The onset of FY 2020-21 has not gone as planned for the Indian pharmaceuticals industry, thanks to the supply chain disruptions caused by the COVID 19 pandemic. Accounting for 10% of the global volume and 1.5% of the value of global pharmaceutical production, the Indian pharmaceutical industry was projected to maintain the status quo on annual CAGR ranging between 10-13% and was all set to be the home to the third-largest market in the world the before the onslaught of the COVID 19 pandemic. However,  prima facie reports from the top pharma industry associations including the downgrading of the Indian domestic pharma sector by rating agency ICRA from stable to negative suggest that the industry is likely to face transient supply chain challenges during the lockdown and beyond.

How Does the Geographical Footprint of Indian Pharma Affect Its Supply Chain Ecosystem ?

 An analysis of the supply chain ecosystem of the Indian pharmaceutical industry can enable the industry to plan recovery measures to overcome the challenges that it faces in the short run. The Indian pharmaceutical industry is home to 3,000 companies and over 10,500 manufacturing facilities that include: captive R & D units, contract R & D units, established bulk drug clusters, established formulation clusters, emerging bulk drug clusters, and emerging formulation clusters. A substantial majority of the top 25 pharma producers in the country operate facilities in emerging formulation clusters in Sikkim, Baddi, Pantnagar, and Haridwar, established formulation clusters in Hyderabad-Medak and Aurangabad, and both established and emerging bulk drug clusters in Tarapur and Vishakapatnam.

What Are the Supply Chain Risks and Operational Challenges Facing Indian Pharma Now?

In the backdrop of the COVID 19 pandemic, the following factors assume significance in understanding the immediate supply chain risks and operational challenges facing the Indian pharmaceutical industry:

• the epidemiological dynamics across the geographical footprint of Indian pharmaceutical clusters
• the evolving contours of the framework of regulatory guidelines on COVID 19
• the dependence of Indian pharmaceutical companies on global supplier networks
• the reset to trade agreements and formulation of trade policies based on reciprocity and 
• finally, the supply chain risks emanating from a breakdown of contractual obligations and compliance mechanisms in geographical regions that host the epicenter of the COVID19 pandemic. 

How Do the Epidemiological Dynamics Impact the Indian Pharmaceutical Industry?

Insulation from and exposure to supply chain risks for Indian pharma manufacturers shall be anchored to the dynamics of morbidity, mortality, and recovery in the aforementioned regions. The effects are likely to reflect in a shortage of multimodal logistics, third-party logistics, and value-added services of palletizing, kitting, and labeling along with disruptions to low-value but critical to mission items like packaging and MRO items. 

What to Make of the Regulatory Guidelines and Standard Operating Procedures to Combat COVID 19?

Focusing on the now and the next quarter in the financial year, it is a statement of the obvious that the measures on regulating workforce participation as stated by the Ministry of Home Affairs vide the National Directive on COVID 19 Management and Standard Operating Procedures are likely to prevail. This is likely to reflect in a downward revision of capacity utilization rates, production volumes, and economic efficiency. While standing capacity utilization of Indian pharma manufacturers both large and small was 60-70% higher than in most other industries in the pre-Covid19 scenario, it is likely to drop at varied rates across regions in India. 

How Do the Dependence on Imports and Force Majeure Events Affect the Indian Pharma Supply Chain?

While the Indian pharma industry is the largest producer of generic medicines in the world catering to 20% of the global supply by volume while also accounting for 50% of global demand for vaccines, it imports 65-70% of its API (Active Pharmaceutical Ingredient) and KSM (Key Starting Material) requirements, with China accounting for 60% of the imports by volume. While Indian pharma companies were reported to have inventories stocked to last till April 2020, it is important to take cognizance of the supply chain risks emanating from the thaw in production and exercise of force majeure clauses in cross-border contractual agreements by major global suppliers located in quarantined regions of China between January to mid-April and any further downtime in the next quarter. It leaves open the possibility of worst-case scenarios of Indian pharma companies facing a shortage of materials to complete the BOM (bill of materials) and batch size processing requirements. 

How Do Trade Policy Interventions Impact Procurement and Downstream Supply Chain?

The supply chain risks emanating from exposure to imports of API and KSM from Chinese drug manufacturers and biopharma suppliers coupled with protectionist trade measures to safeguard domestic requirements is likely to accentuate the volatility quotient of Indian pharma producers in the next quarter. The ban on exports of 26 APIs and finished products, masks and ventilators are likely to limit the market outreach and export opportunities of Indian pharma companies that otherwise supplies 30% of the generic APIs used in the United States. 

How Do the Cost of Production and Pricing Ceiling; DPCO 2013 Affect Revenues and Margins?

