The Government of India launched two schemes in July this year for the promotion of indigenous manufacturing of active pharmaceutical ingredients (APIs), drug intermediaries (DIs) and key starting materials (KSMs). The production linked incentive (PLI) scheme exclusively focuses on those APIs, which the Drug Security Committee constituted by the Department of Pharmaceuticals (DoP) has identified as heavily import-dependent on China. The API Parks scheme, on the other hand, has the objective of enhancing the competitiveness of Indian API industry by providing easy access to common utilities such as steam, waste management, etc. in three selected API Parks. The industry response to these schemes, however, has been lukewarm especially the PLI scheme. A closer examination shows that the design of these two schemes has some major flaws which may result in much less than the expected outcome in terms of elimination of import-dependence on China.
The history of Indian pharma industry shows that the focus of the private sector has always been on the formulations and not APIs. The Hathi Committee (1975), the recommendations of which laid the foundation of a vibrant generic pharma industry in India, had looked into this issue and found that the capital invested to turnover ratio was much higher in APIs as compared to formulations. It was coercion in the form of marketing approval of formulations tied to the indigenous production of APIs that made the Indian private sector invest in the production of APIs. Withdrawal of this coercion and removal of restrictions on imports through economic reforms in the 1990s again made the private sector to shun indigenous production of APIs.
Another interesting aspect of the dynamics of the Indian pharma industry is that the small and medium enterprises (SME) have an important role, especially in the production of APIs. It is reported that they account for 70-80 per cent of the APIs produced in India in terms of quantity. This may sound defying logic, small fellows producing more capital-intensive segment of the pharma industry. But, as APIs are sold in their chemical name, without branding, large firms have no interest in the production of APIs and their focus is on branded formulations. Their production of APIs, if at all, is largely for captive consumption. The SMEs, which are not in a position to establish brands, focus on APIs.
Interestingly, the focus of the PLI scheme is on large firms which are not interested in the manufacture of APIs. In the antibiotics area, where more than half of the budget for the scheme is allocated, each of the beneficiaries is required to incur a minimum investment of Rs 400 crores. This huge amount of investment is required in each of the four antibiotics APIs/DIs/KSMs. Only large companies can afford investments at this scale.
Secondly, the PLI scheme doesn’t consider the option of utilising those API manufacturing facilities which are lying idle. It requires all likely beneficiaries to make fresh investments in the manufacturing facility, irrespective of whether or not they have the idle capacity to produce the same product. There are many firms which used to produce APIs but closed down operations due to cheaper imports from China. It doesn’t make any business sense for a firm which has unused API manufacturing capacity to invest afresh for creation of new additional capacity. The report of the Drug Security Committee provides a list of more than 30 firms including Biocon, Torrent, Alembic, Hindustan Antibiotics Ltd (HAL) and Indian Drugs and Pharmaceuticals Ltd (IDPL) that have wound up production of fermentation-based APIs.
Thirdly, and most importantly, the PLI scheme doesn’t have a technology component. Without appropriate technology, API manufacturers in India would not be in a position to beat their Chinese counterparts in pricing. There are four key areas where Chinese firms have an edge over Indian firms – the cost of raw materials, cost of electricity, cost of steam and effluent treatment and size of operations. The only advantage that Indian API manufacturers enjoy vis-a-vis their Chinese counterparts is in the cost of labour. As a result, the import of APIs is 35-40 per cent cheaper as compared to the cost of indigenously produced APIs. I...
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