For the last two decades, the Indian pharmaceutical industry has been growing almost 1.5 times the Indian GDP. The current government has an aggressive plan of amplifying the industry size from $41 billion to almost $120-150 billion in 2030. Globally, India has benchmarked its position in formulation development and manufacturing. However, India’s dependence on China (primarily) and a few other countries for importing active pharma ingredients (APIs) to manufacture drugs is a problem that looms large in the Indian pharma sector’s path to progress.
This problem was magnified due to the outbreak of the COVID-19 pandemic and long lockdowns. The industry faced numerous barriers regarding the import of APIs over the past one-and-a-half years. While there were delays initially, it became almost impossible to import the APIs in the later stages. This has made it imperative to bring an end to this inordinate dependence on China and other countries for APIs and raw materials as soon as possible.
Acknowledging the fact that API manufacturing and research and development (R&D) are the areas that need impetus, the Government of India, launched the Product Linked Incentive (PLI) schemes – PLI 1.0 (in 2020) and PLI 2.0 (in early 2021) – in the hope that it will make the Indian pharma industry more robust and self-reliant for APIs and other key starting materials (KSMs).
The story so far
As of March 2021, the Centre had approved 33 applications, with a committed investment of Rs 5,082.65 crores, under the PLI scheme for APIs. For these approved applications, the disbursal from the government over six years will be up to a maximum of Rs 5,440 crores. A total of 14 companies committed minimum/more than the minimum proposed annual production capacities. The setting up of these new facilities will lead to a fresh investment of over Rs 450 crores, and they will begin production by April 1, 2023. Overall, 215 applications were received across multiple segments within the API category. The government is in the process of taking up the remaining applications.
On paper, they definitely have the potential to give an impetus to API manufacturing and R&D but how have they fared on implementation? A few stakeholders share their views:
Dr Viranchi Shah, Senior Vice President, Indian Drugs Manufacturers Association (IDMA) informs, “Owing to past policies, the business of many APIs and intermediates had migrated out of India in the late 1990s and 2000s. The industry could have done better in handling that exodus.”
However, he is optimistic about the outcome of these schemes and is happy with their progress. He says, “PLI is a progressive, transparent, objective and well-structured scheme that aims to catalyse the growth and self-reliance of the Indian pharmaceutical industry, more specifically in API and R&D verticals. So far, under PLI1, which is specifically for imported APIs, the approvals have been granted for 36 out of 41 KSMs/APIs, with a minimum committed investment of over Rs 5,300 crores. Identification of investors for other KSMs/APIs is underway, and soon we hope that this will also be finalised. In a medium term of two-to-three years, we will see the benefits of these investments forthcoming for the industry, reducing our dependence and making Indian pharma truly Aatmanirbhar.”
He also informs, “PLI2 has been floated, and applications from the industry were sought before July 31. Seeing the current trends, a large number of industry players are likely to participate in PLI2.”
Dr Shah admits that there are few gaps and informs that IDMA has expressed its views whenever the gaps have been spotted. However, he also points out, “The authorities have responded positively and taken cognizance of its suggestions/objections. In most cases, the concerns have been addressed and the gaps have been closed.”
Citing an example, he informs, “We had raised the issue of a minimum investment of Rs 50 crores for the Micro, Small and Medium Enterprise (MSME) sector being unrealistic, and the same has been addressed. We believe that the overall purpose of the scheme is to strengthen the sector, and the government shall definitely pay heed to our inputs at each stage.”
On the contrary, Harshil Dalal, Global CFO, Dishman Carbogen Amcis, is not very happy about the fact that the schemes are not being ex tended to the companies in the Contract Research and Manufacturing Services (CRAMS) space.
He says, “The criteria for selection of companies for availing the benefit under the PLI scheme does not extend to companies in the CRAMS space where the entire business model is to develop and manufacture APIs, and the ANDA or NDA holder is our customer, and not us. Even the Drug Master File (DMF) would be in the name of the customer and not us, though we would be named as an approved manufacturing site for the production of that particular molecule. Moreover, the development work that we do is for our customers and relatively less for ourselves in India. Thus, the criteria of awarding marks to R&D for a company like us does not help. These gaps can be fixed by modifying the criteria to rate the companies who are eligible for the PLI scheme.”
Anil Khanna, partner, Wisdomsmith Advisors, also says that the industry’s views have been taken into consideration and some amendments have also been made to the schemes. He mentions that when the first version of the scheme was launched, one key suggestion from the industry was to include R&D expenses and product registration-related costs. The government took this request of the industry on board and added these expenses in version 2.0.
