The Indian Pharmaceutical Industry - an Overview of Internal Efficiencies Using Data Envelopment Analysis

Abstract

The Indian Pharmaceutical Industry (IPI) will be going through a major shift in its business model, from the year 2005 onwards, as the existing Process Patent regime gives way to the Product Patent regime, in order to comply with the Trade Related Intellectual Property Rights System (TRIPS) agreement. As a result, IPI, comprising of more than 20,000 players, is slowly consolidating with mergers, acquisitions and alliances; and getting ready to adapt to the new environment. In such a dynamic environment it would be imperative to examine whether there are any common firm level factors which aid in the survival and growth of a firm. This assumes crucial importance due to the fact that it is almost impossible for any firm to control the factors which affect the industry as a whole. This is particularly true when the changes are driven due to the process of globalization and not due to any policy changes of individual governments. With this objective, we have used Data Envelopment Analysis (DEA) on a sample of 44 companies that have survived at least the past one-decade, to determine the best practices in the Indian Pharmaceutical Industry. The results of DEA have been analysed along with their Compounded Annual Growth Rate (CAGR) to see if internal efficiencies and growth rate are related in the Indian Pharmaceutical Industry. We have also used regression analysis to see the correlations between various inputs/outputs and the growth rates. Various models of DEA like Constant Returns to Scale (CCR), Variable Returns to Scale (BCC) and Assurance Region (AR) are used to substantiate the results obtained.

Keywords: Data envelopment analysis, finance, regression, performance, financial ratios