Mumbai, Ahmedabad, Hyderabad and Delhi are the key hubs of the Pharma SMEs. About half of the SMEs are Private Limited Companies with around 25% Public Limited, 15% Partnership and 10% proprietary firms.
The activities of the SMEs have been reported as follows:
• 75% companies are purely manufacturing companies with own facilities
• 13% companies are engaged in manufacturing as well as trading
• 10.5% of the companies are doing R&D work (clinical tests as well as contract research) along with manufacturing
• 1.5% of the companies were focused on only research & development
Around 50% of these companies are engaged in exports to various countries around the world, including USA and Europe.
High level of entrepreneurial zeal and low operational costs across various pharmaceutical business processes are the key strengths of pharma SMEs in India. However, the key question is whether such cost arbitrage is sustainable in the longer term.
The key challenges encountered by the SMEs are as follows:
• Regulatory conformance to more rigid product quality norms to offer better quality of medicines to the patients
• Sustained investments towards technical upgradation to maintain competitive edge related to manufacturing cost
• Sales and Marketing activities are becoming more and more expensive, in terms of cost of skilled field staff together with their other consequential and modern day marketing tools/ practices in India.
It appears survival of those SMEs who operate only in highly competitive domestic market with manufacturing and/or marketing of low price formulations will indeed be increasingly challenging. This challenge will be even more with the SMEs who do not have enough wherewithals or get the support of the government to face squarely the rapidly changing business environment/demand and falter in choosing the right business models, as applicable to each one of them.
Incentives/facilities provided by the Government of India (GoI):
However, the Department of Pharmaceuticals, Ministry of Chemicals & Fertilizers of the GoI has been taking steps to support the SMEs through various incentives/facilities, as follows:
• Credit Linked Capital Subsidy Scheme (CLCSS) to SME pharma units, which will help them to upgrade their facilities as per the revised Schedule M
• List of products reserved for manufacturing by SMEs
• Identification of around 18 pharmaceutical SEZs, which will offer advantages like availability of developed infrastructure, market access and exports along with various tax incentives
GoI involvement in the R&D activities of Pharma SMEs:
As I indicated above, about 1.5% of the SMEs are now focused only on research & development. In ‘India Pharma Summit’ held on November 30, 2009, the Department of Pharmaceuticals of the Government of India announced as follows:
• The government is planning to set up a venture fund to promote R&D in the Pharmaceutical sector, especially for the SMEs
• This will be a close ended fund with a corpus of around Rs. 2000 crore
• The initiative will have active stakeholders both from the government as well as from the industry
• The broad outline of the scheme will emerge in the next two months and the fund will be operational in about three years
Moreover, incentives by way of extending the weighted deduction at the rate of 150% of the expenses on R&D for the next five years and duty exemption for imports of specified machinery used for R&D purpose will help the sector to augment its R&D capabilities.
Areas the Pharma SMEs should look at to strengthen themselves:
Increasing opportunities in the generic pharmaceutical market both domestic and exports will fuel the growth of SMEs having robust and focused business models and plans. Besides, rapidly emerging Contract Research and Manufacturing Services (CRAMS) market also throws open a lucrative outsourcing business space for the SMEs to cash on, leveraging their current cost arbitrage in collaboration with the large local and global pharmaceutical companies.
The future of Pharma SMEs in India, in my view, is quite good, provided they can choose the right business model for growth. However, it is worth noting that the SMEs will now face much more and newer challenges related to the globalization process of the Indian economy and the markets, together with regulatory and social needs for improved quality of medicines and conformance to more stringent environmental and safety standards. Collaborative approach both with large domestic and global players will be of utmost importance and could be a win-win prescription for growth.
By Tapan Ray
Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.