Bulk Drugs Industry Set For Shakeout As Prices Dip And Margins

Call for the stretcher, wheel the patient in and grab the oxygen mask. Now close your eyes and picture the domestic bulk drug industry on the operating table.

After curing people for decades, the over Rs 2,000 crore industry has been stricken by a spate of maladies, sending red sirens blaring all over. Companies are now resorting to emergency procedures to get rid off the malaise.

Consider the facts:

For the past one year, bulk drug prices have plummeted, thanks to excess capacities and cut-throat competition.

Dumping by Chinese manufacturers has eroded profit margins and forced production shutdown in some cases.

 

Overcapacity looms in several products heightened by the presence of innumerable companies. The last count was nearly 15,000.

Prices of ampicillin sodium have crashed 26 per cent, amoxycillin by 25 per cent, ciprofloxacin by 27 per cent, cephalexin by 17.5 per cent, pyroxicam by 17 per cent and trifluoperazine HCl by 24 per cent.

All these are major drugs contributing a major share in the turnover of several companies. Prices have now fallen so much that small manufacturers cannot go below the current level and are making losses, said an official of a bulk drug producer based in south India.

The problem is not so much in the external environment, as in the very nature of the bulk drug industry. Bulk drug manufacture is a high volumes business, requiring simple manufacturing process and small investment.

Add to this, government concessions on sales tax and excise, exemption from price control for small scale sector and the industry soon became a modern-day El Dorado for several small entrepreneurs. The unorganised sector contributes around 35-40 per cent to the total domestic turnover.

Margins are thin and growth is mainly volume led.

Then theres price control. Prices of a majority of bulk drug, 76, are controlled by DPCO. If derivatives are included the number rises to 99.

Sources in the Bulk Drug Manufacturers Association (BDMA) said of the 250-plus units in Hyderabad, nearly 100 are sick.

Inspite of a growth in bulk drug production, margins are being squeezed due to undercutting, said BDMA sources.

And the bottomlines tell their own tale. SOL Pharma, a Hyderabad- based bulk drug manufacturer, posted a 36 per cent decline in its first half profit for 96-97, from Rs 6.74 crore to Rs 4.32 crore.

The present shake-up is only a correction of the situation created by overcapacities being created. Small companies that resorted to borrowings have been unable to withstand competitive pressures and service high interest costs and now they are on the decline, says Smitesh Shah, co-chairman of the bulk drugs sub-committee at Indian Drug Manufacturers Association.

The gloom is not just due to poor prices. There is also the question of demand. Projections by IDMA show that despite the demand for many other bulk drugs growing at around 5-15 per cent, growth in demand for bulks like penicillin, streptomycin, tetracyclin, analgin, tolbutamide, chloramphenicol, tetramisole, and most sulpha drugs like sulphacetamide has stagnated.

For example, demand for chloramphenicol in 94-95 was 112.2 metric tonne (MT). In 1996-97 it is expected to touch only 115 MT.

In other categories, the glut is eating into profitability. Take for example the penicillin industry.

Prices of penicillin-G have crashed from Rs 1075 per BOU in October 1995 to Rs 475 per BOU currently. Hindustan Max GB, a major penicillin producer posted a Rs 11 crore loss in 96-97.

Even exports, usually an escape route for pencillin companies, has not come to the rescue. International prices of penicillin have dropped from around $18 last year to $12 currently.

Kopran, which is the largest manufacturer of semi-synthetic penicillin in the world, has deferred its plans to set up a manufacturing unit in South Africa as it is economically unviable at present.

The only way out, say industry sources is to move into down-stream products like ampicillin and amoxycillin which are growing between five to 10 per cent. SPIC recently announced its decision of a forward integration into downstream intermediate formulations.

Dumping by Chinese producers is another major cause of concern. As a case in point, Chinese dumping of Chloroquine Phosphate, an anti-malarial drug, forced domestic manufacturers to sell below the notified price of Rs 1,340 per kg as imports are available at Rs 1,000 per kg. Ipca Labs and Tata Pharma, which produce around 70 per cent of domestic chloroquin, have cut down production.

The survival strategy for the industry, say analysts, lie in mergers, sourcing arrangements with larger companies and increased focus on exports.

Large firms, have of late, turned to acquiring bulk drug companies with established manufacturing facilities Vorin Labs was acquired by Ranbaxy Labs and Sumitra Pharma was acquired by Nicholas Piramal.

Another option for small companies would be to act as supporting units to multinationals. With its cheap labour and material costs, drug prices in India are one sixth of world pharma prices. Most multinationals resort to third-party manufacture.

SmithKline Beecham recently tied up with Ipca for sourcing its formulations for developing countries. Smaller companies like Orchid Chemicals & Pharmaceuticals and Cheminor drugs, are trying to increase exports. Orchid, which makes cephalosporins increased its export turnover from Rs 110.43 crore to Rs 182.68 crore.

Bigger players like Lupin Labs, are waiting for drugs to go off patent so that they can tap the generic market.