A wake up call for Indian Pharmaceuticals Industry
Indian Pharma Sector Giant Sitting on a Shaky Foundation Today A PROPOSAL FOR CORRECTING THE STRUCTURAL DESIGN FAULTS
Growth So Far
Indian Pharmaceuticals has been one of the most important sectors of Indian economy that contributed to 5.8% of India’s exports that grew by 10.72% YoY at USD 19.2 billion in 2019. Estimates for exports in 2020 were pegged at USD 22 billion without considering the impact of Covid19 pandemic. India is the largest provider of generics drugs globally; in fact, it is popularly known for providing reliable and affordable pharmacy of the world. India provides 20% of the generics to the global markets and the largest share is of North America where 4 out of 10 generics today come from India. US contributes to one third of India’s exports. Indian exports to US market alone grew at 13.7% in 2019 and the future opportunities in the US market are also very attractive. In addition, BRICs, West Asia, North Africa and few countries in Latin America will be important markets in future.
Given the fact that India has the largest number of USFDA sites outside of the US, the industry has done relatively well in the area of regulatory compliances even though the general impression recently has been to the contrary. India has done a decent job if one was to evaluate its performance based on warning letters issued by the USFDA per total number of USFDA approved sites in any country including the US. Indian companies have been heavily investing on upgrading the quality systems and related infrastructure to meet the desired standards prescribed by the most advanced countries. This means that India has been a fast learner on regulatory compliances front and is ready to face any future manufacturing challenges across different verticals of pharma industry.
Indian market also recorded double digit growth in domestic market over last decade, but the future estimates are limited between 8-11% unless there are drastic changes done in the Indian health care system which is 70% self-funded. Ayushman Bharat has been a very well received and popular scheme introduced to cover the health insurance of ordinary workers and citizens.
India has more than 15000 unorganized players in the pharma sector off-which around 400 are in the organized sector with top 10 companies contributing to almost 43% market share. This means that the distribution of players based on their size a bit skewed in favor of large players. This is because the nature of investments is capital intensive and with relatively longer gestation.
India has developed both Active Pharmaceutical Ingredients as well as Finished Formulations that have gone off patent and that has been also one of the reasons for the impressive growth of Indian companies in the past two decades. Unfortunately, India is also in a situation today where it is heavily dependent upon China in imports of its critical APIs and critical raw materials for its APIs and this has become a very serious design fault in the very foundation of this industry on which India’s future depends heavily.
Unfortunately, India still needs to work on biologicals and biotechnology-based products in comparison to the more advanced countries.
Innovation led research has never been the forte of Indian companies so far and it still needs to work on that front. Indian companies have been complaining that it has not been a celebrated enough sector unlike the Information Technology that evidently appears to have been a more favored sector when it comes to incentives given by the government. Indian companies have been crying for greater incentives by the government for encouraging innovation led research which is naturally expensive. When India got independence in 1947, our average age of the population stood at 48 years which rose to 68.5 years in 2019. Our Pharmaceuticals and Healthcare sector rightfully like to stake their claim on this accomplishment but then innovation requires investment and government has not done enough for the Indian Pharmaceuticals sector is the complaint of Indian companies.
Despite the above factors, Indian Pharmaceuticals companies have accomplished competitive levels of international product quality at very affordable prices over the past so three decades.
The Potential for Future Growth
“Our potential lies between what is, and what could be.” – Kim Butler
Biologicals sector is one of the big growth drivers over the next two decades. India has a large pool of educated and trained manpower in this sector. Most of our workforce is also English speaking. Despite these advantages, India has lost heavily to China in terms of investments in this sector. Industry feels that the government is not doing enough to create a conducive environment for the leading global companies to invest in India. Both the cost of capital and cost of power in China are far more attractive as compared to India and both these input costs are very critical to create globally competitive products.
