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China Coronavirus And API Sourcing – A Threat… Or An Opportunity For India?

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‘2015 – Year of Active Pharmaceutical Ingredients’ (API), announced the Government of India by a Press Release on February 25, 2015. This came after ascertaining that over-dependence on imports of bulk drugs or API, especially from China, is detrimental to India’s health interest. This decision was also in sync with the freshly announced, and well-publicized government objective regarding ‘Make in India’.

Two years down the line, on July 15, 2017, eHEALTH publication also deliberated on this issue in an article – ‘Why over dependence on APIs imported from China is harmful for India?’ It reiterated, India has proven capabilities in the generic drug formulations, but over dependence on China for sourcing – 70-75 per cent of APIs does not augur well for the Indian pharmaceutical sector. Because, as any interruption in supply from China can badly impact the sector, jeopardizing the health of millions of people, not just in India, but across the world, as well.

The reason for Indian drug formulation makers depending on China-supplied APIs, is mainly for its low cost, and not for any technological other reason, the article said. Regardless of the India’s announcement – ‘2015 as the year of API’, the API industry continued to struggle without much tangible support. Despite a lot of decisions still being in the pipeline, let me hasten to add, some inconclusive signs of early recovery have been captured in this space by some recent studies.

With the outbreak of the recent ‘coronavirus’ menace, the moment of truth has arrived in the country. On the one hand, it is posing a threat to the country’s API sourcing, on the other it could throw open a door of opportunity for Indian API manufacturers, as the Chinese API prices would start climbing up. But the question is, in which way it would evolve? In this article, I shall focus on this aspect of the new coronavirus menace, starting with a brief description of the background.

China coronavirus – when the alarm bell rang: 

According to the World Health Organization (WHO), on December 31, 2019, it was alerted to several cases of pneumonia in Wuhan City, Hubei Province of China. The virus did not match any other known virus, raising a great concern. No one knows how it affects people who are sick with it – how they can be treated, and what the countries can do to respond. One week later, on 7 January, Chinese authorities confirmed that they had identified a new virus.

What it does?

This new virus is a coronavirus, which is a large family of viruses that cause illnesses ranging from the common cold to more severe diseases, such as Severe Acute Respiratory Syndrome, such as SARS and MERS.

Since the virus, reportedly was first detected in Wuhan in people who had visited a local seafood and animal market, it is likely to have transmitted from an animal to humans. Nevertheless, several known coronaviruses are known to be circulating in animals that have not yet infected humans. The new coronavirus has been named novel coronavirus (2019-nCoV) and is the seventh coronavirus known to affect humans.

W.H.O has been working with Chinese authorities and global experts to learn more about it. However, because this is a coronavirus, which usually causes respiratory illness, the world body has circulated advice to people on how to protect themselves and those around them from getting the disease.

The damage, thus far:

Bloomberg on February 02, 2020 reported the death toll from the coronavirus outbreak has risen to 305, with 14,555 confirmed cases worldwide.  The first death outside of China took place in the Philippines on February 01. Alarmingly, 2019-nCoV infections have also spread to at least 15 other countries. These numbers keep increasing.

Nearer home, India, on January 30, 2020, also announced its first case. “One positive case of Novel Coronavirus – a student studying in Wuhan University — has been reported from Kerala,” said a statement released by the Health Ministry. On February 02, 2020, Reuters reported the second case of coronavirus in Kerala.

This scenario prompted the World Health Organization (WHO) to meet again on the last Thursday and declare the new coronavirus an international public health emergency.

The impact on the pharma industry:

Responding to the criticality of this situation, health authorities across the world are trying to put in place effective ways to overcome this crisis. In the healthcare space, medical scientists are ‘racing to develop a vaccine to protect people from the virus.’ One lab in California, reportedly. has plans for a potential vaccine to enter human trials by June or July this year.

Alongside, many are wondering about the looming threat that it poses on the API sourcing from China by the global pharmaceutical industry, including India. However, as I said earlier, some Indian experts, are also sensing an opportunity for country’s API manufacturers to fill the possible void, as it gets created.

API sourcing concern:

An exclusive survey conducted by Kemiex, titled ‘Coronavirus impact analysis for APIs, feed and food additives,’ among 97 life sciences professionals, published by them on January 20, 2020, reports some interesting findings. Some of the key ones are, as follows:

  • 85 percent experts foresee API and other ingredient supply disruptions, with 35 percent expecting a high and 50 percent envisaging a low impact.
  • Orders planned for the 1st quarter with delivery in 2nd quarter are expected to be mostly affected, while disruptions might continue a quarter. Only a minority believes the disruptions will last until year end or beyond 2020.
  • The biggest impact is expected from extended Chinese New Year holidays and delayed production start.
  • A first impact analysis based on preliminary information shows that only selected products such as amino acids (taurine…), certain vitamins and other APIs and additives could be affected.
  • European and other suppliers report readiness and stocks to secure delivery to end users during interruptions in China, or some of its districts. respectively.

However, other reports also underscore, with the proliferation of the new coronavirus the incidences of confirmed infection with clear symptoms and deaths are also expected to increase. This may lead the Chinese government to extend lock down several commercially important parts of the country. Which, in turn, could impact, among others, manufacturing and shipments of API and pharma ingredients for several months.

Some green shoots are now visible in India?

Quoting a JM Financial analysis, some media reports predicted, a worsening coronavirus crisis may benefit Indian API manufacturers, as it observed some green shoots in the Indian API manufacturing space. Analyzing the stocks of six local API manufacturers – Galaxy Surfactants Ltd., Fine Organic Industries Ltd., Navin Fluorine International Ltd., SRF Ltd., PI Industries Ltd. and UPL Ltd., it found that the stocks of these companies have beaten the market trend in recent years. They observed, the robust growth of these companies was fueled by end-user industries, and exports to China – which has closed many chemical facilities on environmental concerns.

Moreover, the increase in overall API demand – caused by shortages triggered by a serious disruption of API production in China’s Hubei province, and restriction of movement within China, is likely to drive the prices up with the spread of the epidemic. The cumulative impact of all this, would possibly help the Indian bulk drug manufacturers, significantly, helping India to tide over the API sourcing crisis.

