FINANCIAL POLICIES OF SELECTED

PHARMACEUTICAL UNITS – A COMPARATIVE STUDY

THESIS SUBMITTED TO THE KAKATIYA UNIVERSITY FOR THE AWARD OF THE

DEGREE OF

DOCTOR OF PHILOSOPHY

IN COMMERCE AND BUSINES MANAGEMENT

D. VENKATA RAO

RESEARCH SUPERVISOR

Prof. P.Krishnama Chary

THE DEPARTMENT OF COMMERCE AND BUSINESS

MANAGEMENT

KAKATIYA UNIVERSITY
WARANGAL

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 2010
ABSTRACT

Financial management is concerned with raising of funds in the most economical and

suitable manner and usage of such funds profitably in comparison of risk involved in the

investment. Financial management strives to match the sources and use of funds so as to

maximize the value of the firm in the market to benefit the stake holders of the corporation. It

is an integrated activity consisting of Planning, Organizing and controlling monetary

resources needed by a corporation to achieve its objectives. The finance function centres on

the management of funds raising and using them effectively. Financial management is

important because it has an impact on all the activities of a firm. Its primary responsibility is

to discharge the finance function successfully. R.C.Osborn 1 observes finance function as a

process of acquiring and utilizing funds by a business. Finance function is not substitutable

and is a focus of all activities.

Financial Policies:

Financial Policy is concerned with Planning and Controlling of firm’s financial

resources. Financial policy includes Investment policy or Long-term asset mix policy,

Financing or capital mix policy, Dividend or Profit Allocation Policy and Liquidity or Short-

term asset mix policy. Financial policies are called for skilful Planning, Control and

execution of a firm’s activities. The prudent financial policies increase the market value of

the shares. Following is the brief discussion about the financial policies:

Investment Policy:

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 Investment policy or capital budgeting involves the decision of allocation of capital or

commitment of funds to long-term assets that would yield benefits in future. Important

aspects of the investment policy include evaluation of the prospective profitability of new

investments and measurement of cut-off rate against the prospective return of new

investment. Future benefits of investments are difficult to measure and cannot be predicted

with certainty. Due to the uncertain future, investment decisions involve risk. Investment

proposal should, therefore, be evaluated both in terms of return and risk. Besides the decision

to commit funds in new investment proposals, capital budgeting also involves decision of

recommitting funds when an asset becomes less productive or non-profitable.

Financing Policy:

Financing policy is the second important function to be performed by the financial

manager. Basically the decision of where and how to acquire funds to meet the firm’s

investment needs. The financial manager must strive to obtain the best financing mix or the

optimum capital structure for the firm. The firm’s capital structure is considered to be

optimum when the market value of the shares is maximized. The use of debt affects the return

and risk of shareholders. It may increase the return on equity funds but it always increase

risk. A proper balance will have to be struck between return and risk. When the share

holder’s return is maximized with minimum risk, the market value per share will be

maximized and the firm’s capital structure would be considered optimum.

Liquidity Policy:

Management of firm’s liquidity is yet another important policy. Current assets should

be managed efficiently for safeguarding the firm against the dangers of illiquidity and

insolvency. Investment in current assets affects the firm’s profitability, liquidity and risk. A

conflict exists between profitability and liquidity while managing current assets. If the firm

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does not invest sufficient funds in current assets, it may become illiquid. But it would lose

profitability as idle current assets would not earn anything. Thus, a proper trade-off must be

achieved between profitability and liquidity of the firm. In order to ensure that neither

insufficient nor unnecessary funds are invested in current assets, the finance manager should

develop sound techniques of managing current assets. A financial manager not only should

estimate the firm’s needs of current assets but also need to assure the funds available when

needed.

Dividend Policy:

Dividend policy is the third major financial policy. The financial manager must

decide whether the firm should distribute all profits or retain them or distribute a portion and

retain the balance. The dividend policy should be determined in terms of its impact on share

holder’s wealth. The optimum dividend policy is one that maximizes the market value of the

firm’s shares. Thus, if shareholders are not indifferent to the firm’s dividend policy, the

finance manager must determine the optimum pay-out ratio. This policy influences the

decision of further investing in long-term assets by using the retained earnings for growth and

development of the firm which ultimately increases the value of the firm. The finance

manager should also consider the question of dividend stability, bonus shares and cash

dividends in practice.

Thus, financial policies directly concern the firm’s decision to acquire or dispose off

assets and require commitment or recommitment of funds on a continuous basis. It is in this

context the financial policies are said to influence production, marketing, human resources

and other functions of the firm. Financial policy may affect the size, growth, profitability and

risk of the firm.

