An elaborate report by CNN had clearly brought out that the Indian pharma industry could be the most vulnerable to the Chinese Coronavirus pandemic. It only magnified the already existing problems for the pharma sector in India.
Why China matters to pharma
Over the last 30 years, Indian pharma companies have become giants riding on the back of the generic drugs wave. Today, India produces nearly 20% of all drugs manufactured in the world by volumes. The big challenge is that India relies on China to supply nearly 70% of the raw materials for the manufacture of these drugs. Popularly known as active pharma ingredients (APIs), the factories to manufacture these APIs are largely based in the Hubel province of China. This region is one of the worst affected by the Coronavirus scare as the virus is expected to have originated there. Most factories in this region are shut and hence production is badly affected. Then there is the challenge of dwindling inventories. Most of the Indian pharma companies keep inventories up to 2 months with them. The production disruption has already crossed 1 month and most of the pharma companies are now worried that this could create a major supply chain problem for them. Companies like Cipla heavily depend on China for feeding their supply chain and the impact is evident on the stock price. Even alternate sources of APIs have an indirect dependence on China.
What about alternate suppliers?
In the last one month since the virus scare broke out in China, many India API companies have nearly doubled their stock prices. The argument is that a reduction of API supply from China would mean greater demand for APIs from India. But that argument may not really hold water for three reasons. Firstly, only China can manage the volumes of APIs to feed the Indian pharma industry. Secondly, relying on other countries has cost implications, which could change the economics of the industry. Lastly, most of the other suppliers also are likely to have a supply chain link to China and that is invariably likely to get impacted. For Indian pharma, there is no escaping the virus!
Magnifies the pharma problem
For the pharma industry, the API issue comes up on top of its already existing problems. Indian pharma has been up against a hostile US-FDA over the last five years. Secondly, pharmacies have consolidated and that has reduced the bargaining power of Indian companies. Lastly, the competition in the global generics market has been tightening with Eastern Europe, Turkey, Asia and Latin America giving Indian pharma a run for their money. At this juncture, the Chinese virus syndrome only serves to magnify already existing problems of Indian pharma. That impact is visible in the recent crack in pharma prices.