Pharma and Life Sciences
How can Indian API companies re-orient their cost competitiveness
28 Aug 2023
Last 2-3 years have been quite challenging for API companies. Indian API industry adjusted well to the black swan event of COVID-19 and many companies witnessed increase in EBIDTA margins, during FY21. However, this celebration did not last long as several API companies witnessed downward pressure on margins after FY21 due to multiple factors:
- Increase in cost of Raw materials: The shock of COVID-19 coupled with other factors led to an increase in the cost of raw materials. Many companies built up their raw material inventory to ensure continuity in the supply. These high-cost inventories have had a significant impact on the margins.
- Weakening of demand: The demand surge witnessed in the immediate aftermath of COVID-19 came down which had an impact on capacity utilizations and operating leverage of many API companies.
- Supply risk management by formulation companies: Several formulation companies with API capabilities also increased backward integration to deal with COVID-19 like disruptions in the future. This further contributed to the weakening of demand.
- Increase in competitive pressures: Competitive pressures started increasing after many of the capacities came back online after the COVID-19 disruption.
While the high-cost raw materials inventory is coming down and the demand is expected to strengthen soon, Indian API companies need to evaluate their cost competitiveness in the new post-COVID normal. They can achieve this by:
API companies that can re-orient their cost competitiveness in the new post-COVID normal will be the leaders of the future.
- Re-evaluating 'make vs. buy' strategy: The guiding north star question that needs to be answered is what should be the strategy that will enable the company to be competitive and manage supply risks. This will entail answering questions like
- What should be the degree of backward integration?
- What intermediates should be manufactured in-house and what should be outsourced?
- Should the strategy be static or dynamic?
- What should be the capabilities (including competitive intelligence) that companies need to build to keep evaluating these strategies
- Optimal scale for operations: For a given product, what should be the scale of operations at which the company should manufacture? What are the key considerations that determine this scale?
- Optimal cost structures for various scales of operations: The demand for each product is different. Some are high-volume products, and some are low-volume. Based on the volume, some will be manufactured in production blocks with lower unit reactor volumes and others in higher unit reactor volumes. Without considering the value of the products, what should be the cost structures for these blocks that will optimize operating cost efficiencies?
- Procurement efficiencies: What should be the procurement strategies in the new post-COVID normal and what type of capabilities should companies build/enhance to improve procurement efficiencies?