Global Scenario of the Pharmaceutical Industry:

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 The global pharmaceutical market is highly dynamic and is characterized by greater

levels of R&D expenditure and extensive regulation of its products. Increasing R&D

expenditure, longevity of population, strong economies are driving the global pharmaceutical

market. Though the developed countries dominate the global pharmaceutical market, the

share of developing countries, like India, China, Mexico, is increasing in recent years. Global

pharmaceutical sales have grown from US$ 334 billion in 1999 to US$ 773 billion by 2008,

with a CAGR of 11%. However, it may be noted that though the global pharmaceutical sales

are increasing in absolute terms, the rate of growth has been receding over the years. The

year-on-year growth rate of global pharmaceutical sales was 16.5% in the year 1999 from its

previous year and it came down to 8.11% in 2008. The market size nearly came to US $800

Billion mark the growth seen a diminishing rate. This is because of many reasons peculiar to

different countries. The major reason is the saturation of the health insurance market and

heavy growth in the cost of health insurance in the US which is a world’s largest market for

the pharma sales. One more prime reason was the number of block buster drugs gone off-

patented, which were manufactured and sold at comparatively very cheaper (Approximately

one tenth cost of the US producers) by the top most generic based companies of India, Japan

and Brazil.

Indian Pharmaceutical Industry

In the process of industrialization, pharmaceuticals have been a favorite sector for

policy makers in the developed as well in developing countries, including India. This special

policy preference has been due to the criticality of the pharmaceutical products for the health

security of the populace as well as for developing strategic advantages in the knowledge

based economy. However, not all developing countries succeeded in enhancing local

capabilities in the sector. The growth of the pharmaceutical industry in the developing region

is largely confined to a few countries like India, China, Singapore, Korea, Czech Republic,

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Brazil, and Argentina. Among these countries, most often the Indian pharmaceutical industry

is projected as the most successful case of a developing country scaling up the indigenous

capabilities.

The Indian pharmaceutical industry, which had little technological capabilities to

manufacture modern drugs locally in the 1950s, has emerged technologically the most

dynamic manufacturing segment in the Indian economy by the 1990’s. It achieved a

significant scale and level of technological capability for manufacturing modern drugs

indigenously and cost efficiently, to emerge as a major developing country competitor in the

world market. It indigenously meets up to 70 per cent of the domestic requirement of bulk

drugs and almost all the demands for formulations, thus, restricting imports from developed

countries into India. Besides, it generates rising trade surpluses in pharmaceutical products by

exporting to over 65 countries, therefore, significantly competing with developed countries

for global market share.

Stages in the Evolution:

1) Pre- Independence period

The pharmaceutical production in India began in 1910s when private initiatives

established Bengal Chemical and Pharmaceutical Works in Calcutta and Alembic Chemicals

in Baroda and setting up of pharmaceutical research institutes for tropical diseases like King

Institute of Preventive Medicine, Chennai (in Tamil Nadu), Central Drug Research Institute,

Kasauli (in Himachal Pradesh), Pastures Institute, Coonoor (in Tamil Nadu), etc. through

British initiatives. The nascent industry, however, received setbacks in the post World War II

period as a result of new therapeutic developments in the Western countries that triggered

natural elimination of the older drugs from the market usage by newer drugs like Sulpha,

antibiotics, vitamins, hormones, antihistamine, tranquilizers, psycho pharmacological

substances, etc. This culminated in the discontinuation of local production based on

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indigenous materials and forced the industry to import bulk drugs meant for processing them

into formulations and for selling in the domestic market.

2) Post- Independence Period

Evolution of Indian pharmaceutical industry can be classified into the following four

stages in the post independence period. The first stage is during 1947s-1970s, the second

stage being from 1970s, with the enactment of Indian Patent Act, 1970; third stage is

beginning from 1980s and the fourth stage begun in 1990 and fifth and final stage starts from

2001 onwards as preparatory ground in light of the regulatory changes across the global

regulated markets and post TRIPS regime begun from the year 2005.

