Compliance, competition could be speed breakers
As India positions itself as part of the China+plus one strategy, China has a counter strategy: dumping of low cost imports and competing at unsustainable rates in export markets
Speaking at the recent ASSOCHAM Annual Pharma Summit 2024, Secretary, Department of Pharmaceuticals, Dr Arunish Chawla’s review of the regulatory reforms needs to go hand in hand with the growth opportunities. But lost among the headlines that 50 greenfield pharma plants would be completed in the next two years under the PLI scheme, and pharma and medtech becoming India’s fourth largest sector for merchandise exports, Dr Chawla’s comment that “we want to make India not just a pharmacy of the world, but a reliable pharmacy of the world” deserves more spotlight. (https://www.expresspharma.in/50- new-pharma-plants-under-pli-scheme-to-be-completed-in-twoyears/)
A recent CRISIL report, based on a study of 190 drug makers, accounting for about half of the Rs 4.1 lakh crore market last fiscal, projects that the pharma sector is set for 8-10 per cent revenue growth this fiscal, due to healthy exports to regulated markets, recovery in exports to semiregulated markets and steady domestic demand. As per Aniket Dani, Director, CRISIL Market Intelligence & Analytics, formulation exports are expected to grow 12-14 per cent in rupee with the regulated markets of the US and Europe witnessing a growth of 13-15 per cent, driven by continued drug shortages, easing pricing pressures in the US generics market and the volume uptick expected from new product launches as well as players shifting focus towards niche molecules and speciality products. On the other hand, exports to semi-regulated markets will grow 8- 10 per cent this fiscal, led by improving forex reserves, strengthening of local currencies against the dollar, and easing economic crises in select African and Latin American countries.
On the domestic front, Aditya Jhaver, Director, CRISIL Ratings predicts that with strong cash flows and healthy balance sheets, players are increasingly focusing on inorganic growth opportunities in the API and the formulation space, to either diversify the product portfolios by acquiring the brands/businesses and/or to consolidate market share in the targeted therapeutic areas.
Reports from India Ratings and Research (Ind-Ra) highlight that the sustainability of the US business remains key to support the low margins in other markets. Rating the 1QFY25 performance of a sample of 18 leading pharma companies, the Ind-Ra report points out that normalisation of drug prices in the US and a softening in raw material prices will help companies to keep revenue growth of 9 per cent yoy and EBITDA margin of about 22 per cent during FY25. Ind-Ra sees the pharma industry moving up the value chain in the US, with an increased focus on developing complex generic products (injectables, patches, inhalants, nasal, ophthalmic) over the past five to six years, which offsets the price erosion in existing molecules.
However, it won’t be smooth sailing. Let’s consider two major factors: China and non-compliance with manufacturing norms.
As India positions itself as part of the China+plus one strategy, China has a counter-strategy: dumping of low-cost imports and competing at unsustainable rates in export markets. Ind-Ra reports point out that API prices have witnessed a steep decline over the past year in domestic and export markets, due to aggressive Chinese pricing/dumping, stabilisation of supplies from China, excess capacity caused by past capex and ProductionLinked Incentive scheme-led capacities coming online, and lastly, factors like weakness in export demand etc. While the fall in domestic API prices has been in the range of 15-40 per cent, price declines have been steep in the export API business, upwards of 25 per cent.
For instance, the report states that domestic API prices of paracetamol crashed 40 per cent over the past year. Other examples include metformin (15-20 per cent), ibuprofen (25-30 per cent) and ciprofloxacin (15-20 per cent). Export price/kg of ciprofloxacin declined 69 per cent while paracetamol declined 35 per cent.
Export volumes of APIs have also declined over the past two quarters, with inventory destocking by customers in regulated markets, weakness in demand scenario and competition from Chinese suppliers.
Some relief comes from a decline in the raw material prices since 1QFY23, led by a multitude of factors, majorly Chinese dumping, which resulted in better gross margins for Indian API companies. China’s role in predatory pricing is well known and will continue, as a pushback to India’s new pharma plants under the PLI scheme getting to production stage over the next two years.
Secondly, on the compliance front, an increase in USFDA inspections in FY25 is also expected which might impact growth prospects. Though Ind-Ra predicts that these are unlikely to cause significant disruptions, a recent inspection report should have pharma companies on high alert. A Form 483 highlights serious deviations at Granules India’s Telengana facility, including disposing off truckloads of torn manufacturing documents, bird droppings and feathers on some air purification units and improper cleaning of manufacturing equipment leading to the possibility of cross-contamination. Such incidents could derail growth projections, not just at the defaulting company as more stringent regulatory oversight measures could extend across the sector.
India’s drug watchdog the CDSCO too has pulled up many pharma companies for not-of-standard quality (NSQ) (substandard) drugs but most pharma majors claim that these batches are spurious and not manufactured by them. For instance, Alkem has pointed out that there are differences between the CDSCO samples and the actual batches manufactured by Alkem in terms of physical appearance, colour, and text when labelling the two products. Companies have also pointed out that QR codes are missing from these batches. While these incidents make a case for increased investments in anti-counterfeiting measures, public awareness of such features needs to increase. The onus is on all stakeholders: government, pharma companies and the public, to use these features to check if the pills we are popping are authentic and safe.
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