Why Indian pharmaceutical companies run the risk of driving up U.S. consumer drug prices when scaling too quickly: the diseconomics of scale.

Why the U.S. looks to India as a global supply chain hub for medications

India’s pharmaceutical industry saves U.S. consumers billions, but scaling too fast is a mistake. Premature scaling through mergers and acquisitions (M&A) is not just unsustainable, it is reckless and a recipe for inefficiency, error, and rising prices for U.S. consumers. In today’s political climate, America wants to bring everything home—everything but our pills. Despite the nationalist turn in U.S. policy under the Trump administration, we still depend on Indian pharmaceutical companies held to the same regulatory standards as those in the U.S. Why is pharma the outlier?

The answer lies in cost. Indian drugs are simply cheaper. Personnel costs, when compared to the U.S., to manage active pharmaceutical ingredients are 47.1 percent lower in India. Facility costs, from repairs to welfare expenses, are also 26.8 to 43.2 percent lower. These savings fuel the economics of scale, leading to mergers and acquisitions that are supposed to benefit both Indian companies and American patients. But scale has limits. When these Indian companies chase growth too aggressively, they risk collapsing under their own weight, ultimately hurting U.S. consumers.

Explaining economics of scale through M&A

India’s pharmaceutical hubs thrive on economies of scale. Mass production spreads fixed costs like research and compliance across millions of units, making each drug cheaper to produce. This gives Indian manufacturers a pricing advantage in global markets like the U.S., where affordability is key.

To expand quickly and deepen those cost savings, many firms turn to M&A. A 2023 Asia and the Global Economy study found that Indian firms involved in M&A outperformed peers on tech adoption and management efficiency, likely due to improved distribution, specialized equipment, and cheaper raw materials. But these deals only boost efficiency in Indian pharmaceutical companies to a point. Beyond that, overconsolidation undermines quality and delays delivery. These consequences land hardest on the U.S., where many depend on timely, affordable generics.

Diseconomics of scale

Diseconomics of scale arise when Indian pharmaceutical firms grow too large too fast, leading to inefficiencies, higher costs, and increased drug prices, often due to bureaucratic bloat and innovation stagnation. As firms scale, increased public scrutiny forces costly bureaucratic bulk that reduces efficacy and drives up prices.

Additionally, contrary to popular belief, there is no evidence that mergers aimed at achieving economies of scale lead to greater innovation or faster growth. In fact, innovation and growth can decline, contributing to diseconomics of scale. Ranbaxy’s rapid global expansion resulted in manufacturing violations and a 2008 FDA import ban. The ban delayed generic valsartan’s launch due to Ranbaxy’s exclusive marketing rights, triggering a 19.8 percent share drop in the company, legal battles from U.S. pharmaceutical firms, and delaying U.S. consumers’ access to more affordable drugs. Despite undergoing major mergers, Ranbaxy’s collapse demonstrates that growth alone does not guarantee better performance. The company’s issues were largely attributed to mismanagement and rapid overexpansion. Unfortunately, when generic monopolies like Ranbaxy falter due to overexpansion, it is consumers who suffer the most.

How to balance scale and diseconomics of scale

So how can Indian pharmaceutical companies protect themselves from the diseconomics of scale so that U.S. consumers are not left bearing the consequences of premature growth? The solution is not to avoid growth, mergers, or acquisitions altogether. Rather, it is to first focus internally, specializing and improving performance.

Research consistently shows that companies that specialize rather than endlessly expand tend to be more efficient, adaptable, and profitable. Unlike companies like Ranbaxy that pursued aggressive scaling without robust internal systems, Catalyst Pharmaceuticals shows the power of more disciplined approaches. Catalyst focuses on treatments for rare neurological and neuromuscular diseases. In 2023, CEO Richard Daly emphasized how maintaining a specialized focus allows the company to build close patient relationships while staying flexible in a changing marketplace rather than rushing into expansion.

Profitability depends not just on strategy, but also on employee performance. Companies should tailor performance-based incentives to individual contributions, as shown by increased employee engagement in a study on Bhopal’s pharmaceutical sector. With thoughtful, performance-based incentive structures, companies can boost morale, encourage innovation, and ultimately improve their bottom line—a principal step before taking on the goliath of global scale.

Expansion requires first building a strong foundation. Without it, Indian pharmaceuticals run the risk of stumbling into premature M&As and consequently driving up drug prices for American patients. Sustainable growth for Indian pharmaceuticals does not start with scaling up; it starts with scaling smart.

Adwait Chafale is a medical student.