Saturday, August 18, 2007
GINA S. KRISHNAN
It’s strong medicine that global pharmaceutical companies will find difficult to swallow but Indian firms may savour. The Chinese government recently decided to reduce value added tax (VAT) subsidies by upto 8 per cent on a range of products, including chemicals and active pharmaceutical ingredients (APIs). Since these products are used to make drugs, Beijing’s decision to lower subsidies will raise input costs for the global pharma companies, including Indian generic drug manufacturers such as Ranbaxy Laboratories, Orchid Chemicals, Lupin and Aurobindo Pharma.
That’s because these companies, who bulk manufacture copies of original drugs after their patents have lapsed, also rely on low-cost Chinese inputs to maintain the tight margins demanded by the highly competitive generic drug market.
For now, Ranbaxy and other Indian generic manufacturers are playing down the repercussions of China’s move, which could raise drug manufacturing costs between 4 per cent and 10 per cent across the board. “The increase in prices can’t be to the extent of the subsidy withdrawal,” a senior Ranbaxy official says. “I’ll know in a couple of weeks.”
Since China exports $4 billion (Rs 16,000 crore) worth APIs and related products to global pharma companies, the cost of drugs may rise across the world, affecting poor countries that already struggle with high medication costs.
There are indications that Chinese chemical and API manufacturers may not pass on the cost increases to their clients. But in the long run, Chinese companies will be hampered by what appears to be an official desire to discourage the manufacture of high polluting, low-end, energy-intensive production.
For instance, Hong Kong headquartered United Laboratories’ plant, one of the world’s largest producers of the API Penicillin G, was shut down in 2006 for flouting environmental norms. In a crackdown on counterfeit drugs, director of the State Food and Drug Administration (SFDA), Zheng Xiaoyu, was executed in early July, after a Beijing court awarded him the death penalty on charges of corruption. Good manufacturing practices (GMP) certificates have also been withdrawn from 128 drug makers.
China also wants to meet its WTO commitments, and raise the price of its exports to help correct its balance of payment surplus , which stands at $216 billion (Rs 8,64,000 crore). This could augur well for Indian API manufacturers. “Increase in prices for (companies) operating out of China will also reduce the gap in prices offered by competition from, say, India,” says Satish Reddy, CEO of Dr Reddy’s Labs. Noida-based Jubilant Life Sciences’ President J.M. Khanna expects “more business”.
But this won’t happen automatically. “Chinese competitiveness cannot be questioned just because of the withdrawal of subsidies,” a senior manager from Aurobindo Pharma says. Indian firms will also have to increase the scale and efficiency of their operations to effectively compete with the Chinese. No one’s holding their breath on this.
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