Conclusion:

‘Scientists are racing to develop a coronavirus vaccine, but it could take years to reach the market,’ as media reports highlight. Meanwhile, researchers are, reportedly, also looking at ways of quickly repurposing existing antiviral drugs to see whether any might work against the new coronavirus.

The serious health menace caused by the new coronavirus that prompted the W.H.O to signal it as a global emergency, has also raised a serious concern on API sourcing. This is because, around 80 percent of the API used by drug formulation manufacturers is sourced from China.

Looking only at this aspect of the issue, and also from the Indian perspective, the point to ponder – is it all threat? Or a veiled opportunity worth cashing-on to neutralize, at least, a part of the API sourcing threat?

Against the backdrop of the Indian Government’s announcements, such as, ‘2015 – Year of Active Pharmaceutical Ingredients’ (API), alongside the well-publicized ‘Make in India’ campaign, and some recently reported green shoots in this area – the expectation of an ‘opportunity in waiting’, could well be a reality. Who knows? But, a lurking apprehension still lingers!

By: Tapan J. Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

For Improving Drug Quality in India – A Bizarre Intent

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On January 16, 2017, quoting a Government source, a media report revealed, “India’s drug regulator is looking to inspect US pharmaceutical facilities, making critical medicines so that only high-quality products are imported from them.”

This intent follows a similar decision of the apex regulatory body – the Central Drugs Standard Control Organization (CDSCO), against some Chinese manufacturers on drug quality concern. The latest proposal to this effect was sent to the health ministry the previous week – the above report adds.

In this article, I shall explore the fundamental basis of this specific initiative. If it has any, I shall try to fathom whether it’s yet another case of misplaced priority of the decision makers, if not a bizarre one.

The current perspective:

About a couple of years ago, an article published in the global financial daily – the Financial Times, on September 9, 2015 titled, ‘Indian drugs: not what the doctor ordered’, articulated that the Indian pharma industry ‘now face a serious credibility crisis, as they battle to allay western regulators’ concerns about their manufacturing practices — especially the reliability of data from trials of their medicines.’

The report also pointed out: ‘Overseas regulators have been scrutinizing and banning products from some of India’s biggest and most reputable groups — including Sun Pharmaceuticals, IPCA, and Wockhardt – many of which have ongoing relationships with large multinational drug companies.’

Has anything changed now?

Nothing perceptibly seems to have changed in this area since then, to set our ‘own house in order’. Not even after witnessing a barrage of drug quality related ‘import bans’ by the US-FDA that involves Indian manufacturers of all sizes and scale. Instead, CDSCO turns its focus on setting-right ‘others’ manufacturing houses with its reportedly meagre manpower resources. Curiously, these initiatives include even those countries, which are globally acclaimed for having stringent regulatory frameworks well in place, such as the United States (US) and the European Union (EU).

Where a justifiable reason exists:

On Chinese API import by different countries, the article titled “Imports To Fuel India’s Active Pharmaceutical Ingredients’ Requirements,” published by Bloomberg | Quint on November 15, 2017 brings out a nice comparison. It says: ‘Among the top emerging and developing economies, India is a major importer of bulk drugs from China at 54 percent, followed by Indonesia at 24 percent, Brazil at 12 percent and South Africa at 8 percent.’ It also writes, in comparison, most of the developed markets of the world import in the range of just 2-3 percent from China.’

Going by this fact, Indian drug regulator’s inspection of some of the Chinese API plants is, by all means, understandable – mainly for two reasons. One, India is largely dependent on Chinese bulk drugs for formulations manufacturing and consumption in the country, besides exports. And the second, some incidents of compromised Chinese drug ingredients have already been reported. For example, citing quality issues, the Drug Controller General of India (DCGI) has recently, reportedly banned import of such questionable drug constituents from six major Chinese pharma companies. This is not a solitary instance. Similar incidents involving Chinese drugs were  reported in the past, as well.

An irony:

When international media agencies flash headlines, such as “U.S. and EU regulators urge Indian drug companies to step up standards,” Indian drug regulators decide to inspect overseas manufacturing plants, as well. Such a decision becomes intriguing, especially when it includes those countries, where from imports are meager, besides their stringent drug quality standards being globally acclaimed.

This is an irony, as the recent local media headlines like, “India among countries where 10% of drugs are substandard: WHO” or “… 27 medicines sold by top firms ‘fail’ quality tests in seven states”, unfold the veracity of drug regulatory laxity within the country.

The basis of the recent proposal becomes more incomprehensible, when the DCGI himself reportedly admits, even today that: “Substandard medicines are a major issue in India and we are looking out for ways to tackle the problem. As quality regulator, we are developing proper mechanisms to stop manufacturing and sale of counterfeit drugs so that they don’t reach the patients.”

The reasons cited for overseas plant inspection:

According to media reports, the reasons cited in the CDSCO proposal for Indian Drug Inspectors’ (DI) inspecting other overseas manufacturers, including those in the US and Europe, are broadly as follows:

  • Most of over 28 manufacturing sites registered in India from the US, manufacture critical formulations or critical new therapies, which are not available in other countries, as they fall into high-risk categories.
  • Inspections will not only result in compliance to the Drugs and Cosmetics Act and Rules, but also give exposure to Indian drugs inspectors to new technology adopted in the manufacturing and state-of-the-art facilities.
  • The sites will be inspected if they have made substandard drugs, received quality complaints, or faced action by other regulatory authorities.
  • Companies shortlisted for the proposed inspections include those making biologic and anti-cancer medicines.

Let me hasten to add, there is nothing wrong with this intent as such, but the moot point is: what’s the core issue that we are talking about? While addressing this point, let’s first have a quick look at India’s import of pharmaceutical product around the last two decades.

India’s import of pharmaceutical products – 1996 – 2018:

According to ‘Trading Economics’ (last updated in January of 2018), India’s import of pharmaceutical products decreased to USD 254.57 Million in 2016 from USD 795.34 Million in 2015. Average drug imports are shown as USD 645.06 USD Million from 1996 until 2016, reaching an all-time high of USD 1747.65 Million in 2012, and a record low of USD 64.32 Million in 1996.

