No Chinese supply threat for drug companies, but scaling Great Wall is tough

ET Intelligence Group: The earnings calls of Indian pharmaceutical companies for the third quarter of FY20 had evoked much interest among analysts owing to their plans related to China and for gauging the impact of lockdown in China on the supply of bulk drugs. However, the situation has changed drastically, with the words ‘China’ or ‘Chinese’ being conspicuously absent in the fourth quarter earnings calls of leading pharma companies.

There are two reasons for this. First, there has been no disruption of supplies of bulk drugs from China despite the lockdown and, second, the pandemic has upset the plans of Indian drug companies to expand into China. The speculative increase in prices of some key ingredients also tapered off once Chinese factories began servicing their orders.

“The concerns over supply of Chinese raw material proved to be ill-founded,” Nilesh Gupta, managing director of Lupin, told ET.

However, till the government walks the talk on setting up of active pharmaceutical ingredient (API) parks locally, no major Chinese imports substitution for Indian pharma can be expected

In 2019, several pharma companies entered the Chinese market through the joint venture route. Sun Pharmaceutical Industries, Cipla, Aurobindo Pharma, Glenmark Pharma, Strides Pharma and Alembic Pharma forged joint ventures in a bid to launch products in China. By winning a tender last September to supply olanzapine to public hospitals in China, Dr Reddy’s Laboratories (DRL) became the first Indian pharma company to export generic drugs to the Asian giant. For most other Indian pharma companies venturing into China, the market is restricted to licensing of speciality products, with monetisation being two to three years away.

The fourth quarter earnings calls of FY19 of DRL, Sun Pharma and Cipla had discussions on the Chinese market prospects. However, a year on, ‘China’ was absent in the calls of Cipla and Sun Pharma and summarily brought up in that of DRL.

In the latest fourth quarter earnings call of DRL, when asked about an update on the business plan for China, the company’s CEO, Erez Israeli, said: “China is a very important market for us, and we ramped up our activities there. We are not yet sharing any specific numbers for China. But let’s say that the strategy that I communicated in the last meeting in San Francisco is still valid.”

The spread of Covid-19 pandemic, with its epicentre in Wuhan, has effectively stalled the plans of Indian pharma companies to work and expand in China for now. Though the intent and strategy to enter the second largest pharma market are intact, it will take time to resume work on that front. For instance, Lupin’s Gupta was slated to make his maiden visit to China in March, but the visit is unlikely to be planned anytime soon.