Potent Mix
COVER STORY/ PHARMA INDUSTRY
| Clearly it's a paradoxical situation for the small and medium scale enterprises (SMEs) in the Indian pharmaceutical sector. Even as many face the threat of closure due to a changing business environment, there are still other pharma SMEs that are successfully riding the waves of change. |
| Last few years have seen nearly 5,000 pharma SMEs undertake structural changes at various levels involving acquisitions, unleashing of new identities based on their locational advantages, technology strengths and financial-marketing powers. This process is bound to witness winners emerge, who will then be expected to make the critical transition to the big league; the losers, of course, will have to face the terrible prospect of closure. |
| Let's look at all the positive aspects supporting pharma players first: Hints from market data are encouraging, for instance, and domestic prescription pharmaceutical sector last year recorded 18 per cent growth "� highest ever in its entire history. |
| According to data compiled by leading drug prescription audit agency ORG-IMS, Indian prescription drug market in 2006 was worth Rs 27,333 crore, up by 18 per cent as compared to Rs 23,243 crore of 2005. The data also revealed that bulk of this business came from the sale of drugs that do not enjoy patent protection, manufactured and marketed by domestic companies "� including pharma SMEs. |
| The reason for the growth is interesting, as it is attributed to the deeper penetration of drug sales in domestic market. With access to modern medicines still a dismal 40 per cent in India, domestic pharmaceutical companies with entrenched distribution network are likely to continue the growth trends at 12-14 per cent over the next three to five years, it is learnt. |
| Says Shailesh Gadre, managing director ORG-IMS Research Ltd "We believe that the performance of the domestic drug companies was driven by increased penetration to smaller towns and villages. The therapeutic segments contributed to more than proportionate growth were acute segments like antibiotics and non-steroidal anti-inflammatory drugs (NSAIDs). There cannot be no major change in this trend in immediate future". |
| This analysis is especially relevant when seen in the context of SMEs that normally restrict themselves to regional pockets when it comes to marketing their select product portfolio of antibiotics or NSAIDs like paracetamol. "The surge in economy and the increase in the purchasing capacity of consumers here will have a positive impact on healthcare spends. Drug companies with strong marketing network are bound to succeed" says R C Juneja, MD, Mankind Pharma. |
| To be sure, the pharma fortunes have not received any special growth trigger in the recent Budget 2007-08, as it has been viewed as largely neutral. In fact, most of the recommendations from the pharmaceutical sector have been neglected. However, what has helped many pharma SMEs are the changes in drug regulatory norms; though this is a source of trouble to several other players in the industry. |
| The attempts of the Indian drug regulatory agency "� Central Drugs Standard Control Organisation (CDSCO) "� though initially viewed as limiting roadblocks on account of the additional investments involved, has actually helped players align with rules and regulations and the international norms. On the back of these, many SMEs have managed to attract considerable contract manufacturing opportunities from the big players. The major pharmaceutical companies have also gained from the deal as they now outsource quality products for their domestic sales from local companies and utilise their facilities (having international quality standards) for manufacturing medicines for export purposes. |
| The second major cause of resurgence among SME pharma sector is its shift towards excise free zones of the country. Over 300 units, majority of them SMEs, are known to have set up manufacturing base in excise free states like Himachal Pradesh, Jammu & Kashmir, Uttaranchal and the North Eastern region. The tax concession enjoyed by these firms and the state-of-the-art, manufacturing facilities have managed to garner large contracts from big pharma players. While these, companies expect to break-even within three years (by the time the excise concessions are over), they are hopeful of utilising their spare capacities for export production in future. |
| That explains the optimism shown by S V Veerramani, chairman and MD, Fourrts (India) Laboratories Pvt Ltd. Veerramani, the chairman of SME committee of Indian Drugs Manufactu-rers Association (IDMA) finds "tremendous future" for SMEs in pharmaceutical sector. |
| "Initially SMEs had a problem with the additional investments they had to make for upgrading their manufacturing facilities to the revised good manufacturing practices standards of CDSCO. Now that they have seen the overcome that the hurdle imposed, on the basis of these upgradations they can now think of going global. With widening global opportunities, they can easily upgrade their existing units to WHO standards and cater to less regulated markets in Africa, South East Asia and CIS countries," he says. |
