The Hindu Business Line : Yuan effect: Drug cos to feel the pinch?

THERE may not yet be a crease of worry on the forehead of Mr Satish Nachane, Managing Director of Aarti Drugs Ltd, currently on a business tour in China.

But having heard of the Chinese currency yuan's revaluation on Thursday, even before his counterparts in India woke up to the news, Mr Nachane has spent his entire day in discussions with Chinese suppliers.

"Chinese manufacturers are already talking of a three per cent increase in prices," he told Business Line, speaking from Wuhan, China. Having talked to Chinese manufacturers and suppliers, he said, "there is a likelihood that past commitments will not be honoured, as suppliers will ask for increased prices."

Aarti Drugs imports about $15 million worth of active pharmaceutical ingredients from China. However, he points out, about 40 per cent of the company's $60-million sales turnover is from exports of value-added products. And, this may balance out the implications of the yuan revaluation, he said.

But analysts watching the Indian drug industry are not so optimistic. Indian drug companies may become a better sourcing option for global pharma companies, if Chinese manufacturers raise their prices, an analyst said. However, if the rupee appreciates against the dollar over a sustained period of time, Indian drug companies harbouring export plans will feel the pinch, he added.

Most Indian pharmaceutical companies have hedged their exports and do not expect a significant impact of the rupee appreciation in the short term.

Having spoken to pharma companies, he said, a consistent appreciation could have an adverse impact on export margins in the long term.

"Some Chinese players are active in certain product categories like Statins, Cephalosporins and Pen-G-based anti-infectives... ..since the yuan has been revalued by only 2 per cent, it will not improve the relative competitiveness of Indian players in these categories," he observed.

Indian drug companies who have availed themselves of foreign currency loans (denominated in dollars) will benefit from the appreciation of the rupee. Most local drug companies also import intermediates for further processing and the import content ranges between 20 per cent and 40 per cent of total material consumption.

"Ranbaxy, Dr Reddy's Labs and Cipla have an import content of more than 30 per cent while in case of Aurobindo the import content is higher at 60 per cent. Sun Pharma's import content is about 23 per cent," he said.

These companies could benefit due to the reduced cost of imported inputs, as a result of the appreciating rupee.

However, he added, since these companies have significant exports, the overall impact of an appreciating rupee will be neutral-to-negative in the long term. Multinational drug companies are net forex spenders, because of higher imports and dividend payments to the overseas parent.

An appreciating rupee will benefit these companies in the long term, the analyst said.

Aventis Pharma has an import content of over 60 per cent, Novartis 30-40 per cent, GSK's import content is lower at about 17 per cent of the total material consumption, he said.

Hence, if the rupee continues to appreciate on a sustainable basis, MNC pharmaceutical companies like Aventis stand to benefit, he added.

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