India Plans To Reduce Reliance On China For Drug Ingredients, But Self Sufficiency Is Still Distant

Back in 2016, the Indian government set a deadline of 2020 to end the country's outsize reliance on China for the basic chemical building blocks used to make drugs. How's that going? Well, we're still long on promises and extremely short on results. But the picture may finally be changing – albeit slowly.

When chemicals minister Ananth Kumar said, "India is going to become self-reliant (in drug raw materials and) the timeframe is 2020,"  China accounted for nearly 60 per cent of India's total active pharmaceutical ingredients or APIs. APIs are the active molecules that give a drug its efficacy. Drug companies use the APIs to formulate the finished product.

Now, seven years later, the percentage of APIs imported from China stands at around 70 per cent, according to government figures. In the financial year 2021-22, Chinese imports of bulk drugs actually increased by around 20 per cent. Also, what are known as key starting materials (KSMs) for some APIs for vital antibiotic drugs such as azithromycin, ciprofloxacin, ampicillin, amoxicillin and cephalosporin are virtually all sourced from China.

Based on India government figures, as Chinese API prices became increasingly cheaper over the years, China's share of India's API imports kept on increasing over the years.

India supplies pharmaceutical products to 206 countries out of which its two largest markets are the US and Europe.

India and the world's API dependence on China has mainly been due to a race to the bottom in terms of low Chinese pricing. Pharmaceutical firms worldwide have long worried that a breakdown in supplies from Chinese API factories could potentially disrupt the global drug supply.

India's National Security Advisor Ajit Doval has called the dependence on a "national threat."

In 2014, Dr. Y.K. Hamied, chairman of Indian generics giant Cipla Ltd. bluntly warned that, "If China decides to stop its supply of intermediates and other raw material to India, it will drastically affect India's pharma industry and bring it almost to a halt…we would be finished."

The pharma industry, Hamied said, would be "zero – both domestic and export."

Diversification Key To Ensuring Stability Of Drug Supplies

So there's a lot at stake for India in diversifying its sourcing of drug ingredients, not only for the domestic market but also for other countries. Over 80 per cent of all APIs for essential medicines used in the US have no domestic manufacturing sources.  From Washington's perspective, the US's reliance on overseas API manufacturers means its supplies of essential medicines from painkillers to antibiotics are precarious.

"API self-reliance is a global issue," said Sudarshan Jain, who's Secretary General of the Indian Pharmaceutical Alliance.

Then minister Kumar announced in 2016 ambitious plans to ramp up production of bulk drugs and create end-to-end indigenous drug manufacturing. He said the scheme would require a $6bn investment, overwhelmingly from private sources. "Without being self-reliant in pharma, in formulations, bulk drugs, in implants and medical devices, we can't provide health security," he said. Ultimately, the plan had little follow-through.

So how did India become so dependent on China for these bread-and-butter chemicals? Indian pharmaceutical companies were self-sufficient in APIs in the 1990s – China's share of India's API imports stood at 1 per cent in 1991. But as Chinese API prices became increasingly cheaper over the years, Indian players migrated up the value chain to focus on value–added formulations with higher margins, meaning India is today severely dependent on imports for many essential and large-volume drugs.

A 2016 KPMG consultancy report in 2016 detailed the extent of India's heavy dependence on Chinese API imports and industry officials say the figures remain much the same. For antibiotics like penicillin, reliance was 98 per cent and for ciprofloxacin it was 99 per cent. Dependence on Chinese API imports was as high as 98% for the heart medication digoxin and 100% for blood-pressure drug losartan. There was similar high reliance on Chinese APIs for diabetes drug metformin and isoniazid and streptomycin for tuberculosis.

Chinese competitiveness has been driven by large-scale government manufacturing incentives, cluster-based development, better integration with the chemicals industry and a dependable supply of cheaper inputs like power, water and labour along with state subsidies to promote exports, experts say.

Chinese Has Key Cost Advantages Over India

The Chinese API industry now has some formidable advantages. According to a 2020 PwC consultancy report, China's economies of scale have led to 15-to-20 per cent lower set-up costs and it has over 1,000 API manufacturers against 300-to-400  in India. And the Chinese API industry is forecast to grow even further with the number of manufacturers expected to increase five-fold by 2025, PwC said.

According to a 2020 PwC consultancy report, China's economies of scale have led to over 1,000 API manufacturers against 300-to-400 in India. And the Chinese API industry is forecast to grow even further with the number of manufacturers expected to increase five-fold by 2025.

In addition, it's got an extensive and supportive research and development ecosystem. There are also tax incentives for API exports, exemption from various taxes and low-to-no-import duties, the PwC report said.

Initially in India, huge API capacity was created by both the public and private sector to cater to growing demand for medicines. However, because of ever-cheaper Chinese prices, substantial API quantities started being imported from China which meant local Indian  manufacturers shut down operations due to commercial unviability.

Some of the reasons India's API capacity declined so drastically was a lack of tax incentives, higher utility costs and more expensive borrowing costs. Also pollution controls were tighter in India than in China – API manufacturing is a highly polluting industry.

Dependence Has Led To A Series Of Wake-Up Calls

India has had a string of wake-up calls for what could happen if Chinese API supplies were to be significantly disrupted for any reason. API shipments were hit during the 2008 Olympic Games in Beijing when industries were closed to reduce pollution and in 2017 when diplomatic relations sank over Chinese construction of a road in Doklam close to the India-China border.

