With contract manufacturing business losing sheen, greener pastures like Sikkim emerging as better options for many, increased regulatory scrutiny putting pressure on biggies and financial crises engulfing the established firms, the North Indian pharmaceutical industry is facing rough weather.
The so-called excise free zones of Himachal Pradesh and Uttarakhand, the two major hubs of North India, have become less attractive for the pharmaceutical units, portending woes for the entire industry in the region. Now the only remaining hub is the Jammu region.
The future being bleak, the industry is asking the government to step in and extend excise benefits at least till 2020, so that all units in the hubs can be on the level-footing and they can compete with other preferred regions. However, indications are that the Government is reluctant to give special status again to the regions and antagonize other regions.
Delhi has been a pioneer spot of Indian pharma industry to take roots in the early days and during its peak time, the national Capital Region like Delhi, Gurgaon, Ghaziabad, Noida , Faridabad etc. had over 2000 units. But some of the units had to down shutters due to Schedule M compliance and due to shifting of some of the units to HP and Uttarakhand.
Even going by the old statistics, North India has already lost its sheen as a happening place for pharma industry as such. According to official numbers, there are more than 10,000 manufacturers in the country. Whereas Maharashtra is the home to as many as 3139 formulation and bulk drug units, Delhi has just 540 units.
``In 1970 and 80s, Delhi and outskirts were leading hubs for the pharmaceutical industry, mostly led by small scale and medium players. Then slowly biggies emerged and captured the ground while some existing units diversified. It is learnt that 30-40 per cent of the units in the excise-free zones are ready to sell their business,” according to industry leader Nipun Jain.
The major pharmaceutical units in the region are Ranbaxy, Panacea Biotec, Venus Remedies, Ind-Swift, Ind-Swift Laboratories, Surya Pharma, Dabur Pharma, Jubilant Organosys, Nectar Lifesciences, IOL Chemicals and Pharma. Over the years, unlike Gujarat of Maharashtra, the region has not witnessed the rise of any new player to reckon with, other than Mankind Pharma.
Excise-free zones
``Excise-free zone is no more a favoured place as its attractions have virtually ended. Almost 70 per cent of the units in the region have lost the advantage of excise benefits. The remaining lot would also end by 2016 and 2017,” said Himachal Pradesh Drug Manufacturers Association (HDMA) general secretary S L Singla.
North India came to limelight a decade ago because of Government announcement of excise free zone mainly in Himachal Pradesh, Uttarakhand and Jammu areas. Ever since this scheme was announced there have been positive as well as negative aspects for the pharmaceutical industry. While youth of these states got jobs and state government got the revenue , industry has been mislead because of changes being brought by state and central Government from time to time.
“SME segment is bleeding because of various changes being brought for upgradation of plants etc by way of investment on Scheme M compliance, Schedule L compliance etc resulting in huge investment but some of the organized units got settled giving ample opportunities for pharma students to get absorbed in such units,” points out Sikri BR, the co-chairman, FOPE (Federation of Pharma Entrepreneurs).
“When it was launched, the excise duty was 16 per cent outside the zones and it lured many companies to migrate and cash in on this. The duty was now cut down to four per cent over the years and those outside the units now can get more benefits through reimbursement through MODVAT. After paying just four per cent duty on their production cost, they can earn more by reimbursing four per cent of the MRP’’ according to Singla.
According to industry experts, the contract manufacturing which has been the mainstay of the excise-free zones will end completely within three years. The big companies which depended on loan-licensing companies now opt for well established places like Chennai and Andhra Pradesh, because of logistic reasons. They are not in a position to get advantage of the excise benefits.
Another big issue in the area is shifting of business. After the state government changed the laws, any company can shift to new business and segments with the existing license. Hence, the small units which still have excise benefits are opting for sale of the licence so that more prospering business could be undertaken. This has become true especially with those entrepreneurs who had no pharma background but launched the companies to make use of the pharma revolution.
Another threat that North India faces is from places like Sikkim which offers greater benefits, thanks to the Central government policies. Many of the big companies have moved out their production to new units set up in Sikkim and contract manufacturing business is also shifting steadily to such places.
