Europe's Energy Crisis Has A Collateral Benefit For Indian Drugmakers

A severe energy crisis is looming over Europe due to Russia choking off gas supplies, forcing factories to shut down and power plants to run at reduced capacity leading to astronomical electricity bills.

Power prices in Europe have escalated 8-10 times and this would, in turn, adversely impact the cost of manufacturing of active pharmaceutical ingredients, Aditya Khemka, fund manager at InCred Healthcare Fund, told BQ Prime. That, according to him, could be an opportunity for some Indian companies. "Customers may look for alternatives in a bid to diversify their supply chain."

"And if demand shifts, it would stick," he said. "Derisking is not temporary and that regulated products imply stickiness to suppliers."

Europe's API industry, according to Khemka, is the largest in the world after China and India. Europe's overall API manufacturing is almost 50% generic and 50% custom synthesis, Khemka said. China is a 95% generic API manufacturer.

Custom synthesis is a low-volume but high-margin business. So, requests for more custom synthesis APIs could mean better gains for Indian API manufacturers, he said.

Agreed Vishal Manchanda, pharma analyst at Systematix. But he said the gains might be more product-specific.

For Indian companies with an existing large revenue base from APIs, a 10-15% shift in demand may not show a material impact on their profitability, but it may be an important opportunity for smaller players, Manchanda said.

"Solara Active Pharma Sciences Ltd. is one such company that has a broad portfolio of API products and can see a favourable impact," he said. The other companies that could stand to benefit to some extent but have a large base are Dr. Reddy's Laboratories Ltd. and Aurobindo Pharma Ltd.

Khemka didn't name any beneficiaries. According to public disclosures, however, InCred Healthcare owns API stocks such as Divi's Laboratories Ltd., Hikal Ltd., Neuland Laboratories Ltd. and Syngene International Ltd.

Emails sent to Divi's Labs, Hikal Ltd., Neuland Laboratories Ltd., Syngene International Ltd., Sequent Scientific Ltd., Suven Lifesciences Ltd., Dr. Reddy's, Aurobindo Pharma and Aarti Drugs Ltd. remained answered.

Europe's energy crisis has a collateral benefit for Indian drugmakers.

German-based BASF SE—a large producer of painkiller Ibuprofen—is witnessing a "competitiveness issue in Europe far beyond the chemical industry", it said in its Q2 conference call in July.

The company said it would have "structurally higher energy costs because one contributor to the wealth and also the growth in Europe was cheap Russian gas". "If this is now LNG-based, there is a $5-6/mmBtu adder for gasification, transport and regasification. That will structurally bring the costs up."

"How long-term prices will change and how much LNG comes in, this is too early to say, but that certainly has to trigger some thoughts about long-term competitiveness and capacity growth. You might run out capacities but not build new ones," BASF had said in its call.

According to Manchanda, if Ibuprofen's production is impacted, there will be a surge in its prices, forcing customers to seek alternatives.

He expects IOL Chemicals and Pharmaceuticals Ltd. to be among the companies that may stand to gain.

When BASF's supply chain took a hit in the past, Manchanda said IOL Chemicals gained from the disruption, and there is a possibility that it may happen again this time.

Email sent to IOL Chemicals, too, remained unanswered.