Nonetheless, the micro- picture of India’s bulk drugs or API import isn’t quite the same. On December 19, 2017 in a written reply to the Lok Sabha, the Minister of State, Chemicals and Fertilizers gave details of India’s bulk drug imports from top five countries, as follows:

Country Import value Rs Crore Import value $ Million (Approx.)
China 12,254.97 1915 (66%)
United States 820.18 128 (4.5%)
Italy 701.85 110 (3.8%)
Germany 485.11 76 (2.6%)
Singapore 422.01 66 (2.3%)
Total 18,372.54 2871

It’s worth noting, although the overall value of API import has declined, including from China, its volume share still remains too high in India. More importantly, Indian drug import from the United States and the European countries, are not only very small, there doesn’t seem to be enough instances of substandard drugs imported from these countries to India, either.

The core issue:

Taking a serious note of the reported incidences of widespread substandard drugs by various reports, including the WHO, the core issue becomes rather obvious. What else could possibly be the core issue other than taking effective remedial regulatory measures to contain the menace of substandard drugs circulating within the country?

An article titled, “Correcting India’s Chronic Shortage of Drug Inspectors to Ensure the Production and Distribution of Safe, High-Quality of Medicines,” published by the International Journal of Health Policy and Management (IJHPM) on April 27, 2017, made an important observation in this regard.

It reiterated: Good drug regulation requires an effective system for monitoring and inspection of manufacturing and sales units. In India, despite widespread agreement on this principle, ongoing shortages of drug inspectors have been identified as a major hindrance to this effort by the national committees, since 1975. Rapid growth of India’s pharmaceutical industry and its large export market makes the problem more acute.

Thus, the major remedial measure that CDSCO needs to take on priority to effectively address this core issue, is the chronic shortage of competent drug inspectors in the country.

An assessment of the current situation:

On the ground, the above situation continues to prevail almost in every state of the country, with a varying degree, though. However, at this point, I shall quote just three such instances – only to illustrate the gravity of the situation.

Example 1 – Delhi:

The article titled, “Delhi’s pharmacy woes: Only 21 inspectors for city’s 25,000 chemists,” published by ‘India Today’ on November 25, 2017, well-captured the latest scenario in this regard, of India’s national capital – New Delhi.

It wrote, there’s no guarantee that the medicine you are buying from a pharmacy is safe. The drug regulatory body does not have enough manpower to conduct regular inspections of the city’s mushrooming chemist shops and wholesale units.

Against the sanctioned posts of 31 drug inspectors, the department has only 21 DI for keeping an eye on Delhi’s 25,000 medical stores, and blood banks. Quoting Government officials the report reiterated, while the number of DI has declined – or at best remained constant – over the past 40 years, the number of pharmacies has increased from 5,000 to 25,000.

Whereas, going by the Centre’s recommendation, Dr. Mashelkar Committee report and the Task Force Committee’s observation, there should be one drug inspector for every 50 manufacturing units. Considering the magnitude of the problem, the Drugs Technical Advisory Board (DTAB), in a recent meeting, reportedly suggested, there should be one official for every 200 sales outlets, and one official for every 50 manufacturing units.

Example 2 – Kerala:

Another report of July 08, 2017, with a similar headline – “Remedial action needed in medicine market”, focused on one more important state – Kerala. It wrote that the Kerala has just 47 drug inspectors to monitor the entire State drug market that has over 20,000 drug stores, excluding those located in the hospitals. “In Kerala – the consumer of about 15 to 20 percent of drugs manufactured in the country, there are no quality checks taking place owing to the manpower shortage” – the article cautioned.

Example 3 – Maharashtra:

Yet another national media report of March 16, 2017 carried a headline ‘FDA faces staff shortage again.’ It discussed the same issue for a major State where the financial capital of India is located – Maharashtra. Giving details, the article pointed out that out of 160 posts of drug inspectors across Maharashtra, only 90 have been filled so far and of the 250 food safety officer posts, just 180 have been filled. More than 50,000 pharmacies, 15,000 wholesalers and over 8,000 manufacturing units, are supposed to be properly governed as per the regulatory rules and godliness, to ensure high quality drug safety standards, by this meager DI staff strength of the State.

Conclusion:

Against the above backdrop, it appears absolutely minimum to expect that CDSCO would make the public know, how does it plan to make the drugs manufactured for domestic consumption of high quality standards, as a safeguard to patients’ health and safety.

This calls for strict quality audits by the DIs of the individual states, at pre-determined periodicity, just as what US-FDA does to ensure exactly the same, for patients in their own country. With dwindling resources of DI, CDSCO seems to be continually failing in achieving this critical goal. There doesn’t seem to be any specific and transparent accountability criteria in place, for the CDSCO to comply with.

In this situation, the plan to audit the overseas manufacturing plants located in the US and EU for drug quality assessment, carving out a slice from the existing DI manpower strength, appears rather foolhardy. Moreover, the safety-risk for those imported medicines is apparently low, not just due to meager quantity of drug import, but also for stringent regulatory environment prevailing in those countries.

In view of all this, the media report on CDSCO’s plan to inspect US and EU pharma facilities, making ‘critical’ drugs to ensure high product-quality, is interesting. If it holds any water, the initiative may be construed by many not merely a case of misplaced priority, but a bizarre one, to say the least.

By: Tapan J. Ray 

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

India’s China Dependence On API: A Time To Think ‘Outside The Box’

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The Department of Pharmaceuticals (DoP) has declared the Year 2015 as the Year of ‘Active Pharmaceutical Ingredient (API)’. Following it up on February 25, 2015, the Union Minister of Chemicals & Fertilizers Ananth Kumar assured the Pharmaceutical Industry that appropriate decisions will be taken soon to make India self-sufficient in Bulk Drugs (APIs).

The Minister also confirmed having received the recommendations of high level ‘Katoch Committee’ that was set up by the Government on October 8, 2013 to look into various issues concerning the API. This would be implemented expeditiously after taking the Union Cabinet’s approval, as the Bulk Drugs constitute the backbone of the Pharma Industry and the sector needs to be incentivized to take on the challenges from cheaper imports.