The issue of Indian reliance on Chinese bulk drug imports was brought into sharp focus in 2020 when a deadly territorial dispute in the remote Himalayas threatened to explode into open conflict. It was one of the most serious confrontations between the neighbors since China won the border war in 1962 and the  flare-up was a reminder of India's drug import vulnerability. Most recently there has been Covid-19 which shut down some Chinese factories for months, disrupting supply lines and interrupting deliveries.

To the alarm of drug companies in India and abroad, the Covid-19 led disturbance in the supplies from China not only led to the increase in the price of some medicines in India but also forced the government to restrict export of medicines for a short period

China, which accounts for around 30 per cent of the global API market, has never stopped supplying drugs to India or the West even when political tensions have been at their highest. New Delhi and Western nations have become increasingly wary over the fact that the basic ingredients for many of their most vital drugs come from China.

Just under a quarter of Indian drug producers make APIs. India's pharmaceutical industry has been pushing for years for government help to compete against cheaper Chinese APIs and intermediates. "If we have to operate on that scale, it can't be left to industry alone. It requires a mix of policy, infrastructure support, some incentives." Satish Reddy, chairman of Dr Reddy's Laboratories, told trade publication Scrip in 2020,

Chinese Government Support Gives Big Support To API Industry

It's difficult to match the economies of scale that Chinese companies have achieved without major government assistance. The Chinese have dedicated large plants for API production and offer free land. They also have more sophisticated effluent treatment facilities as well as subsidies in the form of tax holidays. While China's labor cost has increased over the years, productivity also has improved, aided by factors such as superior quality infrastructure and production techniques. China's labor productivity is estimated to be nearly 1.5-times higher than that of India.

"Electricity costs Rs. 4.5 per KWH for firms in China, it costs Rs. 7 per KWH in India. Similarly, effluent treatment costs Rs. 102 per KL in China whereas it costs Rs. 1,920 per KL in India.," the Confederation of Indian Industries (CII) noted. Chinese APIs are about 20-to-30 per cent cheaper than Indian products, the CII estimated in 2022.

The Chinese producers also have developed technologies which require cheaper raw materials like cauliflower whereas producers in India still use costlier raw materials like glucose and lactose for fermentation. India needs to "launch a scheme dedicated for development of new technologies for API production," Dr. Reji K. Joseph, Associate Professor at the Institute for Studies in Industrial Development, said in a 2020 paper.

Manufacturing APIs is a complex process involving a number of reaction and purification steps. Fermentation-based key starting materials, drug intermediates and APIs present particular challenges. The APIs created through fermentation are used for crucial drugs such as antibiotics and anti-fungal drugs. They use living organisms to produce required pharma inputs and they're not easy to manufacture.

Also, any shift away from Chinese raw material imports could make Indian medicines more expensive – an outcome that would run directly counter to the government's aim of making drugs more affordable for Indians.  In addition, higher input prices could affect Indian competitiveness in increasingly challenging world markets.

India Moving To Counter Chinese Reliance

To shrink its Chinese dependence, India in 2020 launched a large-scale production-linked incentive or PLI scheme to bolster domestic manufacturing of critical APIs, key starting materials (KSMs) and drug intermediates.  The program covers 53 APIs considered critical to India's medicines security and will run up to 2029-30.

"Under the PLI scheme, 32 new plants for the production of APIs have been set up and production has now started in 35 of the 53 identified (critical) APIs," Chemicals Minister Mansukh Mandaviya said.

According to an estimate by ratings company ICRA, the nearly $2 billion worth of incentives to be offered under the program will cut API reliance on China by up to 35 per cent by the end of the decade. Some companies are nervous though about investing in setting up API facilities due to worries that the Chinese may seek to retain their dominance of the sector through price cuts.

Late last year, the approved construction of three bulk drug parks in Himachal Pradesh, Gujarat and Andra Pradesh. The government is kicking in Rs 10 billion crore to the setting up of each park. The sum represents at least 70 per cent of the project cost of common infrastructure facilities. The states of Maharashtra and Telangana are also planning bulk drug manufacturing parks.

Bulk Drug Parks Will Make It Cheaper For Indian Firms To Make APIs

The big attraction for companies of the bulk parks is that the government says it will provide drugmakers with streamlined environmental approvals for the heavily polluting industry. The industrial parks will also have shared effluent treatment facilities,  solid waste management and other infrastructure that will mean significantly cheaper operating and capital expenses for companies.

But the drug firms will need to be sure they can make money producing APIs which traditionally is a normally a relatively low-margin business. "If the prospects of successfully competing against Chinese products are poor, then even the attraction of the facilities at the bulk drugs plants may not be enough to induce investments in the first place," says a report by Indian think-tank Research and Information System for Developing Countries.

"As long as there is a considerable gap between profit margins for APIs and those for finished formulations, sentiments on local production of APIs will remain subdued," said Dr Gurpreet Sandhu, president of Council for Healthcare & Pharma.

Becoming self-sufficient in API production will be more of a marathon than a sprint.

While the government's plans for bulk drug production "are a significant step… regaining the advantage and achieving self-reliance will be a long-term process," said the IPA's Jain.