Venkatachari Jagannathan 1 July 2004 Chennai: The four domestic penicillin-G (Pen G) manufacturers are a baffled lot. These four — J K Pharmachem Limited, Southern Petrochemicals Industries Corporation Limited-Spic, Torrent Gujarat Biotech Limited and Alembic Limited — are not able to relate the economic theory of prices increasing when supply goes down to their industry.

The sudden closure of operations by Hindustan Max GB Limited (HMGB) last December hasn''t resulted in the increase in demand and prices of Pen G. HMGB had a capacity of 2,400 mega million unit (mmu-635 kg equals 1 mmu), nearly one third of the domestic production capacity.

The price of Pen G has crashed to $5.8/billion unit (BU-635 grams equals 1 BU) from $10.5 BU that prevailed in April 2003. However there was a marginal increase in prices in January 2003 to $6/BU from $.5.4/BU, subsequently the prices came down.

"At this price we are not in a position to cover even the variable costs. As a result nearly 95 per cent of the investments in the domestic biotech industry — Rs750 crore — is likely to turn lemon," bemoans Dr S K Sagar, president Indian Penicillin Manufacturers Association (IPMA) and president & director J K Pharmachem.

The building block The crude bulk Pen G is a product of fermentation. The major inputs are sugar, soya oil / flour, starch, cottonseed meal, etc. From Pen G, intermediates like 6-APA, 7-ADCA, 7-ACCA and others are derived. These in turn are converted into semi synthetic penicillin/semi synthetic cephalosporin bulk drugs, like ampicillin, amoxycillin, cephalexin, and cloxacillin and later to therapeutic antibiotics formulations.

Amongst the domestic Pen G manufacturers, only the Rs91.38-crore turnover Torrent Gujarat and the Rs600 crore Alembic are integrated manufacturers.

Though the Indian industry is still in its nascent stage, globally the Pen G business is large and mature with not so impressive growth rates. Some of the global majors in this segment are Dutch company DSM, GlaxoSmithKline, NCPC and Shiyao Group of China, Aurobindo Pharmaceuticals India Limited, India, and Bristol Myers Squibb, USA. The Indian company, Aurobindo Pharmaceuticals has recently commissioned its Chinese Pen G mainly for captive needs.

Historically, till 1991, the manufacture of Pen G was exclusively reserved for the public sector Hindustan Antibiotics and Indian Drugs and Pharmaceuticals Limited (IDPL). The country''s oldest pharma company, Alembic, manufactured the product for its own captive use. Nearly 70 per cent of the domestic requirements were met through imports, mostly from Europe. At that time the price of the product was around Rs1,100/BU. Pen G and its derivative 6APA were in the negative imports lists.

Between 1991-93 there was a change in the government''s policy and three private sector companies were issued licences to set up Pen G units here and thus J K Pharma (installed capacity 1,250 mmu), Mitocon Biotec (a division of Spic-1,000 mmu) and Torrent Gujarat (1,500 mmu) came into existence.

In 1994 Hindustan Antibiotics Ltd and Max GB formed the 50:50 joint venture, HMGB. Max GB is a 74:26 joint venture between Max India and GB-Gist Brocades, Netherlands, a global leader in Pen G production. GB was later taken over by DSM, which according to IPMA, decided to walk out of the HMGB plant last December.

Till 1995, there used to be a Pen G policy governing imports. According to Dr Sagar, for every procurement in the domestic market, duty free imports were permitted on a pre-designated ratio. In 1996 the duty free imports were scrapped.

As the country achieved self sufficiency in production, India even started to feed the overseas market, and in March 2003, Pen G was moved to open general licence (OGL) category from the restricted list.

From a production level of 2,000 mmu in 1996, the Indian capacity went up to around 8,000 mmu. But the journey was not smooth as almost all the players incurred losses ever since they started operations. Net profits were posted intermittently. "The industry is suffering from an accumulated loss of Rs500 crore, wiping out almost the entire investment made in this sector," adds Dr Sagar.

According to IPMA, the annual demand for penicillin for domestic and export use is around 14,000 mmu. Till 2002-03 net imports used to be around 7,500 mmu. With domestic production around 8,000 mmu, Indian manufacturers exported Pen G last fiscal.

The removal of Pen G from the negative import list last March seems to have dealt a deathblow to the manufacturers.

"From $10/BU in April 2003, the price came down to $5.5/BU, courtesy the Chinese Pen G manufacturers," remarks IPMA vice president and director, Mitocon Biotec Dr P Ramanujam.