PRESENT STATUS OF PHARMACEUTICAL INDUSTRY

Indian pharmaceutical industry is one of the fastest growing segments of Indian

manufacturing sector. The pharmaceutical industry has experienced a growth rate of 12%,

with the annual turnover of the sector crossing US$ 14.6 billion, in 2008-09. Globally, Indian

pharmaceutical industry ranks 4th in terms of volume with a share of 8% in the world

pharmaceuticals market. Indian pharmaceuticals industry ranks 14th in the world in terms of

value, in the Asia-Pacific pharmaceuticals market, India holds a share of 6.6%. Japan is the

biggest player in the Asia-Pacific region accounting for 67% of the total market value. The

sector has attained self-reliance in the production of formulations and produces almost 70%

bulk drug requirements of the country. The key Therapeutic segments include anti-infective,

gastrointestinal, cardiovascular segments. In India, acute therapies make up about 60% of the

pharmaceutical market. However, it is expected that with the changing lifestyle and aging

population, sales of medicines for chronic therapies (such as diabetes, cardiovascular) is

growing rapidly. A study has estimated that by the year 2010, the Central Nervous System

and Cardiovascular segment would have a market share of 33%. The industry is fragmented

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with more than 25,000 registered units, of which 300 units are large and medium scale units.

In terms of value, however, top 20 players control more than 50 per cent of total market.

Need for the Study:

The pharmaceutical firms need prudent financial policies to sustain their growth and

development in the light of patent regime. Many pharmaceutical companies are in doldrums

due to improper financial policies. The very nature of the pharmaceutical units involves huge

commitment of financial resources on Research and development activity which is

characterized by uncertainty and risk. Primarily many researches centred on basic research

and marketing research of pharmaceutical sector. Adequate research has not been conducted

on the overall financial management of pharmaceutical industry. Still this area remains

unexplored as such we felt a greater need to undertake detailed study in this area.

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Objectives of the study:
Following are the objectives of the study,
1)To present the origin and growth of the global and Indian pharmaceutical

industry,

2) To study the various sources of finances for mobilizing the funds with a view to

determine the cost of capital and profitability in the selected units,

3) To analyze the investment policies of pharmaceutical units in order

to highlight the efficiency with which fixed assets are utilized,

4) To examine the working capital policies in terms of its size, turnover, financing

and liquidity considerations,

5) To highlight the dividend policies of selected pharmaceutical units with reference

to consistency and its impact on market value of shares,

6) To investigate into the financial policies, with the help of views elicited from the

executives of selected pharmaceutical units, and finally.

7) To offer suitable suggestions for the improvement of financial Management of

selected units in the light of the inadequacies highlighted by the study.

SOURCES OF DATA AND METHODOLOGY:

Sources of Data:

The study is based on both the primary and secondary sources of data. Primary data is

collected through a structured questionnaire specially designed for the purpose and

discussions held with the finance executives of selected pharmaceutical units.

Secondary data is collected from the published annual reports, policy documents,

websites of the pharmaceutical industry regulators across the globe (USFDA, TGA, MHRA,

MCA) and portals of Indian regulators (SEBI, RBI, NSE, BSE, Patents office), manuals etc,.

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Data is also collected from published manuals and annual reports of world Trade

Organization (WTO).Data is collected and analyzed for the period of 12 years beginning

from 1997-98 to 2008-09.

Methodology:

The data collected from both the primary and secondary sources is classified,

tabulated and analysed. The statistical tools such as percentages, ratios, correlation coefficient

are used wherever applicable in the analysis. Executive’s views are collected through a

questionnaire and the results of the primary data are corroborated with the results obtained

from the secondary data analysis.

Appropriate conclusions are drawn from the analysis. At the end suitable suggestions

are offered for the efficient performance of pharmaceutical industry in general and effective

financial performance of the selected pharmaceutical units in particular.

Selection of Sample Units:

Sample units selected are engaged in bulk drug manufacturing and formulations

which are composed of two small and medium companies and remaining are large

pharmaceutical companies. The basis for inclusion of the companies in sample is to make a

likely representation of Indian pharmaceutical industry in terms of market share, overall

presence, sales quantum and exports from the country. The selected units represent 41% of

Indian pharmaceutical market share in value and 60% in volume. In the selected companies 5

companies listed in Indian as well as US and European stock exchanges and the remaining

six companies listed on Indian stock exchanges only.

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Design of the Study:

The present study is organized into eight (8) chapters as per the details given below:

Chapter – I “About the Study” covers the aspects such as the conceptual framework of

financial management, review of earlier research studies, need for the study, objectives of the

study, sources of data and methodology including design of the study.

Chapter – II is on “Profile of the Pharmaceutical industry” which describes the Global

scenario of Pharmaceutical industry, Evolution of Indian pharmaceutical industry in terms of

pre and post independence period, and present status of pharmaceutical industry including the

profile of the selected sample units.

Chapter – III Deals with “Financing policies of selected Pharmaceutical units”

covering the resource mobilization in terms of equity composition like equity share capital,

reserves and surpluses, depreciation and debt composition like secured loans, unsecured

loans, current liabilities and cost of capital and profitability analysis of pharmaceutical

companies.

