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Indian Pharma: A Global Leader Under Pressure

BLOG - 6 November 2020

India is a global supplier of generic drugs. Its export-oriented pharmaceutical industry is extremely profitable but encounters a number of challenges, from domestic demand to human resources. The Covid-19 pandemic has brought to light its dependence on imports from China of active pharmaceutical ingredients and chemical intermediates. As the whole world discusses how to increase the resilience of supply chains, could this be an opportunity for a Europe-India cooperation? This is the theme of the last article of our new series on India’s health sector, by Christophe Jaffrelot, Senior Research Fellow at CERI-SciencesPo/CNRS, Vihang Jumle, Data Analyst and IT Engineer and Maitreyee Kishor, a Sciences Po graduate who works at Ashoka University's Centre for Writing and Communication.

While India does not fare well in terms of its health infrastructure, what it certainly excels at is in supplying the world with pharmaceutical products. Indian pharma fulfills over 50% of the global vaccine demand, 40% of the US’s generic medicine demand and 25% of all of the UK’s medicine demand. India’s domestic pharma market turnover touched INR 1,400 billion (USD 20.03 billion) in 2019. In May 2020, pharma sales grew by 9% year-on-year, by INR 103 billion (USD 1.47 billion). Including export, the Indian pharma market was estimated at over USD 38 billion a year (in December 2019). It employs 2.7 million people, directly and indirectly, across 12,000 firms, and is a champion at formulation development.

Experts in the area explain this growth basis by the following factors: an increase in disposable income and hence on healthcare expenditure (Indians spend 1% of their income on pharmaceuticals); growing capabilities in contract manufacturing, R&D, and clinical trials; opportunities arising out of national healthcare schemes; and, of course, a growing population and demand, especially internationally – as pharma exports have amounted to nearly the same as the domestic pharma turnover.

Table 1: Domestic turnover and exports of the Indian pharma sector

Year

Domestic Annual Turnover (USD Billion)Annual Exports (USD Billion)
201515.5314.9
201616.4116.9
201717.8716.8
201818.1217.3
201920.0319.1

(Source: Statista)

Export-driven growth

While prior to 1970, multinational companies dominated India’s pharma market with an 85% share, the Patent Act 1970 changed this by allowing local manufacturers to create domestic replicas of foreign medicines. Section 83 of the Act stated "that patents are granted to encourage inventions and to secure that the inventions are worked in India on a commercial scale and to the fullest extent and not to enable patentees to enjoy a monopoly for the importation". Local manufacturers started reverse engineering multinational companies’ patented medicines and started producing them cheaply and in different ways (since production processes could be patented for 7 years). Subsequently, by the 2000s, foreign share dropped to 40%, and in 2010 down to 23%. This was not only an India-centric issue: the ones who export technology prefer patents, since it safeguards them from cheaper local domestic competition, whereas the ones who import technology (largely developing countries) prefer having it cheaply. Japan, Korea, and Taiwan too progressed in the same fashion.

Eventually, patent protection won at WTO. A set of agreements were made: Trade Related Intellectual Property Rights ("TRIPS") mandates a minimum level of patent protection worldwide. Given the importance of a platform like the WTO, developing companies have had to comply with it irrespective of how much they disliked it. Most essential drugs are not patented. TRIPS, however, has a role in protecting new and essential drugs of the future. There have been some efforts in making TRIPS a bit lenient to better integrate it with international actions to address public health. For instance, the Doha Ministerial Conference in November 2001 adopted a declaration, on the one hand acknowledging the existence of intellectual property rights, but on the other, stating that in case of a conflict, public health could override commercial interests, in addition to other points. In 2005, to comply with TRIPS, the Indian government also introduced product patents on pharmaceuticals, limiting the liberty that domestic pharma companies enjoyed for three decades. India had joined the WTO in 1995 and had been since then (and even before) at crossroads with the US over India’s extremely lenient patent law. This had led the US to name India as a "centre of commercial piracy".

