In 2007, when the total Indian pharmaceutical market was estimated to be R35,000 crore, active pharma ingredients (APIs) of bulk drugs accounted for almost 15-20% of that. Currently, APIs account for around 10% of India?s R70,000-crore pharma market. The rest comprises formulations as domestic drug makers are importing more than 50% of their bulk drug requirement, needed for making medicines, from China. Even as China?s share in Indian bulk drugs market has gone up, there are concerns over quality. In the export markets, this often becomes an issue for Indian drug makers.

Companies like Aurobindo Pharma, Ranbaxy, Sun Pharma, Lupin and others have cut down on their bulk drugs business and is concentrating on formulations which is a high-margin business compared to APIs. In 2011, Hyderabad-based Aurobindo announced that it would sell off its loss-making Chinese API unit to China National Pharmaceutical Group Corporation (Sinopharm). The ongoing process of the sell-off is in tandem with Aurobindo?s shift from the business of APIs and other fine chemicals towards formulations and generic pharmaceuticals, which would generate a greater return on investment. ?It is part of our effort to unlock non-core assets as we want to focus on formulations. We were not successful with our operations in China,? Aurobindo Pharma had said.

On the other hand, there are firms who, in a bid to reduce dependence on Chinese bulk drugs, are integrating their operations backward to increase control over bulk drugs and intermediates. Cipla, for instance, is expanding its API manufacturing capacities at Bangalore, Kurkumbh and Patalganga for backward integrating for raw material requirements. These facilities are expected to be ready for commercial production later this year.

?Cost is a major factor for Indian firms importing raw material from China. Domestic drug makers save round 5-10% on API cost if they buy from China which makes a significant difference in their profitability,? said Suven Life Sciences CEO and and executive committee member of the Bulk Drug Manufacturers Association India Venkat Jasti.

Another reason for increased dependence on Chinese imports, according to Jasti, is the closure of many API manufacturers in Andhra Pradesh and Gujarat due to environmental regulations. Analysts said near-extinct penicillin production in the country was another factor boosting Chinese imports. Penicillin and its derivatives are the base products for a broad basket of anti-infective drugs.

With formulations business is growing for domestic pharma firms, the contribution of APIs to total sales has gone down as firms find it cheaper to buy raw material from China and make finished products. Lupin, which had around 40% of its sales coming from APIs in 2004-2005, gets only 10-11% from the segment. Sun Pharma?s API share has also fallen to 7% of its total revenue from 10% 5 years ago.

According to official data, till February 2012 (2011-12), total imports of APIs and intermediates from various countries stood at $3.07 billion, of which imports from China stood at $1.65 billion. During 2010-11, Indian firms imported APIs worth $3 billion of which imports from China stood at $1.88 billion.

China also has more than 3,700 API products with good manufacturing practices (GMP) certificates from the Chinese drug regulator SFDA, as well as the ability to produce more than 2,000 kinds of APIs. Industry experts said China is also better placed with important raw materials such as phosphorous, potassium and sulphur.

However, the increase of imported APIs in India has also raised quality concerns. Indian law requires foreign drug manufacturing facilities that export to India to register with the Drug Controller General of India. More than 45% of bulk drug exporters registered in India are from China. However, the drug regulator does not have the resources to monitor and eliminate entry of inferior quality material.

The drug controller is also opening a foreign drug inspection office in Beijing to inspect manufacturing sites and check whether GMPs are being complied with.

China?s competitive advantage comes from a favourable operating environment, such as cheap interest rates and incentives from the government, which help them to compete in the highly commoditised API business. Apart from this, a two-year tax holiday, followed by three years of 50% tax, coupled with excellent infrastructure, goes a long way in boosting the Chinese pharma industry.

Medicine sans frontiers

* There are concerns over quality of drugs from China. In the export markets, this often becomes an issue for Indian drug makers

* Indian companies like Aurobindo Pharma, Ranbaxy, Sun Pharma, Lupin and others have trimmed their bulk drugs business

* In 2011, Aurobindo announced it would sell off its loss-making Chinese API unit to China National Pharmaceutical Group Corporation

* To reduce Chinese dependence, Cipla is expanding its API manufacturing capacities at Bangalore, Kurkumbh and Patalganga