Attracted by improved cost realization, enhanced margins and de-risk business models at special economic zones (SEZs), the biotech and pharmaceutical companies from Karnataka are making a beeline to tap low value and high volume manufacturing prospects in the emerging biotech-pharma SEZs in Andhra Pradesh. The companies are in a race to capitalize on the advantages of multi-location strategies. Two of the biotechnology companies from Karnataka, Biocon and Avestha Gengraine Technologies (Avesthagen), will be investing in manufacturing facilities in Andhra Pradesh, mainly to prevent a possible over-dependence on a single location.
Since the biotech boom in 2000, Karnataka and Andhra Pradesh have been gung-ho for capturing a lion's share of the biotech-pharma business. While industry critics opine that poor industrial support and lack of infrastructure are driving many pharma-biotech companies out of Karnataka, the reality is just the contrary. Except tax saving locations like Hindupur and some other districts, poor infrastructure undermines the status of Andhra Pradesh as a preferred location for biotech-pharma business. However, the biotech and pharma companies of other states are eyeing SEZs in Andhra Pradesh for it makes the state a hot destination for low value but high volume manufacturing.
In 2001, RL Fine, a mid cap neuropsychiatry bulk drug company, had set up its second facility in Hindupur, which is now up for sale. "We have decided to close operations here mainly because of bad roads," said Anjan Roy, managing director, RL Fine Chem. "We were attracted to Andhra Pradesh and Hindupur largely due to proximity with the mother plant in Bangalore and the tax sops. Now we are planning to sell the facility and make it big at SEZs either in Andhra Pradesh or Tamil Nadu," he added.
Except RL Fine Chem, no other pharmaceutical companies from Karnataka have embarked on the second facility in Andhra Pradesh, largely due to the introduction of the excise duty on maximum retail price (MRP) regime in January 2005. The enforcement of the excise duty on MRP has forced the companies to look at the excise free zones at Baddi in Himachal, Uttaranchal and Jammu & Kashmir to capitalize on costs as a better option, said Jatish N Seth, director, Srushti Pharmaceuticals, who is also secretary, Karnataka Drugs and Pharmaceutical Manufacturers Association (KDPMA).
According to VR Kannan, pharma consultant, absence of SEZs for the pharma biotech sector would create a situation where Karnataka would lose new projects to Andhra Pradesh, Pondicherry and Goa. "Multiple locations are part of a company's growth tactic. Availability of land, tax exemptions, access to large labour force and easier and cheaper utility costs are some of the factors that attract a company to a particular location to set up new facilities. The main objective of the companies is to reduce costs to push up the top-line growth," he added.
Biocon and Avesthagen in AP
Over the next five years, Biocon is expected to make an investment of Rs 500 crore at the special economic zone, Jawaharlal pharma city, near Visakhapatnam for its second manufacturing facility in Andhra Pradesh. The company will acquire approximately 50 acres of land to set up a manufacturing facility.
"It is incorrect to view our preference for Andhra Pradesh to establish a second manufacturing base due to lack of infrastructure in Karnataka. Given the current size of the company's operations, it was imperative to have a multi-location strategy to de-risk the business. Bangalore is an ideal location for research and development but for high value and low volume manufacturing. However, Andhra Pradesh is a place suitable for low value and high volume manufacturing," said Dr. Kiran Mazumdar Shaw, chairman and managing director, Biocon.
"In order to achieve high volume, low value manufacturing needs, a lower investment and operational cost base that is globally competitive, is often the choice of companies. Other attractive factors include, uninterrupted power that allows a smaller standby power generation system, availability of water at low cost and a central effluent treatment facility. In the case of Biocon, it decided on the SEZ at Visakhapatnam because the facility would allow the company to release effluent after secondary treatment," Dr. Shaw added.
Biocon's operations in Bangalore has cent percent standby power generation, a zero discharge effluent treatment facility and water supply at a rather high cost. Expanding the current manufacturing operations in Bangalore therefore will not allow the company to be globally competitive, she said.
"We have examined several options before identifying the Jawaharlal pharma city SEZ as the most suitable location. The main selection criteria pertained to power supply, water supply, effluent treatment services as well as SEZ status. Whilst the company makes substantial investments in Visakhapatnam, its expansion costs in Bangalore would be significantly greater than this," Dr. Shaw noted.
A section of scientists from the Indian Institute of Science pointed out that Biotech being a high investment intensive sector, Andhra Pradesh made a suitable choice.
The Avesthagen had entered Andhra Pradesh in 2003 to set up the AQUAS in the premises of International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) at Hyderabad. In pact with ICRISAT to develop research technologies, AQUAS provides a one-stop-shop model of total food, water and seed testing requirements to the Indian food and agri-industry. The company has a fully equipped laboratory and a qualified team employing rigorous and internationally accepted techniques for the tests.
Early this year, Avesthagen raised funds to the tune of around Rs.150 crore from the series 'C'. The company is expected to utilize Rs. 60 crore for bio agriculture expansion in Hyderabad. Avesthagen has already pumped in Rs. 20 crore for a production plant on nine acres of land for its good earth foods business, which is the company's bio-nutritional subsidiary.
Key attractions in AP
#.Special Economic Zones
#.Massive cost savings in infrastructure for manufacture through utilities
#.Presence of ancillary industries
#.Interface of railroad air network
#.Access to both skilled and unskilled labour workforce
#.Varied options for locations (Hyderabad, Vizag, Kurnool, Chittoor, Vijayawada)