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High input, compliance costs likely to bring down operating profit margins of Indian pharma industry during H1-FY23: Care Edge Report

Rajeev Choudhury

An increase in costs resulting from rising prices of active pharmaceutical ingredients (APIs) and key starting materials (KSM), the surge in solvent prices, rise in freight and energy cost and continued pricing pressure in the US generic market is likely to bring down operating profitability of the Indian pharmaceutical industry by 19-20% by the end of the first six months of the current financial year, compared to the same period of the previous year, a new report released by credit rating agency Care Edge said.



Available data reveal that the Indian pharmaceutical industry, which is the third largest in the world in terms of volume and thirteen largest in terms of value, with market size of around 49 billion dollars in FY22, had been growing at 8-9% over the past five years.

The report further stated that driven by higher domestic consumption and stable exports valued at 24.6 billion dollars, the industry grew by 5-7% on a Year-on-Year basis during FY22.

A sharp reduction in marketing, travelling and conveyance expenses as a result of the imposition of COVID 19 restrictions coupled with COVID-led opportunities had fuelled a significant rise in operating profit margins in FY 21 over that of FY20 by almost 3% the report pointed out.

However, changing situations driven mainly by an increase in the price of the APIs and KSM in recent times, coupled with rising oil prices in the international market resulting in increased transportation cost and cost of solvents are set to put a big dent in the operating profit margins by the end of the first half of the current fiscal, the report further noted.

The report highlighted that the disruption of the supply chain and lockdowns imposed in China resulted in rising in the price of some APIs and KSM between 25% to 120%, while the price of the excipients rose between 15-200% during the past 12-18 months.

Similarly, while the cost of power, fuel and coal rose by 50% during the last one year, the cost of freight increased by more than two times, it pointed out.

It may be noted the industry is also facing higher expenditure for complying with regulatory norms after the United States Food and Drug Administration increased its inspections of manufacturing and many Indian companies have received Form 483 observations on their manufacturing facilities indicating violation of regulatory norms.

Care Edge said that the recent decision by the government to allow a price hike of 10.9% for the scheduled drug, the highest price hike in many years coupled with the recent sharp decline in the value of the rupee against the US dollar will have a positive impact on the operating profitability of the pharmaceutical industry.

Overall, the report expects the operating profit margin of the Indian pharmaceutical sector to decline both on a Y-o-Y basis and Q-o-Q basis to 19-20% during the first half of FY23 due to an increase in the cost of APIs and KSMs apart from an increase in the cost of packing material, freight and compliance cost.

However, the margins are expected to rebound in the second half of this fiscal, the report further pointed out.

Noting that rupee depreciation has a positive impact of nearly 100-150 bps on the operating profit (PBILDT) margin during FY23, the report said that on a full-year basis, the company expects the PBILDT margin to shrink by 200-250 bps during FY23 over FY22 after considering the positive impact of rupee depreciation.


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