According to a recent report, in June 2015, the Ministry of Chemicals and Fertilizer has floated a draft cabinet note with the recommendations of the ‘Katoch Committee’. Quoting a senior official of the DoP the report mentioned that the cabinet note also proposes formation of a separate bulk drug authority, which will look into the implementation of such schemes.

The DoP Secretary Dr. V.K. Subburaj has lately reiterated that there is an urgent need to bring about self-sufficiency in the field of API.

In this article, I shall restrict my discussion only to those APIs, which are required for manufacturing the essential medicines in India.

Significant dependence on China:

For a large number of essential medicines, India heavily depends on API imports from China.

On December 12, 2014, the Minister of Commerce and Industry informed the Indian Parliament that in case of 12 essential drugs namely: Paracetamol, Metformin, Ranitidine, Amoxicillin, Ciprofloxacin, Cefixime, Acetyl salicylic acid, Ascorbic acid, Ofloxacin, Ibuprofen, Metronidazole and Ampicillin, there is significant dependence on imports. Approximately 80-90 percent of these imports are from China. He mentioned that the decision to import, and the country of origin for such imports, are based on economic considerations.

The Minister also informed the Parliament that a Committee of Secretaries, under the Chairmanship of the Secretary, Department of Health Research was set up on October 8, 2013 to study and identify the APIs of critical importance and to work out a package of interventions/concessions required to build domestic production capabilities, and examine the cost implication.

Interestingly, rapid and consistent increase in API import from China has been reported as follows:

Year API import from China (Rs. Crore)
April-September in 2014-15 6,521
2013-14 11,865
2012-13 11,000
2011-12 8,798

Ironically, though India manufactures over 30 percent of global generic drug consumption, more than 80 percent of APIs required to produce these medicines come from China.

In ‘RIS Policy Brief’ February 2015, Dr. Y. K. Hamied, Chairman of CIPLA was also quoted sounding an alarm bell, as follows:

“If China decided one bright day to stop export to India, we would be finished. The pharma industry is zero, both domestic and export, and we are looking at that danger objectively”.

Even, the National Security Adviser of India has reportedly expressed similar concern and urged to create adequate infrastructural facilities to make India self-reliant, at least, on the essential medicines, without further delay.

Another recent industry report:

A July 2014 report of ASSOCHAM, titled “Pharmaceuticals Sector in India: Challenges Faced & Suggested Way Forward” also underscores, since a very significant volume of India’s drug imports are concentrated in China, this lack of self–sufficiency in APIs poses significant risk to the drug security of the country. Any deterioration in relationships with China can potentially cause severe domestic shortages in the supply of essential drugs. 

Additionally, China could easily increase prices of some of these drugs where it enjoys virtual monopoly, noted the ASSOCHAM study.

The report further points out that this risk extends beyond the domestic market to export markets, as Chinese pharmaceutical companies, that have traditionally focused on large-volume intermediates and unregulated markets are beginning to “forward integrate”, with increasing focus on exports to regulated markets.

This emerging trend is supported by the recent improvements in local Chinese cGMP and product quality standards, increase in the number of manufacturing sites approved by the USFDA, and current filings of Abbreviated New Drug Applications (ANDAs) by the local companies of China. Given their overall dominance in intermediates and API manufacturing, Chinese players can pose a serious competitive threat to their Indian counterparts, much beyond the APIs for essential drugs, the above study noted.

‘Katoch Committee’ recommendations:

The recommendations of the ‘Katoch Committee’, as revealed by the the Minister to the law makers of India, appears to me a long list of ‘Things to Do’ without addressing the intricacies involved with the complicated core issue.

On May 8, 2015, the Minister of State of the Ministry of Chemicals and Fertilizers informed the Rajya Sabha of the Indian Parliament that in its report on API manufacturing in India, the Katoch Committee has inter-alia recommended:

  • Establishment of Mega Parks for APIs with common facilities such as common Effluent Treatment Plants (ETPs), Testing facilities, Captive Power Plants/assured power supply by state systems, Common Utilities/Services such as storage, testing laboratories, IPR management, designing, etc., maintained by a separate Special Purpose Vehicles (SPV)
  • A scheme for extending financial assistance to states to acquire land and also for setting up common facilities
  • Revival of public sector units for starting the manufacturing of selected and very essential critical drugs (e.g., penicillins, paracetamol etc.)
  • Financial investment from the Government for development of clusters which may be in the form of a professionally managed dedicated equity fund for the promotion of manufacture of APIs
  • Extending fiscal benefits to creation of the entire community cluster infrastructure and individual unit infrastructure
  • Extension of fiscal and financial benefits to promote the bulk drugs sector
  • Promoting stronger industry-academia interaction
  • Synergizing R&D promotion efforts by various government agencies
  • Incentivizing scientists
  • Duty exemptions for capital goods imports

On the face of it, the recommendations appear to be good. However, are these not too simplistic, based on just what is visible on the surface, without going into the complexity of the issue?

I shall now briefly dwell upon some of these areas, from my own perspective of the core issue and the key challenges involved.

Major challenges:

Profitability is undoubtedly a major reason why the indigenous production of important APIs, required to formulate widely used essential medicines, has paved the way for low priced Chinese equivalents. This has been acknowledged by all concerned and has happened more with APIs involving fermentation technology.

Besides other factors, API profitability and commensurate return on capital employed (RoCE) are primarily driven by the product design, process technology in use together with its associated requirements, cost of capital goods and utilities, working capital requirement, quality of sustainable demand generated and achievement of ‘economies of scale’. The last one is so important, as it signifies that proportionate saving in costs is gained by an increased level of production. Simply speaking, the greater the yield and the quantity of a API produced, the lower will be the per-unit fixed cost, as these costs are shared over a larger number of goods.

Additionally, ‘any time cGMP-audit preparedness’ for the big customers, make the running of the operation really unenviable.

