The contribution of intellectual capital to financial stability in Indian pharmaceutical companies
| Date | 24 August 2020 |
| Pages | 337-359 |
| Published date | 24 August 2020 |
| DOI | https://doi.org/10.1108/JIC-03-2020-0091 |
| Subject Matter | Information & knowledge management,Knowledge management,HR & organizational behaviour,Organizational structure/dynamics,Accounting & finance,Accounting/accountancy,Behavioural accounting |
| Author | Giuseppe Festa,Matteo Rossi,Ashutosh Kolte,Luca Marinelli |
The contribution of intellectual
capital to financial stability in
Indian pharmaceutical companies
Giuseppe Festa
Department of Economics and Statistics, University of Salerno, Fisciano, Italy
Matteo Rossi
Department of Law Economics Management and Quantitative Methods,
University of Sannio, Benevento, Italy and
WSB University in Poznan, Wy_
zsza Szkoła Bankowa, Poznan, Poland
Ashutosh Kolte
Department of Management Sciences, Savitribai Phule Pune University,
Pune, India, and
Luca Marinelli
Department of Management, Polytechnic University of Marche, Ancona, Italy
Abstract
Purpose –This research investigates the top five pharmaceutical companies in India to determine whether
their financial structures are sound and if they face the risk of bankruptcy, highlighting the potential
contribution of intellectual capital (IC) to financial stability.
Design/methodology/approach –The analysis outlines operating ratios, profitability ratios, possibility of
bankruptcy (through Z-scores) and attractiveness of the financial structure (through the F-score), with
consequent focus on (IC).
Findings –The financial structure of the selected companies seems stable. Changes in the Indian
pharmaceutical scenario, above all, regarding the patent system, will force the companies to consider the
impact of IC carefully.
Practical implications –Indian pharmaceutical companies need sustainability and development, with
increasing focus on patent issues. To enhance innovation capabilities and overcome international competition,
they should redesign their business orientation towards IC, mainly when impacting patents.
Originality/value –Using established approaches for predicting potential bankruptcy, this study focuses on
the financial performance of top Indian pharmaceutical companies. IC can support financial stability, and this
study provides further perspectives for managing their financial structure, both statically and dynamically.
Keywords Pharmaceutical industry, India, Intellectual capital, Financial performance, Altman Z-score,
Piotroski F-Score
Paper type Research paper
1. Introduction
The global pharmaceutical industry is highly significant for human race, and is expected to
grow exponentially, especially considering the tremendous impact of Covid-19 in 2020. The
Indian pharmaceutical industry shows currently huge competencies in drug production,
resulting as the third largest producer in terms of volume, the first for generic drugs and the
first for vaccines (InvestIndia, 2020).
Intellectual
capital in
Indian pharma
337
© Giuseppe Festa, Matteo Rossi, Ashutosh Kolte and Luca Marinelli. Published by Emerald Publishing
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The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1469-1930.htm
Received 11 March 2020
Revised 24 May 2020
14 July 2020
1 August 2020
Accepted 1 August 2020
Journal of Intellectual Capital
Vol. 22 No. 2, 2021
pp. 337-359
Emerald Publishing Limited
1469-1930
DOI 10.1108/JIC-03-2020-0091
Indian pharmaceutical companies have approvals from the most important drug
regulatory authorities in the world, including the Food and Drug Administration (FDA) in the
USA. Many multinational companies have invested in India, stimulating huge expansion and
highlighting the country on the global pharmaceutical map (Kodgule, 2012); expectations are
high regarding further growth (Ibef.org, 2020).
The Indian pharmaceutical industry is growing rapidly, focusing more on the quality of
drugs produced. The government is acting accordingly and considers pharmaceuticals a key
sector for the entire healthcare economy of the country (Shukla and Sangal, 2009).
The Indian pharmaceutical sector was valued at 33 billion USD in 2017, and with a
compound annual growth rate (CAGR) of 22.40%, it will reach 55 billion USD in 2020, with
better growth prospects than the global pharmaceutical market. India exports medicines to
over 200 countries, and exports are increasing and likely to exceed 20 billion USD in 2020
(Ibef.org, 2020).
The main strengths of the industry are product line variety, product variation number,
low cost and scale manufacturing (Kolte et al., 2019). The main weaknesses emerge from
macroeconomic and microeconomic viewpoints. In the former, branded generics account for
70–80% of the retail market (InvestIndia, 2020), local players have a dominant position due to
initial investments and expansion abilities and strong competition generates low prices. In
the latter, research, innovation and most of all patents are critical issues.
In terms of emerging economies, Lehman (2003) suggested significant potential for
pharmaceutical patents in India and Brazil, with a focus on local diseases and affordable
costs. Public funding for research and minimum licensing protocols are key aspects in this
respect.
Duggan et al. (2016) highlighted fundamental changes since 2005, when the introduction of
the new patent system in India generated an increase of the number of patents filed. Before
the new patent system, most drugs were domestically manufactured and based on molecules
patented abroad, generating only a minor increase in the expected profits for Indian firms,
which were not oriented to creating new products.
Nevertheless, the Indian regulatory guidelines of 2012 complicated the market for generic
drug producers. There is a need for higher skills and enhanced technological competence for
producing biotechnology drugs that are still lacking in the Indian generic drug production
sector (Chaudhuri, 2015).
To strengthen the sector, the government has launched three major schemes. First is the
“National Health Protection Scheme”, which is the largest government-funded healthcare
initiative in the world and is expected to help about 100 million low-income families in India.
Second, “Pharma Vision 2020”is a programme aimed at making India a global leader in end-
to-end drug research and manufacturing. Third, online pharmacies are regulated via an
electronic platform.
The development of the Indian pharmaceutical sector will also rely on foreign direct
investment (FDI), attracting multinational corporations (MNCs) from all over the world.
Under certain conditions, in cooperation with the Department of Industrial Policy and
Promotion (DIPP), the Indian government is expected to support policies allowing 100% FDI.
Pashkov et al. (2016) emphasised that the growth and success of the pharmaceutical
industryis dependent on government policy,improvements in public healthand support of the
state. It is equally essential to increase the availability of medicine, research innovation and
drug exports.Currently, global competitionfor Indian companies requiresa business approach
towards production efficiency, innovation efficacy and increasingly financial stability. The
risk for emergingeconomies, such as in the airlines industry(Rossi et al.,2019), is that vigorous
growth could distract entrepreneurs and/or managers frombusiness fundamentals.
This research investigated the top five pharmaceutical companies in India to determine
whether their financial structures are sound and if they face the risk of bankruptcy. In terms
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