It is a cost Indian companies look prepared to bear. It stems from a need to maintain higher inventory for select key ingredients imported from China - Active Pharmaceutical Ingredients (APIs) and Key Starting Materials (KSMs) that go into making of certain APIs. According to analysts and industry sources, the costs are up by around 10 per cent for the industry as compared to the pre-COVID days. This is after accounting for around 20 per cent increase in prices that Chinese suppliers have implemented, and not considering the impact of depreciation of the rupee, since it will be offset later through exports from India - with rupee falling from Rs 70 to Rs 76 to a dollar, which is close to 9 per cent. The exact impact of the cost increases is a function of the quantum and nature of imports from China and the amount of inventory. As against the usual inventory for up to two months, the trend now seems to be between three months and six months.
Indian companies are dependent on China for all the key ingredients made using the fermentation process, where China has achieved global dominance and capacities. These are largely drugs like antibiotics - crucial among them being Penicillin G (and other products based on it such as amoxicillin and ampicillin) apart from antibiotics like tetracyclines and also some vitamins. All of these are made using the fermentation-based process.
Those within the industry, speaking on condition of anonymity, say there is also the dimension of decrease in domestic demand, which in turn converts a five-month inventory into a nine-month inventory in some cases because of the domestic demand reduction. This is more in the acute segment (sudden onset ailments such as cough, cold and certain types of pain) than in chronic (more life-long needing medications like those of diabetes and hypertension).
Those supplying to the domestic market say leading Indian pharma companies have, depending on the segment that they cater to, have seen 10 to 15 per cent decrease in domestic demand and in some cases as high as 30 per cent. Also prices in the domestic market cannot be increased if they fall under price control, and even for those outside this category, increase cannot be more than 10 per cent. Those exporting could pass on the price increases or have it offset by the rupee depreciation but then there too, there is not much flexibility and those in the industry particularly point to markets in US where the scope is limited and driven more by the buyer-dictated pricing or inability due to hike the prices on account of competition.
Some of the analysts that BusinessToday.In spoke to read the move on inventory building as a statement by Indian companies that they cannot trust Chinese sources with an inventory that will last just for a month or two. The concerns have also been slightly heightened now in the light of fears of potentially a second wave of COVID-19 in parts of China like Beijing. Though not directly from Beijing but companies in India import from regions near it as also from other parts, including Eastern China.