Chapter – IV “Investment Policies of selected Pharmaceutical Units” focuses on

project planning process in pharmaceutical industry, growth in total investment and fixed

assets, Net worth vis-à-vis investment in fixed assets investment turnover including fixed

and current assets, quantitative and qualitative analysis of the productivity of R &D

Investment and correlation between R&D investment and sales revenue and regulatory filings

and approvals received.

Chapter – V “Working Capital Policies of selected Pharmaceutical Units” consists of

working capital components like inventory, receivables, loans and advances and cash in terms

of investment and their turnover including financing of current assets and liquidity.

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 Chapter – VI “Dividend Policies of selected Pharmaceutical Units” comprises of

conceptual as well as legal framework of dividend policy and dividend payout and retention

policy including capitalisation of earnings.

Chapter – VII “Empirical Analysis” highlights views elicited by the executives with

regard to financial management policies relating to resource mobilization, investment

management, working capital management and dividend policies including views on

competition from multinational corporations.

Chapter – VIII: “Conclusions and Suggestions” deals with the conclusions from the

study and suggestions offered in the light of the findings of the study.

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CONCLUSIONS:

From this study the following conclusions are drawn:

1) Global pharmaceutical sales have grown at a 11% during the year 2001 and 2009

from US $ 334 Billion to US $ 773 Billion. Indian pharmaceutical industry

experienced a sea change in its operational efficiency from its net importing

status to a leading exporter in the world.

2) The large amount of global pharmaceutical sales happened in North American

region with a 47% on an average during the period from 2001- to 2009 and all

the other regions viz., Latin America, Asia, Africa and Australia, Japan and

Europe put together have sales of 53.5% on an average in the same period.

3) Global Pharma R&D spending has increased from US $ 53Billion in the year

2000 to US $ 129 Billion by the year 2009 indicating the commitment of the

leading pharmaceutical companies to retain the market share as well as to create

new markets for the survival beyond decades by introducing block buster drugs

innovated out of the continuous research.

4) Global Pharma R&D spending has increased from US $ 53Billion in the year

2000 to US $ 129 Billion by the year 2009 indicating the commitment of the

leading pharmaceutical companies to retain the market share as well as to create

new markets for the survival beyond decades by introducing block buster drugs

innovated out of the continuous research.

5) Export of pharmaceutical products among the EU countries is the highest with

53% of world’s pharmaceuticals exports valued at US $ 200 billion in the year

2007 and these EU countries exported US $ 75 billion worth of pharmaceuticals

products among themselves in the same year. India stood in 5th place in terms of

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 exports with US $ 5.5 billion in 2007.Value of the pharmaceutical exports of the

world increased four times from US$ 108.60 billion in the year 2000 to US $

426.7 billion by the year 2008.

6) The Indian pharmaceutical industry has emerged as a technologically most

dynamic manufacturing segment by 1990’s from a state of very low

technological capabilities in 1950’s. Indian pharmaceutical industry emerged as

a net exporter with Rs. 38,540 Cr by the year 2008 from its net importer status in

1971 with an amount of imports of Rs. 15.80 Cr.

7) Growth of the Indian pharmaceutical industry can be classified into five (5)

stages such as, a) MNC domination and highly formulation based industry; b)

Rise of domestic companies with a focus on bulk drugs; c) Achievement of self

sufficiency in both the bulk drugs and formulations within the country; d) Focus

on product innovation and increase in the production volumes; and e) Increased

investment in the R&D operations and focus on mergers and acquisitions.

8) Indian pharmaceutical industry has grown at a 20% rate during 2000-2009. India

has emerged as a 4th largest pharmaceuticals manufacturing country by volume

and 13th in value by the year 2009. Profitability of the Indian pharmaceutical

industry showed a significant growth during 1991 and 2009 (from 2% to19%).

9) The number of pharmaceuticals producing firms increased from a mere 2,257

units in 1969-70 to 29,620 units by the year 2009-10. Though the number is

largely increased the industry is dominated by only 300 large companies with

86% market share.

10) The total financial resources employed have grown significantly in six out of 10

selected companies, which have resulted from the increased operations by value

and volume and high growth of exports. Selected companies also concentrated

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 their efforts in establishing new production facilities across the globe for which

the pharmaceutical companies mobilized huge funds from national and

international sources.

11) Indian pharmaceutical companies have rightly utilized the increased

opportunities resulting from the economic liberalization. They established their

reputation and built confidence in the international investing community by

which these companies could raise funds from abroad through ADR’s, GDR’s

and FCCB’s. Seven out of the ten companies utilized these sources to raise

funds.

