Supply chain disruptions, price controls spark demand for contract manufacturing of pharma

Coronavirus may have disrupted supply chains around the world and caused widespread economic pain but the pandemic is slowly re-setting the global world order which dominated manufacturing and trade for half a century, foreign entities have been forced to re-think of their business models as they are increasingly seeking local partners to sub-contract their manufacturing to serve local demand. 

Foreign companies are also weighing on this option as a means to avoid or mitigate the risks stemming from domestic price controls and import controls but this is considered a welcome method to create meaningful jobs at home with important industries being established, which can draw scores of people who otherwise end up driving three-wheelers. 

One such industry that is currently seeing an increase in demand for contract manufacturing is pharmaceutical, Fitch Rating said. 

This is besides the ongoing policy and industry tilt towards manufacturing drugs domestically to reduce foreign currency outflows and to reduce over-reliance on one or two countries for critical life-saving drugs. 

“We expect demand for domestic pharmaceutical manufacturing to increase in the medium term as Sri Lanka seeks to reduce foreign-exchange outflows. 

There is also increased demand for contract manufacturing on behalf of foreign pharma companies to help mitigate the risk stemming from domestic price controls on imported pharmaceuticals,” said Fitch Ratings in a rating report, which carried a commentary on pharmaceutical business of Hemas Holdings PLC. 

Local production or contract manufacturing of foreign products, drugs or otherwise for the local market and possibly for exports, could spark positive momentum in the renaissance in the domestic manufacturing sector, which hasn’t had a meaningful comeback since the import flood gates were opened with no protection to safeguard the local industries four decades ago. 
According to private equity market analysts, this could potentially trigger the next wave of foreign direct investments into the country, particularly into the tradable sector.

Overwhelming FDI flows to the non-tradable sector and the lack of such into the tradable sector has often been cited as a serious imbalance in the foreign investment flows into Sri Lanka.