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The ability of Indian pharmaceutical companies to command higher margins in international markets is helping sustain business.
The goodwill built by big Hyderabad-based pharma companies is helping the small and medium players, which are predominantly into bulk drug manufacturing, withstand the current Chinese invasion into the Indian pharma sector.
The aspect further qualifies the symbiotic relationship these SMEs (small and medium enterprises) enjoy with companies like Dr Reddys' Laboratories where the latter not only outsources a part of its requirement for intermediates and raw materials to them but also helps in enhancing their status in the international market.
"The Chinese have almost taken over the supply of intermediates in the international as well as domestic market, though they are yet to make any dent in the bulk drug (active pharmaceutical ingredients) sector. So when it comes to value addition, we are the leaders. Customers across the globe give us special recognition because big companies from here have already made a name for themselves in terms of quality and trust. This is, in fact, helping us defy the Chinese competition and stay well on course," Narayana Reddy, president, Bulk Drug Manufacturers' Association, says.
The ability of Indian drug companies to command higher margins in regulatory markets is helping small and medium players sustain their business. However, the relatively small size of these companies is acting as an entry barrier since they need to invest more in terms of meeting the global quality standards as well as marketing themselves to enter regulatory markets.
"This is a chicken and egg situation. These companies cannot grow unless they enter regulatory markets. And they cannot enter the international market unless they make big investments, which they can hardly afford," says Subba Rao, managing director, Glochem Pharma Limited.
Yet, companies such as Glochem, which expects to touch a turnover of Rs 35 crore during the current financial year while hoping to increase the share of exports to 65 per cent from the present 55 per cent, has made it to the international market and is moving ahead.
There are around 250 companies that come under the Rs 5-crore category in and around Hyderabad. A few of them have already closed down or are running at low capacities. "I think the SME category as such would disappear in the next 3-4 years," says Varaprasad, adviser to BDMA, citing the problems amplified by the environmental safety and quality standards that have become stricter with the times.
"Environmental safety measures take away 30-35 per cent of the total investment. Quality control equipment, which becomes obsolete once in every 3-4 years, further adds 15-20 per cent to the capital cost. This accounts for almost Rs 2.5 crore of the Rs 5 crore investment. How can an entrepreneur sustain with a mere Rs 2.5 crore investment in actual manufacturing where multi-drug facilities alone can help him survive?" asks Varaprasad.
Reddy says the SMEs across the sector suffer from this problem because they cannot afford to comply with environmental safety measures while facing cut-throat competition. "The only solution in this case will be the government's support. If the government helps in setting up common facilities, such as effluent treatment and disposal plants, smaller companies will be able to utilise their resources more efficiently in manufacturing and marketing," he suggests.
"Another major problem being faced by smaller firms is manpower shortage. It is increasingly becoming difficult for SMEs to attract and retain talent because bigger companies lure them away with exorbitant salaries," Varaprasad says.
While the rate of attrition has been an issue with most companies, irrespective of size, Subba Rao says: "The impact on smaller companies is higher compared with the bigger ones. "Small companies hire fewer people and so if a couple of persons leave, replacement becomes a big issue. Whereas big companies employ in large numbers, therefore they can easily make up for the loss from the large manpower under their wings."
Rupee appreciation is another issue which has been troubling the SMEs in the pharma sector. "The export revenues of small firms have been hit hard. Companies that manufacture drugs under the DPCO (Drug Prices Control Order), which comes under the Essential Commodities Act, are operating on a very thin margin," he rues.
However, Subba Rao says the goodwill of big names has helped here. "Though the rupee-dollar fluctuation substantially dented the export revenue margins, some of the small firms could convince their overseas clients to increase the prices," he adds.
"It is more difficult to deal with European clients because the European currencies appreciated by 20 per cent in the last one year against the dollar which rose 12 per cent against the rupee in the same period," he adds. However, Glochem has been lucky. The firm's European clients agreed to increase the price up to 10 per cent following the exchange rate fluctuation.
But amid all this, two strategies seem to be working in favour of the SMEs one is contract manufacturing that companies like Arch Pharmalabs Ltd continuously do while acquiring small companies, and the second is the integration that brings more value addition to the operations of these companies to sustain and grow further.
In fact, formulations offer a big scope for growth for the Hyderabad-based companies, which account for almost 50 per cent of the country's bulk drug production.
In the eventuality of the SMEs disappearing under the burden of environmental and quality compliance, the possible scenario would be the floating of smaller firms by bigger ones.
"Some big companies are already running small units to meet their in-house requirements under different names. This could become a rule rather than an exception in future," an industry analyst points out.