Greater manufacturing of products for the Veterinary sector, Manufacturing of ordinary and specialized Medical devices in Joint Venture model by importing technology from the world leaders, diagnostics, IT based services, Big Data capturing, Analytics, Disease prediction and prevention, early disease detection and cure with greater number of Hospital and ICU beds and better healthcare services across country would be the main growth drivers in expanding the domestic pharma market in India. In addition, if we achieve higher income levels of individuals and greater penetration of more schemes like Ayushman Bharat then the future growth figures of Indian domestic pharma market could be more attractive, and this is achievable.
India has potential to reach a USD 100 billion in turnover but that requires several players not just a few and a larger presence of international players in the field which has not happened so far. Indian companies feel that right support and incentives from the government if provided on time; can boost a huge growth in our pharmaceuticals sector.
It is high time that our policy makers learnt from the past mistakes and started working closely by understanding the needs of the industry and the factors responsible for greater success of the Chinese companies. It is indeed high time that our policy makers and government worked as one coordinated team to create a robust strategy and plan the right tactical moves to become a successful global player in next two decades.
Important Lessons from the Past
“The essence of a Strategy is in choosing what not to do” – Prof Michael Porter
India has a large presence of MNCs whose primary focus has been increasing scale to reach the population in the remotest areas. These MNCs have been responsible in bringing the latest drugs to our country. They have also encouraged production by Indian companies and the past two decades saw a surge in USFDA approvals with India becoming the largest country outside of US with USFDA approved sites. Our patent regime also encourages production of latest drugs today. Both the MNCs and the large Indian Pharmaceuticals manufacturing companies have taken advantage of this. A large MNC like GSK sells 35% of their global volumes in India. An important lesson is to incentivize exports by MNCs by not just saying “Make in India” but also creating an environment that these MNCs “Make it for the World”. Indian companies have also grown phenomenally over the last twenty years; some of the names and their growth figures over 1999 until 2019 are, Lupin by over 22000%, Sun Pharma by, over 4500%, Aurobindo by over 3000%, Piramal by over 1450%, Dr Reddy’ by over 1000%, CIPLA by over 350% and GSK by over 300%. The major exports are by Indian companies while the MNCs have mainly been focused on expanding their market shares in the domestic market. Another important lesson therefore is that presence of innovative MNCs in India can encourage domestic companies also to innovate and export. India must attract global leaders to “Make in India!” therefore.
While the past growth came from chemical based medicines and the MNCs and Indian companies did very well in expanding the market size, the future significant growth in pharmaceuticals is going to come from the biologicals sector and more complex medicines and vaccines. This is where the patents are expiring, and the new developments are also taking place. This means that we have to bring the large companies active in this sector to India if we were to continue our high single or low double-digit growth in future. India also needs to create a conducive environment for creating globally competitive biologicals in future against stiff competition from China.
Secondly- we are sitting on a potentially precarious situation. While India can take pride in being called the global pharmacy for generics; the fact is over 70% of our APIs and their critical starting raw materials are being imported from China. India has done exceedingly well in the area of Finished Formulations manufacturing by having a large number of USFDA approved sites. Our Formulations are also being exported to Europe, Latin America and the African subcontinent; but we are sitting on a shaky foundation that has serious design faults because we are overly dependent on China.
It was in the year 2019 when China decided to shutdown its industry to control pollution that the Indian industry received its first shock when it realized how seriously its supply chains got disrupted. Most critical APIs or their raw materials are being imported in India from China. COVID19 has only renewed the wakeup call that India needs to move now towards selfreliance if it has to grow in future and this is the most important lesson today. We cannot and should not depend on Chinese imports.
China is Teaching us; But Are We Learning?
“Remember that life’s greatest learnings come at the worst times and from the worst mistakes” – Anonymous
“It’s not how we make mistakes; it’s how we correct them that defines us” – Anonymous
Indian industry has faced two recent price shocks as explained above on critical raw materials needed for APIs sector. They taught us important lessons that if there is a disruption in raw materials supply then we are neither able to maintain our prices, nor delivery export schedules to our global customers.
