Abstract
This paper attempts to analyse the competitiveness of Indian drug and pharmaceutical industry in the domestic market where multinational pharma companies are entering and expanding in a big way, especially after enforcement of product patent regime in 2005. The study applied data envelopment analysis model to estimate relative efficiency and productivity changes in 141 Indian pharmaceutical firms during 2000–2001 to 2012–2013 which encompass pre- and post-product patent regimes. The present study found negative impact of Product Patent Act on the efficiency scores. The technological change factor is found to have played positive role in the growth of productivity, whereas technical efficiency change depicts the judicious utilization of input resources for improving performance. A sensitivity analysis with the inclusion of R&D expenditure in input variables, confirmed the validity of our selected variables. It found marginal bearing of new patent regime on the efficiency of R&D active firms, though it was found to have significantly impacted efficiency scores of large firms, R&D intensive firms, and group-owned firms. The study reported that large size, R&D intensive, private-foreign owned and those engaged in drug formulations exhibit better performance. Further, it is found that ownership, capital imports intensity and size have a positive and significant relationship with efficiency scores, whereas the age, time dummy and size square variables are inversely related. The results suggest that Indian firms need substantive improvements in efficiency by adopting best managerial practices, ensuring optimum utilization of resources, and investing significantly in the technology and products innovation.
Similar content being viewed by others
Notes
Generic drugs: Copies of off-patent brand-name drugs that come in the same dosage, safety, strength, and quality and for the same intended use. These drugs have received market approval based on proof of bio-equivalence to the originator’s product (Grace 2004).
According to this agreement, all the member countries had to grant 20-year patents on pharmaceutical products since January 1, 2005. This new product patent regime, outlawed the generic production of new patented medicines. It provided the freedom that all the approved generic drugs of India could still be sold in the market, after paying for the license fees. Under this Act, generic manufacturer after paying a reasonable royalty can apply to copy a patented drug, but only after it has been marketed for 3 years (Dhar and Gopakumar 2011).
DMUs are usually defined as entities responsible for turning input(s) into output(s), such as firms and production units. In the present study, DMUs refer to the Indian pharmaceutical firms.
Other popular techniques for measuring relative efficiency of DMUs are Stochastic Frontier Analysis (SFA), Thick Frontier Analysis (TFA), Distribution Free Approach (DFA) and Free Disposal Hull (FDH).
Koopmans (1951; p. 60) defined technical efficiency as ‘an input–output vector is technically efficient if, and only if, increasing any output or decreasing any input is possible only by decreasing some other output or increasing some other input’. This definition in economics is treated as a Pareto–Koopmans condition of technical efficiency.
Estimation of cross-period efficiency scores under a VRS technology may result in linear programming infeasibilities for some observations (Ray and Mukherjee 1996).
There are two orientations of DEA models viz., input-orientation and outputorientation. In an input-orientated model (input minimization), desired output is produced with minimum inputs. This model is preferred when inputs are more flexible than output. On the other hand, in an output-orientated model (output maximization), efforts are made to maximize the output with input level held fixed. The choice of orientation depends on the available flexibility either with the inputs or outputs (Coelli et al. 2005; Ramanathan 2003).
Prowess of CMIE provides data on a large number of manufacturing firms, including pharmaceutical ones. It is an online database provided by the CMIE and covers financial data for over 23,000 companies operating in India. Most of the companies covered in the database are listed on stock exchanges, and the financial data include all those information that operating companies require to disclose in their annual reports.
The figures have been arrived at by taking the ratio of the output manufacturing by the registered Indian pharmaceutical companies (provided by the CMIE Prowess database) to the total value of output produced by the sector (provided by the Department of Chemicals & Petrochemicals, Ministry of Chemicals & Fertilisers).
These results are not reported here to conserve the space however will be made available on a request.
PI firms having more than 0.90 mean PTE scores are: Ankur Drugs & Pharma Ltd., Divi'S Laboratories Ltd., Anuh Pharma Ltd., Hetero Drugs Ltd.and Arvind Remedies Ltd. PF category includes Novartis India Ltd., Martin & Harris Lab. Ltd., Merck Ltd. and Wyeth Ltd. In GO category, firms such as Elder Health Care Ltd., Aurubindo Pharma Ltd., Cipla Ltd., Ranbaxy Lab. Ltd. and Glaxosmithkline Pharma Ltd. have more than 0.95 mean efficiency scores.