Initially, multinational companies had protested the 1970 Indian patent laws, but the ones who readily adapted and played on Indian strengths eventually made themselves indispensable. Cipla, for instance, joined hands with the Indian Council for Medical Research in 1990 and agreed to produce AIDS medication locally. In the early 2000s, they nearly controlled 80% of AIDS supplies in India. Many foreign and domestic names have since come up to be the leaders in their domain. Top Indian firms include Sun Pharmaceuticals (market capitalization as of October 25, 2020: INR 1,1 trillion or USD 15.7 billion), Dr Reddy’s Laboratories (INR 839.9 billion or USD 11.35 billion), Divi’s Laboratories (INR 821.05 billion or USD 11.1 billion), Cipla (INR 615.94 billion or USD 8.33 billion), Aurobindo Pharma (INR 468.31 billion or USD 6.33 billion), all listed on Indian stock markets. Top (foreign) firms based on their sales, marketing and business in India include Pfizer, GlaxoSmithKline, Sanofi Aventis, Merck, Johnson and Johnson, etc.

Emerging challenges

A billion Indians spend the same amount on medical drugs per year, as seven million Swiss. India is a cheap, but quality producer of many pharma products.

India produces pharmaceuticals locally to export them globally, which is what drives revenue for companies. A billion Indians spend the same amount on medical drugs per year, as seven million Swiss. India is a cheap, but quality producer of many pharma products. Its pharma exports to the US were pegged at over USD 6 billion in 2020 (to the rest of the world USD 13.3 billion in 2019). However, India’s share in the US market ran into a slight hiccup after US president Donald Trump signed an order to boost domestic production of essential medicines and critical drug inputs, in August 2020. While the short-term impact on India’s share was said to be negligible, the long-term impact is well disputed.

Any decline of exports would have huge consequences on the pharma sector in India, because it cannot live on the domestic market alone. The Indian government wants generic medicine prices in India to go down, so that it can meet its national healthcare mandate with its exceptionally limited budget, whereas the industry strongly pushes back on this demand since generic medicine prices are already at the bottom. In fact, they are amongst the lowest in the world. This back-and-forth became mainstream after price ceilings were introduced in the 1990s, on inexpensive life-saving drugs. This list however has increased from 74 medicines in 1995, to 857 in 2019. Nearly 18% of Indian pharma market is under price control. While this quick fix has made consumers happy – the government claimed that many cancer drugs are 90% cheaper due to price caps – it is stifling innovation by not rewarding the industry sufficiently.

Another challenge comes, not from the domestic demand, but from the domestic human resources. India is indeed too understaffed to cater to the growing needs of the pharma industry. On the public-facing side, India only had 6.7 pharmacists per 10,000 people in 2017. While China had even fewer (3.1 pharmacists), other countries like France (10.69), Brazil (6.8), Italy (11.6), Spain (11.54) had a better pharmacist density. There is also a shortage of skilled human capital: only 2,000 students enrol into pharma PhDs in India, whereas 15,000 do in the US. Does this affect Indian pharma exports in some way? Though the Indian pharma industry is a leader with growing popularity, returns and employability, the real growth for the industry lies, not in retail pharma but in R&D, and that requires a deep specialization that not many graduates in India have. Note that there are enough pharma graduates – nearly 400,000 pharma students graduate each year – but many go unemployed either due to their incommensurate skill or specialization levels. Questions have also been raised over the dropping education quality in pharma institutes. Therefore, while India does have enough students to pursue pharma, they likely aren’t as committed as the industry requires them to be. That, in turn, reduces the growth (and export) prospects of Indian pharmaceuticals.

