Structure and Performance of Small and Medium scale Pharmaceutical Firms

 

Parvathi K. Iyer

 

The objective of this section is to capture the structure and performance of small and medium scale (SME) pharmaceutical companies in the broad context of a changing regulatory regime and policy environment. The structural dimensions that have been assessed include total strength, geographical distribution, and firm type and presence in particular therapeutic areas. Their performance has been assessed in terms of parameters like thrust on in-house quality control, particularly Schedule M related upgradation, sources of technical know-how, total assets, and output and export behavior. The section also tries to provide a brief comparative assessment of some of these above-mentioned dimensions in terms of pre-patent and post-patent regimes.

 

Brief Profile of the SME sector

The Indian pharmaceutical sector, particularly the SME sector is essentially a fragmented and heterogeneous sector, with firms having very varied levels of technological capability. In addition, recent and particularly post-patent regime estimates or database of the total strength of SMEs, comprising listed and unlisted firms are unavailable. This renders the assessment of the activities of this sector extremely difficult. Also, in terms of the revised definition of the micro, small and medium scale sector under the MSMED Act, 2006 and consequent enlarged investment limits of the small sector and inclusion of the medium sector, available statistics may not provide a totally accurate representation of the sector.

The upper cut-off value of plant and machinery for the pharmaceutical SSI, which was the same as that for general SSI in India, has risen from Rs One million in 1975-76 to Rs Two million in 1980-81, subsequently to Rs Ten million in 1999-00 and finally to Rs Fifty million in 2003. The MSMED Act, 2006 has been crucial in terms of providing a standardized definition for medium scale industries along with that of small scale sector. The report of the Fourth MSME census, expected to be compiled and released shortly would enable policy makers to acquire a more insightful and up-to-date understanding of the structure and performance of pharmaceutical SMEs in the context of the new regulatory regime.

 

 

 

PROFILE OF THE PHARMACEUTICAL SME SECTOR

 

 

Total strength: Around 5640 units.Comprising both registered and unregistered units (MSME database, Third Census).  The Planning Commission Report 2006, relying on the ASI database 2001-02 estimates the total strength of pharmaceutical SMEs at around 6090 registered units.  Accurate and recent post-patent regime estimates not available. Fragmented and heterogeneous sector with varying technological capabilities and expertise of units.

 

Type of Units: Mostly bulk drug units, formulation units and units producing Intermediates.

 

Therapeutic Expertise: Majority of the small firms produce anti-infectives, anti-bacterials, nutritional supplements and anti-inflammatory drugs. A few medium scale firms produce manufacture some specialized drugs.

 

Contribution to total pharmaceutical production: 42% (ASI database).

 

Geographical concentration: Maharashtra, Gujarat, Andhra Pradesh & U.P.

 

Technological activities: Manufacture of generic fixed dose combinations and conventional dosage forms (formulation units). Process related activities related to generic drugs by small firms and new processes by some medium scale firms (bulk drug units).

 

Quality certification: Local GMP until Schedule M was introduced in 2001. Deadline later extended to June 2005. Significant percentage of the units has been unable to comply with new Schedule M requirements and upgradation as yet. Najma Heptullah Subordinate Committee report on extent of Schedule M compliance and related issues has been tabled in Parliament in February 2009.

 

Post-patent regime strategies: Contract manufacturing of generics for the organized sector, mostly in the form of sub-contracting and loan-licensing activities.

 

Problems faced by sector: Gradual reduction of list of drugs under DPCO, inability to generate investments for Schedule M requirements and automation, paucity of skilled labour, lack of consistency and standardization  in drug quality requirements, imitation not feasible under new patent regime,  under-utilization of plant capacity, lack of adequate information about the new patent regime and its consequences.

 

Strengths: Provides life saving drugs at affordable prices, particularly in rural India.

 

Policy initiatives by the government: Development of clusters through involvement of industry associations, interest subsidy and provision of soft loans for technological upgradation through PTUF scheme, providing technical and marketing related skills, proposal to build common quality control and testing facilities for small firms.

 

 

 

Geographical distribution

We find the concentration of small and medium scale pharmaceutical units in the four states of Maharashtra, Gujarat, Andhra Pradesh and Uttar Pradesh.