During the shut-down phase of the Chinese raw materials industry, not only the prices of all critical starting raw materials increased but the supply itself dried up. This impacted our export commitments and even saw production of a few raw materials being revived. We have the technology to manufacture all the raw materials that we are so heavily dependent today on China. The problem is that the competition to produce these raw materials is not on a level field. Chinese cost of capital is almost one third or at times one fourth of India. Not all the factories still are adhering to pollution control norms. There are several hidden subsidies given by the Chinese government that subsidies their exports. Indians were happy as long as they could grow with the help of cheaper imports from China. Today these imports have become unreliable and are threatening our current position in the global pharmaceuticals sector. We need to do something.
In the current COVID19 crisis, where china first exported the virus to the world; it later started exporting all the protective gear for the health services workers. Lot of their supplies of test kits got rejected in European and Mediterranean countries and the world has been critical about these events. Let us take the example of one of the critical basic drugs like Erythromycin on which India and rest of the world has been heavily dependent on Chinese imports. All the sources suddenly dried up at the critical times when the world is facing the current Corona pandemic and the availability however little, was feasible only at extremely high and unreasonable prices.
Let us take another example of Chloroquine and Hydroxychloroquine; the two molecules that Indian pharmaceuticals sector has been manufacturing for several years. All the large Indian manufacturers are heavily dependent on Chinese imports of critical starting raw materials whose prices have sky-rocketed in critical current times when we the drug is needed to save lives. India has the technology to manufacture all of the critical raw materials needed but we need to create a sustainable and competitive manufacturing. We must learn our lessons once and for all time in the future.
Attitudinal Shift Needed Towards Pollution Control
“When the whole world is silent; even one voice becomes powerful” – Malala Yousafzai
Industrial associations in various chemical zones have met the pollution control bodies several times in the past. Numerous meetings have been held and industry has submitted excellent proposals for manufacturing of raw materials with zero pollution, most of which have either not been understood or have not been met with the will of governing bodies to implement. Today, the industry is badly suffering on account of the past inaction by the government to create a conducive environment for growth of chemicals manufacturing with pollution free approach which is possible. Any painful suffering of the type that industry is experiencing today creates insights and perhaps in this environment a voice that proposes an implementable future solution to create competitiveness and self-reliance is likely to be heard.
One of the major hurdles in the growth of production in the APIs raw materials’ manufacturing sector has been absence of government permissions or lower government permissions for setting up of new manufacturing sites. Effluent norms are strict, and the industry has not been disciplined enough in the past. Pharmaceuticals manufacturing can be highly polluting and therefore few state governments have acquired a very conservative outlook of not giving licenses to the new manufacturing units. Industry has come up with practical proposals for effluent management too but that has also fallen on deaf ears. As a result of this negative attitude, not many fresh capacities have been created that only helped cheaper imports from China further.
Today, industry has learnt and evolved. After all, there have been so many manufacturing units in the USA and Europe who have been producing chemicals for a long time in history. Many basic raw materials in India, even today are imported from these environmentally friendly American and European sites. This proves that there is a way to take care of the environment and we should and can do that. We must realize that it is possible to create Zero discharge facilities today that do not pollute the environment at all. However, the costs of manufacturing will have to create a priceworthy sales environment for which the government will have to protect the domestic industry from onslaught of cheaper Chinese imports. Secondly- Industry has to also look for the new innovative methods of production that impact cost of manufacturing. Unfortunately, the availability of cheaper imports from China coupled with lack of new capacity creation for raw materials manufacturing, have also killed our innovators to look for new and innovative methods that can create globally competitive products.
Now, we are forced by our circumstances to create self-reliance in a competitive way. Government and Industry need to work together in unison to create strategies that create competence with sustainability and scale while taking care of the environment. This is possible and the only way we can sustain our global position in pharmaceuticals sector.
Vigilant Role of The National Green Tribunal Must Become Both Production and Environmentally Friendly
“A knife in the hands of a surgeon gives life, and the same when used by a murderer takes life; application is most important!”- Anonymous
“A Problem is not the problem; the problem is your ATTITUDE towards that problem!” – Captain Jack Sparrow
While we recognize that problem of pollution needs to be addressed, we cannot solve the same by not having chemicals or pharmaceuticals industry. Secondly, any act that is passed in the parliament for achieving this objective must be applied where the execution is both boosting indigenous production to generate employment and foreign exchange for our country and is also environmentally friendly.
