MSMEs in pharma: Why revenue growth for the sector in FY22 may dip despite Covid vaccine opportunity

As per the Indian Economic Survey 2021, the domestic pharma market is likely to grow 3x this decade from $42 billion in 2021 to $65 billion by 2024 and further to around $120-130 billion by 2030. (Image: Pexels.com)

Ease of Doing Business for MSMEs: Indian pharmaceuticals (pharma) sector, which has MSMEs as its key growth driver, is staring at shrinking revenue growth and decline in operating profitability this financial year (FY), according to market experts. Slower growth in exports, higher prices of raw materials known as active pharmaceutical ingredients (API) or bulk drugs, shipment challenges including container shortage, rising input cost for corrugated box makers, and more are likely to cost pharma businesses this fiscal growth. The impact assumes significance as the sector had leveraged Covid-induced opportunity in selling Covid-related vaccines and drugs to other countries.

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“Exports have declined as production has come down. There are curbs on imports from China, on which the industry depends for a majority of bulk drugs. Hence, revenue will go down this year even as the government has given some encouragement a few months back to focus on the domestic bulk drug industry. So, setting up of pharma clusters in various areas will take some time and meanwhile, the growth will be impacted,” TV Narayana, National President, Indian Pharmaceutical Association (IPA) told Financial Express Online. IPA is a national body representing over 10 lakh pharmacists and pharmaceutical scientists from industry, academia, regulatory, hospital, and community pharmacy.

Another key factor that was likely to hurt Indian pharma sector was the power crisis in China as nearly 70 per cent APIs need of Indian pharma businesses was fulfilled by imports from China. However, as the coal crisis not just in India but China as well begins to ease, with a gradual rise in coal supplies at power plants, this challenge is getting mitigated progressively.

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“Last year was phenomenal for pharma and healthcare. There was a lot of growth due to Covid even as some segments like dental clinics didn’t grow much. Once India’s own demand for the vaccine comes down, exports should go up and make up for the gap as many countries need Covid vaccines along with PPE kits. The revenue growth would still be slightly higher this year in comparison to 2019,” Suresh Khanna, Managing Director at regulatory consultancy firm for pharma sector Dossier Solutions and Services told Financial Express Online.

The decline in revenue growth is likely to be from 12.5 per cent last fiscal to 9 per cent this fiscal due to slower growth in exports despite some support from Covid-19 vaccine opportunities and a pick-up in demand in the domestic formulations market, said rating agency Crisil in a statement on Tuesday. Formulation is essentially a process of combining different chemical substances with the active drug to produce the final medicinal product.

The reasons cited for sluggish exports have been high competition among generic players amid growing pricing pressure in the US market and lower visibility of new product launches due to delay in closure of regulatory actions on manufacturing plants by the US Food and Drug Administration (US FDA).

As a result, growth in exports is likely to be 5-6 per cent this fiscal vis-a-vis 23-25 per cent on the back sale of Covid-19 related drugs and vaccines in regulated and semi-regulated markets, the agency added citing its study of 207 pharma firms that accounted for 55 per cent of the Rs 3.2 lakh crore-a-year revenue for the sector. With respect to the operating profitability, a decline of 300 bps to around 20 per cent this fiscal is expected because of the rise in prices of APIs imported from China among other reasons.

For instance, paracetamol API price has jumped from around Rs 500 per kg to nearly Rs 1,000 per kg in the past few weeks. According to industry estimates, medications such as guaiphenesin have jumped from around Rs 550 per kg to over Rs 800 per kg while metformin has increased from around Rs 250 to over Rs 380 per kg and spironolactone has jumped to around Rs 31,000. Moreover, PVC prices have jumped around 40-50 per cent from approximately Rs 85 per kg last year.

“Operating profit will be hit because drugs are controlled by the Drugs (Prices Control) Order (DPCO), which regulates the prices of drugs, wherein even though the material cost is increasing, the industry cannot increase the cost of the medicine. If we apply now for increasing the cost of medicine, it would take time at least till next year to be applicable, if approved. So, profits will definitely shrink this year. There is a price control formula based on which DPCO fixes the price of medicine. The entire process takes a minimum of one year,” added Narayana.

Moreover, continued pricing pressure in the US and price cap for products under the Drug Price Control Order in the domestic market will limit the players’ ability to pass on the rise in input prices, said Crisil. Importantly, operating profitability had hit a record high of 23 per cent last fiscal on the back of cost-control initiatives and lower selling and marketing costs because of the pandemic-induced travel restrictions.

“Profitability will be hit as raw material costs have gone up phenomenally along with packaging material cost, freight cost, marketing cost, etc. We cannot increase the prices like other industries. MSMEs will be the most impacted ones. However, this is a temporary impact and things should be normal from next year-end onwards,” said Amit Nanda owner of local pharmacy chain Nanda Chemists told Financial Express Online.

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The situation might ease also because demand in the domestic pharma market is seeing a gradual recovery. According to Isha Chaudhary, Director, Crisil Research, “With normalcy returning to healthcare delivery services, domestic formulations revenue, led by acute therapies, is estimated to grow 14-16 per cent this fiscal, compared with 2 per cent last fiscal.” Moreover, with enhanced capacities and a better rate of vaccination, Covid vaccines also provide additional domestic growth potential this fiscal, Chaudhary said.

As per the Indian Economic Survey 2021, the domestic pharma market is likely to grow 3x this decade from $42 billion in 2021 to $65 billion by 2024 and further to around $120-130 billion by 2030. Also, pharma exports stood at $24.44 billion in FY21, up by more than 18 per cent from $20.58 billion in FY20, as per the Pharmaceuticals Export Promotion Council of India. According to IBEF, India is the 12th largest exporter of medical goods in the world. The sector has a share of 6.6 per cent of India’s total merchandise exports.

Before pausing Covid vaccine exports in April to meet domestic requirements, India had exported close to 66 million doses under the Vaccine Maitri Programme to 95 countries, as per Niti Aayog while over 100 million doses were sent to neighbouring countries including Nepal, Myanmar, Bangladesh, and Iran. The country had last month reportedly resumed exports of Covid vaccines.

“India is becoming self-sufficient in pharma production. Before Covid, bulk drugs were coming from China but now many bulk drugs are being manufactured in India. All essential drugs are price control drugs. They have higher consumption and higher volume but lower price and hence lead to lower turnover of businesses while non-essential drugs have higher prices and hence result in higher turnover of businesses dealing into such drugs. However, an increase in turnover depends on multiple factors, price is one of the factors,” said Professor RN Gupta (retd), Department of Pharmacy, Birla Institute of Technology, Ranchi told Financial Express Online.