 

Fig 1: Concentration of listed small and medium scale pharmaceutical units in different states in India.

Source: ASI database (2001-02)

 

 

Total Strength

The Micro, Small and Medium Enterprises Development Act of 2006 defines SMEs as entities that have an investment of above Rs 10 million and below Rs 100 million in plant and machinery for firms engaged in production of goods.

In the pre-patent regime, the total number of pharmaceutical SMEs was generally estimated to be around ten thousand. The OPPI (2001-02), however, estimated the total strength of the pharmaceutical sector to be around 20,053 units, including listed and unlisted firms. According to its report, the number of organized sector firms numbered 300 and the rest were SMEs. According to the Micro, Small and Medium Enterprises (MSME  database, Third Census), the total strength of the SME sector is roughly around 5728 units, comprising of both registered and unregistered units.

 

 

Table 1: Total strength of SSIs and SSSBEs in Indian Pharmaceutical Sector, along with strength of work force

Type of Unit

SSI

SSSBE

Total no of employees

Registered

5676

727

70297

Unregistered

52

15

321

Total

5728

742

70618

Note: SSIs refer to industrial undertakings in which the investments in fixed assets in plant  and machinery does not exceed Rs 100 lakh as on 31-03-2001 and SSSBEs are industry related services and business related enterprises with investment in fixed assets up to Rs 10 lakh.

Source: MSME database, Third Census.

 

 

Therapeutic Expertise

Majority of the SMEs have expertise in the anti-infective, anti-bacterial and nutritional supplements segments and very few firms, especially medium scale firms, manufacture specialized drugs. Most of the small firms are largely dependent on institutional selling and contract manufacturing for their survival. However, the new Schedule M requirements may have led to the closure of a significant percentage of these units. The government, particularly the Central Drugs Standards Control Organization, has yet to compile a comprehensive report on the reasons and extent of closure of these units, though some preliminary information has been generated in this regard by central and state drug control authorities.

 

 

Assets, Exports & Output of Pharmaceutical SMEs

 

Fig 2: Total value of Assets, Exports & Output of Pharmaceutical SMEs (in current prices)

Source: MSME database, Third Census

 

 

 

Pharmaceutical SMEs in India have been traditionally less oriented towards export in comparison to large domestic firms. The policy measures adopted by the state in the pre-liberalization regime provided a sufficiently protective domestic environment to the firms. The firms pursued cost competitive strategies and largely confined their sales to the domestic market. Some of the favourable policy measures adopted by the government included relaxation from the Drug Price Control Order (DPCO) and industrial licensing requirement, reservation of certain drugs for exclusive production by the small scale sector, process patent regime and preference in procurence for government health services. Additionally, the pharmaceutical SME sector also benefited through some general sops provided to the SME sector, including provision of finance, training, technical support, marketing support and access to raw materials etc.  The liberalization measures in the nineties initiated a new era of global competition and stringency in regulatory standards and compelled the SMEs to target foreign markets in order to sustain and grow in the increasingly competitive atmosphere. (Pradhan 2006, Sahu 2006).

The export related performance of these firms has to be assessed in terms of firm-specific parameters such as technologies, scale of operation, learning skills etc. in addition to the overall policy environment. The adoption of policy measures towards transnationalization is extremely relevant for these firms given their significance in relation to production units, volume, and generation of employment for the local populace and mobilization of skills. There is thus a necessity for these firms to integrate themselves into the global markets, with special focus on the entry strategy of exporting and outward foreign direct investment (OFDI). However, the existing efforts of pharmaceutical SMEs towards transnationalization have been restricted by limited financial and technological capabilities. (ibid)

 

 

Technical Know-How

 

Fig 3: Sources of Technical Know-How for Pharmaceutical SMEs

Source: MSME database, Third Census

 

Figure 3 clearly reveals that though a few registered firms have access to know-how through sources like firms located abroad and domestic firms and R&D institution, for a majority of these firms, who largely manufacture generics, common knowledge and the presence of skilled chemists are major sources of technological knowledge accumulation. The recruitment and retention of skilled personnel is thus vital to building innovative capabilities of these SMEs.

