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Business News/ Industry / Manufacturing/  Rupee’s decline a bitter pill for foreign drug firms’ India units
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Rupee’s decline a bitter pill for foreign drug firms’ India units

Currency woes erode profitability of imported medicines, delaying introduction of more such drugs in India

The Indian units of GlaxoSmithKline Plc and Pfizer Inc. appear to be among the most affected by the weakening rupee. Photo: Bloomberg (Bloomberg)Premium
The Indian units of GlaxoSmithKline Plc and Pfizer Inc. appear to be among the most affected by the weakening rupee. Photo: Bloomberg
(Bloomberg)

Mumbai: The Indian rupee’s fall against the dollar appears to be finally hitting the pharmaceutical industry, considered a defensive sector as its earnings remain relatively unaffected by economic downturns.

The drop in the value of the Indian currency has prompted drug makers, especially the local units of foreign drug companies, to delay the introduction of imported medicines. The depreciation of the currency has eroded profitability of several imported drugs, according to analysts, corporate advisers and industry experts.

To make matters worse, drug makers are unable to raise prices because of the drug price control regime that came into force on 1 July. In fact, some of them had to cut prices under a new drug price control order (DPCO).

Most foreign drugmakers, which sell high-value products—especially biological drugs, vaccines and cancer and diabetes medicines—currently import them from their parents under pre-fixed internal pricing contracts. But the unexpected 12.49% drop in the rupee’s value against the dollar since January has upset their margin calculations.

“We are figuring out logistics before the commercial launch and besides that the rupee depreciation is one of the major concerns." said Melvin Oscar D’souza, managing director, Novo Nordisk India. Among emerging markets, Novo chose Mexico to first launch Tresiba three months ago.

Exchange rate fluctuation is the biggest financial risk that the company faces and that risk has grown in tandem with the increasing size of international markets and share of sales in different currencies, according to Novo Nordisk’s 2012 annual report. Novo Nordisk doesn’t have any manufacturing facility in India and it imports all diabetes products, including insulin crystals that it supplies to Torrent Pharma.

“Currency fluctuation is a cause of concern and we are watching the situation closely," said Mads Bo Larsen, vice- president for business area Africa, Gulf and India, Novo Nordisk.

“Profitability of multinational pharmaceutical companies will be significantly impacted in the coming quarters due to fluctuation in the Indian rupee, if they are not making any loss," said Hitesh Mahida, an analyst with Fortune Equity Brokers (India) Ltd.

Internal transfer pricing between the parent company and their Indian subsidiaries for many of the drugs that have already been launched would have been fixed on the basis of the earlier valuation of rupee and dollar. These valuations went haywire with the unexpectedly large fluctuations in the rupee, said a corporate adviser with a foreign consulting firm.

“Pricing of imported drugs currently sold in India must have been fixed earlier when rupee was strong. A drastic change in exchange rate would lead to renegotiation with the exporter (the foreign parent in this case)," said the adviser, who did not wish to be identified. “In most cases, the transfer pricing terms between the parent and the subsidiaries are similar to those between a manufacturer and supplier. In certain cases, the transfer deals may even involve advance cheque payment or a credit period guarantee."

Analysts say more foreign companies, including some of the world’s top drug makers with a direct presence in the Indian market, have delayed introducing new drugs from their parents’ product portfolio. “Rupee volatility is serious issue faced by drug companies, which depend on imported products. The transfer pricing agreement between the parent and the subsidiaries can’t be easily changed," said Sujay Shetty, head (pharma and life sciences) at consulting firm PWC India.

The Indian units of GlaxoSmithKline Plc and Pfizer Inc. appear to be among the most affected by the weakening rupee.

Pfizer (local unit Pfizer Ltd) imports 47% of its raw material which increases the cost of material consumed for manufacturing drugs. Also it has not launched any new product in the past 5-6 months in India," said a senior sector analyst with a domestic brokerage.

Pfizer did not respond to a query seeking comment.

In the past three years, new launches contributed only 6% of GlaxoSmithKline Pharmaceuticals’ pharma revenue. In 2013, it plans to introduce a couple of vaccines, dermatology, respiratory and oncology products in India.

“But we are yet to see most of the launches as rupee depreciation has made the launches expensive for MNC pharma companies," said the analyst, who declined to be identified.

“The rupee erosion has impacted the cost of our imports," said GSK spokesperson in an email statement.

In the past three years GSK India has launched new products such as Votrient, Revolade and XGEVA in oncology, Lamictal and Icacetam in neurology, Physiogel in dermatology, Avamys in respiratory and Synflorix in vaccines.

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Published: 18 Sep 2013, 12:29 AM IST
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