Smaller pharma contract producers face closure

Even as the pharmaceutical industry is growing steadily, attracting more foreign players into the market, small enterprises that have been depending on contract manufacture for larger players are facing the threat of closure, says a federation of small-scale pharma industry associations in the country. 

On the one hand, the pharma market, currently worth around Rs 75,000 crore ( Rs 750 billion) and growing towards Rs 100,000 crore ( Rs 1000 billion), is opening up a large market for companies; on the other, the number of small units has come down drastically, as large companies have expanded their manufacturing capacity, affecting the contract work done by smaller firms, says T S Jaishankar, chairman, Confederation of Indian Pharmaceutical Industry (CIPI).

“For instance, we had around 300 licensed manufacturers as active members in Tamil Nadu five to seven years back. Now it has come down to 124.

The only way for small-scale units to grow is to focus and specialise in particular sectors, for instance, by selecting 10 or 20 products,” he said.

Companies could also look at adding value, such as by acquiring expertise in novel drug delivery systems (NDDS) to sustain and grow in the market.

He said that the confederation had some 3,000 members across the country five years ago, but this has now come down to 1,000 units.

It is further feared that another 50 per cent will have to determine whether to stay as contract manufacturers in the face of cut-throat competition or shut down, Jaishankar said.

What has happened is that the larger Indian players like Aurobindo Pharma, Actavis, Dr Reddy’s Laboratories and Cipla have expanded their facilities and serve many foreign multinationals as contract manufacturers, while companies like Mylan have acquired facilities in India, he said.

Meanwhile, eyeing forecasts about the robust growth prospects of the sector, the industry has created numerous units, especially in places like Baddi in Himachal Pradesh, where the government has announced attractive tax incentives.

While these facilities were built as per the regulatory standards of various countries, many did not match the standards required to supply well-regulated markets.

The facilities were meant to serve the developing countries (which were less explored until the last decade) such as the African nations. A large number of facilities were built during 2005-09.

However, regulatory barriers in the target nations became stringent and several large companies opted to set up manufacturing facilities in the African countries or started outsourcing from local manufacturers in those nations.

This has created over-capacity in India, and small firms found the competition getting tougher, even as raw material prices were growing, Jaishankar said.

“Initially, the large companies came into India without wanting to set up facilities,  and only focusing on marketing. SMEs saw this as an opportunity and built up facilities.

In fact, they had already gone halfway in setting up the plants when the reality hit them, during 2009-2013,” he said.

Small enterprises have also been counting on the institutional market, especially on government purchases, as an opportunity.

Various industry associations, including CIPI, have asked the government to procure a certain share of total purchases from SMEs.

However, government tenders also saw fierce competition and SMEs could no longer rely on them for sustenance.

While many units have closed down, no new company has been formed in the sector in the recent past, Jaishankar said.

Machinery and equipment in the closed units were only fit for the scrap yard, since they were not of high-enough standards for reuse by another unit. Companies were able to earn some returns by selling land and buildings.

“Probably this could be the start of consolidation in the sector. We have to accept that. We are sensitising the remaining players to think differently and bring in value addition and focus on certain segments in the future,” he added.

However, the dwindling number of SMEs coupled with a large base of medium- and large-scale companies will lead to disproportionate price increases in the next decade, Jaishankar warned.