Table 2: Pharmacists per 10,000 population in India

Sum of Pharmacists (per 10,000 population)

Column Labels

 

  

Row Labels

2015

2016

20172018
Brazil  6.831 
China2.992 3.17 
France10.89910.82810.69510.639
India 5.5996.7878.868
Italy11.54511.55111.69110.946
Nigeria1.106  1.259
Russian Federation    
South Africa2.852.716   
Spain11.8712.04414.911.548
United States of America    

(Source: WHO Global Health Observatory)

 

Mutual dependence

The pharmaceutical sector in India, valued at USD 40 billion in 2019, is one of the few sectors where the value of exports is greater than that of imports. In FY 2019-2020, India imported USD 21.1 billion worth of organic chemicals and USD 2.5 billion worth of pharmaceutical products, while it exported organic chemicals worth USD 18.6 billion and pharmaceutical products worth USD 17.53 billion (DGCIS).

As mentioned above, the Indian pharma sector meets 40% of the US’s generic medicine demand. On the other hand, Europe is also extremely dependent on Indian supplies to keep its pharma market stocked up. For instance, earlier this year, the Indian government’s ban on the export of certain drugs in the backdrop of growing Covid-19 cases was a cause for worry in Europe, and analysts anticipated businesses that the "old continent" would be "severely impacted". India holds nearly 26% of European formulations in the generic medicines space. Europe receives approximately 16% of Indian pharma exports, at USD 2.7 billion.

Therefore, the pharmaceutical sector is held up by the government as an example of a profitable, export-oriented enterprise which fulfils the principles of Atmanirbhar Bharat (self-reliant India). Successive annual reports of the Department of Pharmaceuticals, falling under the Ministry of Chemicals and Fertilisers, also highlight this fact.

The pharmaceutical sector in India, valued at USD 40 billion in 2019, is one of the few sectors where the value of exports is greater than that of imports.

What is missing from this report, however, is any mention of the heavy import-dependence of the Indian pharmaceutical industry – largely on China. The imports are concentrated in the form of Active Pharmaceutical Ingredients (APIs), Key Starting Materials (KSMs), and drug intermediates – chemical raw materials that are brought to India and then processed to produce the required dosage and combinations of drugs (each medicine consists of two types of compounds – the active pharmaceutical ingredients which produce the desired effect of the medicine and the chemically inactive excipients which help in delivering the API into the body, and each medecine can have one or more APIs in varying combinations and doses).

In 2018-2019, 614 subcategories of organic chemicals were imported from China at a total cost of USD 8.58 billion. Within organic chemicals, imports required by the pharmaceutical industry are the largest. Among them, heterocyclic nitrogen compounds and antibiotics are the largest organic chemical imports by India from China, accounting for almost 30% of such imports.

The countries representing the next highest sources for importing organic chemicals did not have the same weight at all: USA (USD 1.4 billion); South Korea (USD 1 billion); Singapore (USD 973.94 million) etc. Prepared pharmaceutical products imported from China are only worth USD 158.04 million. Most of the imports from China are Active Pharmaceutical Ingredients (APIs), which made India’s pharma sector very dependent on China for its own exports and the products sold on the domestic market. Of the 373 drugs listed as India’s national essential medicines, some 200 are imported as APIs, mostly from China. According to the Trade Promotion Council of India (TPCI), about 85% of the required APIs were imported from China while the Directorate General of Commercial Intelligence statistics show that 67% of total imports of bulk drugs came from China during 2018-19.

This dependence created some panic when Wuhan (where most of the Chinese suppliers are located) was affected by the Covid-19 crisis in early 2020. In March 2020, the Ministry of Commerce prepared a list of 57 essential APIs that were mainly imported from China. The Department of Pharmaceuticals immediately announced a INR 30 billion (USD 40.3 million) policy for promoting the domestic manufacture of Key Starting Materials (KSMs) and APIs, by setting up three bulk drug manufacturing parks.