12) In most of the selected companies the Debt-Equity ratio is near to one or zero

except in a few companies. The debt-Equity ratio is very lower than the standard

norm specified i.e.2:1. The higher debt-Equity ratio found in ORCHID, AUPL

and AOL.

13) Equity share capital as a proportion of total funds is very high in AOL with an

average of 19% over the study period followed by SUPL. Most of the selected

companies (APL, AUPL, DRL, RAL, PHC and SUN) adopted ploughing back

the profits earned by way of converting the reserves and surpluses in to equity

capital through multiple number of bonus shares issues. The proportion of equity

share capital is lower in most of the companies due to the availability of huge

amount of accumulated reserves and surpluses.

14) The proportion of the reserves and surplus in the total funds deployed is very

high in APL (on average 90%) throughout the study period, followed by DRL,

SUN and RAL with 74%, 64%, and 63% respectively. Most of the selected firms

except NLL and AOL possessed reserves and surpluses more than 50% of the

total resources employed by the companies.

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15) Capital reserve, investment allowance reserve and general reserve are the main

components of reserves and surplus in all the selected enterprises. Capital

reserve and general reserve contributed more funds than investment reserve in all

the selected pharmaceutical firms.

16) Accumulated depreciation as a percentage of total resources deployed is high in

APL followed by NLL, AOL and PHC. A consistent growth in the proportion of

depreciation reserves in total funds deployed is observed in ORCHID throughout

the study period. The proportion of secured loans in total funds deployed is very

high in NLL followed by ORCHID and AOL.

17) Secured loans are raised by selected pharmaceutical companies mainly from

following sources viz., debentures, loans from banks (including cash credit)

rupee term loans from banks (largely from EXIM Bank), foreign currency term

loans and packing credit by hypothecation of fixed assets, movable assets and

stock of material and finished goods.

18) The capital mobilized by pharmaceutical companies through unsecured loans

appears to be meager. Only DRL, NLL PHC and AUPL used a smaller amount

of unsecured loans as a source of finance.

19) Current liabilities are another source through which the pharmaceutical

companies mobilized resources in the form of short-term obligations. These

include sundry creditors, advances from customer’s, unclaimed dividends and

overdraft from banks.

20) Companies like ORCHID, NLL and AOL largely depended on debt sources of

finance and remaining companies marginally used this source of finance. For

example the companies like APL, DRL and SUN became debt free during the

last four years of the study period.

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21) The weighted average cost of capital (WACC) for the selected companies varied

between 9% and 17.50% in the study period. It is found a very high WACC in

the starting period of the study (17.38%) which is decreased later on to a 9%. It

is highest in AOL (17.38% in 1997-98) and lowest in SUN (8.78% in 2007-08)

22) Net profit of the companies showed an increasing trend during the study period.

Net profit of DRL increased by 4 times in the year 2006-07 from its previous

year. In RAL similar growth in net profit observed throughout the study period

except in the year 2007-08, in the year which RAL posted a net loss of Rs.826.58

Cr due to huge loss on foreign currency derivatives.

23) Net profits are volatile in case of AOL, NLL and SUPL through out the study

period. The strong growth and consistency in net profits maintained by few

companies like AUPL, PHC and SUN during the study period. However the,

overall profitability for the majority of the selected companies is quite

reasonable when compared to the industry average. Even some of the selected

companies have a higher ROA and PAT than the industry average.

24) The pharmaceutical firms are using most modern techniques available for the

project selection and evaluation. Most of the Indian pharmaceutical firms are

using scenario analysis, PERT-CPM for the estimation of cost and time required

for the projects undertaken by them. These companies have formulated

“company specific analytical model” for the evaluation of R&D projects.

25) Pay back period and Internal Rate of Return are widely applied capital budgeting

techniques by the selected pharmaceutical companies in the selection of new

projects. In addition, the excess net present value method and profitability index

methods are also used in some cases.

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26) The selected pharmaceutical companies concentrated on the acquisition of

manufacturing facilities in the developed as well as emerging markets. These

companies invested a huge amount of capital resources in the formation of joint

ventures (JV’s) with some of the world’s leading pharmaceutical companies in

the area of research as well as production operations. Large number of JV’s is

found in case of RAL, DRL, PHC, AUPL and SUN. Indian pharmaceutical

companies preferred the JV route to establish themselves in un-established

markets such as EU Nations, Africa and Japan to minimize the cost of operations

to improve the ROE.

