Dear Colleagues! This is Asrar Qureshi’s Blog Post #638 for Pharma Veterans. Pharma Veterans welcome sharing of knowledge and wisdom by Veterans for the benefit of Community at large. Pharma Veterans Blog is published by Asrar Qureshi onWordPress, the top blog site. Please email to asrar@asrarqureshi.com for publishing your contributions here.
Opening Note
February 2022 marked my completing 47 years of working in Pharma Industry. Allah be praised. I am still working. My journey of near half century is also the journey of Pharma Industry in Pakistan. Great changes have occurred in this time and a lot could be written about it. In my blogs, which were started about four and a half years ago, I have covered several topics related to Pakistan Pharma Industry. This multi-part series is the SWOT – Strengths, Weaknesses, Opportunities, Threats – Analysis of the Pharma Industry and propose strategies.
Strategies to Avert Threats/Risks
In this last set, we shall discuss strategies that shall help in averting threats and risks. These may be prevailing now and may be coming up in the near future. The nearness of future is important factor, because some of the shadows are already lurking. In the strategic language ‘Clear and Present Danger’ is which is here and now and serious. Some do belong to this category also.
We shall start from the present and move into future.
- Strengthen Financial Discipline – Another very serious threat is rising costs. Costs are rising for both manufacturing and selling. Both should be considered separately. Financial discipline also means keeping personal and business separated.
- Cost of manufacturing has increased due to multiple factors.
- Governments in developing countries like ours are always in deficit. The inbuilt corruption and incompetence further complicate the matter. The government constantly keeps thinking about increasing its revenues through changes in old taxation and adding new taxes. In a way, the government constantly works on fleecing the public. The latest for Pharma industry is levy of 17% GST – General Sales Tax on all purchases, local and imports. The lollipop incentive is that it will be refunded after consumption of materials. While the GST was implemented from midnight on the announced date, the refund mechanism is nowhere near finalization. It has been a few months but the refund in not on the horizon. The impact is that 17% has been added to the procurement bill which is quite huge, and it has seriously affected the cashflows. An example would help to understand the impact. A Pharma company with a billion rupees turnover annually is now a medium sized company. Such a company would have an average purchase of 300-400 million which has now become expensive by 50 – 70 million rupees. The money is constantly being deposited with the government and it has already piled up to the extent that it scares the government to give refund. It is a solid, definite cost hike.
- Raw material prices have gone up enormously. Even for materials which are quite old and whose prices had been traditionally stable, the fluctuations are common. Once the prices go up, these do not come down. The portion of cost related to active/inactive ingredients is quite large in many products. The times when most generics had huge margins is no more there. The margins have generally squeezed due to increases in cost of materials. The other problem is that the prices are not stable. There are unexpected changes from one purchase to the other. Planning ahead is therefore all the more important. The urgent financial discipline required in this case is managing inventory cost. Supply chain must be tasked with managing inventory in a way that the manufacturing keeps going but the cost is controlled.
- Cost of all packaging materials has gone up exponentially. Historically, packaging was a nominal cost in relation to materials and selling costs. Now it is not so, packaging has become a serious cost factor. Almost all packaging components are imported, and their prices have doubled due to currency devaluation. COVID has caused price increase due to production and logistics issues. The paper market announces new rates every day, and the prices of all paper/card-based packaging is affected. Aluminum foils/tubes/caps have gone very high up. Oil prices have been constantly soaring thereby causing constant increase in prices of polymer-based packaging and components.
- Utilities prices keep on increasing. NEPRA is always asking for increase in unit tariff to cover line losses and distribution losses (a euphemism for theft by powerful people). The entire machinery, equipment, analytical tools all run on electricity. Larger machines like Autoclaves, Dry Heat sterilizer, fluid bed dryer are just a few examples of equipment which guzzles electricity. There is a sanctioned load, and it is restricted at that. However, the connection has capacity for more. If more power than sanctioned load is used by mistake, it is not just billed at extra price, additional penalties are added. As mentioned earlier, our governments come up with ingenious schemes to fleece public. Utilities are also among major expense. In neighboring India, the cost of electricity is much lower, and our DRAP benchmarks India for awarding drug prices.
- Wages increase every year. The government also increases minimum wage to be given to labor every year. Most companies do not pay minimum wage, they pay less than that, but even that increases every year. The increments to senior staff are also awarded every year in most companies. The sum up is that the cost of manufacturing keeps rising despite best efforts to contain it.
- Cost of manufacturing has increased due to multiple factors.
In a time when costs are escalating from all angles, strong financial discipline is the only way to survive honorably.
We have not yet touched the marketing costs. It is a big head and needs separate discussion. We shall do it in the next post.
To be Continued……
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