Cover Story Why India depends heavily on China for drug raw materials? Share

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India has emerged as one of the world leaders in the production of high-quality drugs. But, there’s a flip side to this success story. Deepika Khurana and Dr Sobuhi Iqbal report how Indian pharmaceutical industry despite being a global market leader at generic drug formulations, largely depends on imported APIs from China.

By Deepika Khurana and Dr Sobuhi Iqbal

Exports of bulk drugs and intermediates from India grew in double digits during the financial year (FY) 2019, a period that was marked by drug shortages in the global market owing to supply disruptions in China. India’s domestic market, too, was plagued by shortages of bulk drugs, mostly intermediates, as the Pharma industry largely depends on imports from China.

According to a data released by the Pharmaceutical Exports Promotion Council of India (Pharmexcil), a body under the Union Ministry of Commerce and Industry, exports of bulk drugs and intermediates in FY19 stood at $3.9 billion, up by 10.5 per cent over the previous year.

Bulk drugs or active pharmaceutical ingredients (APIs) are the raw materials used for making formulations or medicines. These are used to manufacture at least 12 essential drugs such as paracetamol, ranitidine, ciprofloxacin, metformin, acetylsalicylic acid, ofloxacin, metronidazole, ampicillin, amoxicillin and ascorbic acid. Intermediates, on the other hand, are chemical compounds that are used in producing APIs.

Department of Pharmaceuticals (DoP) in the Ministry of Chemicals and Fertilizers has consistently maintained that the imports from China are due to economic considerations. This essentially means that Chinese imports are far more cost-effective for Indian pharma manufacturers.

Even industry sources agree that the production cost of API in China is about 20-30% less than that in India.

According to Dr Sakthivel Selvaraj, Director, Health Economics, Financing and Policy, at the Public Health Foundation of India (PHFI) New Delhi, India imports almost 80% of active pharmaceutical ingredients (APIs) and intermediates from China, which is huge and needs be reduced.

While speaking to Health Analytics Asia, he added that in terms of generic drug formulations, India still ranks among global market leaders but for API, our needs are largely import-oriented.

“It is interesting to note how the Indian Pharma industry has evolved over the years. If we track our journey, in early 90s India was self-sufficient to produce both formulations as well as API. However, in the last two decades, we have completely metamorphosed. And, look at the transition; today majority of our API comes from China,” he said.

Most API production units in India run at 30 per cent of their capacity as against capacity utilisation of 70 per cent in China. In fact, it is well-documented now that India has already lost its manufacturing base for API to China.

“What’s worse is the fact that our ability to formulate drugs with API that we import from China is also under threat. The inability of the Indian generic industry to systematically eradicate issues of data integrity has not only undermined the confidence of the buyers of its product but it has also eroded its credibility for years now,” said Dinesh Thakur, Public Health Activist and Director & Founder of Thakur Foundation.

Complex API market

Owing to the low-profit margin on APIs, Indian drug manufacturers consider it as a viable option to import APIs, make formulation drugs and export them. “The three factors responsible for over-dependence on Chinese imports are – wage cost, infrastructure facilities and tax benefits,” stated Dr Sakthivel.

“In the case of wage or labour cost, India still has an advantage as the GDP in China is about 5-10 times higher than ours. This automatically makes their labour more expensive,” he said.

Then what is that we lack or need to improve? And if good times with China recede, will there be enough of the manufacturing sector to fill the void? “If we talk about infrastructure or tax benefits, the government hasn’t done much. Not at least in the last 20 years,” he emphasised.

“And, for a manufacturer, it’s always about turnover and profit. So, if they are able to make profits by importing API, why wouldn’t they?”

Agrees Siddharth Mittal, CEO & Joint Managing Director, Biocon Limited. “Several factors are at play that provides China with an edge. First, China exports API globally which provides huge economies of scale in manufacturing. Further, the cost of capital is cheap and can be readily deployed. Also, they have several government funding options as well as tax incentive schemes unlike we have it here in India,” said Mittal.

“Basically, Indian manufacturing lags in volume and hence in investment. It is a chicken or egg problem,” he said.

In unforeseen circumstances, such as the most recent one when lakhs of Chinese facilities remained shut for over a year to step up their environmental compliance, India depended on countries like the US, Italy, Singapore and Hong Kong for import.

“Though supplies from China have stabilised now, prices of some APIs have increased,” said an industry source. He added that the supply crunch has done good for the Indian bulk drug industry, as API makers increased their capacity.

Further, a pharma manufacturer on the condition of anonymity added, “In a way, it created the opportunity for India to develop APIs and intermediates and fill some of the supply gaps.”

As a result, China along with 174 destinations started purchasing APIs from India during 2018-19. “Our exports of bulk drugs grew for a year or so. But because our cost of production for API is higher, it hampers the export competitiveness of our products,” he added.

Meanwhile, Pharmexcil data too reveals that exports of Indian APIs throughout the last year grew by over 20 per cent. August saw the highest growth of the year in percentage terms, at 32 per cent, while March 2019 saw exports touch $443.88 million — the highest in value terms.

The path forward

Even as India’s dependence on imports is considerable, policies formulated by the government to minimise the same have remained only on paper. It has been reported that Pharmexcil is also ready with a study commissioned by the Minister to suggest strategies to reduce import dependence in APIs, KSMs and intermediates. According to Mittal government can support and incentivise the industry under the Make in India initiative. “Long term tax holidays, affordable cost of capital and priority access can go a long way. The technology exists in India and is further augmented by deep regulatory bandwidth in the pharma sector. A push to make economics work would be a great initiative.”

While expressing how the pharma manufacturing business itself has changed over the years, Dr Sakthivel added, “We certainly need to have policies that are well-strategised and executed. If we look at the business portfolio of our top 10 or 20 manufacturing units, their exports account for about 60-80 per cent. They are not interested in doing domestic manufacturing anymore and have turned into trading companies.”

In addition, if China takes about six months to set up the factory and produce raw materials, India, on the other hand, takes about six years to build a factory for the production of raw materials. “Indian API industry has a complex license renewal system. They need to approach various authorities for the renewal of application,” said Thakur.

However, with India’s over-dependence on bulk drugs and intermediates from China and other countries, the government’s aim to achieve Pharma Vision 2020 seems to be bleak. “Also, there are reports from various quarters which suggest that China will take another 5-6 years to compete, if not overtake, Indian formulation business,” said Dr Sakthivel. “We, therefore, need to be prepared and plan a roadmap to ramp up our Pharma industry.”

But, given the historical unstable political relationship with China, is it risky to be overdependent on China for API? “With the current environmental issue aggravating the situation all across China, thousands of raw material factories are forced to shut down. Besides, Chinese regulatory and economic relations with the US may sour further due to the US-China trade war. This may result in the embargo of Chinese products directly or indirectly,” informed Mittal, “So, self-reliance for Indian Pharma industry is absolutely the need to sustain and lead.”

(This story has been updated with the response from Biocon Limited.)

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