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.