The pharmaceutical industry is growing bigger, more foreign players are entering the market, but that’s not good news for the small scale pharma industry. Small enterprises, mostly dependent on contract manufacture for larger companies are facing closure.
Whereas, the pharma market, currently worth around Rs 75,000 crore and growing towards Rs 100,000 crore, is opening up a large market for companies, the number of small units has come down; large companies have expanded their manufacturing capacity, reducing the contract work done by smaller firms.Small companies doing their own marketing are in really deep waters for a number of reasons.
“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,” source in CIPI said. “And that’s an optimistic view.” A small scale manufacturer said. He said that he was looking for a decent exit, the first chance he gets.
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.The writing is on the wall. “Who has the capital and expertise for this sort of a thing?”Manoj Tiwari a small time manufacturer, said.
It is likely 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.
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,” sources 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 didnot 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, CIPI said.
“Initially, big 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 e reality hit them, during 2009-2013,”the source said.
Small manufacturers were looking to push their goods in institutions, but the government turned their back on them, with dire consequences for the manufacturers. 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.
Many units have closed; no new companies are coming up in this sector. Plant and machinery of the defunct factories are just scrap because most are of obsolete design. Many have shut down their small operations and sold off their machinery long before the cut throat competition hit the market. They saw it coming, so they quit. The units made some money from property but most of the money was spent towards payment of loans by government agencies.
“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,”sources in CIPI said.
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,CIPI warned.