Why such import dependence? The Indian pharmaceutical industry did not start out with a dependence on imported APIs and drug intermediates. In the 1990s however, China’s cheaply manufactured APIs (which were 40% cheaper than Indian APIs at the time) led to Indian drug manufacturers switching to imported products. Today, Chinese APIs are approximately 20% cheaper than Indian alternatives (Chandna 2020). As a result, profit margins for manufacturing APIs remain low and very few private manufacturers remain in India. Apart from that, there are also five Public Sector Undertakings (PSUs) that manufacture APIs, but two of them - Indian Drugs & Pharmaceuticals Limited (IDPL) and Rajasthan Drugs & Pharmaceuticals Limited (RDPL) - are due to be shut down soon, and the other three - Hindustan Antibiotic Limited (HAL), Bengal Chemicals & Pharmaceuticals Limited (BCPL) and Karnataka Antibiotic & Pharmaceuticals Limited (KAPL) - are going to be sold due to the huge losses they incur.

The high start-up and operation costs, and long gestation periods are cited as some of the reasons for the lack of manufacturing capacity within India.

The high start-up and operation costs, and long gestation periods are cited as some of the reasons for the lack of manufacturing capacity within India. Today, even basic medical consumables like syringes and gauze pads are imported (Dept. of Pharma annual report). Similarly, India lacks the capacity to produce even commonly used APIs and drug intermediates like chloroquine (anti-malarial), gabapentin (anti-anxiety), paracetamol (analgesic) and many antibiotics.

Recognizing India’s dependence on imports, the Ministry of Commerce in March 2020 announced a INR. 3,000 crore (~ USD 400 million) revival package to establish three bulk drug manufacturing parks in India in the next five years. The same package also contains a Production Linked Incentive (PLI) Scheme for the "promotion of domestic manufacturing of critical KSMs and APIs in the country with financial implications of INR 6,940 crore (USD 911 million) for next eight years" which will be disbursed to "companies that will invest in domestic manufacturing of critical KSMs required to produce APIs".

However, the response from industry stakeholders has been lukewarm. Part of this can be attributed to the fact that since 2000, two other similar initiatives have been launched to promote domestic manufacturing of KSMs and APIs but have not been successful in reducing India’s dependence on imported drug intermediates. According to the head of a Mumbai-based pharmaceutical company, "We cannot increase the production of APIs to an extent where we end up matching the economies of scale generated by Chinese units. Our cost of production for API will be higher, which in turn would hamper the export competitiveness of the products". Keeping the prices of Indian drugs globally competitive while also switching to domestically manufactured APIs would entail "phenomenally high" incentives, investments, and subsidies.

The other cause for concern is that the scheme to set up bulk drug parks does not address many other systemic issues that puts India at a disadvantage vis-à-vis China. Higher labour costs, lack of cheap and stable power supply, and higher tax and lending rates are some of the causes for the high cost of manufacturing APIs/KSMs in India, according to industry representatives.

Table 3: Indian pharmaceutical imports from China, in 2018-2019

Commodity

Value (USD million) From China (USD million) % of total from China
AMOXICILLIN AND ITS SALTS 36,7 32,87 89,56
AMOXICILLIN IN CAPSULES, INJECTIONS ETC. 0,63 0,47 74,6
CEPHALEXIN AND ITS SALTS 12,22 1,51 12,36
HEPARIN AND ITS SALTS 51,96 44,73 86,09
OTHER ANTIBIOTICS 410,47 291,52 71,02
OTHER CEPHALOSPORINS AND THEIR DERIVATIVES 15,98 0,02 0,13
OTHER RIFAMPICIN AND ITS SALTS 134,15 90,46 67,43
TETRACYCLINE/OXYTETRA - CYCLINE AND HR SALTS 13,68 13,66 99,85
OTHER TETRACYCLINES AND THR DRVTVS SLTS 39,37 1,36 3,45
OXYTETRACYCLINE 0,13 0,13 100
DOXYCYCLINE AND ITS SALTS 16,74 9,68 57,83
GENTAMICIN AND ITS SALTS 9,09 7,77 85,48
NEOMYCIN 3,03 2,78 91,75
STREPTOMYCIN 3,3 3,3 100

 

