By Tanmay Thomas
Recently, India lifted the export ban on 24 pharma ingredients and drugs in a move to alleviate shortages in the countries severely affected by Covid-19. It had imposed an export ban on 26 pharma products and medical devices in March. Despite being a $50 bn industry in 2020, the corona-crisis has highlighted fragilities. A key reason for the ban was the anticipated supply disruption in API, or bulk drugs. With the non-availability of the critical input and the lack of domestic capability to fill in the demand, the expectation was a fall in production of drug formulations. This underlines the need to examine the issue, and propose a post Covid-19 action plan.
Maintaining the high growth trajectory of the pharma industry is a challenge due to the discontinuity in growth drivers. The consumer market is no longer captive, with rising healthcare spending and patient awareness, expanding insurance coverage, and the emergence of new hospital formats. Industry structure, too, has changed with enhanced medical infrastructure, accelerated innovation, and new entrants.
With these developments in the domestic market, India not only catered for the expanding domestic market but also for the global market. India is the largest supplier of cost-effective generic drugs to developed countries. However, for sustaining this demand, the foreseeable challenges are as follows. First, with a number of drugs going off-patent, the demand for cost-effective generic manufacturing will rise exponentially. As such, global pharmaceutical players/innovators will be looking for outsourcing the manufacturing to manage costs for which India would emerge as a major hub. The expected rise in this segment is above 50%. And, second, the growth of exports of formulations is likely to be high at 14-16%, given the loss of patent protection and exposure to generic competition. As such, to meet the projected market growth, the scaling up of the domestic industry is necessary. The potential for scaling up will largely fall in the domain of patented products, consumer healthcare, biologics, vaccines, and public health. It is in this context that R&D would be vital for pharma industry. The R&D cost per molecule has increased significantly due to technological complexity in drug development and greater specificity in diseases targets. Encouraging private investment in R&D necessitates appropriate incentives.
Thus, India’s dependence on API imports from China needs a critical review. It is important to underline that in 1991, India imported only 0.3% of its active ingredients from China. However, currently, India imports 70% of its API from China. This shift is a result of many factors. The emergence of China as a major supplier of APIs in the world market is on account of scale economies and aggressive government support programmes for capex, subsidised interest, free land, electricity and water resulted in lowering the cost of API by over 40%. Coincidentally, in India, with the relaxing of the licensing policies and implementation of the product patent law in 2005, pharma companies preferred to import API rather than to produce domestically. The reason being long manufacturing cycles, and strict quality standards that resulted in low margins. The need for reducing our dependence on imports of API from China came in three years ago when, due to pollution regulations on the chemical industries in China, many API units were closed down, resulting in a price increase of over 20%. This naturally led to the rise in prices of the formulations as well. Even after recognising this impending threat, not much was done. The Katoch committee, in 2015, had proposed several measures like setting up parks for API, providing capex, and subsidised loans to boost domestic production of APIs. Unfortunately, these policies are yet to be implemented. Subsequently, another committee was constituted in 2018, but nothing much has come out of this either.
Amidst the coronavirus crisis, countries have looked to India for the supply of hydroxychloroquine. India accounts for over 60% of world supplies of this medicine, and has established manufacturing facilities. To capitalise on these growth opportunities, the pharma industry would require a resilient and technically dynamic manufacturing set-up that aligns with global standards. The agenda is as follows.
First, with the potential expansion of market both in size and diversity, scaling up opportunities needs a structured approach. For example, an action plan for integration/complementarity between drugs manufacturing and biologics needs to be effectively detailed, particularly considering the vast expanse of technical skills available in these sectors. Together with many patents expiring, investment opportunities abound for pharma companies. The role of the government is to facilitate these investments through appropriate fiscal instruments, investment strategies (FDI, M&A), and promoting a predictable investment climate with fewer uncertainties in pricing policies.
Second, the R&D spend by companies will have to increase not only for product extensions but also for new product development. Considering the huge initial investment required and high gestation time for recovery, incentivising R&D spend along with developing skill-based/knowledge-based ancillary units will facilitate capturing the gains from the growing CRAMS market. The proposal for setting up SEZs, parks, and for developing clusters should be seriously considered. In this context, the collaboration between companies for co-investing, market creation needs to be encouraged. In all this, the overall objective should be to develop a favourable ecosystem for promoting the Indian pharmaceutical industry.
And, third, with the expected growth in demand, particularly in the emerging markets (especially India), the marketing strategies and branding (brand extensions) will undergo significant changes. Although the retail segment is likely to dominate, the hospital channel will gain importance, leading to various hospital formats with varying value propositions in the area of treatment protocols and profitability. As such, the model of engagement with hospitals will change and it is the responsibility of the regulatory framework to ensure a competitive yet technically dynamic industry.
Author is associated with the Economics department at Purdue University. Views are personal