Drug manufacturing in India has two important vertically linked processes: (1) production of bulk drug; and (2) the production of formulation. The Bulk drug production is essentially the production of the raw materials or active pharmaceutical ingredients (API) for drugs, whereas formulations are end-products of the medicine manufacturing process, and can take the form of tablets, capsules, injectables or syrups, and can be administered directly to patients (Greene 2007).
Most of the bulk drugs are imported from China due to cost advantage. The significant dependence of India on China is found to be in case of 12 essential drugs namely; Paracetamol, Metformin, Ranitidine, Amoxicillin, Ciprofloxacin, Cefixime, Acetyl salicylic acid, Ascorbic acid, Ofloxacin, Ibuprofen, Metronidazole and Ampicillin. The phenomenal growth of China as a bulk producer has already led to closer of many companies in India (Kallummal and Bugalya 2012).
The advantage of panel data is its ability to account for the unobservable firm-specific individual effects, like managerial skill, firm-specific capabilities and others. Not accounting for the firm-specific individual effects can actually lead to bias in the resulting estimates (see Baltagi 2005).
X-inefficiency was introduced by Leibenstein (1966). It is the difference between efficient behavior of businesses assumed or implied by economic theory and their observed behavior in practice caused by a lack of competitive pressure. The sources of X-inefficiency have been ascribed to things such as over-investment and empire building by managers, lack of motivation stemming from a lack of competition, and pressure by labor unionsto pay above-market wages.
References
Abrol D (2004) Post-TRIPs technological behaviour of the pharmaceutical industry in India. Sci Technol Soc 9(2):243–271
Aitken BJ, Harrison AE (1999) Do domestic firms benefit from direct foreign investment? evidence from Venezuela. Am Econ Rev 89(3):605–618
Arrow K (1962) The economic implications of learning-by-doing. Rev Econ Stud 29(3):155–173
Avkiran NK (2006) Productivity analysis in the services sector with data envelopment analysis, 3rd edn. University of Queensland Business School, The University of Queensland, Brisbane
Balk BM (2001) Scale efficiency and productivity change. J Prod Anal 15(3):159–183
Baltagi BH (2005) Econometric analysis of panel data, 3rd edn. Wiley, England
Banker RD, Natarajan R (2008) Evaluating contextual variables affecting productivity using data envelopment analysis. Oper Res 56(1):48–58
Banker RD, Charnes A, Cooper WW (1984) Some models for the estimation of technical and scale inefficiencies in data envelopment analysis. Manag Sci 30(9):1078–1092
Bas M, Berthou A (2012) The decision to import capital goods in India: firms’ financial factors matter. World Bank Econ Rev 26(3):486–513
Caves RE (1982) Multinational enterprise and economic analysis. Cambridge University Press, Cambridge
Chadha A (2009) TRIPs and patenting activity: evidence from the Indian pharmaceutical industry. Econ Model 26(2):499–505
Charnes A, Cooper WW, Rhodes E (1978) Measuring the efficiency of decision making units. Eur J Oper Res 2(6):429–441
Chaturvedi K, Chataway J (2006) Strategic integration of knowledge in Indian pharmaceutical firms: creating competencies for innovation. Int J Bus Innvov Res 1(1):27–50
Chaudhuri S (2005) The WTO and India’s pharmaceuticals industry. Oxford University Press, New Delhi
Chaudhuri K, Das S (2006) WTO, the TRIPS and Indian pharmaceutical industry. J Quant Econ 4(1):97–110
Chen TY, Yeh TL (1999) Technical and scale efficiency in Taiwan’s banks. Asia Pac J Finance 2(2):191–205
CII-PwC (2013) India PharmaInc. Changing landscape of the Indian pharma industry, Pharma Summit 2013. http://www.pwc.in/assets/pdfs/publications/2013/changing-landscape-of-the-indian-pharma-industry.pdf. Accessed 26 June 2015
Coelli TJ, Rao DSP, O’Donnell CJ, Battese GE (2005) An introduction to efficiency and productivity analysis. Springer, Berlin
Cohen WM, Levinthal DA (1989) Innovation and learning: the two faces of R&D. Econ J 99(397):569–596
