Real Economy Check: ‘Jammed Liquidity’ To ‘Overwhelming Regulations’ Hurting Small Drugmakers, Says Orbit Lifesciences
Second-generation entrepreneur Amit Sheth followed his father into India’s pharma industry, nurturing a near 40-year-old business to a point where it now deals in finished formulations, active pharmaceutical ingredients and their import and export to 50 countries around the world. The company even manufactures for some of India’s bigger drugmakers. But Sheth is now in a quandary rarely experienced by the industry.
“Pharma is the only sector in the world which has never, ever de-grown globally, which is primarily the essential nature of the goods. This is the first time ever, in the domestic pharma industry, that as the contract manufacturer we are facing de-growth of the entire assembly belt,” Sheth, promoter and director at Orbit Lifesciences, told BloombergQuint on ‘Real Economy Check’—a special series on challenges faced by India’s small and medium enterprises.
The reason is equally surprising. After conducting surveys across the country, Orbit Lifesciences found that while Prime Minister Narendra Modi did a “fantastic job” by putting up 40 million toilets under the ‘Swachh Bharat Abjiyaan’—cutting into the rate of infections caused by open defecation—it also lowered the demand for anti-bacterials.
While the development is great for the country, it is only an example of why the whole industry needs to change gears. “Now people are spending more towards the chronic segment, more towards the well-being segment, the whole paradigm shift is happening in the business model itself,” Sheth said.
But that’s where the second challenge comes in for small and medium companies like Orbit Lifesciences.
“Jammed liquidity” and stifling regulatory measures are making it difficult for domestic firms to innovate, contribute and compete in the developed markets, Sheth said.
“The insurance regulatory body, IRDAI, is getting stricter by the day. Pharmaceuticals, the DCGI (Drug Controller General of India), the FDA are getting stricter by the day...at times we do feel that they are so overwhelming, and at times you feel that it is overpowering you...and your growth is getting stopped and it is getting curtailed due to the over-emphasis of the regulations.”
Sheth argued that regulations are meant to provide a conducive atmosphere for businesses to grow in a disciplined manner. “We must not forget that we are an emerging market. We are not a developed market like the U.S.”
Orbit Lifesciences has been making regular representations to industry regulators through Pharmaceutical Export Promotion Council and Indian Drug Manufacturers’ Association, asking for them to ease these growth suppressing factors.
“For example, if I bring in innovative products from outside of India which is not there, we need to get in the registration. Earlier it used to take six to eight months. Now it is taking us 12-18 months. Probably, 24 months.”
To be sure, the government is working on online single-window clearance systems to get licences.
Still, Sheth said regulation has stifled innovation within the country by leaving no incentive for research and development. While other countries give tax breaks on investments in research and development, which usually costs billions of dollars, that is not the case in India, he said.
“Is there any one single molecule in the pharma industry which is an innovation by India? No. Because there are no incentives for research and development in the pharma industry, which is sad because today India has the best skill labour, best technical brains, best technology in pharmaceuticals and ideally better infrastructure in pharmaceuticals for the global play than any other country in the world. Despite that, we are not able to come up with a single molecule which is innovation or an original research product,” he lamented.
The Indian government, however, gave a tax break of 200 percent for scientific research and development—also used by the pharma industry—up to 2016-17. In the 2016 budget this was reduced to 150 percent from April 2017 and will be further lowered to 100 percent from April 2020.
According to Sheth, lack of funds also limits companies like Orbit Lifesciences from realising their growth potential.
India’s bid to clean up its public sector banks, coupled with a string of defaults in some non-banking financial companies, has left small and medium enterprises starving for cash. While Sheth supports the need to clean up the country’s financial system, he said small players like his are going to suffer in the short term.
Barring one or two NBFCs, none of the institutions are lending money, Sheth said. Public sector banks, on the other hand, are asking for double the security for the same amount of loan, he said.
“Our ability to grow the business within a limited amount of capital is becoming less and less, day by day... Right now, the situation is such that in spite of having a good opportunity to grow, globally and domestically, due to the dearth of capital I think a lot of SMEs are impacted,” he said.
This puts the onus on the government to ease the fund crunch, Sheth said, adding the country is far behind developed markets when it comes to credit cost. “Naturally, with this burden of interest, it is not allowing us to do business and expand business because we constantly have the pressure to pay back the interest.”
