High input costs impacting API firms' profitability, margins? Here's what experts say

Active pharmaceutical ingredient (API) makers are seeing a jump in their input costs emanating from key starting material (KSM) -- used in the manufacturing of drugs. Factors such as a power outage in China and the subsequent rise in chemical prices have inflated the prices of KSM by 10-30 percent for API companies in just one month.

India imports around 30-40 percent of KSM from China. The price of benzimidazole, an API used as input in the making of blood pressure drug telmisartan, has risen by 45 percent in the past six months. The surge is also because the supplier has shut down production in China. The prices of solvents have risen as much as 140 percent so far in 2021.

Indian API manufacturers, which import more than 50 percent of solvents, have been impacted by global supply issues. Overall, Indian API companies see the impact of around 5-10 percent on costs, and around three percent on margins.

The companies are cautious that a softening of prices, which generally happens in a few months, has not happened this time around. However, API companies have said that demand remains intact even though input costs have risen.

To talk about the price trends and their impact on Indian API companies, CNBC-TV19 spoke with Viva-API Labs Managing Director Vijay Garg and  Prabhudas Lilladher's Surajit Pal.

Garg is of the view that high KSM prices are due to the power outages in China. Earlier, the price occurred when the Chinese went on vacation, and lasted for short periods. But this time, the power outage in the country has caused the prices of certain products to rise as much as 100 percent.

For instance, the price of yellow phosphorus -- a basic raw material -- has risen almost 200 percent in a big shock for the Indian API industry. There seems to be no solution coming in from China in October so far, but hopefully, from November, the power shortage problem may ease. So this impact will remain for 2-3 months, said Garg.

Asked where does he see the maximum damage, Pal said almost all Indian companies are dependent on either Chinese API or key starting materials. "So, no matter what policy we come out with in the interest of our national producers, the fact of the matter is that KSMs are globally supplied by China," he said.

"Moreover, the Chinese government is thinking of reducing the demand in the country, and doesn't want to compromise on the environment front. So that has driven prices in this space," Garg added.

"With rising KSM costs, freight costs and packaging costs have gone up. So what would be the impact of costs that cannot be passed on to customers?" asked Garg. He believes the total impact of costs will be in the range of 20-30 percent, out of which, most costs will be passed on to the end-user or formulation companies. "For other costs which cannot be passed on, API companies would have absorb about 8-10 percent, which will impact their profitability," he said.

However, API companies may feel the impact only in the next quarter as they have stocks to carry forward. "The overall profitability impact will be 3-5 percent," he said.

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Asked if there could be EPS or earnings cuts, Pal said: "I don’t think this pricing pressure and the erosion of EBITDA is because of that. I did not see any reflection in the price or the valuation of the company, say, for example, in the last two months."

The market is pretty much unconcerned for now but will definitely see the impact at least in Q3, Pal added.