However, he also advises that the two schemes need to be seen in the context of China and points out that the Chinese API industry has certain inherent advantages because of economies of scale and support from the Chinese government in the form of financial incentives, infrastructure and regulatory policies.
“China has got cheaper borrowing costs at six to seven per cent, while in India, it is from nine to 12 per cent. Further, the total cost of logistics in India is around three per cent in comparison to China, which is at one per cent. In addition to it, since the Special Economic Zones (SEZs) in China are atleast 12-15 times the size of the Indian SEZs, the CAPEX requirement for companies in China is lower. Cheaper electricity is another advantage for this country,” he highlights.
“The Indian API industry suffers on account of various factors like getting pollution control clearance that is stricter and time taking, leading to delay and higher costs of manufacturing; absence of large-scale parks for manufacturing of bulk drugs, though the government has now come out with a scheme to support set up of bulk drugs mega parks. Besides, the fermentation industry has collapsed in India, and there is a lack of financial incentives like lower tax, cheaper utilities and land subsidy to lower CAPEX requirement,” he laments.
Thus, the industry’s reaction to these schemes is mixed. They laud the intent but many feel that there is a need to improve the schemes to leverage their true potential.
Expectations and possibilities
“The industry believes that a strong formulation industry needs the support of a strong API industry. We have made good progress in the last two-to-three years in reviving the API industry. These changes are driven by a combination of political will, regulatory support and entrepreneurial will. Fortunately, this time, everyone is aligned. Some results are already showing. For example, a large number of new units are coming up in this sector, the existing API players are also seeing growth in volumes. This has been mostly due to non-fiscal initiatives such as simplification of the EC process and awareness about Indian APIs. However, the major changes will show in the next two years once the investments committed under PLI1 and PLI2 will be executed on the ground,” Dr Shah emphasises.
Khanna feels that at the best, the schemes will lead to only a 25-30 per cent reduction in the import dependence on China. This was also echoed by the rating agency ICRA in its commentary, though ICRA predicts that it will lead to better value addition in exports. With India importing more than Rs 25,000 crores worth of APIs, KSMs and DIs in FY20, and the majority from China, even a 30 per cent reduction would be a decent amount.
“Another point which got highlighted was that the PLI scheme is only for the greenfield projects. Existing (brownfield) facilities with idle capacity will not be eligible for incentives under the scheme. Thus, the benefits will not be seen immediately. Only when the greenfield plants become operational, then the benefits will start kicking in, which will take at least a couple of years. Some stakeholders also feel that the Chinese may suddenly reduce the price if they find enhanced capacity being created in India.
In that case, investors/companies may be forced to relook at the business case. With minimum investment criteria, a company may face challenges to avail benefits. They want assurance from the government to take necessary measures to neutralise the issue of the price difference,” he adds.
In Dalal’s view too, it looks difficult for India to be independent for APIs by the next Independence Day. “Additional incentives for CRAMS companies should be provided,” he demands.
Roadblocks to clear
According to experts, timely, fast and single-window clearances became an issue after the PLI schemes were launched. For instance, currently, environment clearance may take up to six months, which the industry feels should be reduced to around two months, so that the projects can kick-off quickly, and without much hassle.
Khanna points out, “The industry feels brownfield facilities should also get the support. Otherwise, the benefits of the scheme will take time to kick in. In fact, it has been seen in the recent past, that many operating API facilities are looking to raise capital to expand their business fast, in line with the current opportunity. Since they will not get any benefit under the government scheme, they are looking to raise private capital at the earliest. Further, since the fermentation industry has virtually collapsed in India, stakeholders believe this should get focus, and may be, get higher subsidy linked to the production value. This is considered to be an important requirement. Finally, the cost of utilities like electricity and water should be subsidised significantly for the next few years, as this is a significant cost element. This suggestion is in line with such incentives which the Chinese government provides
to its API companies.”
“I believe it’s a marathon and not a 100-metre race. Industry, regulators, government, media and all stakeholders will have to play a role in helping India to regain the lost API sector and to make it stronger. We can take the Indian pharmaceutical industry, currently from number three to number one, globally, by developing the entire value chain clinical research and development, API manufacturing, and formulation manufacturing; and this is possible in the coming 10 years. The recent COVID-19 pandemic has made us all realise that healthcare and pharmaceuticals are of the utmost importance to the national security, and it is in our interest to ensure that the Indian pharma industry is nurtured and grown,” remarks Dr Shah.
The PLI schemes are a significant part of a larger action plan aimed at making the Indian pharma industry more competitive and competent. So, it is important to take note of the industry’s suggestions and keep evaluating and amending the schemes to make them key tools in India’s pursuit of true Aatmanirbharta.
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