The scope for Europe-India cooperation

In March 2020, during the early days of the Covid-19 pandemic in India, the Director General of Foreign Trade (DGFT) issued a notification to restrict the export of 26 key APIs leading to great uncertainty in both the US and EU. According to India’s Pharmaceutical Export Council of India (Pharmexcil), this sudden move has negatively affected India’s image as a global supplier of generic drugs, and lead to a loss of credibility along with monetary losses. Since this decision to restrict imports was partially driven by fears of a long-term disruption of API imports from China, facilitating domestic manufacturing of APIs in India would also benefit the EU by reducing the influence of foreign countries on India’s drug exports.

To some extent, India’s dependence vis-à-vis China calls to mind the dependence of Europe vis-à-vis China. Since both face similar risks of disruption of their supplies, should they cooperate to increase the resilience of their supply chain?

Europe depends on India for 26% of its generic formulations. India also houses 253 European Directorate of Quality Medicines (EDQM) approved plants, more than 262 US-FDA compliant Pharma plants and more than 2,000 WHO-GMP (World Health Organisation – Good Manufacturing Practices) approved Pharma Plants, most of which are geared towards producing generic drugs for export to the US and Europe.

Although the volume of trade in pharmaceuticals between India and Europe is high, the relationship is neither robust nor does it extend to long-term engagements in research and development, sharing scientific know-how, supply of equipment, joint investments etc. Both parties stand to benefit from broader and deeper cooperation since it would help reduce their dependence on China. Currently, Indian manufacturers cite high start-up costs and long gestation periods as reasons for not investing in domestic API manufacturing. In such a situation, FDI from Europe, especially in greenfield projects where up to 100% FDI is permitted, would be welcome.

For India, gradually shifting to domestic manufacturing of APIs with financial, scientific and technological support from the EU would mean a reduced reliance on Chinese API imports. Similarly, shifting to Europe as a source of APIs rather than China is also an option that needs to be explored.

Currently, European countries, particularly Italy and Spain are important sources of API imports for India, but the volume imported from these countries is far behind that imported from China. For the EU, having a greater stake in India’s pharmaceutical manufacturing sector would insulate it from shocks that come from sudden restrictions on imports like those which happened in March 2020.

Europe depends on India for 26% of its generic formulations.

The framework to extend India-EU cooperation already exists, as does a conducive environment. The EU has a cooperation agreement with India signed in 1994, which allows the setting up of specialized subgroups on sectors including pharmaceuticals. In 2005, they also adopted a joint action plan for the India-EU strategic partnership, under which a joint working group on pharmaceuticals, biotechnology and medical devices was set up and began functioning in 2006. According to India’s Ministry of External Affairs (MEA), this working group is helping India by "fostering alignment with international standards and practices and ensuring the quality of pharmaceutical active ingredients and medicines" along with facilitating bilateral trade (MEA 2020). The EU’s Committee on Herbal Medicinal Products is also looking to expand research and cooperation on Ayurvedic medicines.

China’s inclination to upgrade from a factory that manufacturers generics to a country that makes and supplies patented drugs is also a motivation for India and the EU to step up cooperation in this field (the European Chamber of Commerce in China recently stated in a position paper, "China is at a critical stage, as the country is changing from a manufacturer of generic drugs to a supplier of original drugs"). According to the Germany-based Association of Research-Based Pharmaceutical Companies, 2,320 scientific studies about pharmaceuticals were conducted in the US in 2017, as compared to 588 studies in Germany, 352 in China and only 65 in India. This makes the difference in capacity very clear, and also demonstrates the need and space for cooperation.

Therefore, the greatest avenue for cooperation however lies in research and development in the pharmaceutical sector. Despite being a mass producer of generic medicines, India lacks the capacity to invest in research and development, while in the EU the pharmaceutical sector receives the highest amount of funding for R&D (as a percent of total sales) as compared to other sectors.

 

Copyright: Money SHARMA / AFP

 

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