 

 

PRODUCTS RESERVED FOR SMALL SCALE MANUFACTURERS

 

The government of India, as part of its regulatory initiatives, maintains a list of products for exclusive manufacture by small-scale units. These include Nicotinic acid / Niacinamide, Paracetamol, Parabens and their sodium salts starting from p-hydroxyl benzoic acid, calcium gluconate, benzyl benzoate, pyrazolones, aluminium hydroxide gel and para amino phenol Industrial grade. Most of these items are ingredients in medicines, which are widely consumed and consequently have a huge market. Majority of the SMEs are formulators who operate in the local markets.

 

 

Good Manufacturing Practices and Schedule M Upgradation

Schedule M classifies the various statutory requirements mandatory for all drugs, pharmaceuticals and medical disposable industry relevant as per current good manufacturing practices (cGMP). Schedule M was first revised in 1986, when the concept of GMP was first introduced in India. The Central government subsequently revised the Schedule M protocols in 2001 to harmonize it along the lines of the WHO and US-FDA protocols. These protocols include specifications on infrastructure and premises, environmental safety and health measures, production and operation controls, quality control and assurance, stability and validation studies. The implementation of these protocols being difficult in a fragmented sector, several extensions were allowed before it was made mandatory in the year 2005.

 

Fig 4:  GMP-Compliance status of SSI units in pre-patent regime

Note: The data refers to GMP compliance status in the period before the revised Schedule M protocols were made mandatory. Schedule M compliance was made mandatory for firms June 2005 after several extensions. Also, the data broadly refers to the compliance status in the pre-patent regime.

Source: Planning Commission report 2006.

 

 

However, engaging in sub-contracting and loan licensing activities for large-scale firms also entails investments to the tune of Rs 2 crore for machinery and revamping of the manufacturing premises under the new quality requirements. In addition, firms do not have any guarantee of returns in the form of optimum utilization of newly acquired machinery, despite shouldering the added burden of financial investments. In addition, the plant designs of most of the old units are unsuitable for WHO-GMP specifications and therefore these owners may have no other alternative except to go for entirely new plants. The shift towards intensive technological efforts may not be smooth for small firms, who are already constrained by limited capital, sales turnover and paucity of skilled labour, and who may need to emphasize more on R&D related efforts, hiring of experienced and trained personnel in addition to investing in modern machinery and information and communication technologies. (Pradhan 2007).

 

 

Relief measures sought by small firms

In recent years, industry bodies representing the interests of small scale firms have sought some relief measures from the government with regard to Schedule M upgradations and fixed dose combinations. The relief measures relating to Schedule M have been sought in connection with the provisions related to space stipulations, air handling units and documentation.  In addition, these bodies have also demanded subsidies in excise-free zones. The government’s move to clamp down on fixed dose combinations has also come in for criticism from these groups. The Najma Heptullah Committee report on the issues related to the extent of upgradation related to Schedule M and government related initiatives has been tabled in Parliament in February 2009.

The Najma Heptullah Committee on Subordinate Legislation has recommended the adoption of clear guidelines on Schedule M related upgradation of firms. The Committee has recommended some flexibility with respect to space stipulations and air handling units and has noted that 80% of the Schedule M norms required change in mindset of technical persons and good practices and only 20% of the norms required change in infrastructure facilities, which entailed some financial investment. The Committee also referred to the proposal initiated by the Department of Chemicals and Fertilizers, pending approval by the Planning Commission, which would provide a 5% interest subsidy on an amount up to Rs 1 crore. Additionally, the Committee also recommended the promotion of Credit Linked Capital Subsidy Scheme (CLCSS) and Credit Guarantee Fund Scheme, rationalizing of fiscal incentives  and stated that it was in the process of gathering statistics pertaining to Schedule M upgradation and related closure of  small pharmaceutical firms.

The National Institute of Pharmaceutical Education and Research (NIPER), in 2007, submitted a study report, which attempted to identify the difference in MRP of the drugs manufactured in tax-exempt areas in comparison with non-exempt areas.  In addition, it also attempted to identify the trade margins of pharmaceutical small scale units. In order to identify the trade margins of the small scale units, price list was collected from the area of Baddi, Karnal, Mohali, Ahmedabad and Paonta Sahib. The study found that the trade margins was 291% (approx) in tax non-exempt states versus 389% (approx) in the tax exempt states. The trade margin average was calculated to be 340%.

