'Biz environment to be tough as govt wants to make drugs affordable'

Aurobindo Pharma has said the business environment is expected to remain challenging for the next one or two years as governments intervene and regulate healthcare costs to make it affordable to people.

It also listed slowdown in global markets and currency fluctuations as problem areas, but said the company will get ahead despite challenges. Aurobindo is the second pharma company from the city after Dr Reddy’s Laboratories, which has expressed apprehensions on regulations of healthcare cost in developed economies.

[caption id=“attachment_410774” align=“alignleft” width=“380”]  DRL had said it may see some pressure on revenues due to the cost cutting measures and mandatory discounts. Reuters[/caption]

“I believe the business environment will continue to remain challenging for a year or two. As economies in the advanced markets manage their pressure points and governments intervene and regulate healthcare costs to make it affordable for their people, pricing will be even more competitive,” Aurobindo’s former Chairman Ramprasad Reddy said in his message in the annual report of 2011-12.

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He said, however, that despite the challenging environment the drug maker is expected to do well in future. “We are witnessing a slowdown across Europe and currencies are expected to remain volatile in relation to the dollar. Having said that, we at Aurobindo believe in getting ahead despite challenges,” Reddy added.

He said raw material costs were fairly correlated to the hardening global petroleum prices, impacting cost of production and putting pressure on margins. India’s second largest drug maker Dr Reddy’s Laboratory also expressed similar views recently in a filing with the Securities and Exchange Commission of USA.

DRL had said it may see some pressure on revenues due to the cost cutting measures and mandatory discounts being followed by some countries including India. The DRL filing said, “The existence of government-imposed price controls and mandatory discounts and rebates can limit the revenues we earn from our products.

“We expect these efforts to continue in the year ended March 31, 2013 as healthcare payors around the globe-in particular government-controlled health authorities, insurance companies and managed care organisations-step up initiatives to reduce the overall cost of healthcare.” Aurobindo said, meanwhile, that the current dollar-rupee situation is impacting its financials.

Though a strong dollar adds to the income and cash, it also creates the need to provide for a larger quantum of repayment of the company’s debt borrowed in foreign currencies.

“This conundrum needs to be addressed. We shall aggressively drive up the revenues, pare costs, enhance productivity, improve the business mix, lower the gearing and take several other actions to improve the profit after tax,” said Nityananda Reddy, Vice Chaiarman, of Aurobindo in the annual report.

The company incurred Rs 123.5 crore net loss (consolidated) in the last financial year. At the close of FY'12, the rupee had depreciated by 14.1 percent and this resulted in a forex loss of Rs 248 crore as the rupee’s weakness impacted foreign currency denominated borrowings of Aurobindo.

PTI