27) Financing of new projects in pharmaceutical companies is influenced by the

corporate objectives, long term growth, sustainability and the philosophy of the

management. To avail the subsidies and tax holidays, the pharmaceutical

companies are establishing their production facilities in the areas of states in

which these incentives are extended.

28) The investment in fixed assets by the selected companies has grown manifold

throughout the study period. Huge growth in fixed assets is found in AUPL (180

times) during the study period (Which increased from a mere Rs.140Cr to

Rs.2,625Cr) followed by RAL, PHC, DRL and SUN with 17 times, 16 times 14

times and 9 times in net fixed assets respectively.

29) Net worth to fixed assets of the selected pharmaceutical companies indicates that

the amount of owner’s funds used for the acquisition of the fixed assets. A mixed

trend of net worth to fixed assets is observed in the selected companies over the

study period. Most of the selected companies’ net worth to fixed assets ratio is

greater than one (1) which indicates that the fixed assets are acquired by using

owner’s funds in case of SUPL this ratio is marginally less than one (around

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 0.96) which means the company acquired the fixed assets by using loan funds

partially.

30) Fixed assets turnover ratio seven out of ten selected companies the showed a

decreasing trend till the year 2005-06 and later on increased. In case of APL,

SUN and RAL the fixed assets fixed assets turnover ratio has grown throughout

the study period.

31) A comparative analysis of the proportion of R&D spending by the selected

pharma companies with the total amount by pharma industry on R&D, the

selected companies’ spending forms 75% of total industry’s spending on R&D

during 2000-01 to 2008-09.

32) R&D in Indian pharmaceutical industry mainly influences the export sales, the

effectiveness of the R&D investment can reveal from the growth in export sales.

Export sales for the last ten years reveal that the exports increased in line with

the increase in R&D expenditure.

33) The interrelation between R&D expenditure and the sales can be understood

from the coefficient of correlation between these two factors. In the eight, out of

ten selected companies coefficient of correlation is above +0.50 indicating

perfect relationship existing between sales and R&D expenditure. Co-efficient of

correlation in AUPL, DRL, NLL, SUPL ORCHID and SUN is above +0.80,

indicating these companies’ R&D expenditure is very closely related with sales

revenue and in case of RAL and PHC a moderate correlation (+0.64 each) is

existing between sales and R&D expenditure.

34) In case of filing of DMF’s, it is highest in AUPL with 1,915 filings to date

followed by RAL and SUN with 1,588 filings and 1,106 filings respectively in

which these companies have a success rate above 80% in getting approvals.

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35) The percentage of current asset investment to fixed assets investment increased

from 90% in 1997-98 to 483% till 2007-08 and decreased to 430%% in the year

2008-09 in APL. The percentage of current assets investment in fixed assets is

very high in DRL with 543% during 2006-07.

36) In the selected pharmaceutical companies’ current assets turnover is ranged

between 0.33 and 4.52 which means the highest sales revenue generated per

rupee invested in current assets was Rs.4.52 in APL during 1997-98 and least

sales revenue generated per rupee of investment in current assets was Rs.0.33 in

RAL during 2008-09. The current assets turnover ratio showed a decreasing

trend in all the selected companies except NLL during the study period.

37) Inventories in pharmaceutical companies continued to form a major component

in current assets, inventories as a percentage of current assets varying between

13% and 64% during a major period of study. The highest percentage of

inventories in current assets occupied in case of AOL and NLL throughout the

study period. The highest absolute amount invested in inventories by RAL

followed by ORCHID, AUPL and DRL during the last four years of the study

period.

38) Sales generated per rupee of inventory held by selected pharmaceutical

companies showed a specific pattern of decrease in five out of the ten companies

selected for the study. In the remaining five companies three companies showed

a continuous growth in sales per rupee held in inventory and the two companies

showed a fluctuation in sales generated per rupee held in inventory.

39) Days of inventory turnover is very high in case of ORCHID followed by AOL

during 2004-2009 and the shortest inventory turnover is observed in SUN, in the

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 remaining companies the days of inventory turnover either constant or decreased

over the period of five years from 2004-05 to 2008-09.

40) Receivables as a percent of current assets of selected Pharma companies varied

between 5% and 73.50% and thus formed next major component after inventory.

On an average, receivables as a percentage of current assets were highest at 43%

in AUPL followed by AOL (41%) and DRL (36%). It was lowest in APL

followed by SUN.

41) The receivables turnover ratio of the selected pharmaceutical companies was

very high in APL followed by AOL and NLL and the lowest in DRL followed

by SUN it is constantly grown throughout the study period in case of PHC, SUN

and the remaining companies except SUPL.

