To accelerate recovery of pharma ancillary industry, primary focus should be financial relief to players

The distribution of ancillary supplies, which include necessary drug manufacturing components like APIs, excipients and packaging material, suffered a severe setback as the government implemented a nationwide lockdown to curb the coronavirus spread. What is the full measure of the disruption caused in the ancillary industry in India due to the COVID-19 pandemic?

While the pharma sector in the country was able to operate during the coronavirus-induced lockdown, the $9 billion ancillary industry faced severe restrictions during this time. With many industries/products not falling under the ‘essential business’ umbrella, ancillary companies faced challenges around manpower availability, logistics disruptions, and raw material shortages.

While these issues have largely been resolved with the re-opening of the economy, financial distress continues to a big challenge, especially those within the MSME category. With the government announcing various assistance packages to financially stabilise these firms, disbursal of these packages has been an ongoing challenge leading to severe financial stress for smaller players.

The report ‘REVIVING THE PHARMA ANCILLARY INDUSTRY’ suggested that partnerships, especially the ones formed between big pharma companies and MSMEs, could go a long way in strengthening the ancillary industry in India. How will such a partnership function? What are the various benefits that the participating companies may enjoy?

MSMEs represent 60 per cent of the ancillary industry and are a vital part of the pharma supply chain. The partnership between large pharma companies and ancillary players is envisioned as a mutually beneficial relationship that will result in creating a transparent view of the customer and the supplier network across the value chain.

Through these partnerships, large pharma companies can mentor the ancillary players by providing them access to frugal innovation, while also supporting demand aggregation across ancillaries of a similar kind to negotiate better with the source.

Further, this network can assist in developing the commercial acumen of ancillary players by ensuring better payment terms across the value chain and implementing price hikes wherever required, to ease the financial distress on the ancillaries

With a turnover of over $9 billion, the ancillary industry is a major segment of India Pharma Inc. Even before the COVID-19 hit, this segment has had its share of hiccups. How has this segment shaped over the years, and what are the challenges that it has faced? Please also tell us about how these got amplified by the COVID crisis.

Ancillary companies, over time, have clustered in two ways: close to the buyers (in case of industries like packaging) or as backward linkages for industries like API which have a high dependency on the location of utilities. These small businesses are characterised by low levels of automation, which results in higher dependency on manpower.

Given the nature of the business for these MSME ancillaries, most of them were already facing stretched working capital cycles even before the pandemic, which further intensified with the lockdown and the median gross current asset days stretching up to 220. Further, a drop in demand and manpower shortage has led to constrained operations and lower revenues. With a reduced top line, constrained working capital and higher cost impact, the MSMEs are looking down the barrel with increased financial pressure with no relief in sight.

What are some short-term and long-term remedial measures that can be adopted to boost the growth of the ancillary industry, in the present and the post COVID era?

To accelerate the recovery of the pharma ancillary industry, the primary focus needs to be delivering financial relief to the players. While relief packages have been announced, the government needs to ensure a mechanism for effective disbursal of the proposed interventions and availability of loans to smaller units. In addition, support on working capital extensions and relief on expenses (statutory and wage-related) can further lighten the financial burden on these players.

Another immediate focus area should be towards implementing safety protocols at the workplace, to minimise incidences of infection.

What would be an ideal disaster management framework to protect this segment, if the industry has to face similar unfortunate circumstances in the future?

A robust disaster management capability must leverage learning from past disruptions with a control tower as the nerve centre to ensure industry readiness in case of similar crises in the future. Developing a business continuity toolkit will be key to leverage past learnings, including a comprehensive list of essential industries across the pharma value chain, rapid response SOPs in case of infection detection, clearly defining roles and responsibilities of key stakeholders and a comprehensive view of the ancillary network in the pharma ecosystem with all the backward linkages. This toolkit can feed into a COVID-19 Control Tower to ensure on-ground issues are effectively resolved and risks are proactively identified and mitigated.

The Control Tower will play a pivotal role in influencing and managing precise communication and flow of information across stakeholders and hierarchies of administration. It can influence policy, proactively control, and monitor communication to ground authorities to avoid ‘loss in translation’, be the single POC for issue resolution for manufacturers and coordinate with other regional war rooms.

Lately, there has been a lot of emphasis on making the Indian pharma industry self-reliant to avoid dependence on exports for APIs and other supplies. How can the ancillary industry incorporate the essence of ‘atmanirbharta’ in its operations?

In the next one to two years, it would be necessary to reduce reliance on imports from a single geography to manage supply disruptions. This will require the government to identify strategic APIs for indigenous manufacturing and provide early approvals to clusters, set up common utilities to make smaller units economically viable, lower borrowing costs and embed strong research-based linkages to continuously innovate to improve process technologies.