National Green Tribunal Act, 2010 allows creation of a special tribunal for expeditious disposal of the cases pertaining to environmental issues. The tribunal is empowered to penalize the industry for any environmental damage. The NGT Act empowers the tribunal to levy penalties depending upon the extent of damage done to the environment by the industry. Secondly, setting up of any new chemicals’ factory requires NGT clearance before it can start production.
The main objectives for this statutory body as above are very honorable but let us look at how this system of governance is being misused by numerous NGOs and a few anti-social elements of our society and how the wrong use of this legislation is hampering growth environment of our chemical industry.
Most industrial managements today express that they have to deal with a new crop of NGOs and a new breed of few local environmental activists who threaten and forge cases if not rewarded. There has been a sudden spurt of legal disputes filed by these individuals and NGOs; a lot of which are baseless and harassing in nature. The act is being abused for demanding ransom and industry has been suffering. Government needs to find a mechanism of differentiating genuine cases before they get qualified for filing disputes. The industry has been facing numerous unwanted disruptions on account of unethical actions by several disrupting forces in the society that need to be controlled. The implementation of this act has to be in the hands of competent legal teams with reputable track record of high integrity. Penalties levied by the tribunal must have accountability. The money so collected must be used for solving the problem that is emanating from the polluting source. Instead of the government taking money, the culprit should be advised to invest that money in installing the necessary equipment that allows both continuation of production and ensures that the environment is not damaged too. Practically feasible solutions to most pollution related problems caused by the industry exist but they require investments by the industry, and we need to design a penalizing system that promotes pollution-free production by the industry without causing any damage to the people or the environment.
Let us address the improvements needed in clearances for setting up of new chemical units. Currently, there is a lot of red tape and long waiting period for getting environmental clearances for a new chemicals’ manufacturing unit. This problem needs to be immediately addressed and the time for getting permissions for a new unit needs to be shortened. We must have competent decision makers as part of the committee with cross functional specialization; professionals who understand chemistry and not just the environment. It has been a concern of the industry that many a times the decision makers are not able to appreciate the design of pollution control technologies proposed by the new units. A lot of the proposals are rejected for the lack of understanding of the proposed technology or processes by the decision makers. A cross functional competence where a decision maker, who is both competent in chemistry and environmental impact, should be the pre-requisite for anyone being part of the committee that is empowered to give environmental clearances for any new unit.
Another important issue is the flexibility in manufacturing any new product. We are all aware that markets are dynamic, and any manufacturing unit needs to respond to the changing demand coming from the end-users. We must therefore design a system of permitting manufacturing units to change their product mix as per the market demand provided, they are within the overall permitted effluent generation norms. Authorities must govern the pollution levels but need to give a free hand to the manufacturing units to decide their product mix in sync with the global market’s demand.
Currently, this is not the case and it takes a very long time to get permissions to change the product mix. All progressive countries, including Japan allow change of product mix as per the market demand. It is only in India that industry needs to apply for permissions every time a new product needs to be added for production even if that is not creating any environmental load. This kind of micro-management by the governing bodies hampers the growth of the industry and comes in the way of timely expansion of production which is in sync with the global market demand. India invariably loses such opportunities to China and can never take advantage of being the first mover and this needs to be immediately corrected.
Today the Cost of Inaction will be Unaffordable
“The Only Strategy that is guaranteed to fail is NOT TAKING ANY RISKS!” – Mark Zuckerberg
Let us evaluate our current position in the global medicines sector. Indian pharmaceuticals sector stands at 37 billion USD and has grown at 17% CAGR since 2005. Future growth is expected to be between 9-10% and the major contributor apart from the biologicals sector is also the veterinary sector. India produces a lot of veterinary APIs and medicines too. India is the generics capital of the world and has attained this position through shear hard work over past three decades. But today, we are importing 70-80% of our APIs and raw materials from China and we have learnt that the current business architecture even though cost effective in normal times has been extremely unreliable and opportunistic at critical times of our needs.
