Demand for domestic pharma manufacturing to rise amid forex controls: Fitch

• Price controls on certain imported drugs to add it

Sri Lanka may recalibrate its sourcing of pharmaceutical drugs as the country seeks to reduce its over-reliance on pharmaceutical imports amid the government-imposed controls to preserve foreign exchange in its battle against COVID-19.

In a rating review on Hemas Holdings PLC this week, Fitch Ratings said the foreign exchange controls, which are expected to remain in place for some time, could redirect demand for domestically-manufactured drugs. 

Further, the rating agency expects the demand for locally-produced drugs to gain, as price controls in place on certain imported drugs have stifled the importers’ ability to improve profitability by way of price increases. 

Both combined could amplify the need and the urgency of the authorities to ramp up local production of substitutes for imported drugs, a matter, which is currently being thought out at the highest levels 
of policymaking. 

“We expect the demand for domestic pharmaceutical manufacturing to increase in the medium term as Sri Lanka seeks to reduce foreign exchange outflows and foreign suppliers’ attempt to improve profitability, which is curbed by domestic price controls on imported pharmaceuticals,” Fitch Ratings said. 

The coronavirus pandemic showed how vulnerable many countries are as they depend on China and India for most pharmaceutical drugs and medical equipment.

However, with the global supply chains getting disrupted due to the virus, the governments all over the world have called on the private sector to ramp up manufacturing of drugs and medical equipment, including ventilators and testing equipment domestically. 

Meanwhile, Hemas Holdings, which has its own pharmaceutical manufacturing business, had said they were expecting the manufacturing activities to normalise with the lifting of lockdowns expected in early May. 

“The company’s domestic pharmaceutical-manufacturing business was disrupted in the early part of Sri Lanka’s lockdown due to social distancing requirements. However, Hemas says production capacity utilisation is improving and should normalise with the lifting of the lockdown in early May,” Fitch Ratings said. 

Fitch this week affirmed Hemas Holdings at ‘AA-’ with a Stable outlook, weighing against its largely defensive operating cash flows against the disruptions from the pandemic and the resultant economic downturn. 

“Pharmaceutical trading and manufacturing as well as fast-moving consumer goods (FMCG) in home and personal care and stationery account for over 80 percent of the group’s earnings before interest and tax,” the rating agency said justifying its judgement to leave the company’s rating at its current level. 

Fitch expects Hemas’ pharmaceutical sales to remain stable throughout FY21 due to defensive demand and the government classifying pharmaceutical imports as essential goods, even as it imposed restrictions on a wide range of other imports to preserve foreign exchange. “Hemas continued its distribution operations during the country’s lockdown starting in March through third-party pharmacies, delivery partners and its own delivery platform. The business also has adequate inventory, providing a buffer against any supply shortages although supplies have so far held up. 

We expect Hemas to be able to pass on rising costs from a weaker exchange rate due to its contractual arrangements with global suppliers, price revisions and cost efficiencies,” Fitch said. 

Although the pandemic has decimated Hemas’ 300-room hotel business, its impact on the group’s cash flow remains manageable due to its less than 5 percent contribution to the consolidated revenue.