Highly competitive generic API market, with larger number of manufacturers, is driven by its customers’ requirement of the lowest possibly cost for any quality product. With this ascending trend, global API manufacturing business has started slowly shifting from the long time much preferred big-name players of the western world, to the upcoming ones in India and China. Unfortunately, now even India has started importing APIs in significant volume from China. APIs of Chinese origin for Indian essential drugs are not just cheaper, but are also available almost on the shelf.

This fiercely competitive scenario has compelled a sizeable number of bulk drug manufacturers to shut shops in India. Many other ‘API only’ Indian manufacturers are now venturing into production and marketing of higher margin formulations, moving up the pharma value chain.

Some API producers have also entered into contract manufacturing of formulations in large quantities. A few others have already entered or are trying to enter into their API based formulation manufacturing agreements with large pharma MNCs for the regulated markets, and by filing DMFs and ANDAs.

To sum up, the challenges before the API sector, in my view, are predominantly as follows:

  • Intense price competition
  • Requirement of attaining ‘economies of scale’ for business sustainability, at times leading to overcapacity
  • Low profitability and RoCE
  • ‘Any time technical audit’ preparedness for high-end customers
  • Capital intensive business
  • High inventory carrying cost both for intermediates and finished goods
  • Long credit demand
  • High working capital requirement
  • Undifferentiated capabilities
  • Product obsolescence with changing disease profile or newer off-patent molecules coming in the same therapy area

Need to think ‘outside the box’:

I do not have access to the complete report of the Katoch Committee, just yet. However, going by what the Government has reported to the Indian Parliament on this subject, it appears that overall recommendations made by the Committee of Secretaries on the subject, are steps in the right direction.

If all the suggestions are implemented, the cost of manufacturing infrastructure and utilities are expected to come down. However, I am not quite sure, whether just these steps would be good enough making India self-reliant on APIs required to manufacture the essential medicines.

Nevertheless, to achieve the desired goal, some critical questions would still need to be answered with high clarity, such as:

  • Despite lowering cost of manufacturing, would it still be enough to neutralize Chinese competition?
  • Stakes being very high for China, if it feels threatened of loosing the booming API generic business from India, won’t the Chinese Government not find out ways and means to retain its ground? If so, are there proactive measures ready to negate the possible counter-move by China?
  • Would this cost reduction help most of the Indian API manufacturers achieving ‘economies of scale’ for reasonable sustainability, with cost competitiveness in the business?
  • Most of the essential drugs are low cost products. Thus, what happens, if Indian API manufacturers in clusters, thus created, decide to produce and sell only higher margin APIs and intermediates, including for the global innovator companies, without getting engaged in APIs for essential medicines?

Since this crucial problem is multi-faceted one, the recommendations should address all possible ‘what if’ scenarios, thinking ‘outside the box’. Mere creation of infrastructural and financial support base, may not help addressing all the key challenges, effectively. After all, it’s an open market competition, and Chinese players are tough nuts to crack, as they have been demonstrating time and again in various fields of activities.

Conclusion:

Having achieved dominance in the Indian generic API market, Chinese bulk drug manufacturers are now concentrating on continuous improvement in process technology to drive down the cost further. According to available reports, they are achieving it too, with great success, focusing on multiple critical areas starting from product and reactor design to much wider use of catalysis.

To effectively compete with Chinese APIs, especially for essential drugs, Indian API manufacturers in the clusters would require to start, at least, from where China is today in this area, and take off from there. This is possible, though quite challenging too.

Moreover, manufacturing overcapacity for generic APIs is already existing in China. If it gets further aggravated with overcapacity created in India for the same molecule, the overall scenario may lead to a desperate sales and marketing situation of survival for the fittest.

No doubt, over-dependence on Chinese APIs for the essential medicines may pose a threat to the drug security of India, as many have already opined, including the National Security Advisor of the country. Nonetheless, the situation could possibly turn even worse, without imposition of artificial tariff barrier, if India decides to rely on a simplistic solution for a multi-factorial complex problem.

‘Katoch Committee’ report is a good initiative for the domestic API business, in general. Nonetheless, to significantly reduce over-dependence on imported Chinese bulk drugs and be self reliant on  high quality and competitively priced APIs for essential medicines, India would need to think ‘outside the box’, undoubtedly.

By: Tapan J. Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

The domestic API players are fast losing their dominance in the Indian API market

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There are two broad categories of markets for the Active Pharmaceutical Ingredients (API) across the world namely, highly regulated and semi regulated markets. Countries like, USA, Europe and Japan will fall under highly regulated category with high entry barriers for the global API players like, robust Intellectual Property (IP) regime and stringent regulatory requirements to meet their product quality standards. Such an environment prompts a premium price for the APIs. On the other hand, the semi regulated markets, which offer low entry barriers with not so stringent IP and regulatory requirements, attract more number of API players engaging in cut throat price competition.

The top three markets for Active Pharmaceutical Ingredients (APIs) are the US, Europe and Asia Pacific. According to ‘Business Wire (July 13, 2011), the API market in the Asia-Pacific is expected to grow from 6.7% between 2005 and 2010 to 9.6% between 2010 and 2016.

Currently a perceptible shift in API manufacturing is being noticed from the western markets to the emerging markets like, India and China. In the Asia Pacific region Japan and China enjoy the highest market share for API with 42.8% and 20.8%, respectively. India accounts for 10.3%, while South Korea holds an 8.1% share of the market. To avoid price erosions now seen in the US, Indian manufacturers have started exporting more APIs to Japan.

In 2010, contribution of generic API from the Asia-Pacific market was at 71.5%, with patented APIs contributing for the rest, where Japan enjoys a larger share than India and China. While this is the current scenario, many experts in this field contemplates that important players from the regulated markets will soon start making significant inroads in India.

Current API Market in India:
In 2007 the API output value in India was around US $4.1 billion registering a 5 year CAGR of around 19% and ranking fourth in the world API output. According to the Tata Strategic Management Group, Indian API export value is expected to increase to US $12.75 billion in 2012.

Currently in India about 400 different types of APIs are manufactured in around 3000 plants, Ranbaxy Laboratories, Lupin, Shasun Pharmaceuticals, Orchid Chemicals, Aurobindo Pharma, Sun Pharmaceuticals, Ipca Laboratories and USV being the top API manufacturers of the country. Indian domestic companies source almost 50 percent of their API requirements from China, because of lower cost in that country.

