Raw material prices affect margins of pharma drugs

Raheel Shah, Director, BDR Pharma, explains why pharma sector requires extraordinary precision and attention at every stage starting from acquiring raw ingredients to receiving ready-to-sell products

The pharma industry is dynamic in its operations, and is hugely dependent on the availability of raw materials. From acquiring raw ingredients to receiving ready-to-sell products, the pharma sector requires extraordinary precision and attention at every stage. A small raw material availability can be a challenge and has the power of delaying or even completely stopping the production in some cases.

The COVID-19 pandemic, for the last two years, has caused an economic crisis world over, resulting in supply difficulties and a sharp increase in raw material prices. The health crisis has brought to light difficult-to-quantify structural supply concerns, which are essentially the result of fragmented and insecure supply networks. Disorganisation and slowdown of industrial chains, increased transportation costs and rising energy prices are all contributing factors that impact the prices of pharma drugs. Any amount of rise in raw material prices affects all industries, resulting in increasing finished product prices.

Based on statistics from the Wholesale Price Index (WPI), the increase in drug prices comes out to about 10.76 per cent, and this is the highest increase that can be made. Under the Vital Commodities Act of 1955, the federal government of India controls the cost of essential medications. Price caps are justified by the need to lower drug costs and provide accessibility to all. While big companies are managing to keep a buffer stock of raw material even after paying high prices in view of the challenges, the smaller companies are facing more difficulties.

In the pharma business, this situation is exacerbated by a greater reliance on foreign suppliers, the majority of which are located outside the country. A hike in raw material prices becomes an immediate concern for suppliers of intermediate products, such as APIs, that are directly impacted by the imposition of the price by their raw material suppliers, and are unable to fully pass on this increase to their sales prices, reducing their margins significantly.

The volumes of production and demand have skyrocketed, and India has become reliant on imports for more than 70 per cent of its raw material requirements as a result. In the case of certain drugs, this dependence is more than 90 per cent. Nearly 70 per cent of APIs are imported from China, and the cost has reportedly jumped by orders of magnitude and geo-political concerns causing end products impacting the margins of pharma drugs.

Drug shortages can occur when basic materials are in short supply. A shortage of Active Pharmaceutical Ingredients (API), excipients, or packaging materials could be the cause. Raw materials may be unavailable due to political unrest, environmental conditions, weakening rupee degradation during transport, trade disputes, low plant yield as a source of material from the source country and other operation costs.

Drug prices account for a significant portion of total healthcare expenditure for a layman in both developed and developing countries. In many developing countries, public healthcare expenditure is minimal, and health insurance coverage is limited, because majority of people work in the informal and unorganised sectors, with no social security. The vast majority of the population’s access to private health insurance is limited, owing to lack of information and affordability concerns. Health expenditure is largely met by Out-Of-Pocket (OOP) spending by households, particularly in developing countries and so one of the major causes of a large number of households falling into poverty is OOP healthcare spending.

Reforms in the pharma sector involving opening up the sector to imports, slashing trade margins, and liberalising policies have facilitated the increased production of the necessary raw material for medicines by giving incentives within the country itself. The PLI schemes launched by the government in July last year provides monetary incentives to increase the production of critical raw materials, including APIs, intermediates and Key Starting Materials (KSMs), distributed in four categories, that are required for manufacturing final formulations (medicines) in India. The pharma industry is gradually seeing its impact on the production.

BDR Pharmapharma drugsRaheel ShahRaw Material
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