cost labor, has been main importer of goods and services.
The Product Lift-Cycle Theory was proposed by Ramond Vernon who argued that just because a new developed product is first sold in the United States market does not mean the product must have been produced by the U.S. The new product introduced could have been produced in another country at a low-cost location and then exported back into the United States for sale.
Understanding the mission is a general reason why businesses exist in any region. There are many reasons to create a global business relationship with India. The objective to conduct business in India is to save cost through outsourcing. The outsourcing activities include information technology services, business process outsourcing, back office operations, medical transcription, web development services, and infrastructure. Outsourcing in India is maturing and companies are seeking the advantages. The advantages of outsourcing include India’s manpower, education system, and government policies. India produces talented students that proficient in all disciplines including file management systems and system software.The availability of technically trained and skilled manpower in India is making companies across the world look at the country as a profitable base to shift their high-end support services. Software experts in India are equipped to make the most of international scenarios because of their command over quantitative concepts along with understanding how to communicate in various situations. India also has manpower that allows companies to outsource specialized talent in specific areas. The government of India has taken steps to support the growth of outsourcing sector by given global companies’ incentives by doing business in the country.
Conducting business in India through outsourcing provide companies cost-effective services, increased efficiency, increased productivity, shared risks, reduced operating cost, increased quality, better services, and time for organizations to focus on other core competencies. The reason why global organization outsources is to potentially cut operations. Outsourcing companies in India use the latest in software, technology, and infrastructure to provide global customers with high-quality outsourcing solutions. Outsourcing in India help global organizations achieve its mission which consist of providing customer satisfaction and creating wealth.
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