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Rising API prices to hit drug firms' profit by 300-500 bps in 2-3 quarters

In the past few months, the prices of APIs from China have gone up in the range of 15-80 per cent, amid a crackdown by the local government on industries allegedly polluting the environment

Samreen Ahmad  |  Bengaluru 

Representative Image
Representative Image

Increasing prices of active pharmaceutical ingredients (APIs) from China are likely to hit the margins of Indian According to India Ratings and Research (Ind-Ra), this could hit the operating profit margins of the domestic pharma by as much as 300-500 basis points in the next two-three quarters of the current financial year.

APIs are key raw materials used to manufacture pharmaceutical formulations like tablets, capsules, and syrups.

In the past few months, the prices of APIs from China have gone up in the range of 15-80 per cent, amid a crackdown by the local government on industries allegedly polluting the environment. China, by far the biggest supplier of APIs to Indian pharma companies, accounts for almost 60 per cent of the total imports of the ingredients.

India imported 310,000 tonnes of and intermediaries in FY18, compared with 278,000 tonnes in FY17, according to the Ind-Ra report.

In the first quarter of the current financial year, major pharma firms in India, such as Lupin, Cipla, Aurobindo Pharma, Sun Pharmaceuticals and Glenmark, have reported a decline of 300 to 500 basis points in their gross margins on a year-on-year basis. The decline was largely on account of the rising cost of API imports, according to Karthikeyan Thangarajan, associate director – corporate ratings – Ind-Ra.

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The sector is already undergoing a high level of pricing pressure in key markets like the US and Europe. “that are more focused on the domestic market for their revenue are less exposed to this API input price hike. However, the ability of the companies focusing on regulated markets to pass on the price hikes is limited, given the level of competition they face in those markets,” explains Thangarajan.

The high API cost impact will be felt in a prominent way in the next two to three quarters as Chinese manufacturers shift their plants from densely populated regions to thinly populated areas, as directed by their government. Domestic manufacturers are also looking at developing alternative suppliers within India. However, due to the country’s dependence on Chinese imports, the country’s API manufacturing infrastructure has not grown much, and it will require tremendous investments, adds Thangarajan.

However, despite these profitability headwinds, the domestic pharmaceutical market’s growth is likely to remain robust, largely supported by various measures adopted by the government to improve access to medicines, said the Ind-Ra report.

First Published: Wed, September 05 2018. 12:59 IST
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