Currently, Pen G is sold at Rs300-325/BU affecting the Indian manufacturers topline. For instance Torrent Gujarat closed last fiscal with a turnover of Rs91.28 crore down from Rs142.14 crore logged during 2002-03. J K Pharma''s turnover came down by Rs19.42 crore to Rs91.36 crore during 2002-03 (year ending September 30, 2003).

The industry complains that the price drop was not due to any technological breakthrough in fermentation resulting in higher output by the Chinese manufacturers, a deliberate pricing strategy to cripple Indian units.

Adds J K Pharma''s DGM marketing C V Seshadri, "The Chinese are selling below $6/BU despite their government''s order not to go below that price. China accounts for more than 35 per cent of the global Pen G production."

Meanwhile, the Indian Pen G industry is caught in a cleft stick. On one hand, Pen G is available at a very low rate globally and on the other hand, they contend, most of the imported Pen G under the advance licence route is diverted to the domestic market.

For the last four years imports had always been exceeding exports. Particularly in the last 8 / 9 months, the imports have increased by 250 per cent while corresponding exports have not taken place.

"Further the domestic lifting by drug manufacturers have fallen by 35 per cent proving that the imported crude bulk drug is finding its way into the domestic market," he adds. Between October 2003 and March 2004 imports shot up to 9,000 mmu under advance licensing scheme.

According to IPMA, Pen G / 6 APA imports are disproportionate to the equivalent exports of semi synthetic penicillin (SSP). "For instance," Seshadri says, "during the first quarter of this calendar year January-March 2004 saw imports shooting up to 4,519 mmu while the exports was 2,681 mmu."

As none of the import consignments come under the OGL category, the industry is not able to classify the imports as dumping and take anti-dumping measures.

"The only way out is for the government to impose an ad-valorem duty of Rs200/BU on Pen G and proportional duty on its derivatives," says Seshadri.

IPMA''s other demands include: (a) Reducing the advance licence fulfillment period to six months from the present 30 months (b) Ban imports of 6 APA (c) Strict monitoring of physical exports against advance licences issued (d) Issue of fresh advance licences only after completion of export obligation of the previous licences and (e) Rationalisation of entry tax on furnace oil from the current level of 16 per cent.

Justifying these demands, Torrent Gujarat director, V A Shah, "With an interest rate of around 12 per cent and power cost of Rs5 to 6 per unit, there is a need to provide us with some safeguard duty support."

Adds Dr.Sagar, "The shelf life of most drugs is around two years. So there is no justification for giving around 30 months for importers under advance licence to fulfill their export obligations."

In terms of production the Indian companies have achieved comparable standards with that of other major players in the world. "Our power cost is 23 units per BU which is more or less similar to the global majors," says Seshadri. The yield from the Indian fermentors is also comparable to that of other global majors, though the same cannot be compared to that of DSM.

Adds Nitin Jaywant, president-API Business, Alembic, "The most important aspect in fermentation products is the bacteria strain. Manufacturers are investing in research and development to improve the strain and get better yields. Already our productivity has improved."

Companies like Alembic have invested in captive power generation to reduce the cost of production. "We have invested Rs13 crore in three gas turbines. In the last six months the gas price has gone up to Rs8.50 from Rs4.50 per cubic metre."

Changing over When queried about the alternatives like selling the business off to an interested buyer Dr. Ramanujam replies, "All the three players have accumulated losses and liabilities. No buyer wants to buy out the other under current conditions when Pen G is available cheap."

Given the projection that the global demand for Pen G would go up only by 4 per cent per annum, can Indian the manufacturers look at down stream products or getting into animal health / feed segment?

Citing a report by Michael Barber and Associates, Seshadri says that the use of penicillins in animal health and veterinary segment is small. Around 700 ton of Pen G is used as animal feed and 250 ton in veterinary formulations. The SSPs are used in fish farming. The total volume of Pen G and its derivatives for veterinary use would be around 1, 550 ton.

Remarks Jaywant, "The important issue here is that Pen G for human consumption cannot be produced at the same place where the products for animal use is fermented." According to him Ivermactin drug is what generally given to bovine animals. As majority of Indians are not beefeaters, the market is largely in US and other western countries. On the other hand J K Pharma''s Dr. Sagar says, "The prices of down stream products is also going down. We at J K Pharma are now looking at the animal feed segment seriously." According to him the company is now holding talks with couple of foreign companies. "We are even open to leasing our fermentors for others."

Says Shah of Torrent Gujarat, "We are also examining the possibilities of using the product as animal feed / healthcare product."

While that is for the future, IPMA members have started cutting down their production. Last fiscal the total production was approximately around 6,841 mmu as against 7,845 mmu during 2002-03. The current fiscal production is estimated to be around 5,500 mmu.