Cooper WW, Seiford LM, Tone K (2000) Data envelopment analysis: a comprehensive text with models, applications, references and DEA-solver software. Kluwer Academic Publishers, Boston
Dhar B, Gopakumar KM (2011) Effect of product patents on Indian pharmaceutical industry. Center for WTO Studies. http://wtocentre.iift.ac.in/papers/3.pdf. Accessed 5 Jan 2017
Djankov S, Peter M (2002) Enterprise restructuring in transition: a quantitative survey. J Econ Lit 40(3):739–792
Epifani P (2003) Trade liberalization, firm performance and labor market outcomes in the developing: world what can we learn from micro-level data. Working paper, University of Parma and CESPRI-Bocconi University
Färe R, Grosskopf S, Lindgren B, Roos P (1992) Productivity changes in Swedish pharamacies 1980–1989: a non-parametric Malmquist approach. In: Gulledge TR, Lovell CAK (eds) International applications of productivity and efficiency analysis. Springer, Dordrecht
Färe R, Grosskopf S, Norris M, Zhang Z (1994) Productivity growth, technical progress, and efficiency change in industrialized countries. Am Econ Rev 84(1):66–83
Färe R, Grosskopf S, Roos P (1995) Productivity and quality changes in Swedish pharmacies. Int J Prod Econ 39(1):137–147
Feinberg SE, Majumdar SK (2001) Technology spillovers from foreign direct investment in the Indian pharmaceutical industry. J Int Bus Stud 32(3):421–437
Gascón F, Lozano J, Ponte B, De la Fuente D (2017) Measuring the efficiency of large pharmaceutical companies: an industry analysis. Eur J Health Econ 18(5):587–608
Ghose A, Chakraborty C (2012) Total factor productivity growth in pharmaceutical industry: a look using modern time series approach with Indian data. J Ind Stat 1(2):250–268
Goldar et al (2010) Effects of new patents regime on consumers and producers of drugs/medicines in India, report submitted to UNCTAD. Institute of Economic Growth, New Delhi, August
Gonzalez E, Gascon F (2004) Sources of productivity growth in the Spanish pharmaceutical industry (1994–2000). Res Policy 33(5):735–745
Government of India (2014) Annual report. Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, New Delhi
Grace C (2004) The effect of changing intellectual property on pharmaceutical industry prospects in India and China. DFID Health Systems Resource Centre, London, pp 1–68
Greene W (2007) The emergence of India’s pharmaceutical industry and implications for the U.S. generic drug market. office of economics working paper, no. 2007-05-A, U.S., International Trade Commission, Washington
Grifell-Tatjé E, Lovell CK (1999) A generalized Malmquist productivity index. Top 7(1):81–101
Griliches Z (1980) Returns to research and development in the private sector. In: Kendrick JW, Beatrice V (eds) New developments in productivity measurement and analysis. University of Chicago Press, Chicago
Hashimoto A, Haneda S (2008) Measuring the change in R&D efficiency of the Japanese pharmaceutical industry. Res Policy 37(10):1829–1836. http://www.elsi-project.eu/fileadmin/user_upload/elsi/brosch%C3%BCren/DD/Chinas_Pharma_Industry_-_KPMG_2011__REPORT_.pdf. Accessed 15 Dec 2017
ICRA (2012) Indian pharmaceutical sector. http://icra.in/Files/ticker/Indian%20Pharmaceutical%20Sector.pdf. Accessed 10 July 2015
IMAP Industry Report (2015) Global M&A report pharma/biotech 2015. http://www.imap.com/Reports/IMAP%20Pharma%202015.pdf. Accessed 24 Dec 2017
Jha R (2007) Options for Indian pharmaceutical industry in the changing environment. Econ Polit Wkly 42(39):3958–3967
Jovanovic B (1982) Selection and the evolution of industry. Econometrica 50:649–670
Kallummal M, Bugalya K (2012) Trends in India’s trade in pharmaceutical sector: some insights. CWS/WP/200/2, draft report of Centre for WTO Studies, Indian Institute of Foreign Trade, New Delhi
Katayama H, Lu S, Tybout JR (2009) Firm-level productivity studies: illusions and a solution. Int J Ind Organ 27(3):403–413
Klette TJ, Griliches Z (1996) The inconsistency of common scale estimators when output prices are unobserved and engogenous. NBER working papers 4026. National Bureau of Economic Research, Cambridge, MA
