Rising Cost Of Chinese Raw Materials Eat Into Margins Of Indian Pharma Companies

Hyderabad, 16 Aug 2018: Indian drug makers are staring at diminishing margins as raw material imports from China has increased while drug prices have stagnated. The cost of raw materials sourced from China has risen after Chinese government started cracking down on facilities that violate the country’s pollution control norms.

Many production units have been mothballed till the required clearances are clinched. This has resulted in a drop in production, which has consequently led to price inflation. India is one of the largest markets for pharmaceuticals, but production of drugs is usually undertaken with imported raw materials and intermediaries.

The pricing pressure on imports is hurting domestic manufacturers. Costly imports from China has led to an about 3 percent decline in Q1 FY19 margin for Laurus Labs, reports Business Line. Lack of an indigenous ecosystem for the extraction and processing of minerals, among other raw materials used in pharmaceuticals, could leave the sector vulnerable to price shocks in the supply chain.

India has picked up the reputation for being a net importer of drugs, acting as a dispensary to other countries in the neighbourhood, including China. However, geopolitics could change the status quo. Almost 90 percent of intermediaries used by manufacturers of active pharmaceutical ingredients (APIs) are imported from China, according to the Bulk Drug Manufactures Association of India (BDMA).

Any disruption in the supply chain induced by artificial scarcity, production cuts or bad bilateral relations with China could impact domestic drug makers. According to the Pharmaceutical Export Promotion Council (Pharmexcil), Chinese active pharmaceutical ingredient (API) and other raw materials exports amount to $7 billion a year.

Pharmexcil is optimistic that efforts at creating an indigenous procurement mechanism can be expedited. Research institutes and private players have been sounded out. The Institute of Chemical Technology, the Ministry of Commerce and the Council of Scientific and Industrial Research (CSIR) have been contacted by the pharma body for consultation. A basket of goods comprising of 60 raw materials and intermediaries have also been identified.

Some pharmaceutical companies like Dr Reddy’s Laboratories have taken the initiative to develop some raw materials in-house. However, drug pricing remains a concern in light of the high cost of acquiring raw materials for APIs.

Other manufacturers are planning to pass on the rise in input costs to customers. Aurobindo Pharma CEO N Govindarajan told Business Line that it may be forced to hike prices to cover cost in the antibiotic segment. It is also roping in domestic suppliers to bolster its procurement pipeline, if Chinese imports become commercially unviable.

Industry body Pharmexcil started an initiative last year to encourage raw material production and eventually reduce the sector’s reliance on imports. Moneycontrol