I recently had a chat with Satya Sivaraman (Journalist) on what could be India’s strategy with regards to API (Active Pharmaceutical Ingredients) manufacturing.
First of all, here is a list of the problem at hand.
India is a leader in pharma manufacturing, especially generics. I understand that 1 out of every 3 medicines in the world is made in India. Many of these manufacturers buy the APIs they need as raw materials from API manufacturers. The so called Drug Product manufacturers focus on formulation, product manufacturing, packaging, regulations, marketing and sales. The pharma companies in India not only represent an important industry and economic sector but also are one of the reasons for low cost of medicines in India (compared to the world).
In recent years, China has been stepping up its industrial activity in the broader pharma space. In particular, it has been producing APIs at unbeatable prices (perhaps due to various subsidies, support etc that their Government provides). India drug product companies are also sourcing a lot of APIs from China (Note: This translates to better profitability for the product companies since raw materials are available cheaper.). Consequently, the Indian API manufacturers are either closing down or suffering considerable losses.
The Government of India has been worried about too much reliance on China for APIs. There is a concern that this can create risks for a) the stability and competitiveness of India pharma industry, b) the the people of the country at large via foreign control (especially of a not so friendly country) on prices of medicines and c) the survival of the API industry. The Government os trying to find ways to mitigate these risks.
More context
One must note here that Indian companies and investors are moving away from API manufacturing because the industry does not seem to be producing the returns comparable to what they are expecting or happy with. Clearly there are better avenues available for investors to make better returns than APIN manufacturing in the current context of China supplying APIs at low prices. I think it will be naive to think that Indian companies lack adequate technology capabilities for API manufacturing; they know how to manufacture APIs, but they just do not find it as attractive as it used to be.
On the other had the product companies are happy getting cheaper raw materials from China and thus increase their profit margins.
Strategy for India:
So, what should India do?
Approach 1: Diversify supply chain.
One can ask the question —- Does India really need to produce every API indigenously? After all, we do rely on so many other imports. And every country cannot be self-reliant in everything. So, it appears that the real problem is not the import of APIs per se, but the dependance in China in particular. This immediately suggests that one solution could be to diversity the supply chain out of China. One approach is to have manufacturers in India but if that is not viable, why not manufacturer APIs in other countries that can beat China’s prices. My suggestions:
- Actively build supply networks in other countries around the world. Diversify risk by having multiple sources.
- Encourage and support Indian companies to become Indian MNCs with supply manufacturing at many different locations.
- Consider the middle east as an alternative location for API manufacturing by Indian companies by leveraging low raw material cost and possibly investment from gulf countries especially in context of recent efforts by Middle Eastern countries to diversify away from Oil.
Approach 2: Improve IRR for Indian API manufacturers
Indian API manufacturers are not manufacturing APIs in India because their IRRs (Internal Rate of Returns) are not attractive enough. They can get better IRRs in other initiatives.
Why is IRR low? a) Price of the API is low (because of Chinese competition). b) Costs and risks of manufacturing in India are relatively higher.
If we want to improve IRRs for them what can we do?
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- Increase selling prices. How? Tariffs on imports? (I am not for tariffs because lower input prices for drug product companies because of low API cost will be affected)
- Find ways to reduce costs and risks. What are the costs and risks?
- Cost of capital. What can we do here?
- Provide capital at lower cost or subsidised capital or grants
- Help medium companies source cheaper foreign capital more easily
- Help Indian companies improve their credit rating and reduce risks
- Cost of technology. What can we do here?
- Provide subsidies related to R&D and technology licensed. R&D grants
- Allow easier import of technology and without any cess
- Cost of raw materials. What can we do here?
- I do not know!
- Cost of regulations. What can we do here?
- Make regulations very predictable and processes fast
- Reduce cost of compliance
- Cost of overheads
- Can consider shared facilities or rented facilities (like parks) to reduce costs
- Cost of capital. What can we do here?
I would bet on just reducing the cost of regulations, reduce corruption and bureaucratic delays and reduce other overheads.
Approach 3: Innovation and branding
- Focus on innovative technologies and business models to reduce costs or build a premium (image and track record of quality). For this the GoI can help build technology strength in selected institutions on sleeted topics
- Ex: More efficient processes of synthesis
- Ex: Continuous flow technologies
- Ex: Use of IOT, big data etc to ensure data driven process control, optimization and continuous monitoring including for audit and data integrity.
- File patents in many parts of the world including China and defend it aggressively.
- Subsidise Indian companies to file and defend patents in China relating to the pharma industry. GoI can pay for patents filed in China by Indian companies.
- Use patents for tactical negotiations and creating some bargaining chips for negotiations.
- Create areas when China will feel a pinch if we withdraw our products from China in retaliation to them withdrawing their products from India.
- Strengthen brand perception of India as a source of high quality products in the US and EU.
The above approaches are all possibilities. The knee-jerk reaction of the Indian Government agencies is to assume that technology development and investment in process development research alone is going to solve the problem. I hope the Govt can think beyond it!