Koopmans TC (1951) An analysis of production as an efficient combination of activities. In: Koopmans TC (ed) Activity analysis of production and allocation. Wiley, New York
KPMG Report (2011) China’s pharmaceutical industry-poised for the giant leap. https://www.elsi-project.eu/fileadmin/user_upload/elsi/brosch%C3%BCren/DD/Chinas_Pharma_Industry_-_KPMG_2011__REPORT_.pdf. Accessed 18 Aug 2016
Lanjouw J (1998) The introduction of pharmaceutical product patents in India: heartless exploitation of the poor and suffering? Working paper no. 6366. National Bureau of Economic Research, Cambridge
Leibenstein H (1966) Allocative efficiency vs. Xefficiency. Am Econ Rev 56(3):392–415
Liebler WJ (1976) Impact of public policy on drug innovation and pricing. Public policy research in the drug industry. American Enterprise Institute, Washington
Lothgren M, Tambour M (1999) Productivity and customer satisfaction in Swedish pharmacies: a DEA network model. Eur J Oper Res 115(3):449–458
Lovell CAK (2003) The decomposition of Malmquist productivity indexes. J Prod Anal 20:437–458
Mahajan V, Nauriyal DK, Singh SP (2014) Technical efficiency of Indian drug and pharmaceutical industry: a non-parametric approach. Benchmarking Int J 21(5):734–755
Mahajan V, Nauriyal DK, Singh SP (2015) Efficiency trends in the Indian pharmaceutical industry in the new patent regime. Int J Bus Perform Manag 16(4):389–406
Majumdar SK (1994) Assessing firms’ capabilities: theory and measurement: a study of Indian pharmaceutical industry. Econ Polit Wkly 29(22):M83–M89
Malmquist S (1953) Index numbers and indifference surfaces. Trabajos de Estadistica y de InvestigacionOperativa 4(2):209–242
Mao Y, Li J, Liu Y (2014) Evaluating business performance of China’s pharmaceutical companies based on data envelopment analysis. Stud Ethno Med 8:51–60
Mazumdar M, Rajeev M (2009) Comparing the efficiency and productivity of the Indian pharmaceutical firms: a Malmquist-meta-frontier approach. Int J Bus Econ 8(2):159–181
Mazumdar M, Rajeev M (2012) Sources of heterogeneity in the efficiency of Indian pharmaceutical firms. Indian Econ Rev 47(2):191–221
Mazumdar M, Rajeev M, Ray SC (2009) Output and input efficiency of manufacturing firms in India: a case of the Indian pharmaceutical sector. Working paper 219, The Institute for Social and Economic Change, Bangalore
McDonald J (2009) Using least squares and tobit in second stage DEA efficiency analyses. Eur J Oper Res 197(2):792–798
Mostafa M (2007) Benchmarking top Arab bank’s efficiency through efficient frontier analysis. Ind Manag Data Syst 107(6):802–823
Nauriyal DK (2006) TRIPS-compliant new patents act and Indian pharmaceutical sector: directions in strategy and R&D. Indian J Econ Bus 22:1–18
Nauriyal DK, Sahoo D (2008) The new IPR regime and Indian drug and pharmaceutical industry: an empirical analysis. In: Paper presented at 3rd annual conference of the EPIP association, Bern, Switzerland, Gurten Park/October 3–4, 2008
Neogi C, Kamiike A, Sato T (2012) Identification of factors behind performance of pharmaceutical industries in India. Discussion paper series, Kobe University, Japan
O’Mahony M, Vecchi M (2009) R&D, knowledge spillovers and company productivity performance. Res Policy 38(1):35–44
Pannu HS, Dinesh Kumar U, Farooquie JA (2011) Efficiency and productivity analysis of Indian pharmaceutical industry using data envelopment analysis. Int J Oper Res 10(1):121–136
Pastor JT, Lovell CK (2005) A global Malmquist productivity index. Econ Lett 88(2):266–271
Pastor JT, Asmild M, Lovell CK (2011) The biennial Malmquist productivity change index. Socio Econ Plan Sci 45(1):10–15
Pattnayak SS, Chadha A (2013) Technical efficiency of Indian pharmaceutical firms: a stochastic frontier function approach. Productivity 54(1):54
Perlitz U, Just T, Ebling M, Walter N (2008) India’s pharmaceutical industry on course for globalisation. Deutche Bank Research: Asia Current Issues, London
Pradhan JP (2004) FDI spillovers and local productivity growth: evidence from Indian pharmaceutical industry. Artha Vijnana XLIV(3–4):317–332
Pradhan JP (2010) Strategic asset-seeking activities of emerging multinationals: perspectives on foreign acquisitions by Indian pharmaceutical MNEs. Org Mark Emerg Econ 1(2):9–31
