A bleak picture turning rosy ?

Companies are raising prices at break neck pace. The rising input costs has painted a gloomy scenario for the procurement function. The industry is faced with two dilemmas:

• Either it increases the prices of its products in response to the increase in key input commodity prices & thereby risk losing the market.
• Continue to hold on the price increases and risk diminishing margins or possibly bleed.

Also a degrowing market has not helped the cause. The problem is compounded in the Indian pharmaceutical industry faced with a triple whammy.

1) With the Olympics due in China, China would want to present itself as a country which is conscious of the environment in which it lives. Therefore, all the chemical firms (supplying intermediates) that were flouting the global environmental norms are being forced shut. This has led to a huge supply crunch. The output has dropped to 40% of the previous year, leading to
unprecedented hike in input costs.

2) The crude story is well documented and would not need much elaboration. However the key reasons identified for the increase in crude price are: (order depends on where you live & who you are)

a) Falling dollar (due to sub prime crisis)

b) US Iran standoff

c) Increasing consumption of oil by third world countries

d) No increase in production

e) Excess Speculation

f) Rising costs of oil exploration & development

3) Key pharmaceutical product prices are controlled by the government (whoever talked of liberalization). Prices of essential drugs are fixed by the government and are revised only through a lengthy, time consuming process. To quote an example, Ibuprofen is considered an essential drug and the government fixes the price of the finished product marketerd by the companies. Ibuprofen was hovering at around Rs 400/- when the government last fixed the price (about six months back) and today the same is hovering at around Rs 500+. To make matters worse the cost of the input Ibuprofen represents 90% of the cost of the finished product, & 65% of the Average selling price. Therefore if the price of the key active pharmaceutical ingredient rises by 25%, the pharma company starts bleeding. This is the reason why many of the pharma products are going of the shelf.

However, all is not lost. China is expected to revive production in a short while and all the pharmaceutical organizations are waiting with bated breath for the olympics to be completed & factories to resume operations. Crude is expected to soften on the back of anticipated production from Brazil, Canada & Central Asia and also due to softening of demand. The government is expected to revise the pricing norms in a shortwhile based on the stable conditions expected to arrive in a short while.

Now you maybe wondering the reason why I have not mentioned the ever so ubiquitous inflation as one of the three reasons. Well inflation is an effect of these three, atleast in the pharma industry. There are other minor factors too like the rise in the prices of Soda ash & Caustic soda. I will be discussing the same in another post. Till then keep your fingers crossed, pray for the early completion of the olympics, discovery of more oil fields and revival of the global economy.