India’s drug regulator, the Drug Controller General India (DCGI), should be cheered by a recent report from India Ratings and Research (Ind-Ra), that seems to suggest that India Pharma Inc is in the process of reducing its dependence on APIs from China. The Ind-Ra comment dated January 30 headlines that the DCGI’s recent ban on a few Chinese API makers would not impact the credit profile of Indian pharma formulators under its coverage. The note specifies that the banned Chinese API makers are not approved suppliers to the large (revenue above Rs 10 billion at end-FY17) and mid-sized formulators (Rs 2.5 billion-10 billion) rated by the agency. Channel checks also revealed that neither are they suppliers to their indigenous contract manufacturers.
This analysis should give policy makers in India’s Department of Pharmaceuticals some satisfaction that industry has heeded warnings to reduce dependence on Chinese APIs. The apprehensions were on two fronts: quality and national security concerns. The DCGI’s recent ban came due to significant deviations in regulatory compliance set by Central Drugs Standard Control Organisation (CDSCO), leading to concerns about the quality of the APIs from these six to eight companies, after inspection of several API manufacturing facilities in China.
China and India are the leading sources of APIs and competition for market share is only going to get more fierce. Indian pharma companies have to realise that backward integration into cleaner APIs might be more capital intensive today but could help them edge out Chinese APIs in lucrative markets like Japan, which are evolving towards generics and biosimilars, while opening up to imports. A New Year report from CPhI forecasts that rising generic usage is the biggest opportunity for domestic manufacturers (60 per cent) with Indian manufacturers bagging a relatively high vote of 24 per cent of respondents. Here, the US and European manufacturers were chosen by less than 10 per cent of respondents as price will remain the primary factor when choosing imported generics medicines. Japanese companies were much more open to sourcing foreign APIs (as opposed to finished products); from China (60 per cent), India (48 per cent) and Europe (67 per cent: excluding Italy). This high share should convince large Indian pharma companies as well as API contract manufacturers that investments in APIs should be planned not keeping both domestic demand as well as exports in mind.
While the anticipated disruption in medicines supplies due to the ban on these six to eight Chinese API makers would hopefully be minimal, the larger picture unfortunately remains unchanged. Larger pharma companies have reduced Chinese API imports from 20-25 per cent of total APIs in FY12 to 10 -15 per cent in FY17, but their smaller peers have been unable to follow suit. The Ind-Ra report points to data from the Directorate General of Commercial Intelligence and Statistics (DGCI&S), which shows that value of Indian imports of bulk drugs and intermediates dropped from Rs 212.3 billion in FY16 to Rs 183.7 billion in FY17 but volumes increased from 269.2 million kgs in FY16 to 278.8 million kgs in FY17. China’s share in India’s imports of bulk drugs and intermediates by value increased from 65.3 per cent in FY16 to 66.7 per cent in FY17, with a corresponding increase in volume terms from 58.8 per cent in FY16 to 60.7 per cent in FY17.
Larger pharma companies exporting formulations to regulated markets need to use APIs from primary and secondary sources pre approved by the regulatory agencies of the destination country (like the United States Food and Drug Association, European Directorate for the quality of medicines and UK Medicines and Healthcare Products Regulatory Agency). APIs from Chinese manufacturers are generally preferred for commoditised formulations while high value critical formulations are manufactured using an indigenous API source, according to the Ind-Ra comment.
Small and mid sized pharma manufacturers should aim to capture a share of markets like Japan, which are just opening to generics and invest in a bigger way in backward integration not just on APIs but key starting ingredients as well. APIs have been the Achilles’ heel of Indian pharma companies and have been responsible for holding back the growth of the sector. But this weakness can be overcome, with sustained efforts. For instance, over 60 per cent of respondents to the CPhI report on Japan believe brand loyalty hinders uptake, in particular, for Indian-made products. Despite this, the international market had a strong view that Indian companies (47 per cent) had the biggest opportunities for generics growth. India was second to domestic manufacturers (52 per cent), while confidence in European (35 per cent) and US manufacturers (25 per cent) was some way behind. Of course, this preference has a lot to do with the low cost of India’s generics compared to the other countries mentioned. Thus a long-term view to building the brand of Made in India APIs will go a long way towards sustainable success.