Active Pharmaceutical Ingredients (APIs) are the founding block of strategic architecture in the pharmaceutical value chain. More importantly, APIs provide therapeutic effect of a medicine and, are, therefore, the central innovation and, more often, the critical intellectual property that drives the industry. API manufacturing is not only about prowess in chemistry, but also the skill to navigate the maze of patents that inventors and others file to ring-fence and evergreen their invention, thus, prolonging the marketing exclusivity and concomitant commercial gain. It is generally believed that the API industry migrated to India from Europe where it thrived for more than a century due to cost arbitrage. However, India’s skill in chemistry catalysed this migration and her dexterity in process design and engineering gave her the power to stay.
There is another myth that India’s patent regime gave it a structural advantage. While that may be true for the domestic market for which APIs could be produced and sold even if under patent, it would certainly not have helped India become the hub of exports for regulated markets. Besides, like India, a host of other countries had the process patent regime till they all joined TRIPs in 1998.
In 2020, the global API value was $180 billion, and it is expected to grow at a CAGR of mid-single digits (five-to-six per cent) during 2021-2026 to $250 billion by 2026 and $300 billion by 2030 adding about $50 billion every five years. As per IMS 2020, the generic market for API has a share of 94 per cent by volume with the innovator’s share of six per cent. This shows that the opportunity of penetration into the generic market is immense. Given the sheer size of the market, a whole lot of ancilliarisation, as it happened in the 50s in the automobile industry, is on the anvil, and we foresee a big stand-alone capacity for intermediates of APIs, the new star on the horizon.
API cohabits at the base of the value pyramid. The impact of genericisation is the highest on this segment. The price erosion is also the fastest. Hence, for mature APIs, the focus will shift from R&D prowess to excellence in engineering. Improved kinetics, improved process engineering, improved solvent recovery, optimal batch sizes, scale and minimal changeovers – all will be critical for cost efficiency. Companies will focus on fewer APIs, but manufacture more of them, for scale, procurement and cost efficiencies.
Dependence on China for APIs has been a big concern for the Indian pharma industry. From 0.5 per cent in 1987, the percentage of API imports from China shot up to around 78 per cent in 2020. India imports approximately 55 per cent of its API needs, and almost all imports are from China. Scale, subsidies, cheaper capital with cost of four-to-five per cent versus 12-15 per cent in India, lower logistics cost (0.9 per cent versus four per cent in India), cheaper power, all work to China’s advantage.
However, the ride with China is always a roller coaster. Their implementation of laws is too capricious. In early 2018, several industrial parks and SEZs were shut due to environmental issues. The government launched a programme, ‘26+2’ with 5,000 inspectors swooping on industrial parks and factories and closing more than 1,000 creating global shortages. Besides, wages in China are increasing. There is always an additional factor of geo-politics. Whether it is the Doklam Standoff of 2017 or the skirmish in Galwan in 2020, peace with China is always tenuous. Several Indian companies have moved their requirement of APIs, KSMs and intermediates to Indian manufacturers who have ramped up their capacity rapidly to cater to this uptick in demand. Nevertheless, the dependence on China for basic chemicals continues. Therefore, to say that we have insulated and shock-proofed our supply chain from dependence on China would be an overstatement.
The COVID-19 pandemic, a Black Swan event in the real sense, came as an eye-open for pharma manufacturers worldwide. Prices of several APIs shot up between 50 to 100 per cent. The world also witnessed medicine nationalism. Most importing countries saw the need for repatriating the pharma industry back to their shores and domiciling production. While the Indian API industry had capability, it lacked capacity. Noting this, the Government of India stepped in with the PLI scheme as a part of Aatmanirbharta (self-reliance) to encourage the industry to build capacity in India.
Post pandemic, there was a clear clamour for reshoring in the US. The government encouraged Phlow Corp with aids from outfits like BARDA for reshoring several essential APIs back to the US with reliance on continuous manufacturing to keeping costs low. As the industry moves to fewer APIs with high scale and cost control, the migration to continuous manufacturing will become an imperative. The draft guidelines on continuous manufacturing are evolving under the sponsorship of USP.
The interchangeability of biosimilars, which, in the US, till a few months back was allowed only as follow-on-biologics, is another game changing phenomenon on the firmament. Insulin has been the first to receive that status. The biologics market is expected to be around $150 billion to $170 billion going off patent by 2030. The market will grow in leaps and bounds once interchangeability is allowed for all of them. The products are all small volume and do not need scale. Many scientist-driven boutique companies are expected to come up with specialisation in few APIs to address this opportunity.
India is the largest manufacturer of drugs, next only to China and Italy in volumes, and, globally, 12th in terms of value. The Indian pharma sector is projected to reach $75 billion by 2024 and $130-138 billion by 2030. India has been a major contributing factor to global healthcare outcomes and is responsible for meeting 60 per cent of the global requirement of ARV (Anti-retroviral) drugs. About 38 per cent of ANDAs have been filed by Indian manufacturing sites in the last five years. India has the highest number of US FDA-approved plants outside that of the US, and has a reputation for meeting top-notch standards laid by FDA and EDQM.
Post-COVID, the Indian pharma industry is at an inflexion point. It is envisaged, that the contribution of pharma to the GDP will grow to 4.5 -5 per cent from 1.8 per cent, at present. And, given the learning from India’s contribution to TB and retroviral drugs, one can extrapolate that APIs to a very large extent will drive this aspiration and growth trajectory. The growing negative sentiment about China in large due to the pandemic and due to the growing unpopularity of its trade bullying and debt diplomacy has significantly increased the migration of interest to India and will help the API industry. As a consequence, we see huge PE interest in the Indian API industry.
The top 10 or 12 global funds have created a war chest of about $5 billion to invest in the Indian industry. To keep in step with its own captive needs, growth aspiration and the market demand, Cadila Pharma has also created a blueprint for quadrupling its API manufacturing capacity in five years at its green field project at Dahej in Gujarat.
Pharma is one unique sector where the consumer is not the decision maker and the decision maker is not the payer. It is unique in another sense, that there is no product obsolescence. Aspirin, paracetamol and metformin still continue to be gold standards of front line therapy. Hence, scale, quality, compliance and process excellence shall drive growth. The aforesaid notwithstanding, India will have to create robust and resilient supply chains and fix infrastructure much faster than she plans, to ensure that she is not a bystander to this next phase of growth.