42) The average debt collection period is as high as 197 days (ORCHID in 2008-09)

though most of the selected companies are exporting pharmaceuticals to various

countries all of them may have longer debt collection period, the 197 days

collection period in ORCHID appears to be quite abnormal, that too in respect of

a lesser amount of export sales by the company.

43) Cash formed a major percentage of total current assets in the case of APL

throughout the study period ranging between 29% and 92% followed by SUN in

which cash to total current assets percentage ranging between 25% and 63%

during the same period.

44) Cash to sales turnover ratio is very high in few companies like AUPL, DRL,

RAL and PHC which indicates that these companies are practicing proper cash

management methods.

45) Most of the selected pharmaceutical companies used the short term liabilities for

the purpose of financing the current assets. Trade credit, advances from

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 customers, differed liability and other deposits are predominantly used as a

source of working capital finance by selected pharmaceutical companies. No

clear shift towards a specific source of short term finance did emerge from the

analysis.

46) The selected pharmaceutical companies determined the size of investment in

each component of the current assets such as cash and marketable securities,

receivables and inventories by preparing a separate budget for each component

by analyzing the proportion of each component in the total current assets.

47) Loans and advances formed a moderate percentage in total current assets in most

of the selected pharmaceutical companies where as it is formed a major

percentage of total current assets in the case of RAL followed by DRL, NPIL. It

was lowest in APL followed by ORCHID. In case of AUPL, DRL and SUN the

turnover of loans and advances showed considerable improvement consistent

with the declining proportion of this component in current assets.

48) In RAL and DRL major percentage of the loans and advances occupied by MAT

credit entitlement, prepaid Income Tax, advance to material suppliers and the

balances with statutory authorities.

49) Earnings per share (EPS) showed very high growth in AUPL followed by SUN,

PHC and APL. In three of the selected companies EPS became negative which

happened in AOL, RAL (2007-08) and ORCHID 2008-09. A consistent growth

in EPS is reported in few companies like NLL, APL, PHC and SUN.

50) In the dividend policy, the decision regarding retention is as equal as

distribution. The earnings retention gradually decreased from 100% in 1997-98

to 60% to 75% in 2008-09, in few of the selected companies like RAL, DRL the

retention of earnings is zero in most of the study period.

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Suggestions:
Following suggestions are offered for the efficient performance of pharmaceutical industry in

general and effective financial management in particular.

1) Indian pharmaceutical companies are suggested to intensify the efforts of

innovation of the “block buster drugs”, as they face competition from the

leading multinational companies resulting into lesser margins.

2) Cost cutting is another measure which makes our products very cheaper in

price and can be promoted and sold easily in not only third world countries but

also in developed countries like USA, UK and other European countries.

3) A recent move by the African Union under New partnership for Africa’s

development (NEPAD) in collaboration with WHO to introduce African

Medicines Registration Harmonization (AMRH) scheduled in the year 2010

promises new opportunities for Indian companies. The Indian pharmaceutical

companies can build a track record of phenomenal growth from the following

factors: a) its competitive edge; b) increasing reliance on generics, as health

care expenditure explodes in OECD countries; c) rapid expansion of

pharmaceutical market in the emerging economies, d)the potential of bringing

new original research products from its R&D stable and e) the congenial

relationships existing between India and African countries.

4) Industry - Academia relationship needs to be strengthened, on the lines of US

model, where the universities are the sites of innovation and the industry

commercializes the product. The universities are permitted to own the IPR and

get the share out of profits. Academic institutions will then become the engines

of entrepreneurship.

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5) Greater stress on professionalization, better utilization of resources and

productivity of men and materials, improved financial and material

management and an effort to reduce inventory level will help in a greater

measure in improving the performance of the pharma sector.

6) Several steps need to be taken by domestic pharmaceutical companies in order

to strengthen the industry. Indian companies need to take advantage of the

recent advances in biotechnology and information technology. The future of

the industry will be determined by how well it markets its products to several

regions and distributes risks, its forward and backward integration capabilities,

its research and development, and its co-marketing licensing agreements.

7) Multi National Companies are adopted a multi-pronged strategy to counter the

strong Indian competition in the developing countries of Africa and Latin

America which are major markets for our medicines, these strategies can be

countered by a) regular bilateral dialogues followed by agreements for

accessibility of markets with an open trade model be signed between these

countries and India; b) arranging regular road shows in these countries

promoted by pharma industry associations like Pharmaxcile, IDMA and IPA

and supported by Department of Pharmaceuticals, Govt. of India; c)Local

Indian generic exporters to these countries must be motivated and encouraged

to go in for joint ventures and also set up independent manufacturing plants in

these countries; Regular meeting/ brain storming sessions should be held

between Indian regulators / target countries’ regulators and Indian exporters

on various quality / trade issues, hindering exports.

