The small scale drug units in the country may have to suffer a production loss to the tune of about Rs 2000 crore in January alone if the government goes ahead with implementation of MRP-based excise duty regime, according to an estimate made by SSI industry leaders.

Most of the small drug-manufacturing units in the country have either stopped production or suspended delivery of products, following the notification valid from January 8, 2005. While calculating at an average production worth Rs 20 lakhs a month per unit, production losses could be Rs 2000 crore for at least 1000 affected units, says T S Jaishankar, chairman of Confederation of Indian Pharmaceutical Industries (CIPI).

Production has been either suspended or slowed down anticipating the crisis in the ensuing months. Normally, production of a month will be supplied by next month, and realizations will come back in the next month, in a three-month cycle. With the government decision, most of the SSIs, which rely only on super stockists for distribution, are in a dilemma, whether to continue or to stop production, fearing the traders may reject their production. At present, the SSI manufacturers, who make only branded generics, are continuing production.

Most of the manufacturers are reluctant to step into the new regime, as drug manufacturing is unviable with the 35 per cent abatement. With the charm of contract manufacturing lost, big companies having spare capacities are discarding the SSIs. A clear picture on loss of business and increase in drug prices by minimum 10 per cent would be reflected only by March- April, this year, said Jaishankar.

The SSIs immediate goals are in two areas, at least to get the abatement increased to minimum 65 per cent or get the order freezed or cancelled. Further, the excise duty exemption should be increased to Rs 3 crore to stay in business, as calculating ED on MRP will exhaust the present limit of Rs 1 crore very fast. CIPI claims the SSI and labour ministries have agreed to extend their support in this case.

Meanwhile, there are different opinions on the impact. According to a few top-level trade sources, marginal increase in drug prices is unlikely to happen. Now about 10 per cent of the drug manufacturers are offering drugs to traders at MRP inclusive of excise duty, and they will not be affected by the decision. The traders who deal with manufacturers having own manufacturing facility and paying excise promptly on controlled category are likely to gain by 0.1 per cent to 0.34 per cent. However, rest of the manufacturers, who rely on SSIs for contract manufacturing and those without own manufacturing facilities, are likely to cause the traders losses to the tune of 0.28 per cent to 0.94 per cent of the margins. Top-level office bearers of the All India Organization of Chemists and Druggists (AIOCD) are meeting by this weekend to discuss the issue.

However, a trade leader told Pharmabiz that they would not entertain any reduction in their trade margins, and would demand margins inclusive of excise duty as a solution to the issue. "The burden cannot be passed on to the consumer as competition will influence market prices, and the manufacturers will have to adjust it in their profits," noted the source.

S V Veeraamani, VP, IDMA and chairman of the SSI subcommittee of IDMA says that even bigger units would be suffered from the decision. "Most of the bigger units were using their own plants only for export- oriented manufacturing and were sourcing from SSIs for the domestic market, to leverage the excise benefit to SSIs. With this scenario, the units have to either set up their own plants or convert/accommodate their EoU plants for domestic production. Setting up new units or relocation of units will take lot of time," notes Veeraamani.

He also points out the decision has adversely affected the ongoing Schedule M implementation by the SSIs. Most of the SSIs borrowed funds to modernize anticipating the potential in contract manufacturing. Now the units fear it will be difficult to utilize their spare capacities. Many of the SSIs have stopped the Schedule M compliance process, though the extended deadline is just five months away.

He suggests the government should reduce the excise duty burden to about 8 per cent as a solution. "The move is detrimental to the interests of the pharmaceutical industry. It came at a crucial time when we are looking at tapping global markets, and the patent regime is going to affect us. The government should consider pharmaceutical industry as a priority industry and should give the necessary sops instead of bringing in more burden and restrictions," opined Veeramani.