Pharma industry calls for revival of ancillary units to tackle supply chain crisis

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Updated: Jun 09, 2020 7:27 AM

The way forward is to identify strategic APIs for local sourcing, extending pre-approval for environmental clearance and easing other regulatory clearances, the study said.

The domestic $41-billion pharma industry accounts for about 22% of the global generics market having over 550 USFDA-approved plants.

Stretched working capital cycles and increased input costs are creating financial distress for the pharmaceutical ancillary industry. Besides, reduced inventory turnover and payable days are leading to an overall cost impact of 9% to 11% for ancillary players, leading to severe financial stress, revealed a study by the Indian Pharmaceutical Alliance (IPA) in collaboration with Accenture.

While medicines come under essential item, the pharma ancillary industry such as active pharmaceutical ingredients (APIs), key starting materials (KSMs), excipients like colours and flavours and packaging materials are facing adversities.

The domestic $41-billion pharma industry accounts for about 22% of the global generics market having over 550 USFDA-approved plants. “The ancillary industry is a vital part of the pharmaceutical supply chain. For the industry to function, immediate action is required to support the ancillaries by identifying interventions that will enable their early revival in select segments and clusters,” Satish Reddy, president, IPA, said while explaining the importance of ancillary partnerships.

India accounts for 10% of global production by volume, 1.5% by value, with a potential to switch from generics to higher margin-licenced drugs. Due to a strategic shift in pharma supply chain, there is a strong global push to de-risk pharma supply chains and reduce dependence on China. A significant percentage of about 70% of KSMs are imported from the country. Rising wages and anti-pollution drive have eroded China’s once-overwhelming cost advantage.

According to industry estimates, the size of the ancillary industry is approximately $9 billion and is a key contributor to the growth of the pharma industry. Further, MSMEs have a significant share of 55-60% within ancillaries, contributed by 10,000-11,000 units. “While the government has announced relief measures for MSMEs to the tune of Rs 3 lakh crore collateral-free automatic loans, they will have to ensure effective disbursal of the proposed intervention. Additional relief on electricity costs and wage support packages and moratoriums on statutory payments like ESI, PF and gratuity will improve the financial situation of the MSMEs,’’ said Sudarshan Jain, secretary general, IPA.

As part of the relief measures, guidelines from the government on pre-emptive safety protocols and steps along with awareness of insurance schemes would bolster the effort to revive the industry in the next three months.

In the next one or two years, it would be necessary to reduce reliance on imports from a single geography to minimise supply disruptions. This will require the government to identify strategic APIs for indigenous manufacturing and provide early approvals to clusters, set up common utilities, lower borrowing costs and research-based linkages to continuously innovate.

The short-term focus would be to provide financial relief to MSME ancillaries and ensure adequate manpower at work. Robust disaster management framework, backed by greater transparency across the ancillary network, needs to be implemented, the study stated. Large pharma companies are providing necessary support to the MSMEs associated with it. The long-term goals include self-reliance to reduce the dependence of APIs or KSMs or capital goods imports on a single geography along with active mentorship by the industry experts to guide ancillaries manufacture efficiently in the post-Covid era.

Of the several factors responsible for the disruption, constrained operations of starting material suppliers is a major one. Challenges around third-party services like engineering and courier services were limited. While some challenges are getting resolved, raw material shortages and logistical disruptions due to unclogging of seaports are likely to take longer to be sorted.

The way forward is to identify strategic APIs for local sourcing, extending pre-approval for environmental clearance and easing other regulatory clearances, the study said.

The licence renewal process needs to be simplified, common utilities like solvent recovery and distillation plants, effluent treatment plants need to be set up to make smaller units economically viable.

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