 

 

Weaknesses plaguing Pharmaceutical SMEs

 

 

New Initiatives for SMEs

The Ministry of MSME has recently instituted a significant step to enable small and medium companies to meet new technological and regulatory challenges by formulating a National Manufacturing Competitiveness Programme (NMCP), worked out by the National Manufacturing Competitiveness Council (NMCC) in consultation with industry. Under the aegis of this programme, a “major promotional package” has been announced to provide support to the SMEs in the areas of credit, technological upgradation and marketing. Other steps proposed by the Central Government to enable the small and medium pharmaceutical companies to counter the competition from big pharmaceutical companies include: availability of financial assistance up to Rs.1 crore with 15% capital subsidy to small scale drug and pharmaceutical units for technology up-gradation under the credit linked capital subsidy scheme of Ministry of Micro, Small and Medium Enterprises (MSME); proposal of Department of Chemicals and Petrochemicals to extend 5% interest subsidy to pharmaceutical small scale units for technology up-gradation on the basis of Schedule ‘M’ of Drugs and Cosmetic Rules, 1945; support to high-risk pre-proof-of-concept research and late stage development in small and medium companies in the areas of diagnostics, immuno-biologicals and various industrial products like antibiotics, industrial enzymes, vitamins etc. under the Small Business Innovation Research Initiative (SBIRI) scheme launched by the Department of Bio-technology,subsidy on borrowings to SMEs to building necessary infrastructure for standardization of their products and development of Pharmaceutical SEZs which facilitates the availability of infrastructure, market access, boosts capacity utilization, encourages exports and facilitates excise relief. The National Pharmaceutical Policy 2006, has also included some initiatives like reduction in excise duty from 16% to 8% and enhancement of the exemption limit for excise duty from Rs 10 million to 50 million for SMEs.

 

 

Policy Recommendations

 

 

Pharmaceutical SEZs in India

 

Developer

Location

State

Type

Approved

Divi’s Laboratories Ltd.

Chippada

AP

Pharmaceuticals

Ramky Pharma City (India) Ltd

Village Lemarthi, Visakhapatnam

AP

Pharmaceuticals

Hetero Infrastructure SEZ Ltd

N.Narsapuram,

AP

Bulk Drugs

Andhra Pradesh Industrial Infrastructure Corp Ltd

Rakapur and Pollepally

AP

Pharmaceuticals (formulation)

Meditab Specialties Pvt Ltd

Bhut-Khamb, Kerim, Tal Panda

Goa

Pharmaceuticals

Zydus Finance Ltd

Ahmedabad

Gujarat

Pharmaceuticals

CPL Infrastructure Pvt Ltd.

Dhandhuka, Ahmedabad

Gujarat

Pharmaceuticals

Karnataka Industrial Areas Development Board

Hassan District

Karnataka

Pharmaceuticals

Serum Institute of India Lmd

Pune

Maharashtra

Pharma & Vaccines

MIDC

Krushnoor Dist. Nanded

Maharashtra

Pharmaceuticals

Wockhardt Infrastructure Development Ltd

Shendre, Aurangabad Dist.

Maharashtra

Pharmaceuticals

Maharashtra Industrial

Lote, Parshuram, District Ratnagiri

Maharashtra

Pharmaceuticals

Ranbaxy Laboratories Ltd

Mohali

Punjab

Pharmaceuticals

In-Principle Approved

Dr. Reddy’s Laboratories Ltd

Medak District

AP

Pharmaceuticals

Dr. Reddy’s Laboratories Ltd

Ranga Reddy district

AP

Pharmaceuticals

MIs. Jubliant Orgonosys Ltd

Vilayat

Gujarat

Pharmaceuticals

Dishman Infrastructure Ltd

Village Keraala

Gujarat

Pharmaceuticals

BioPure HealthCare Pvt Ltd

Hosur, Krishnagiri District

TN

Pharmaceuticals

Source: Ministry of Commerce & Industry, Government of India

 

 

References

 

 

 

 

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