Watch the full video here:
Here are the edited excerpts of the interview:
Can you first tell us about yourself and your company in a nutshell?
I am Amit Sheth, a second-generation entrepreneur. My dad started about 50 years ago in pharmaceuticals and I am following his footsteps. We have grown the business into many different sectors within the sector. We deal with imports, exports, APIs and finished formulations, we export in mainly 50 countries and import from about 10 to 12 countries, which includes Europe, the U.S. and China. We have three factories where we have our equity and we have invested in the company. We pretty much control the entire production.
So essentially, you also deal in imports-exports and as well as manufacturing for other clients, which are large pharma companies?
How is the business around currently Amit? Is it very different from what the previous periods have been wherein the economy has been slowing down?
It is very different. I would say, it has impacted the morale of SME players like ours. It is really negative, because of various factors; starting with the liquidity crunch that we are facing, tightening of the liquidity coming from banks and NBFCs because obviously they have been given a guidance by the authorities to tighten up the grip, clean up the mess which in long term is a fantastic move for the country, the nation, for the banking system as a whole. But for short term, it is a pain point for players like us, where we constantly thrive for growth, for liquidity coming in, from banks, NBFCs, and from facilities for discounting and export packing credit etc. Right now it is a challenging situation for us. Not only that, I would say that what is happening is that due to the economy downturn the consumption store is also going down. So overall, the kind of demand that we have been witnessing, especially in the pharmaceutical sectors is, which I am sure most of the guys must be knowing that it is the only sector in the world which has never, ever de-grown globally which is primarily due to the essential nature of the goods. This is the first time ever, in domestic pharma industry that as a contract manufacturer, we are facing de-growth for the entire SME belt; not the big guys but the small guys.
I am sure Mr. Modi did a fantastic job by putting up 40 million toilets in the Swatchh Bharat Yojana but as a positive impact towards that, the kind of infections that used to come and we used to drive the demand for anti-bacterials has been eliminated —which is a great thing for the country. So, we have to constantly look forward to change models of the business. Now people are spending more toward the chronic segment, the well-being segment— a paradigm shift is happening in the business model.
Okay, now let’s try and bifurcate this. What happened due to specific idiosyncratic factors, what happened due to the Swatchh Bharat is something that is specific to a particular segment. But are there things which are different from previous slowdowns which can be corrected? Processes, labour issues, liquidity issues, banking facilities which you hope are rather corrected so that things can improve? Have you lost contracts because processes or regulations that stopped you right now?
Yes, what is happening is, a lot of regulations are being implemented in every industry, from pharma industry to health industry to the real estate industry. Like, RERA is being introduced in real estate. The Insurance Regulatory Body, IRDAI is getting stricter by the day, pharmaceuticals, the DCGI, the FDAs are getting stricter by the day. So, my view is that, we must not forget that the regulations are for businesses to grow, to provide a conducive atmosphere and at the same time to give guidelines and to discipline. But at times, we do feel that they are so overwhelming and you feel that it is overpowering you from the prospective of your growth and your growth is getting stopped due to the over-emphasis on regulations which I believe if there are eased-out regulations in various sectors starting from pharmaceuticals. Because we must not forget that we are an emerging market, we are not a developed market like the U.S. where they have grown.
Have you made representations to the concerned bodies that some of the regulations can ideally be corrected in order to facilitate growth?
Yes, we have a body in the pharmaceutical industry called Pharmexcil, we have got IDMA, couple of bodies which are very active. We are regularly making representation and most importantly, when we are talking about Pharma you tell me is there any one single molecule in the industry which is an innovation by India? No. Because there are no incentives for research and development in the pharma industry which is a sad part because today, India has the best skill labour, best technical brains, best technology in pharmaceuticals and ideally better infrastructure in pharmaceuticals for the global play than any other country in the world. Despite that, we are not able to come up with a single molecule which is an innovation or original research product. We call it the NCE, New Chemical Entity, in our industry, which is an unfortunate thing because it requires billions of dollars of investment which in a developed country is being tax exempted. While in India the Research and Development incentive is not there.
Is it a new thing or has it been there from the past?
It has been there for a while. We’ve been making representations to the government after government for incentives but unfortunately it has not yet come up.
How different is this downcycle in terms of liquidity issues because we’ve heard a lot of companies say, that ‘Liquidity is stuck, it is not coming through’? Is that a clear and present danger and what do you think in your experience can be done easily to try and clear this?
