The preferred API partner

The preferred API partner

India ranks amongst the most favoured destinations for outsourcing of high quality-cost competitive APIs. Usha Sharma analyses the scenario

“Indian companies are realigning and restructuring their operating models to maintain their low cost base, while integrating vertically and strengthening their distribution base, diversifying into newer geographies and enhancing their product baskets. There is also an increased focus on niche segments”

– Hitesh Gajaria Executive Director

KPMG

India is now emerging as a preferred supplier of Active Pharmaceutical Ingredients (APIs) to many global companies for considerations beyond costs. It is today the third largest API player after China and Italy and by 2010, is expected to be the second largest after China. The current share of around 6.5 percent of the global API market is expected to reach 10.5 percent by 2010. Major Indian pharma companies dealing with APIs include Ranbaxy Laboratories, Lupin, Shasun Chemicals, Orchid Chemicals, Aurobindo Pharma, Sun Pharmaceuticals. Other companies like Ipca Laboratories, USV, and Sharon Bio-Medicine have significantly scaled up their R&D spending in the last few years.

Indian bulk drug exports are expected to grow at a Compound Annual Growth Rate (CAGR) of around 28 percent between 2006-07 and 2011-12, which will be largely driven by exports to regulated markets. But Indian companies source almost 50 percent of their API requirements from China. They face severe competition from Chinese players in the API space, particularly because of China’s low cost raw materials, labour and utilities. These economies of scale and sustained government support has enabled China to consolidate its position as a low cost destination for pharma intermediates and APIs. Over the years, this has edged Indian API producers out of the market.

While most of the world’s innovator and generic companies are setting up shop in India to benefit from India’s talent pool and exploit India’s positioning as a high quality cost competitive destination, a few Indian companies like Aurobindo Pharma have their own manufacturing plants in China, underlining China’s cost advantage over India.

Pranay Godha, President-APIs and Generics, Ipca Laboratories, says, “Competition from China has been nothing new. It has been and will be a continuous and exciting struggle to stay ahead in terms on production and cost efficiencies. Both Chinese and Indian API manufacturing companies have some inherent strengths, which the other will find hard to compete.” He continues, “The Chinese have historically been strong in high volume, commodity chemicals. Apart from the obvious Chinese competition, most Indian manufacturers have also to compete with their Indian compatriots. Majority of Indian manufacturers source their key raw materials and intermediates from China. As the last four months (pre—Olympics) have shown, it has been a rough ride in maintaining customer confidence in terms of API supplies and price stability. Challenges also lie in the ever growing ‘net’ of intellectual property rights.” Emphasising India’s niche strength, Jitendra Sharma, Marksans Pharmaceuticals, CFO, says, “A trend is that Chinese chemical synthesis abilities (have moved) towards lower-tech generic API producers in comparison with Indian companies who have a rapidly improving skilled basis for new drug discovery. Indian API industry is poised to grow in near future.”

This is borne out by the fact that India is way ahead of its competitors in Drug Master File (DMF) filings. The proportion of DMF filings by Indian players has gone up from around 14 percent in 2000 to around 50 percent of the total filings in 2007 (till June). India has more than 75 US FDA approved facilities, the largest being outside the US. Both these factors add significant credibility to India’s quality of delivery of APIs. As a result, India has raced ahead of China in terms of API exports to the regulated markets. Indian firms are able to tackle complex synthesis in relatively short periods of time with cost efficiency. They also have an added advantage on various issues like large pool of skilled manpower with good English speaking ability.

Hitesh Gajaria, Executive Director, KPMG, says, “With the introduction of product patents in Indian patent legislation, the level of confidence towards India by global players has increased. It is in a better position to become a preferred outsourcing partner for manufacturing of APIs, as compared to China, particularly with the innovator companies. In order to remain competitive, Indian companies are realigning and restructuring their operating models to maintain their low cost base, while integrating vertically and strengthening their distribution base, diversifying into newer geographies and enhancing their product baskets. There is also an increased focus on niche segments.”

Pain points

“The uncertainty surrounding production of chemicals and pharmaceutical products resulted in an introspection on the over reliance on Chinese imports and a growing realisation that India as a force in the pharma world cannot be ignored”

– Ajit Kamath Chairman and Managing Director

Arch Pharmalabs

A major challenge that Indian API manufacturers would face in the near future is that of rising input costs. At present, India’s cost structure is competitive, but for how long can India sustain itself as a low cost provider? China’s aggressive steps, to emerge as leading global pharma player pose a considerable threat to India. The low operating cost environment significantly enhances Chinese players’ ability to compete.

Secondly, industry observers point out that the API business has become highly commoditised. This gives the manufacturers limited scope for product differentiation, and hence, they are looking at various other methods to gain a competitive edge like relationship building etc. Some API producers are migrating to niche segments where relatively greater scope for differentiation exists. Also, the lack of common regulations across continents imposes additional costs on API manufacturers.

As global pharma undertakes various cost cutting initiatives, like outsourcing their bulk drug manufacturing to low cost destinations, the global bulk drug industry will grow rapidly and so will the API segment. The bulk drug segment has been targeted to reach $12.7 billion by 2011-12, with exports expected to grow at a CAGR of around 28 percent between 2006-07 and 2011-12. Thus penetration levels of Indian players in the global bulk drugs market are expected to increase. The bulk drug exports have increased from $0.74 billion to $3.74 billion and are expected to reach $12.75 billion by 2011-12.

Regulatory hurdles

As far as exports are concerned, regulatory standards in Europe differ from that of US. There are no common rules and regulations across continents. In order to put Indian pharma manufacturing companies at par with global standards, the Indian government has put various regulatory norms in place, like dual regulatory control over the drugs (under the Drugs and Cosmetics Act, 1940).

While regulation of manufacture, sale and distribution of drugs is primarily the responsibility of the State Authorities, the Central Authorities are responsible for approval of new drugs, clinical trials, laying down standards for drugs, control over imported drugs, coordination of the activities of state drug control organisations.

“Recent developments in China (curtailing of production and shutting down of factories due to Olympics and strict environment protection) have badly shaken customer confidence. Quite a few Indian customers have openly stated how their ‘eyes have opened’ due to the erratic supplies by the Chinese. I think, Indian companies can learn a lot from these incidences, and should make the most of it. Apart from these recent issues, Indian companies can offer a clear advantage in terms of their understanding and capabilities in IPR, regulatory and SHE (Safety, Health and Environment) related issues,” Godha said.

Ajit Kamath, Chairman and Managing Director, Arch Pharmalab, says, “Documentation and EHS (Environment, Health and Safety) compliance is where India ranks over China in the current context. This is reflected statistically by way of India having the maximum US FDA approved units outside the USA and also the maximum filings of DMFs. Recent developments in China, preceding and during the Olympics have highlighted the fragile situation in China on the environmental and the policy front.” He adds, “The uncertainty surrounding production of chemicals and pharma products leading to uncertainty of shipments led to a strange situation of rising prices and severe shortage of pharma products. This resulted in a sort of introspection around the pharma world on the over reliance on Chinese imports and a growing realisation that India as a force in the pharma world cannot be ignored. The factors in India’s favour include stability of supply, high quality of products and firm governmental policies.” This situation will definitely result in a strong endorsement of Indian manufacturers and a resurgence of India as a dominant player in the API segment as well as the pharma world as a whole.

u.sharma@expressindia.com