By: Rahul Koul
Last updated : December 21, 2020 9:34 am
50% of the critical APIs are being imported and almost all the imports are from China.
In case of Active Pharma Ingredients (API) industry, China’s loss could be India's gain. The disruption of trade supplies during COVID-19 pandemic has brought spotlight on the excessive dependence on neighboring countries for API and Key Starting Materials (KSMs). Meanwhile, India's border skirmishes with its neighbor have also added fuel to the fire.
The percentage of API imports from China has spiked from 1% in 1991 to 70% in 2019 and in recent past the actual market price of some of the APIs which are imported from China have gone up steeply. In context of the recent coronavirus outbreak, it has the potential of disrupting supplies of essential medicines, resulting in price volatility and ultimately leading to a situation where medicines are not available to patients. With up to two thirds of the total imports of bulk drugs or drug intermediaries being imported from China, any supply shock can literally put a halt on drug production in India and create huge shortages.
As per the PwC report based on 68 critical APIs captured from 19 leading pharmaceutical companies, 50% of the critical APIs are being imported and almost all the imports are from China. Domestically produced APIs cover approximately 50% of the total quantity however, KSMs for most APIs are still sourced from China.
API accounts for almost 100% of the total imports and because of this API prices have been very volatile and prices going up by more than 100% in recent past. High dependence on a single source can have significant adverse impact in emergency-like situations.
Challenges galore
The Chinese API industry has an inherent advantage because of economies of scale and the support from its government in the form of financial incentives, infrastructure and regulatory policies. It has lower capex requirements due to large Special Economic Zones (10–15x the size of Indian SEZs). Apart from that lower borrowing costs of 5–7% in China versus 11–14% in India help the local industry thrive well. Other factors include lower logistics costs, 1% of total costs in China as against 3% for India besides lower conversion costs as labour and electricity costs in China are relatively cheaper.
Indian API manufacturers lost competitive edge to manufacture lower end of the spectrum for APIs and fermentation technology to countries like China, majorly on account of factors like stricter implementation of pollution control norms, leading to higher costs of manufacturing APIs in India and issues in interpretation of the laws. Over that there are issues such as financial incentives like lower tax, cheaper utilities and land subsidy to lower capex requirements. Lack of large scale mega parks to manufacture bulk drugs needs attention too.
Way forward
Given the fact that the domestic API industry has been struggling for a long time because of high dependence on China, it becomes even more prudent for the country to revive the domestic industry in the wake of an ongoing pandemic. To achieve that, the government has to review certain policies like stricter implementation of pollution control norms, implementation of the Drug Price Control Order (DPCO), 2013, lower import duties and address issues facing indigenous fermentation industry that have deeply affected the API industry.
Following API constraints due to the coronavirus, the Indian government has taken measures to bolster domestic capabilities. Earlier in March this year, the government had approved the Production Linked Incentive (PLI) scheme focusing on APIs and API Parks scheme to boost competitiveness of India’s indigenous manufacturing. The scheme aims to reduce India’s dependence on China for APIs to produce crucial antibiotics, anti-HIV drugs, vitamins and cardio medicines.
APIs, popularly known as bulk drugs, produced under the scheme will now also be allowed for exports apart from sales in the domestic market. A committee appointed by the Department of Pharmaceuticals (DoP) to chart a roadmap for an ambitious Rs. 10,000 crores scheme to boost the production of raw materials for crucial drugs has readied an implementation plan. Rs. 6,490-crore have been earmarked as incentives for companies making key starting materials for critical drugs and another Rs. 3,000 crores has been reserved for creating bulk-drug parks in various states.
However, the industry faces the challenge of escalating costs if it tries to scale up the local production of APIs, KSMs and solvents. Escalating costs are a challenge to profitable production and the private sector might not be a wholesome game for it. It is important therefore that the Government helps finance or subsidize production for the next few years either through public laboratories or through public private partnerships.
In keeping with the feedback from the industry, the government has further tweaked the PLI scheme for bulk drugs to extend the incentives to exports of the products and ease other norms such as minimum investment threshold. The move is set to encourage more drugmakers to apply for the scheme and boost production of active APIs used in making medicines.