Indian Pharma Monitoring Coronavirus Fallout On Production
Zhejiang Major Supply Base For Intermediates, APIs
Executive Summary
With several Chinese manufacturing facilities shut at least till 10 February, Indian pharma companies are keeping a close watch on the evolving coronavirus situation. API inventory can last for a while, but if intermediates supplies don’t resume soon the fallout could be grim.
The negatives of globalization can at times outweigh the positives, Indian pharmaceutical manufacturers are discovering yet again.
With India's huge dependence on China for active pharmaceutical ingredients (APIs), the evolving situation there arising from coronavirus infections and a limited outbreak of avian flu is being closely watched.
Most Indian pharma companies import intermediates and API materials from China and carry a two- to three-month inventory on average, with an additional buffer built in for the Chinese New Year holidays. However the worry is not just over a supply shortage but also about a potential steep hike in input prices should the crisis not abate in February.
Given the rising incidence of coronavirus cases across the world and China additionally reporting an outbreak of a highly pathogenic strain of H5N1 bird flu at a farm in Hunan province, a quick resolution doesn’t seem likely.
Hubei province, where the epidemic began and 22,112 cases had been reported by 7 February, hosts 32 US Food and Drug Administration (FDA)-registered drug manufacturing facilities, while Zhejiang province hosts 105 such sites, the highest number in China, and it has reported 1,006 infected patients so far.
Other places which have significant concentrations both of coronavirus cases and drug manufacturing facilities, include Guangdong, Jiangsu and Shandong provinces as well Shanghai city. (Also see "Novel Virus Brings Novel Threats To Global Pharmaceutical Manufacturing" - Pink Sheet, 3 Feb, 2020.)
Even if factories re-open as currently scheduled on 10 February, high employee absenteeism and logistical difficulties in getting shipments out when entire cities in China are in lock-down will mean that it won’t be business as usual.
However, this isn’t the first time Indian industry has caught a cold when China sneezed. Supplies were reported to be affected during the 2008 Olympic Games in Beijing as industries were shut down in a bid to control pollution and in 2017 when diplomatic relations between the two countries deteriorated over Chinese construction of a road in Doklam close to the India-China border.
India’s Dependence On Chinese Imports
The proportion of Chinese imports for each key starting material, intermediate and API varies. However, two-thirds by value of India’s imports of APIs in fiscal 2017 came from China, according to data revealed by then Indian health minister Ashwini Kumar Choubey in answer to a parliamentary question. Choubey said the value of API imports from China was almost INR123bn ($1.93bn), accounting for 66.7% of total API imports at INR184bn.
An October 2019 report by consulting firm PricewaterhouseCoopers (PwC) quotes India’s Department of Pharmaceuticals data showing that India imports 80-90% of APIs required to produce at least 12 essential price-regulated drugs listed in the country's National List of Essential Medicines (NLEM).
These include ranitidine, metronidazole, paracetamol, ibuprofen, metformin, amoxicillin, ciprofloxacin, cefixime, acetyl salicylic acid, ofloxacin, and ampicillin. Import data of intermediates such as ciprofloxacin, ofloxacin, metronidazole, salicylic acid and ampicillin, 6-aminopenicillanic acid (6-APA) reveals that China has achieved near-monopoly in such critical intermediates too.
As a result, in December 2019 the National Pharmaceutical Pricing Authority (NPPA), the Indian regulatory body governing prices of medicines on the NLEM used its emergency powers for the first time ever, to raise ceiling prices of 21 essential medicines by 50% as input costs had risen sharply, in some cases by 200% after China’s imposition of tighter control on industrial pollution led some units to shut down temporarily or permanently.
Industry had been seeking price increases in view of factors including a spurt in the cost of APIs (essentially from China), increased cost of production and exchange rates movements it said had made it unviable to sustain production and marketing of the drugs.
Intermediates Concerns
The supply of intermediates is more of an immediate concern in the current situation, say industry observers. Many large Indian formulation manufacturers such
Sun Pharmaceutical Industries Ltd., Torrent Pharmaceuticals Ltd., Dr. Reddy's Laboratories Ltd., Cipla Ltd., Lupin Ltd. and Cadila Healthcare Ltd. produce APIs for captive consumption, selling the balance on the open market. However, a disruption in the supply of intermediates could affect them.
“Typically, companies hold anywhere from two to four months of API and other inventories. In times like this, typically the cover should go up. However, every buyer would want to do that in which case things become difficult. If plants in China don’t open by mid or end-February we may have an issue. We are watching the situation,” said Cipla joint president and global CFO Kedar Upadhye said.
“On an average, formulation manufacturers carry around three months of API stock and traders would also have some stock. The bigger concern is intermediates. If supplies from China are disrupted, smaller API manufacturers will find it difficult to source supplies from elsewhere and over the longer term, it could in fact, cause the weaker ones to shut shop or sell out," said Vivek Joshi, advisor at A-Joshi Strategy Consultants. "There could even be a consolidation in the sector if the situation doesn't change soon.”
India could explore other source markets like Italy, Germany or the US; however, that would translate into a sharp rise in input costs. Alternate raw materials could be used to manufacture certain APIs, but modifying processes and equipment to accommodate the change might not be a viable or immediately-available solution, Joshi said.
Limited Ability To Raise Prices
Industry observers point out that if input prices go up, formulation manufacturers have limited capacity to raise product prices in India or other global markets.
Most Indian companies have a significant exposure to the US where they sell generics and financial results show prices falling steadily over the past few quarters, even though the pace of erosion has slowed down of late. “Given the power that distributors [pharmacy store chains] in the US have, Indian companies’ ability to get higher pricing will be limited in the US,” said Joshi.
Domestically, competition on account of large number of companies as well as government caps on pricing of medicines and limited paying capacity of patients will mean that formulation manufacturers will not be able to increase prices beyond a certain level here too.
Possible Remedies
India’s dependence on Chinese imports has long been a topic of discussion between the industry, and the government and India’s Draft Pharmaceutical Policy, 2017 sought to address this concern. It proposed that formulations produced using locally-produced API and intermediates be given preference in government procurements and such formulations be taken out of price control for five years, with controls being linked to the indigenous content.
It also advocated imposing peak customs duty for APIs which can be indigenously manufactured, along with setting up mega-bulk drug parks where benefits of scale can be availed of by using common facilities for activities such as pollution control and effluent treatment.
Minimum government interface or single-window clearance by various government agencies was also called for. A few of these proposed measures mirror the recommendations made by an Indian expert committee in 2015. (Also see "India’s Draft Plan To End API Reliance On China ‘Needs Work’" - Pink Sheet, 26 Sep, 2017.) (Also see "India’s API Build-Up Plan To Bridle The Dragon" - Scrip, 4 Oct, 2015.)
The PwC report said that over the past year or so, the Indian pharma sector has capitalized on the opportunity to re-establish its capability in producing APIs. Increased initiatives by the government are driving small and medium-sized companies to enter the domestic API market and capture small and niche segments.
However, it’s difficult to match the economies of scale that Chinese companies have achieved. “We can’t compete - they have dedicated, huge plants. Chinese manufacturers get free land, easy loans, free or very cheap utilities like electricity. We can’t do this on our own. The government has to do something,” insisted Daara Patel, secretary general of the Indian Drug Manufacturers Association, an industry body.
While there is merit in temporary or preliminary aid, protection is not a sustainable or profitable strategy over the long term, industry observers point out. Companies will have to develop efficient, cost-competitive processes to be financially viable.