| According to Veerramani, finance will never be a problem before a professional pharma SME that aspires to grow big. Having succeeded in turning his own SME - Fouurts - into a major drug manufacturer, exporting medicines to over 40 countries within a short span of time, Veerramani says that the assistance from both the private and public sector financial institutions was more than sufficient for aiding business growth. |
| "The formation of pharmaceutical export promotion council (Pharmexcil) is very timely. The council is going to unleash many programmes (Market Access Initiative, for instance) where they reimburse the entire registration expenses or expenses incurred during market exploration trips for SMEs. With the advent of internet, seamless communication is also a reality." This is a defining moment for pharma SMEs of the country," says Veerramani. |
| Of the 5,000-odd SMEs in the sector, over 2,000 are expected to have prepared themselves to face the challenges of future business. Veerramani is of the opinion that only 100 SMEs, among these 2,000 units that have complied with the changed regulatory requirements and are capable of a fresh take off, have entered the export business. |
| "Rest of them can also think of tapping the export markets in the coming years. Big players are not focusing on less-regulated pharmaceutical markets. India can very well become the formulation supplier of the world. With foreign countries looking at India as a preferred outsourcing base, companies here should be able to successfully foray into export business," he says. |
| Veerramani's advice to the players hesitant to seek changes, is to look at cluster opportunities to maximise their production. The cluster approach is catching up in several traditional SME pharma manufacturing hubs of the country. Here the companies will have the advantages of bulk purchase as they can think of bargain prices on virtually everything, beginning from the raw materials to the equipment to common effluent treatment facilities, etc., he explains. |
| What about the future of the remaining 3,000 units? Veerramani feels that these remaining players are better tuned for regional markets. The smaller companies, which do not have the wherewithal to grow big, can think of secured regional markets. "The domestic market being so large, offers growth opportunities for every player. There are huge institutional markets to be catered to. Hence, the tender businesses can be better tapped by small firms that have the agility for quick decisions," he feels. |
| Finally, there is this untapped segment - the therapeutic areas where bigger players are not interested. Veerramani puts this as 'therapeutic gaps' that could be filled in by the SME sector. "Dental segment, surgicals, nutraceuticals (food supplements), over the counter drugs, non-antibiotic pain management medicine segment, etc present of opportunity for niche developments. SMEs should focus on such areas for better market penetration and faster growth," he said. |
| However, there is the other view as well. "SME situation cannot be generalised. There could be some silver lining, but majority are on the verge of closure due to the same government policies that help a few", says S R Vaidy of Sunyan Pharma. Vaidya, co-chairman of the SSI committee of IDMA feels that SMEs in traditional manufacturing areas like Hyderabad, Gujarat, Maharashtra, the southern states and the ones remaining in states that surrounds excise free zones (states like Punjab and Haryana) are all struggling to survive. "There is no level playing field for SMEs in this country. Not everyone can migrate to excise free zones. Not a single issue raised by us has been addressed by the government" Vaidya laments. |
| According to him, another 1,000 drug SMEs will face closure within six months. "We had 2347 pharma SMEs in Maharashtra in 1999. This year, the official figures have come down to just 800. This explains the seriousness of the situation. Only a few hundreds would be left out", he fears. |
| Jagdip Singh, President, Punjab Drug Manufacturers Association has a point when he says that most of the SMEs in drug sector will not be able to migrate to excise free zones after having invested huge amount in upgrading their existing facilities for regulatory compliance. "Most of the SME drug units producing about 40 per cent of total medicines in the country cannot migrate. Secondly, a large unit can recover the cost of the plant in less than a year, while SME cannot recover it before five years. Except states enjoy excise exemption only till levy of GST in 2010. It simply means small scale drugs units have to perish, whether they migrate or not". |
| In the final analysis, what is clear from the feedback available from various industry sources is that, it is too early to rule out the survival chances. If the government policies were the primary reason for the difficult phase of some pharma players, then all it takes is a shift in policy that is more SME-friendly with more relaxed rules and regulations. Parleys are on, and SMEs hope to see the reversal of some harmful policy directives from the central government very soon, which is bound to work wonders to this knowledge-intensive sector. |
| Read more 'We have leveraged purely on marketing strengths' Grave issues with MRP Private equity is fueling SME growth A road to excise free zone |