24-08-2012, 04:44 PM
Efficiency and productivity analysis of Indian pharmaceutical industry using data envelopment analysis
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Abstract:
In this paper, we have used data envelopment analysis (DEA)
models to analyse the relative efficiency and productivity change in Indian
pharmaceutical industry (IPI) between 1998 and 2007 which covers the post-
TRIPS (1995) and post Indian Patent Act Amendment (2005) period. BCC
DEA model and Malmquist productivity index are used to estimate the relative
efficiency and productivity change of Indian pharmaceutical companies over
the 10 year period. We have proposed and tested several hypotheses on the
average efficiency and the productivity change of IPI to check if the indigenous
and multinational companies differ in their efficiency and productivity change
over the aforementioned period. Also, we have analysed the effect of firm size
on several performance measures. Exploring the relationship between DEA
efficiency and innovation, we find that innovative firms with R&D and patents
have higher efficiency than non-innovative firms.
Introduction
The Indian pharmaceutical industry (IPI) today is the fourth largest pharmaceutical
producer of the world, after USA, Japan and Germany, with 8% share of global
production in volume. IPI is a high growth sector of the Indian economy with substantial
international presence and has emerged as a technologically dynamic manufacturing
industry in the recent years (Kumar and Pradhan, 2003). IPI has achieved a significant
scale and level of technological capability for manufacturing modern drugs cost
effectively to emerge as a major force in the pharmaceutical products in the world. IPI
meets up to 70% of the India’s domestic requirement of the bulk drug and almost 100%
of the formulations (Pradhan, 2006). The industry today possesses the largest number of
US Food and Drug Administration (FDA) approved manufacturing facilities outside the
USA.
Efficiency and productivity analysis
The bulk drug business is essentially a commodity business, whereas the formulation
business is primarily a market driven and brand-oriented business. While the indigenous
companies are present in bulk as well as formulation business, the multinational
companies have continued to focus only on the formulation business. The IPI is highly
fragmented, with around 280 players constituting the organised sector while more than
6,000 players present in the small-scale sector. Exports form a vital component of the
growth strategy of most Indian pharmaceutical companies and the growth of exports over
the last five years has been more than 20% (Saranga, 2007). The USA is the largest
export market for Indian pharmaceutical companies. Indian companies have a cost
advantage that facilitates the production of drugs at much lower cost incurred by other
developed economies. Indian pharmaceutical products are exported to over 65 countries
across the world (Pradhan, 2006). A major share of Indian pharmaceutical exports is
destined to highly regulated markets of USA, Germany, UK, Netherlands and others.
Some of the top Indian companies have export contribution of more than 50% in their
sales. For example, Ranbaxy had an export share of more than 75% (Aggarwal, 2004).
Description of the IPI data
We obtained the relevant data from the Prowess Database which is one of the
many databases provided by the Center for Monitoring Indian Economy (CMIE).1
Centre for Monitoring Indian Economy Pvt. Ltd. was established in 1976 and has grown
into India’s leading private sector economic research institution headquartered at
Mumbai, India. Prowess is a database of over 10,000 Indian companies. It contains
detailed normalised data culled from the audited annual accounts, stock exchanges, company announcements, etc. It has over ten years of time-series data and is updated
with the latest data on a daily basis.
Analysis of the DEA results
Using BCC VRS model, the efficiency and productivity leaders and laggards have been
identified. Efficiency leaders and laggards based on BCC VRS output model over 10 year
period along with their average efficiency scores are shown in Table 3. Among efficiency
leaders, we found that Cipla Ltd., Ranbaxy laboratories Ltd. and Abbott India Ltd. were
efficient throughout the 10 year period. Among efficiency laggards Shree
Dhootapapeshwar Ltd., Amol Drug Pharma Ltd., Elder Projects Ltd., Godavari Drugs
Ltd., Vista pharmaceutical Ltd., Senbo Industries Ltd. and DIL Ltd. were inefficient
during all 10 years.
Conclusions and future research
Indian pharmaceutical companies have gone a long way since the patent act in 1970 and
the change of process patent to product patent in 1995. In this paper, we analysed a
sample of 146 Indian pharmaceutical companies over 10 year period starting from 1998
to analyse the efficiency and productivity gains of these companies. Over all the average
productivity change shows an increasing trend starting from 1998, interestingly this
increase in productivity change is mainly due to the technical efficiency.