I am sure the liquidity is jammed as you rightly said. Because predominantly the liquidity was driven in the market by NBFCs. The NBFCs, they were ahead compared to the PSU government banks, in terms of lending and they were very aggressive in their lending. Now, that has completely stopped. Barring one or two organisations in the NBFCs, I don’t see any other NBFC lending money at all.
You can only go to NBFCs? You can’t go to banks?
No, we can go to PSUs also, we can go to private banks as well as the PSUs. But what is happening right now, let’s say for example, earlier we used to get ‘X’ amount of money against ‘X’ amount of security. Now those security standards are becoming ‘2X’ so the kind of borrowing that we used to get against a particular amount of security has become half. So, our ability to grow the business within a limited amount of capital is becoming less and less, day by day. I mean, its impacting us adversely for sure and the measures I would suggest: the government needs to seriously think about making lot of improvements in terms of liquidity inflows by the government and most importantly, the repo rate cut. If you see the interest rates in terms of what India is paying and what a developed economy is paying, we are nowhere in comparison. And obviously, that is the biggest incentive for them, to be able to use the capital when the capital is available at a cheaper rate of interest as compared to what we get over here. Naturally, with a burden of interest, it is not allowing us to do business and expand business because we constantly have the pressure to pay back the interest. So right now, the situation is such that, in spite of having a good opportunity to grow, globally and domestically, due to the dearth of capital, lack of capital, I think a lot of SMEs have been impacted.
Is that the single biggest reason or do you think something else can be done to improve sentiment? We are trying to figure out why this series, what is it that the government or the regulators can do to improve sentiment in their semi-space? Is liquidity the single biggest factor or is it something else?
No, I would not say that it is the single biggest factor. In terms of government regulations, in terms of ease of doing business, in terms of the clearances where you see a lot of bureaucratic things happening; The government is working on a single window clearance, online systems, they are trying to avoid multiple channels of getting their regulations and getting their licenses and all but there is a huge scope of improvement in that space. At least in our sector, I would say. Let me give you an example, if I bring in innovative products from outside of India, we need to get registration. Earlier, it used to take six to eight months. Now it is taking us 12 to 18 months. Probably, 24 months.
So, what has happened is, the kind of documentation which was required earlier, for us to register a product, whether it is an API or a finished formulation, limited number of requirements were there. But now, the requirements have increased to manifold. Now, we are trying to match the global standards. But at the same time, we are forgetting that India is an economy which used to work in a particular fashion and the tragedy is that by the time the marketing company, our marketing partner, the big guys, they plan the launch, spend their money and by the time they hit the market from the time we sell the concept,—it’s a two-year window and the whole steam is lost in between. There can be single window clearances when it comes to registration of the product instead of going to multiple windows. There can be a lot less number of documents that are required for registration of a product because, at the end of the day, a product which has been selling in India, earlier also, it is the same quality of product that we are going to bring in. So why is there so much of change of documentation which is required? Which is adversely impacting our ease of doing business. Earlier, we used to launch five products every month, five new products as our company has Orbit for our clients. Now there is hardly five or six products in a year.
One final question, and I heard this from a lot of people and hence I am asking you because you are present across both sides. There are companies which told us that buyers are demanding the product on time but the payment from them come in slightly late. The problem is, the recoveries from contractors is not coming on time. Is there a problem industry wide that you and your peers might be facing? The money is not coming in, but at the same time, the payments that you have to make, to your large customers, have to happen on time. How do juggle with this? Can something be done to improve this?
So, this is a problem I think across the industry we all are facing. In pharma, the normal payment terms to the distributors was 21 days. Now that has gone to four months. Imagine the gap. Now we have to put our own capital so we are asking our manufacturing partner, our marketing partners that when you give us the credit, we can pass on the credit. Now that credit they can extend up to maximum two months. So, for a period of two months, we have to extend our capital, which was never the case. It was 21 days and seven days. Now it has gone from two months to four months, Definitely this thing is causing a huge loss of business, loss of opportunity which in my view, we should obviously look at easing out the credit lines, the SME guys, the norms by which we disburse money to the SME can be much more relaxed and there should be a more conducive environment in terms of giving different schemes where SME people are encouraged to get disbursement at a much lesser interest rate. These are the few things which we can look at. They will improve the overall impact on the industry.