The Joy of Capital Spending

Sept. 30, 2015
India’s Top 20 Pharma companies are upgrading facilities to proactively enjoy Pharma market opportunities

India’s top 20 pharmaceutical companies are increasing capital expenditures by 40 percent to take advantage of market opportunities to come, says a report from CRISIL, a global analytical company providing ratings, research, risk and policy advisory services. The article, which appeared on The Economic Times of India website, attributes the CapEx increase in India to the fact that the country’s “drug makers are expected to pay greater attention to regulated markets, especially the U.S. market, and to take advantage of substantial patent expiries expected in the medium term, as well as an ever-increasing demand for generics.”

There’s been no shortage of criticism of India’s pharmaceutical industry and its drug-quality lapses. A recent Deloitte India survey of risk and compliance professionals at India-based pharmaceutical companies found that a shortage of skilled manpower is cited as the leading reason that India drug companies are unable to keep pace with rapidly changing regulatory environments.

According to the survey, 64 percent of survey respondents attribute non-compliance to shortage of skilled staff (on their risk and compliance teams), followed by challenges in implementing cGXP guidelines (52 percent), complying with professional association guidelines (42 percent), and poor fraud risk management systems (36 percent).

Additionally, close to 50 percent of survey respondents indicated that data management systems and pharma quality systems were a concern. This too can largely be attributed to the skill deficit in handling these issues in the sector. Among other things, the survey’s analysis points to the lack of a “zero tolerance” approach to non-compliance and malpractice among senior management in India as a serious challenge to growth.

Regulated markets require higher investments to meet stringent standards, says CRISIL, “CRISIL expects the capital expenditure of India’s top 20 pharmaceutical companies, which contribute nearly two-thirds of the country’s exports, to increase 40 percent to over [~$8 billion] until fiscal 2018, compared with about [$5.8 billion] seen in the last four fiscals.” Out of the top 20 pharma companies, the CapEx spending of the eight companies currently generating a majority of revenues domestically, “will almost double by fiscal year 2018, growing at a much faster pace compared to the rest, which are already focused on regulated markets.”

“Increasing domestic pressures will force Indian companies to seek greener pastures abroad. This will lead to higher expenditures related to compliance, research and manufacturing capacities. We see their CapEx rising around 200 basis points to nearly 8 percent of operating income by fiscal 2018 from 6 percent now,” says CRISIL president Ramraj Pai.

Prompting capital spending, says CRISIL, is the need for stricter adherence to FDA regulatory oversight. “Scrutiny of Indian manufacturing plants by the U.S. health regulator has been increasing of late, so companies would have to invest in upgrading facilities proactively to enjoy uninterrupted benefits from opportunities.” India is seeing the light; the pressure on them to improve is not coming from some central source, but from the desire to compete in (relatively) free global markets. Markets have the great ability to reward good corporate behavior and punish the bad. India wants to stay in the game and is putting its money where its mouth is.

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Steven Kuehn | Editor in Chief