Value-addition must for Indian API makers to take on the Dragon challenge

In 2012, India reportedly imported active pharma ingredients (APIs) and drug intermediates worth $4.6 billion, a rise of about 58% compared to $2.9 billion in 2011. China was one of the major exporters of APIs and intermediates into India. The rapid rise in imports of APIs from China in the last few years is raising a major concern among Indian API manufacturers. Agrees Jagdeep Singh, Secretary General, SME Pharma Industries Confederation, India (SPIC), “Of course, it is of major concern as competition has increased and market for Indian manufacturers has become unhealthy in many APIs.”
 
Rising production cost and increasing pressure on margins are forcing Indian formulation manufacturers to turn to low-cost imports from China. “Generally, business will follow the economics of demand and supply, especially supply of APIs at absurdly low prices, almost tantamount to dumping. Again intermediates also need to be imported as the cost of procuring or manufacturing within India is very high and this leads to comparatively higher costs of APIs produced here,” said Daara B Patel, Secretary-General, Indian Drug Manufacturers’ Association (IDMA).
 
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India, which was for long viewed to be a major player in APIs, is losing ground to China, which has been augmenting fine chemicals capacities in the last few years. Aided by pro-active government policies, China has attracted huge investments in APIs and intermediate manufacturing. Patel explained, “China has overtaken India as the main of source of APIs due to planned and sustained support from its Government in terms of infrastructure, subsidies, cheap power, transportation, dedicated capacities in voluminous manufacturing, effluent treatment facilities, industry-friendly labour laws etc. Such sustained mega growth can also be replicated in India with whole-hearted support from our Government on all these fronts.”
 
Biological APIs: High on imports
Chinese and Italian manufacturers have historically been strong in high volume and commodity chemicals, giving added advantage to APIs manufacturers from these countries. “The lower cost base and continued Government support has led its leadership in fields like fermentation-based and prostaglandin and steroidal-bases APIs. As per Central Drugs Standard Control Organization (CDSCO) data around 50% sites from China and around 10% sites from Italy are registered for bulk drugs export to India,” said Vinod Kalani, President, Rajasthan Pharmaceuticals Association (RPMA), and General Secretary, Federation of Pharma Entrepreneurs (FOPE).
 
APIs are generally manufactured through a variety of processes such as chemical synthesis, fermentation, recombinant DNA, isolation & recovery from natural sources, etc. Some APIs require a combination of these processes. It is believed that China dominant the chemical synthesis route, while it is still not a strong competitor in the technically complicated processes such as fermentation, recombinant DNA, etc. However, ground reality is tad different.
 
Kalani observed, “As per the data obtained from the port offices of the CDSCO at different zones in the country as well as the report of imports submitted to Ministry of Finance and Ministry of Commerce by the Pharmexcil, around 60 to 62% of the import of API & biological bulk drugs is done every year from China, which is consistent for last five years due to low prices and this could have a bearing on the pharmaceutical industries in India as some of the key APIs required from formulation may not be available.”
 
Imports: Short-term benefit, long-term risk?
The rapid rise in imports of APIs and intermediates from China in the recent years is a matter of great concern for pharmaceutical API manufacturers as well as formulators. Kalani said, “Since the Indian API industry is not viable, the formulators are importing the APIs which ultimately results in discontinuation of manufacturing of many Indian APIs. As we are dependent on the Chinese manufacturers for many molecules, the formulations may face shortages and price increases from time to time.”
 
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As result of low-cost imports, many Indian APIs manufacturing units have become redundant and have to be closed down. Though imports seems to be beneficial for formulation manufacturers, experts feel that over-dependence on imports can jeopardies long-term interest of Indian pharmaceutical industry.
 
As Patel points out, “The competition from China is unhealthy due to the unnaturally low prices of APIs from China, thus increasing our dependence on China to dangerous levels. What we should be cautious about is the fact that due to very low prices of Chinese APIs, many formulation companies opt for the same. As a result of this, many Indian API manufacturers are forced to close down their units. There is every likelihood of the Chinese manufacturers hiking their prices later on and stopping supplies, which can put the Indian formulation industry in jeopardy.”
 
Compete on quality, not on price
It is said that cost of manufacturing APIs in China is increasing. So, will this help India become competitive vis-à-vis China in API manufacturing? Though costs in China are increasing, which is partially levelling the playing field, Krishna Prasad, Managing Director, Granules India, feels that it is important for Indian pharma industry to not get too comfortable.
 
He believes that it is not prudent for Indian manufacturers to directly compete with the Chinese strictly on price. “There needs to be a sustainable advantage and we believe Indian manufacturers should use this opportunity to focus on quality and new technology,” he added.
 
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To compete, Indian companies need to build more advanced facilities to manufacture highly potent active ingredients. In addition, domestic manufacturers can partner with other international companies having niche capabilities. Case in point is Granules India’s joint venture with Omnichem, a wholly-owned subsidiary of Japan’s Ajinomoto, for high potency products.
 
Prasad said, “Indian manufacturers need to focus on differentiators in order to thrive. They should focus on customers that want quality and service. This does not mean just the regulated markets but also branded generics in the semi-regulated market. Indian manufacturers need to see how else they can add value. Perhaps it makes sense to forward integrate into PFI or finished dosages in order to bolster their value proposition. We are also seeing many Indian manufacturers backward integrate into key intermediates that they used to buy from China, this trend will continue because Indian API manufacturers can get a cost benefit.”
 
In addition, India will have to focus on high-margin, low-volume APIs, which are mostly knowledge intensive. “India should also harness its strengths to the fullest. For instance, India has been one of the leaders in the anti-malaria therapy segment. Also, the country should make use of its potential to export to regulated markets and add value to API manufacturers. Obviously we need to further specify on specifics of API production in terms on quality,” opined said Dr R B Smarta, Founder and Managing Director, Interlink Marketing Consultancy.