Mumbai: Germany, the second largest market for Indian drug exporters after the US for the past several years, is no longer an easy destination. The newly introduced bidding system for drug purchase and intense price negotiations by the local government have queered the pitch for India’s 300-odd large, medium and small drugs and pharmaceutical exporters.
While the country slipped from being the second largest drugs export market for India to fourth in January in value, the shipments to Germany has dropped by 12.06% in the first 10 months of the fiscal ended 31 March for the first time since Indian drug makers started exports to the European nation.
The fall in exports in January has been the sharpest in value, 34.92%, and the situation may turn worse in the remaining two months of the fiscal, February and March.
New laws: Dr Reddy’s Laboratories will be affected under the new system as there is an 8-16% price cut on every generic product each time a firm enters a contract with Germany’s AOK and other insurance firms. Bharat Sai / Mint
India’s Pharmaceutical Export Promotion Council, or Pharmexcil, releases the export data, compiled by the directorate general of foreign trade, with at least a five-month lag.
The shrinking German drug market in value as well as volume, according to industry watchers, will not only affect the exporters but also large Indian drug makers that have set up subsidiaries there making huge investments.
The $49 billion (Rs2.3 trillion) a year German market, currently the third biggest pharmaceutical market in the world after the US and Japan, implemented a drug procurement law last year that mandates inviting of competitive tenders from generic drug suppliers.
The law, executed by Germany’s public health insurance funds such as Allgemeine Ortskrankenkassen (AOK) helps accepting drug supply contracts from generics producers that agree to sell their drugs at reduced prices. This ensures significant reduction in public expenditure on medicines.
AOK currently insures 35% of Germany’s population, and it expects the new contracts accepted by this fund alone would help save €900 million (Rs6,030 crore) a year.
Since the drug procurement system is now regulated by competitive bidding system, the sales and margin of not only exporters but also local players are being affected.
Dr Reddy’s Laboratories Ltd had in 2006 bought Germany’s Betapharm Arzneimittel GmbH for €480 million, anticipating rise in sales and margin, but under the new system it will be affected as there is an 8-16% price cut on every generic product each time a firm enters a contract with AOK and other insurance firms.
Besides Dr Reddy’s, the Ahmedabad-based Torrent Pharmaceuticals Ltd is another Indian firm that operates in Germany through local subsidiaries.
Currently almost 40% of the $300-350 million worth Indian drug exports to Germany is by 25 leading Indian drug makers including Lupin Ltd, Orchid Chemicals and Pharmaceuticals Ltd, Jubilant Organosys Ltd, Aurobindo Pharma Ltd, Cipla Ltd, Ranbaxy Laboratories Ltd and Dr Reddy’s, among others.
According to the latest data released by Pharmexcil, India exported drugs worth $247.14 million from April 2008 to January to Germany against $281.04 million in the same year-ago period. India’s total pharma exports from April 2008 to January reached $6.99 billion, growing by 16.4% from $6.08 billion year ago. While the US remained the largest market for Indian drug makers at $1.24 billion, Russia and the UK were at the third and fifth places with $266.85 million and $223.73 million, respectively.
According to Pharmexcil, Austria has replaced Germany as the second largest importer of Indian drugs. Indian exports to Austria grew by 1,123.26% in the last 10 months to $283.43 million in value terms from $23.17 million a year ago.
“We are investigating the factors that contributed to the unprecedented decline in exports to Germany. The trade shift from Germany to Austria and the recent pricing scrutiny by the local insurers could be the two key factors other than the generalrecession, which caused an immediate fall in exports from India,” Pharmexcil’s executive director P.V. Appaji told Mint last week.
According to Indian exporters, with the drop in stock movement in the bulk drugs or ingredients segment, the formulation exports have started slowing down. But firms such as Orchid and Torrent and a few others that are focusing on certain categories of drugs where competition is less have not been much affected.
“Germany as a market has not seen any great drop in revenues for us in the recent past. We have started our generic formulations journey into EU (European Union) quite recently and since we operate in a niche product space, we don’t expect any great impact,” said Orchid’s spokesperson Ch. Ram.
Orchid is currently focusing on products that enjoy patent protection but once they go off-patent the company will be affected.
Though Indian drug makers including Dr Reddy’s, Cipla, and many medium scale players including Mumbai-based Indoco Remedies Ltd have secured AOK contracts for generic drug supply for this year, the number of products have been accepted by the German insurer in these contracts are insignificant in size compared with the large product range that these companies submitted in the tender.
For instance, Dr Reddy’s has received contracts for only eight products from AOK for this year.
Indoco has recently received contract for supplying one anti-diabetic drug worth Rs50 crore for two years.
A query sent to Dr Reddy’s on the impact of Germany’s new regulations on the company remained unanswered. Torrent Pharma, another key player in German market, also did not respond to an email query.