Corporate Finance

Financial Performance of Pharmaceutical Companies 
 145

Chapter 7

26. A Case Study: Financing NTPC

Financial Performance of

Pharmaceutical Companies

OBJECTIVES


 Introduce students to the Pharmaceutical Industry in India.


 Demonstrate the application of financial statement analysis in a real life setting.

Pharmaceuticals are chemicals (bulk drugs) that are converted into formulations. Bulk drugs are derived

from plant derivatives, animal derivatives, synthetic chemicals, and biogenetic derivatives. Pharmacists

disburse certain formulations (the so called ethical drugs) only upon medical prescription, whereas others

are obtained over-the-counter.

The pharmaceutical industry is segmented into two types of firms—those that carry out basic research to

manufacture products that are patent protected, and those that manufacture generic drugs. Manufacturers of

generic drugs manufacture and market pharmaceutical products that are not subject to patent protection.

Manufacturers of generic drugs may also manufacture even patented products when the patent expires.

Generic drugs are less expensive than the patented products because companies would not have spent money

on R&D, all else being equal.

In 1995, India became a signatory to the Uruguay Round Agreement—Trade Related Intellectual Property

Rights that requires the signatories to enforce product patents. It comes into effect in 2005.^1 Historically

drug prices in India have been controlled by the central government. The Drug Price Control Order (DPCO)

established in 1985 enables the government to control drug prices for 143 basic drugs. The number of drugs

covered under DPCO has been brought down from 90 percent to 50 percent and is likely to be reduced

further. The aim of the DPCO was to ensure that certain drugs were available at affordable prices to all. The

obvious disadvantage of the system is that it does not provide adequate incentives to manufacturers to invest

in research and development to produce new molecules because the prices of the end product are low. Indeed

the prices of many drugs in India are among the lowest in the world.

(^1) The Indian Patents Act recognizes only process patents. Parts of the pharmaceutical industry background are from India
Infoline.