Key Financial Metrics Used In Pharmaceutical Industry

October 11 , 2021

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Key Financial Metrics Used In Pharmaceutical Industry

Indian Pharmaceutical Industry is emerging as one of the most dominating pharma industries in the world. Being the 3rd largest manufacturers of pharma products, it has created a significant position for itself amongst the global pharma players. With raised consumption levels and heavy demand from the world for medicines, India is constantly enhancing its research and production facilities to cater to the global demands. India possesses the most advanced research facilities but still requires more laboratories and skilled man force to conduct research and experimentation to develop unique formulations that can be patented. This will lead to greater revenue and India can soon enhance its position in terms of the value of pharmaceutical exports. 

In this blog, we understand the key financial metrics used in the Pharmaceutical Industry. These denote the financial characteristic of the pharmaceutical industry. 

Revenue Generation: How is revenue generated in the pharmaceutical sector? So, basically, the pharma sector generates its revenue from research & development activities, marketing and distribution of pharma products, dispensing (i.e. transportation and handling of pharma products from the manufacturer to end-user), selling patented drugs, selling patent rights to any drug, and finally, the margin kept at each stage of distribution. 

Marketing & Selling Expenses: This is one of the major expenses in the pharma industry. Marketing plays a very important role in boosting the sales of any pharma product and without enough marketing, it is difficult to sell the product in the market. Companies undergo huge marketing campaigns that cost them lakhs or even more for big companies to promote their products in the market. Then finally offering it to the general public through various channels also poses a heavy burden on their financial statements. These are ultimately borne by the end customers in terms of high MRP.

Investment in R&D: Research and Development is one of the most significant part of the Pharma industry and thus a lot of money goes into developing the products. A good R&D department forms the foundation of any pharma company. Thus all the major companies have huge investments in the R&D units. This is the key to their survival and growth in the pharma industry. 

Product Diversity: The therapeutic segment in which any company decides to deal, also plays a major role in deciding the future of that company. The demand and supply of drugs pertaining to that segment will determine the revenue that this company is going to generate. But majorly big companies try to deal in all the major therapeutic segments. 

Clinical Trials: All these drugs and medicines developed by any company need to go through clinical trials and testing to ensure that they are safe and effective in their indicated use. 

Drug Development and registration Expenses: This is a major expense of any pharma company. Any drug developed by the company needs to be registered with drug authorities after several clinical trials. All these legal processes cost a lot of money to the pharma company.

IPR rights: The most important task of any pharma manufacturer is to develop unique formulations and get them patented. Getting drugs patented gives them exclusive rights over those drugs and thus can become a source of huge profits for any company. So almost every pharma company is focused on producing such formulations that they can get patented and earn profits out of it. 

Dividend Payout: SInce pharma companies are doing really well in terms of profits earned, so the investors also expect dividend payout from their pharma holdings. But many companies refrain from announcing large dividends and try to reinvest that into the business for future growth. Thus dividend decision also plays an important role in deciding the profitability as well as investor satisfaction. 

Indian Pharmaceutical industry has huge unrealized potential for revenues. Most of the companies deal in generic drugs which don't really make much money in the market. It is the patented drugs that generate money. Thus we need to realize our potential and invest more in education and research & development facilities so that we can also compete globally in forming unique drug formulations. This can pave way for India to improve its ranking in terms of the value of our pharma products being supplied to the world. 

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