A bitter pill to swallow

KARACHI: Production interruptions at the Chinese factories due to power cuts and resultant raw material supply disruptions have put the medicine manufacturers across the world in a fix, with certain big banners expecting over 10 per cent decline in production.

As an alternative arrangement, Pakistan can open imports from neighbouring India but that too will only resolve half of the issue, as inactive ingredients are only made in India, while Indian suppliers would jack up the prices; still that would be lower than the European salts.

An industry official said the pharmaceutical manufacturers in Pakistan didn’t keep large raw material inventories because of the perishable nature of some chemicals/salts, or may be due to inefficient planning in some cases.

Over 80 per cent of raw materials, and most of the packaging material are imported from China. The official said imports from China had slowed down by around 30 per cent. Local companies can’t afford European salts, since medicine prices are regulated by the drug authority and impact can’t be passed on.

“European salts would jack up the cost price even above the selling price. This is not sustainable because by the time the authority revises the selling price, if even it does, the company already discontinued production.”

The industry is already reeling under steep rise in prices of imported inactive ingredients, as well as active pharmaceutical ingredients (APIs) and excipients, transportation and packaging materials. The prices of active pharmaceutical ingredients (APIs), excipients, glass vials and packaging material, among other inputs, have escalated over the last three months.

A wholesaler said production of pharmaceutical companies had already started declining, and there would soon be shortages. Since drugs are under price control, the companies are forced to absorb the higher cost, raising questions about their availability in the future.

Over a period of time, certain medicines could disappear from the medical stores, as the companies working on thin margins would not be in a position to continue production, amid rise in the prices of raw materials.

In a working paper, which investigates private corruption in Pakistan’s pharmaceutical sector as a possible factor harming development, Kabeer Dawani and Asad Sayeed of the Collective for Social Science Research, said that Pakistan’s pharmaceutical sector has not seen the growth and dynamism one would expect from the industries with an upward growth trajectory. It has also not been competitive internationally, with limited exports.

Further, the pharmaceutical industry in Pakistan has developed a top-heavy structure in terms of market share, where the top 100 firms, of a total of around 750, cater to 97 per cent of the market. It follows that approximately 650 firms survive on only 3 per cent of the market. Together, the poor competitiveness and the skewed industry structure suggest that there are factors preventing this sector from contributing to economic growth and public health.

According to the paper, three issues are restricting development of the pharmaceutical sector in Pakistan, which included pricing, poor quality of drugs and government’s procurement of medicines.

Besides, the growing menace of counterfeit products has also become a serious problem for the established pharmaceutical companies in the country. The proliferation of fake and modified goods is not only hurting the local industry but the consumers, as well. The menace is adversely affecting the government revenues and; thereby, the public sector socioeconomic programmes. Counterfeit medicines are estimated to cost the government over Rs12 billion/annum.

The then government in 2001 set the price mechanism, which barred the pharmaceutical industry to increase prices of even those drugs whose costs have gone up by more than 100 per cent, whereas the price of inputs such as fuel, electricity, labour wages and raw materials increased drastically, making the survival of the industry very difficult.

There were 36 multinational companies working in Pakistan in the early 2000s but now the number is down to around 22. This is eye-opening for the authorities. In recent times, the situation has become worse, as most of the raw material is imported and any increase in the dollar rates adversely affects the profitability of the local manufacturers.

The real problem started in China late August when power curbs and outages began to affect at least 20 provinces in the country, including Guangdong, Zhejiang, Jiangsu, Yunnan, Tianjin, etc, having a significant presence of API units. China aims at cutting energy intensity by 3 per cent this year and a cumulative 13.5 per cent through to 2025, forcing the local authorities to ration electricity.

As per the new government rules, the Chinese factories cannot work more than three days a week. Some of them are permitted for only one or two days a week. Remaining days there will be power cuts across the entire industrial city. And because of this, the prices are expected to rise 20 per cent to 40 per cent in the coming weeks across textiles, electronics, chemicals, paper, automobiles, etc.

China is grappling with a power crisis as a shortage of coal supplies, strict emissions standards and huge demand from manufacturers and industry have led to a massive rise in coal prices. This has resulted in widespread curbs on the usage. Dozens of Chinese coal power plants have reduced their production, throwing the industries in disarray. China is the world’s biggest producer and consumer of coal. It consumes over 56 per cent coal as a part of its total energy consumption.

Last year, it imposed a ban on the Australian coal shipments leading to widespread power rationing and forcing the local authorities to limit power supply to several provinces. However, this time around, China is looking at rising coal prices, which is bound to cause power woes even further.

Though there is no serious disruption in production yet, the manufacturers have expressed apprehension over raw materials shortage and resultant rise in the production cost due to disruption in production. The present stock of raw materials may be sufficient for two to three months; however, if the power crisis shapes up in China, the supply would be disrupted leading to serious contraction of pharmaceutical production.

On top of everything, sales tax exemption on pharmaceutical raw materials is proposed to be withdrawn, which would further increase the cost of production for the manufacturers.

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