8) The regulated markets, especially the United States and Europe are opening up

a huge opportunity worth billions of dollars market as a number of block

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 buster patented products (worth around $80 billion) are expected to go off

patent within 2012-13. Indian generic manufacturers are supposed to engage

themselves in filing applications for product approval or commence marketing

generics in these countries.

9) It is suggested to the pharmaceutical industry associations that to pursue the

possibilities of cluster approach for testing of medicines in view of exorbitant

costs in terms of equipment and overheads.

10) The Indian computer industry is on par with its American counterpart, and

many companies in the world depend upon Indian programmers to develop

complex software. The use of computers in the pharmaceutical industry is

increasing, and in particular they are being applied to data management and

drug discovery programs. Thus, collaboration between the computer and

pharmaceutical industries will help drug discovery and development programs.

11) Government of India with the help of Department of Pharmaceuticals opened

“Jan Aushadhi Stores” in the states of Andhra Pradesh, Bihar, Delhi, Haryana,

Punjab, Utharakhand etc., and further planning for opening many more such

stores across the country to make the medicines available at an affordable

price to the needy people. Pharmaceutical companies are suggested to use the

opportunity and plan for supply of essential drugs in bulk quantities. They can

supply at an economical rate by delivering the products without branding and

supplying them in containers to government.

12) Highly fragmented pharma industry with a large number of small players can

consider a proposal of establishing R&D consortia to pool up the capital

resources for taking up of R&D operations to innovate new drugs in the areas

of specialization of the consortium members.

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13) Most of the companies are not utilizing the tax advantage of debt capital, in

this connection, it is suggested that the pharmaceutical industry is supposed to

use the sources of debt capital to have tax advantage on interest paid and hence

the shareholder’s wealth will be further increased.

14) Balance sheets of major pharmaceutical companies remained strong with huge

amounts of equity funds. Hence, it is recommended to pharmaceutical

companies that they can raise debt capital to have minimum WACC and

increase in shareholder’s wealth.

15) The Indian Pharma Industry presently investing a less than 4% of sales

revenue in basic R&D, where as R&D spending to total sales at world level of

12-14%. The Indian pharmaceutical companies are supposed to increase the

investment in R&D near to the R&D investment of developed nations.

16) India should exploit its know-how in herbal medicines as these medicines does

not come under purview of TRIPS regime and research in NCEs involves

millions of dollars of investment and result is uncertain, the Indian companies

should engage in R&D of herbal medicine.

17) The Indian government can take several policy measures for enhancing the

nation’s competitiveness in the pharmaceutical sector. A fragmented domestic

market marked by a lower degree of domestic competition, is not conducive

for global competitiveness. Hence, policy measures are needed to encourage

mergers and acquisitions among domestic firms to offset the scale

disadvantage and to overcome the trap of low R&D intensity. Increase in

average firm size through M&A until the concentration index of the industry

rises significantly, may result in improving India’s competitive advantage in

the pharmaceutical sector.

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18) One of the main problems that remain for the domestic drug manufacturers is

the existence of fake and counterfeit medicines. The annual cost of

counterfeiting to the pharmaceutical industry is $68 billion. Current

resolutions to this problem are tagging true drugs with Electronic Product

Code (EPC) or Radio Frequency Identification (RFID). EPC technology uses

RFID tags on cases of medicines for identification, detection, and subsequent

segregation of genuine medical drugs and supplies. RFID serves the purpose

of improving the integrity of the supply chain. Companies can maintain much

tighter control over legitimate shipments by clearly identifying and tracking

their products, ensuring that they haven’t been hijacked or stolen.

19) Investment in receivables, though necessary, should be properly regulated and

controlled. Receivables have carrying costs just as inventory has and the

finance manager should see to it that their costs do not out weigh the

advantages to be derived from increased credit sales which give rise to them.

Moreover, the financial condition of the firm must be a factor in the

formulation of policy regarding investment in receivables. Even though a large

investment in receivables may appear to be potentially lucrative use of funds,

the requirements of a large inventory or an expansion program or the like, may

be more expedient. Availability of funds should be an important consideration

in determining the allocation of resources at any stage in a company’s life.

20) A firm can economize funds tied up in receivables by adopting a number of

policies including selection of customers after due evaluation of their credit

worthiness. Well thought out, predetermined credit limits and alert collection

methods will hold down the bad debt losses ratios as well as minimize the

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amount of funds tied up in accounts receivable without reducing sales and

profits.

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