In terms of global ranking, India is now the third largest API producers of the world just after China and Italy and by end 2011 is expected to be the second largest producer after China. However, in Drug Master File (DMF) filings India is currently ahead of China.

In addition, India scores over China in ‘documentation’ and ‘Environment, Health and Safety (EHS)’ compliance. All these have contributed to India having around 125 US-FDA approved world class manufacturing facilities, which is considered the largest outside the USA.
Indian API manufacturers are facing a cut throat competition from their Chinese counterparts mainly because of lower costs in China. Considerably higher economies of scale and various types of support that the Chinese API manufacturers receive from their Government are the main reasons for such cost differential.
Growing competition from the regulated markets:
We now observe a new trend within the API space in India. Many of the global innovators and generic companies are keen to enter into the API space of India.

It is known that API manufacturers from the regulated markets are already selling their products in India. However, at present, the numbers of Indian registrations for API applied by some of the large global companies, as reported by ‘Thomson Reuters Newport Horizon Premium’, are quite significant, which are as follows:

1. Novartis, Switzerland: 20 2. Pfizer, USA: 16 3. Sanofi-Aventis, France: 26 4. Teva, Israel: 45 5. MSD, USA: 39 6. BASF: 37 7. DSM: 26 8. EON AG: 16 9. Kyowa Hakko: 23

All these companies, who are entering into the API business space in India, I reckon, have worked out a grand design to compete not only with the low cost domestic API manufacturers, but also with the cheaper imports, particularly from China.

China an emerging global force to reckon with in the API market:

An economy of scale leading to cost leadership is fast establishing China in the global API market as a force to reckon with. Dominant presence of China even in the bulk intermediate category with high level of technical expertise, especially in the fermentation technology, strong manufacturing base, supported by increasing standard of regulatory compliance and better IP protection, as perceived by the global pharmaceutical community, are helping the API manufacturers of China to gradually increase their presence even in the highly regulated markets of the world.

In this emerging scenario, when China throws a tough competition to the API producers of India,  developing and manufacturing niche APIs will be the key differentiating factors for the Indian players to maintain their global presence in future, especially with APIs involving non-fermentation technology.

What will then be the competitive edge of these companies in India?
It appears that each of these companies has weighed very carefully the existing strategic opportunities in the API sectors of India, both in terms of technology as well as domestic demand.

Strategic gap in API manufacturing technology:
India, undeniably, is one of the key global hubs in the API space, with competitive edge mainly in ‘non-fermentation technology’ product areas. This leaves a wide and perceptible technological gap in the areas of products requiring ‘fermentation technology‘.

Significant demand from domestic formulations manufacturing:
India is much ahead of China in pharmaceutical formulations manufacturing, especially in the area of exports to the regulated markets like, the USA and EU. Over 25 domestic Indian companies are currently catering to exports demand of the U.S market. However, it is interesting to note that the global manufacturers like Sandoz, Eisai, Watson, Mylan have already set up their formulations manufacturing facilities in India and some more are expected to follow suit over a period of time. Hence, fast growing domestic demand for APIs, especially for exports, will drive the business plan of the global API players for India.

Is the cost arbitrage of India sustainable?
Indian API manufacturers although currently have a cost advantage compared to their counterparts in the regulated market, this advantage is not sustainable over a period of time because of various reasons. The key reason being sharp increase in cost related to more stringent environmental and regulatory compliance, besides spiraling manpower and other overhead costs.

Indian regulatory requirements for the global API players:
To sell their APIs into India, global companies are now required to obtain the following regulatory approvals from the Indian authorities:

1. Foreign manufacturing sites for the concerned products

2. APIs which will be imported in the country

The Drug Controller General of India (DCGI) has stipulated a fee of U.S$1,500 to register the manufacturing premises and U.S$1,000 to register each individual API. Since January 2003, around 1,200 registration certificates have been issued in India. Large number of Indian registrations is attributed by many to the strategic technology gap in India, as stated above, demand of high-quality API for finished formulations required by the regulated markets like the U.S and EU, and relatively cheaper product registration process.

As we see above Teva has gone for maximum number of Indian registrations, so far and most probably selling the APIs to their contract formulations manufacturers in India. Similarly, Schering-Plough and Sanofi, if not Pfizer are perhaps catering to the API demand of their respective formulations manufacturing plants in the country.

Apprehension of counterfeit APIs from the emerging markets:

Growing apprehensions of counterfeit APIs from the emerging markets like, India and China must also be addressed expeditiously by all concerned.

‘The New York Times’ dated August 15, 2011 reported that APIs from India, China and elsewhere now constitute 80% of the active ingredients in US drugs. The US FDA Commissioner Margaret Hamburg was quoted saying, “Supply chains for many generic drugs often contain dozens of middlemen and are highly susceptible to being infiltrated by falsified drugs.”

Conclusion:

Be that as it may, some key global players mainly China, as mentioned above, are now exporting APIs at a much larger scale to India and in that process have started curving out a niche for themselves in the Indian API market. Impressive growth of the domestic pharmaceutical formulations manufacturing market fueled by increasing domestic consumption and exports to the regulated markets, coupled with gradual improvement in the regulatory environment of the country and some global collaboration for the pharmaceutical formulations sourcing from India, are expected to drive the growth of API business of the global players in India. However, the moot question still remains: will the Indian API players be able to thrive or even survive the tough competition from the global players, especially China?

Disclaimer:The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Indian Pharmaceutical Industry could well be a contender for global supremacy by the next decade, competing effectively with China

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By the next decade of this millennium both India and China are expected to be the top two emerging markets of the world in the pharmaceutical sector, registering a scorching pace of growth all around. The quality of consistency and sustainability of growth, will determine who will be the main contender of supremacy and the ultimate winner in this game of wealth creation for the respective countries and be the ‘Eldorado’ of the global pharmaceutical companies.

The financial reform measures in the run up to the process of globalization started earlier in China, in 1980 as against 1990 in India. In that sense China took a plunge to be an active member of the ‘global village of commerce’ at least a decade earlier than India.

