The Indian Pharmaceutical Industry – An Overview on Cost Efficiency using DEA.
Haritha Saranga1 & B.V.Phani2
Abstract
The Trade Related Intellectual Property Rights System (TRIPS) agreement is part of an effort of the international
community to move towards a global economy. India’s assent to comply with this is a part of its effort towards
increased globalization of the domestic economy. The Indian Pharmaceutical Industry (IPI) is one of the few
industries which will be affected in a major way due to this as the existing “Process Patent” regime would give way
to the “Product Patent” regime from the year 2005. This combined with the changes in the industry due to India’s
efforts over the past one decade to move towards a market economy created a dynamic environment for the firms in
the industry. 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 this new environment. In such a dynamic environment it
would be interesting to examine whether there are any common firm level factors which aid in the survival and
growth of a firm. This assumes importance due to the fact that with so many players it is almost impossible for any
single 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 listed companies that have survived
the past one-decade, to determine the best practices if any in the Indian Pharmaceutical Industry. The results of DEA
have been analyzed 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: Globalization, Data Envelopment Analysis (DEA), Finance, strategy, efficiency, performance