Rai RK (2008) Battling with TRIPS: emerging firm strategies of Indian pharmaceutical industry post-TRIPS. J Intellect Prop Rights 13:301–317
Ramanathan R (2003) An introduction to data envelopment analysis: a tool for performance measurement. Sage Publishing, New Delhi
Ramcharran H (2011) The pharmaceutical industry of Puerto Rico: ramifications of global competition. J Policy Model 33(3):395–406
Rao PM (2008) The emergence of the pharmaceutical industry in the developing world and its implications for multinational enterprise strategies. Int Journal of Pharm Healthc Mark 2(2):103–116
Ray SC (1991) Resource-use efficiency in public schools: a study of Connecticut data. Manag Sci 37(12):1620–1628
Ray SC (2004) Data envelopment analysis: theory and techniques for economics and operations research. Cambridge University Press, Cambridge
Ray SC, Mukherjee K (1996) Decomposition of the Fisher ideal index of productivity: a non-parametric dual analysis of US airlines data. Econ J 106(439):1659–1678
Ray SC, Desli E (1997) Productivity growth, technical progress, and efficiency change in industrialized countries: comment. Am Econ Rev 87(5):1033–1039
Saranga H (2007) Multiple objective data envelopment analysis as applied to the Indian pharmaceutical industry. J Oper Res Soc 58(11):1480–1493
Saranga H, Banker RD (2010) Productivity and technical changes in the Indian pharmaceutical industry. J Oper Res Soc 61(12):1777–1788
Saranga H, Phani BV (2009) Determinants of operational efficiencies in the Indian pharmaceutical industry. Int Trans Oper Res 16(1):109–130
Sharma C (2012) R&D and firm performance: evidence from the Indian pharmaceutical industry. J Asia Pac Econ 17(2):332–342
Sharma C (2016) R&D, technology transfer and productivity in the Indian pharmaceutical industry. Int J Innov Manag 20(01):1650010
Sharma A, Dadwal SS, Singh PK (2010) Mergers and acquisitions in Indian pharmaceutical industry. Indian Manag Thought Pract 180:180–195
Shinnawy AE (2010) Trends of total factor productivity in Egypt’s pharmaceutical industry: evidence from the nonparametric Malmquist index approach. Working paper 524, Economic Research Forum
Shrivastava N, Sharma S, Chauhan K (2012) Efficiency assessment and benchmarking of thermal power plants in India. Energy Policy 40(1):159–176
Simar L, Wilson PW (1998) Productivity growth in industrialized countries. Working paper, Department of Economics, University of Texas, Austin, TX 78712, USA
Simar L, Wilson PW (2007) Estimation and inference in two-stage semi-parametric models of production processes. J Econ 136(1):31–64
Singh J, Singh P (2014) Decomposition of technical efficiency and productivity growth in Indian pharmaceutical industry: a non-parametric analysis. Artha Vijnana 56(4):456–478
Solow RM (1957) Technical change and the aggregate production function. Rev Econ Stat 39(3):312–320
Tripathy IG, Yadav SS, Sharma S (2013) Efficiency and productivity in the process and product patent regimes: empirical evidence from the Indian pharmaceutical industry. Int J Econ Bus Res 6(1):1–19
Tyagi S, Mahajan V, Nauriyal DK (2014) Innovations in Indian drug and pharmaceutical industry: have they impacted exports? J Intellect Prop Rights 19:243–252
Tyagi S, Nauriyal DK, Gulati R (2016) Firm level R&D intensity: evidence from Indian drugs and pharmaceutical industry. Rev Manag Sci. https://doi.org/10.1007/s11846-016-0218-8
Tybout JR (2000) Manufacturing firms in developing countries: how well do they do, and why? J Econ Lit 38(1):11–44
You T, Chen X, Holder ME (2010) Efficiency and its determinants in pharmaceutical industries: ownership, R&D and scale economy. Appl Econ 42:2217–2241
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Mahajan, V., Nauriyal, D.K. & Singh, S.P. Domestic market competitiveness of Indian drug and pharmaceutical industry. Rev Manag Sci 14, 519–559 (2020). https://doi.org/10.1007/s11846-018-0299-7
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11846-018-0299-7
Keywords
- India
- Pharmaceutical industry
- Efficiency
- Productivity
- Data envelopment analysis
- R&D
- Size
- Ownership
- TRIPS
- Product patent