Reform process started earlier in China:

The Product Patent regime in India was reintroduced in January 1, 2005. Well before that China started creating and encouraging a large number of independently funded pharmaceutical R&D institutions to create an environment of innovation within the country. Many of these institutions are now viable profit centres, creating wealth for the country.

At the same time, focusing on global ‘economies of scale’, Chinese pharmaceutical players have now become globally competitive, may be a shade better than India. Clear dominance of China in the business of ‘Active Pharmaceutical Ingredient (API)’ among many other, will vindicate this point. On the other hand in the formulations business, India is miles ahead of China, catering to over 20% of the global requirements for the generic pharmaceuticals. Moreover, in ANDA and DMF filings, as well, India is currently much ahead of China.

FDI in India and China:

The Pharmaceutical Industry in India has now started attracting increasing Foreign Direct Investments (FDI). As per the reply to question No. 615 tabled in the Parliament of India (Rajya Sabha) on November 25, 2009 by Mr. Jyotiraditya Scindia, Minister of State, Ministry of Commerce and Industry, from the year 2006-07 up to September 2009, India attracted FDI of US $ 817.30 million for Drugs and Pharmaceuticals with a compounded growth rate of around 60%. USA, Canada, Singapore, UAE and Mauritius contributed 82% to this FDI, which in turn helped significantly to fuel further development and growth of the Industry.

According to ‘The Survey of Foreign Investments in China’s Medicine Industry’ of the Government of China, the FDI in the pharmaceutical industry of the country for the three year period commencing from 2006 to 2008 was around US $ 1772 million, over one third of which coming from Hong Kong and around 11% from the USA.

It is worth noting that the financial and policy reform measures were initiated in China much earlier, as compared to India, which in turn have enabled China to attract more FDIs in the pharmaceutical sector, thus far. In the new paradigm of the post product patent regime both the countries are expected to grow at a scorching pace attracting more and more FDIs for their respective countries.

In this article, I would like to focus on some of these comparisons to assess the progress made so far by both the countries, in a comparative yardstick and the key factors, which will decide the pace-setter.

Country ranking both in value and growth terms:

In global ranking, China is currently the seventh (India: 14) largest pharmaceutical market and is expected to be the fifth (India: 10) largest market by 2015 and the third largest by 2020. Chinese pharmaceutical market is expected to grow by over 15% per annum in the next five years, which is higher than India.

Healthcare coverage of population:

China is racing ahead and gradually but surely distancing itself from India, widening the performance gap with rapid increase of domestic consumption of modern medicines. It is worth mentioning that as per WHO, the access to modern medicines in China is around 85% as against just 35% in India. Of a population of 1.3 billion, 250 million of Chinese are covered by health insurance, another 250 million partially covered by insurance and balance 800 million are not covered by any insurance. In India total number of people who are having some sort of healthcare financing coverage will be around 200 million and penetration of health insurance will be just around 3.5% of the population.

Currently India is losing grounds to China mainly in healthcare infrastructure development, with inadequate healthcare delivery systems and delay in rolling out a long overdue comprehensive healthcare reform process in the country.

Strong commitment of the Chinese Government to the globalization process:

Strong commitment of the Chinese Government to make China a regional hub of R&D and contract research and manufacturing (CRAM) activities within next seven to ten years is paying rich dividends.
Department of Pharmaceuticals recently expressed its intention to make India a R&D hub in not too distant future. This cannot be achieved just through investments of couple of million US $ through Public Private Partnership (PPP). A strong commitment of the Government to hasten regulatory reform processes will be the key factor. The new product patent regime for the pharmaceutical industry has ushered in a new paradigm, with the Government planning to strike a right balance between TRIPs compliant IPR regime and the ‘Public Interest’ and NOT one at the cost of the other.

India and China competing well in Pharma outsourcing business:

Since last 5 years both India and China have made rapid strides in the space of pharma outsourcing. Today the evolving business model of ‘Contract Research and Manufacturing Services (CRAMS)’, is shaping up quite well. To make India a global hub for Pharmaceutical outsourcing of all types, the pharmaceutical industry of the country has all the ingredients. India has the potential to emerge as a serious contender for global supremacy, in this fast growing sector, especially in ‘contract manufacturing’ area, having largest number of US-FDA approved manufacturing plants, outside the USA.

According to ‘Global Services”, in 2009 Pharmaceutical outsourcing market in China and India was of US $ 1.77 billion and US $ 1.42 billion, respectively with China growing at a faster pace. The future growth potential for both the countries is huge, as each enjoyed just 2% share of this outsourcing market in 2009.

It has been forecasted that China will have more environmental growth accelerators than India due to greater continuing fiscal stimulus and policy support by their Government, which could catapult the country ahead of India, just beyond 2010.

‘Country Attractiveness Index’ for clinical trials:

‘A.T. Kearney’ developed a ‘Country Attractiveness Index (CAI)’ for clinical trials, for the use of, especially, the pharmaceutical industry executives to make more informed decision on offshore clinical trials. As per this study, the CAI of China is 6.10 against 5.58 of India.

Pharmaceutical patent filing:

In patent filing too China seem to be ahead of India. Based on WIPO PCT applications, it has been reported that 5.5% of all global pharmaceutical patent applications named one inventor or more located in India as against 8.4% located in China. This will give an Indication how China is making rapid strides in R&D areas, as well.

Where India is regarded clearly as a preferred destination:

However, India is globally considered as a more mature arena for chemistry and drug-discovery activities than China. Most probably because of this reason, companies like, DRL, Aurigene, Advinus, Glenmark, Nicholas Piramal and Jubilant Organosys could enter into long-term deals with Multinational Companies (MNCs) to discover and develop New Chemical Entities (NCEs).

Pharmaceutical exports, by end 2010:

India is currently an attractive pharmaceutical outsourcing destination across the globe. Pharmaceutical exports of India is currently far ahead of China. However, PriceWaterhouseCoopers (PWC) reports that China may reverse this trend by the end of 2010, establishing itself as the largest country for Pharmaceutical exports. In API exports China has already overtaken India, way back in 2007. The report titled, “The Changing dynamics of pharmaceutical outsourcing in Asia” indicates that in 2007 against API exports of U.S$ 1.7 billion of India, China clocked a figure of US$ 5.6 billion. By the end of 2010, China is expected to widen the gap further with API export of U.S$ 9.9 billion against India’s U.S$ 2.8 billion.