Baddi, once a hotbed for the pharma, has still 400 units, but 70 per cent of them are in the small and medium scale sector. Only 20 per cent of units are owned by established big companies who are not much affected the changing situations. The area accounts for 35-40 per cent of the total production of drugs in the country.
The plight is the same is the same for other such hubs like Haridwar, Roorkee, Dehradun and Rudrapur in Uttarakhand also.
Ranbaxy woes
Ranbaxy has been the flag-bearer of the region for long. The recent troubles spelt on the company, following the increased regulatory scrutiny by the United States, also cast a shadow on the overall sentiments of the industry in the entire region. The US drug regulator had barred products from Ranbaxy Laboratories' Toansa plant, dealing a crippling blow to its ability to sell products in the world's biggest drug market in the near term. Toansa was the sole facility of Daiichi Sankyo's India unit that was still permitted to make drug ingredients for the US. The Food and Drug Administration (FDA) had put three other plants under an import alert since 2008 for not meeting standards.
The three are engaged in a clean-up drive aimed at complying with norms, with two having come under a consent decree in 2012 and a third in 2013. The Japanese drug company acquired Ranbaxy Laboratories from promoters Malvinder and Shivinder Singh in 2008.
The ban leaves Ranbaxy with just Ohm Labs, a US-based formulation plant, which can continue to make drugs for that market. The Ohm facility is heavily dependent for raw material on the Toansa plant, which was the source of about 70 per cent of the bulk drugs that Ranbaxy produces. While technically, it may already have or can still tie up with a third party to source active pharmaceutical ingredients (APIs), profitability will be hit hard as it would then have to share the revenue.
Reflecting these developments, the company posted a loss of Rs.160 crore in the December quarter because of a one-time cost and higher tax expenses. The one-time cost was mainly on account of a write-off of inventory at its drug ingredients factory at Toansa. Sales grew marginally to Rs.2,860 crore in the December quarter from Rs.2,670 crore in the year earlier. The sales growth was led by India, East Europe and the US.
“We have been strengthening the base business in key markets, including India, Eastern Europe and the US, which has helped us recover our margins,” chief executive officer (CEO) and managing director Arun Sawhney said in a statement.
Financial worries
Other major players in the region are Panacea Biotec, Venus Remedies, Ind-Swift, Ind-Swift Laboratories, Surya Pharma, Dabur Pharma, Jubilant Organosys, Nectar Lifesciences, IOL Chemicals etc.
One of the emerging concerns about the sector is the financial worries of the mid-sized companies. Surya Pharma has already gone for a corporate debt recast package, but it has failed, indicating the emerging worries. According to sources with direct knowledge of the development, the company's promoters failed to bring the required Rs 85 crore for the debt recast to go through.
Following this development, bankers say they will move to recover their dues from the company. Under the rules of the CDR exercise, promoters are required to share up to 25 per cent of the loss that banks incur.
Surya Pharma's CDR package had been approved in March this year. The company had been given an interest rate of 10.5 per cent, along with a 10-year loan extension. A consortium of bankers led by State Bank of India has an exposure of Rs 1,400 crore to the troubled pharma company. SBI has an exposure of around Rs 500 crore, while other lenders include PNB, and EXIM Bank.
Ind-Swift is another company which is working on the debt restructuring. The net loss of the company was reported to be Rs 13.55 crore in the quarter ended December 2013 as against net loss of Rs 12.03 crore during the previous quarter ended December 2012. Sales rose 6.15 per cent to Rs 246.81 crore in the quarter ended December 2013 as against Rs 232.52 crore during the previous quarter ended December 2012. Earlier, it had approved corporate debt restructuring programme to recast its nearly Rs. 600-crore loans. For the fiscal ended March 2012, the company’s consolidated net sales stood at Rs. 1,427.98 crore with a profit of Rs. 89.16 crore.
The situation is not better for other companies like Parabolic Drugs and Saurabh Chemicals. The banks are getting reluctant to lend loans to other companies also, on account of such bad loans, putting the North Indian industry under pressure.