Pricing pressures in the field of API exports as well as generic finished formulations have been increasing over the past few years which are squeezing the margins of finished formulations manufacturers. This is a general phenomenon across the developed countries like the US and Japan that has announced annual price cuts with procurement based on tender market pricing. Indian manufacturers are already struggling to compete, and margins are under tremendous pressure. In addition, the quality and regulatory expectations today are far stricter than ever in the past.
Our major growth driver in the past two decades has been the US market and our companies have done exceedingly well in providing Finished Formulations to them in past two decades. However, China has been establishing USFDA sites too. If global giants decide to outsource their finished formulations from China in the future, then it will be disastrous for our industry since the APIs and critical starting raw materials are already with China. Why would they sell them to India cheaper and not export formulations instead? If we do not act now, then we may not be able to sustain even our current global position and attaining a 100 billion USD level in next decade will remain a far-fetched dream. Hence, the cost of inaction by the government or our industry is both unaffordable and unacceptable. To act is the only option we have.
Indian industry is focusing on Biosimilars, Insulins and Complex Peptides in future. We need to see a greater number of international innovative investors and a greater number of Indian companies investing in this capital-intensive sector. Government must come up with incentives for investment as we already have skilled English-speaking manpower needed in this sector.
Let us also not forget that while China attained the important position of becoming global supplier of raw materials and APIs to the world, it also remains one of the most attractive markets for most of the global companies in future. India will have to create an attractive ecosystem for basic raw materials supplies at competitive prices to create its competitive edge over China for attracting future global investments as well as for penetrating the attractive Chinese market demand for several of its offerings where it is competitive. Interdependence of countries may reduce in future, but few opportunities will always come our way provided we remain competitive and innovative on a sustained basis.
A Recommended Action Plan
“Strategy without Tactics is the slowest route to victory; Tactics without Strategy is the Noise before Defeat!” – Sun Tzu
Government is aware that 70-80% of our APIs sector, both based on chemical or fermentation technology based raw materials is dependent on the Chinese imports and different departments like Niti Aayog have already been interacting with the industry. To start with, Government has identified 12 essential drugs to create self-reliance. These are Paracetamol, Ranitidine, Ciprofloxacin, Metformin, Acetylsalicylic Acid, Ofloxacin, Metronidazole, Ampicillin, Amoxicillin and Ascorbic Acid. This is a good beginning and the list needs to be expanded further.
We must look at the availability of basic starting chemical raw materials in India and establish sufficient capacity for the same. Case in point is that of diketene which is in severe shortage in India and new capacities have not been created for a long time. Moreover, this raw material is not allowed to be transported as it is considered hazardous even though there is a very safe internationally acceptable way available and countries like Japan and China do transport this critical raw material within their country respectively. India, however, is dependent on the imports of all diketene based products. This needs to change. There could be several more similar examples. Current need is to start from the basic raw materials and then forward integrate to critical starting raw materials for APIs, APIs and finally- finished formulations. We must complete our full backward integration if we are to be competitive in global markets in future.
For generating sustained competitiveness, we will need contributions from both the industry and our government. Industry has to evolve environmentally friendly and competitive processes and ensure that we create cost and quality competencies through innovation. Government on their part need to work on policy matters that subsidise the industry for unfavorably higher cost of capital and power while providing other incentives for creating new production sites as well as exports. Indian Government has done well by way of lowering taxes for new units, but it still needs to work out more funding options for research and innovation activity given that the future growth sectors like the biologicals are heavily capital intensive with longer gestation periods.
The biggest hurdle at the moment is environmental approvals where the government needs to upgrade their outlook by bringing in more chemical technology domain experts to head the environmental and pollution control departments who can lead this tactical shift in traditional thinking, expand the chemicals production base without harming the environment. This is very much possible and for this industry has to commit to environmental discipline and government has to enact policies that bring in self-reliance in backward integration of our raw materials supply chain. Industrial innovators and competent government officials who understand chemistry need to work together to allow industry to grow in a way that is both competitive and environmentally friendly.