Korn/Ferry International reports that more and more Indian talent is being pulled to China to fill key roles, especially in the API sector, signaling ‘brain drain’ from India to China.

Conclusion:

As I said earlier and as has been reported by Korn/Ferry, China’s current overall infrastructure in the pharmaceutical space is better than India primarily due to firm commitment of the Chinese government to initiate reform measures to fetch maximum benefits of globalization process in the country. Government of India seems to be lacking in its commitment to play its role both as a provider and also as an effective enabler in this important space of ‘knowledge economy’ of the world.

India has all the potential to surge ahead with more rapid strides in this ball game. To achieve this cherished goal, the government, other stakeholders and the domestic pharmaceutical Industry should play the ball well, effectively, and in tandem.

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

Global API manufacturers are poised to penetrate the Indian market in a bigger way – will the API ‘marketing warfare’ be even more intense, in future?

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India currently plays a relatively dominant role in the Global Active Pharmaceutical Ingredient (API) Market with China being ahead of India. While this is the current scenario, many experts in this field contemplates that important players from the regulated markets will soon start making significant inroads in India.Current API Market situation in India:In 2007 the API output value in India was around US $4.1 billion registering a 5 year CAGR of around 19% and ranking fourth in the world API output. According to the Tata Strategic Management Group, Indian API export value is expected to increase to US $12.75 billion in 2012.

Currently in India about 400 different types of APIs are manufactured in around 3000 plants, Ranbaxy Laboratories, Lupin, Shasun Chemicals, Orchid Chemicals, Aurobindo Pharma, Sun Pharmaceuticals Ipca Laboratories and USV being the top API manufacturers of the country. Indian domestic companies source almost 50 percent of their API requirements from China, because of lower cost in that country.

In terms of global ranking, India is now the third largest API producers of the world just after China and Italy and by 2011 is expected to be the second largest producer after China. However, in Drug Master File (DMF) filings India is currently ahead of China.

In addition, India scores over China in ‘documentation’ and ‘Environment, Health and Safety (EHS)’ compliance. All these have contributed to India having around 100 US FDA approved world class manufacturing facilities, which is considered the largest outside the USA.

Indian API manufacturers are facing a cut throat competition from their Chinese counterparts mainly because of lower costs in China. Considerably higher economies of scale and various types of support that the Chinese API manufacturers receive from their Government are the main reasons for such cost differential.

Growing competiton from the regulated markets:

We now observe a new trend within the API space in India. Many of the global innovators and generic companies are keen to enter into the API space of India.

It is known that API manufacturers from the regulated markets are already selling their products in India. However, at present, the numbers of Indian registrations for API applied by some of the large global companies, as reported by ‘Thomson Reuters Newport Horizon Premium’, are quite significant, which are as follows:

1. Novartis, Switzerland:20
2. Pfizer, USA:16
3. Sanofi-Aventis, France: 26
4. Teva, Israel: 45
5. Schering-Plough, USA:39
6. BASF: 37
7. DSM: 26
8. E.ON AG: 16
9. Kyowa Hakko: 23

All these companies who are entering into the API business space in India, I am sure, have worked out a grand design to compete not only with the the low cost domestic API manufacturers, but also with the cheaper imports, particularly from China.

What will then be the competitive edge of these companies in India?

It appears that each of these companies has weighed very carefully the existing strategic opportunities in the API sectors of India, both in terms up technology and also in terms of domestic demand.

Strategic gap in API manufacturing technology:

India, undeniably, is one of the key global hubs in the API space, with competitive edge mainly in ‘non-fermentation technology’ product areas. This leaves a wide and perceptible technological gap in the areas of products requiring ‘fermentation technology‘.

Significant demand from domestic formulations manufacturing :

India is much ahead of China in pharmaceutical formulations manufacturing, especially in the area of exports to the regulated markets like, the USA and EU. Over 25 domestic Indian companies are currently catering to exports demand of the U.S market. However, it is interesting to note that the global manufacturers like Sandoz, Eisai, Watson, Mylan have already set up their formulations manufacturing facilities in India and some more are expected to follow suit over a period of time. Hence, fast growing domestic demand for APIs, especially for exports, will drive the business plan of the global API players for India.

Is the cost advantage in India sustainable?

Indian API manufacturers although currently have a cost advantage compared to their counterparts in the regulated market, this advantage is not sustainable over a period of time because of various reasons. The key reason being sharp increase in cost related to more stringent environmental and regulatory compliance, besides spiralling manpower and other overhead costs.

Indian regulatory requirements for the global API players:

To sell their APIs into India, global companies are now required to obtain the following regulatory approvals from the Indian authorities:

1. Foreign manufacturing sites for the concerned products
2. APIs which will be imported in the country

The Drug Controller General of India (DCGI) has stipulated a fee of U.S$1,500 to register the manufacturing premises and U.S$1,000 to register each individual API. Since January 2003, around 1,200 registration certificates have been issued in India. Large number of Indian registrations is attributed by many to the strategic technology gap in India, as stated above, demand of high-quality API for finished formulations required by the regulated markets like the U.S and EU, and relatively cheaper product registration process.

As we see above Teva has gone for maximum number of Indian registrations, so far and most probably selling the APIs to their contract formulations manufacturers in India. Similarly, Schering-Plough and Sanofi-Aventis, if not Pfizer are perhaps catering to the API demand of their respective formulations manufacturing plants in the country.

Whatever may be the reasons, these global players are now exporting APIs at a much larger scale to India and in that process have started curving out a niche for themselves in the Indian API market. Impressive growth of the domestic pharmaceutical formulations manufacturing market fueled by increasing domestic consumption and exports to the regulated markets, coupled with gradual improvement in the regulatory environment of the country, is expected to drive the growth of API business of the global players.

However, the moot question is how significant will this competition be?

By Tapan Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.