The cost of production of the Indian pharma industry was 33% lower than that in the United States in the pre-Covid19 scenario. However, the cumulative effect of the factors mentioned above is likely to alter the unit economics of the pharma industry in India in at least the next financial quarter by conservative estimates. The adverse impacts on unit economics assume significance in the wake of the price ceiling brought into action in the wake of the Covid19 pandemic vide the DPCO  Act (Drugs Prices Control Order 2013) that prohibits a rise in prices beyond 10% of the MRP (maximum retail price) during the preceding 12 months, thereby exerting pressure on revenues and margins of pharma players. 

Recommendations for Making Indian Pharmaceutical Supply Chains More Efficient Now

The Indian pharma industry while being a leading player in the resolution of the crisis is required to make its supply chain and operations more efficient to be able to withstand the disproportionate balance sheet impact emanating from the Covid19 pandemic. Following operational and supply chain measures are recommended for deployment in the short-run (next two financial quarters):

• Periodic review of HVACR in Plants and Warehouses and PPE

Given the prerequisites of the operating environment that the industry has, there is a necessity to periodically monitor and review the working condition of temperature controlled points in the supply chain, especially across manufacturing plants and warehouses. The single-most important measures to ensure the safety of the lives of people working therein and ensure minimum disruption to production routines are the optimal procurement of personal protective equipment and regularization of the MRO supply chain for periodic quality control audits of HVACR (heating, ventilation, air conditioning, and refrigeration) to minimize the risks of spoilage and wastage of raw materials and finished products.

• Map Exposure to Local Supplier Network in Red Zones and Containment Areas

In the wake of the VUCA (volatility, uncertainty, complexity, and ambiguity) elements that have been accentuated owing to the dynamics of the contagion across India it makes sense for Indian pharma companies to stay on guard to regularly assess the on-ground developments across red zones and containment areas. Given the challenges that are likely to emerge in the downstream distribution of drugs and finished products, a switch to smart packaging to enable greater track and trace of SKUs during the supply chain journey can create customer delight in times of crisis. 

• Volume Based Procurement of Materials to Complete BOMs

Given the supply chain disruptions in the present, risks of structural changes in the unit economics of production, operations, value-added services, warehousing, and logistics should be anticipated. It makes sense to switch to volume-based procurement  (VBP) of materials to complete BOMs and procurement from external suppliers. This may include APIs, KSM, and class C items like MRO and packaging to realize economic and technical efficiencies accruing from economies of scale and flow due to larger batch processing sizes. 

• Annual Rate Contracts for Greater Insulation from Inflation and Force Majeure Clauses

In the aftermath of the supply chain disruptions caused by the Covid19 pandemic, the risks of cost-push inflation affecting costs of APIs, KSM and tail-end spend items are anticipated. It is suggested that annual rate contracts can effectively shield the pre-Covid19 cost leadership enjoyed by Indian pharma companies and mitigate the balance sheet impacts of such inflationary pressures. Advance bookings of cross border procurements of materials at forward rates can also help them hedge risks from an untoward disequilibrium in the balance of payments and further depreciation of the Indian Rupee vis-a-vis the US dollar, having already depreciated by 7% since January 2020.  

• Advance Booking of Logistics and Warehousing Capacity to Counter Surge in Domestic Demand

With crude oil prices falling to a historic low in the current financial quarter there is elbow room for Indian pharma companies owing to the 33.6% weightage of WTI (West Texas Intermediate).

However, with an eventual reopening of the economy over the next financial quarter, a surge in domestic demand can hit logistics costs and by implicit economic rationale may invite a need for optimization of inventory holdings. Advance booking logistics capacity may thus be recommended to steer clear of eventualities. Vendor managed inventory services for holding inventories of goods on the account books of suppliers can enable Indian pharma companies to unlock cash and rationalize working capital usage over the short term.

Beyond COVID 19: What is Next for the Indian Pharma Supply Chain?

The COVID 19 pandemic while having disrupted supply chains of Indian pharmaceutical companies offer a vast spectrum of takeaways that are likely to lead to the emergence of a new normal as the industry traverses along the learning curve. These lessons if regularized into programmable functions shall enable the Indian pharma supply chain to be more agile, and resilient to future supply chain disruptions. Given the first-hand experience of having to deal with the exercise of force majeure clauses and digression from the status quo on contractual obligations and compliance by global pharma suppliers and manufacturers, supply chain digitization and automation should signal the heralding of a new chapter. Emerging technology breakthroughs in the domains of artificial intelligence, machine learning, and deep learning can allow Indian pharma manufacturers to do due diligence for supply chain risk compliance and management that is long overdue.