What are the reasons behind getting into API manufacturing after spending considerable time in intermediate business?
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Pravin S Herlekar
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Over the years, we have had a proven track record of serving top notch pharma companies, domestic and globally, with our niche intermediates. However, in a bid to cash in on the colossal growth potential of Active Pharmaceutical Ingredients (APIs) in the global markets, OSCL envisaged a forward integration strategy to convert our existing intermediates into APIs.
In April 2012, OSCL acquired Lasa Laboratories, manufacturing veterinary APIs. Located at MIDC Mahad in Raigad District, Lasa Laboratories is a 100 per cent subsidiary of OSCL with state-of-the-art WHO-GMP and FDA approved API manufacturing facility.
The fundamental reason to get into API business was also because the industry is all set to scale higher peaks by 2015, thanks to the global drug off-patent cliff. Moreover, the role of Indian API manufacturers in the global pharma supply chain is gradually evolving with increasing presence in synthesis, manufacture of late stage intermediates and APIs. Traditionally, innovators frequently opted to perform final stages of API synthesis in-house or partner with specialised European suppliers while outsourcing early stage intermediates to Indian manufacturers. However, in recent times, the proven track record of Indian companies in supplying quality products coupled with complex synthesis capabilities has enabled increasing participation in supply of late stage intermediates to innovator companies globally.
Similarly, the API market is in a period of exceptional growth because of the patent expiry factor which is slated to drive the revenues. Small and medium-sized Indian API and bulk drug manufacturers like OSCL have been targeting small and niche segments and have garnered substantial market shares in some advanced as well as emerging markets, effectively competing with larger Chinese and European counterparts on quality as well as scale in the high-margin/ low-volume complex chemical products where completion is less.
Is the patent expiry slated to drive API market growth in India? What should be the road map for SMEs like yours in future to make most out of the opportunities that patent expiry would offer? Could this be considered one of the sure ‘paths to success’ for Indian pharma companies?
The API industry is poised for a bigger league in the global landscape by 2015 due to the global drug off patent cliff. Indian API manufacturers are likely to benefit as market dynamics undergo a major change in the Asian subcontinent. India, Japan and China are expected to receive a windfall of about $55-60 billion in the next two years, which is unprecedented.
As per estimates, Indian companies are expected to grab a substantial share of the pie from the regulated markets, such as the US and EU, which are saddled with mounting pricing pressures from low cost providers in developing markets and backward and forward integration by some generic companies.
Today, the Indian pharma market is pegged approximately at Rs 1.20 lakh crores, in which API market comprises about Rs 50, 000 – Rs 55, 000 crores. Out of 10,000 manufacturers, about 70 per cent are into drug formulation, and the rest 30 per cent are into manufacturing APIs.
Hence, the patent expiry will provide a significant opportunity for API suppliers and generic drugs manufacturers. It will further offer multinational pharma companies the opportunity to outsource bulk drugs from India.
Today, the API landscape in India is quite promising due to the robust research-based processes, low cost operations and availability of skilled manpower. The global economic slowdown further amplified the growth prospects of the API sectors in India, Japan and China, which on the other hand restricted the growth in developed economies such as the US and Europe and helped to fuel the growth in the Asian markets.
API business margins are mainly based on the product and market mix of companies. Today, OSCL has a diversified portfolio of over 200 products, including a range of organic, inorganic and organo inorganic intermediates making it less susceptible to shocks during adverse global market conditions.
Product portfolios with higher share of recently patent-expired drugs enjoy higher margins compared to older commoditised drugs. Higher share of exports to profitable US and European markets imply better margins. In order to keep abreast with the changes, OSCL has targeted niche segments to garner a large market shares in the emerging markets and effectively compete with the Chinese and European counterparts on quality as well as scale.
OSCL has also adopted various novel technologies to reduce the processing time as well as to yield more production. We have also adopted several environment-friendly production processes. Similarly, OSCL has implemented measures to go green, reduce carbon footprint and cut down on electricity consumption and water. We have measures in place to improve our manufacturing processes, bring down waste from our API synthesis, dispose off solvents and to improve, save and protect the environment.
China is still ahead of India as far as API production is concerned. Which are the areas where China provides edge over India to API producers?
The Indian API industry is moving at a sizzling pace and we are fast gearing up to cash in on the bright export market prospects in next two years.
In terms of global ranking, India is now the third largest API producers of the world just after China and Italy, and by end 2015, it is expected to be the second largest producer after China. However, in Drug Master File (DMF) filings India is currently ahead of China.
India is much ahead of China in pharma formulations manufacturing, especially in the area of exports to the regulated markets like, the US and EU. Over 30 Indian companies are currently catering to exports demand of the US market. However, it is interesting to note that some of the leading global manufacturers have already set up their formulations manufacturing facilities in India and some more are expected to follow suit over a period of time. Hence, fast growing domestic demand for APIs, especially for exports, will drive the business plan of the global API players for India.
Currently, there are two broad categories of markets for the API globally — highly regulated and semi regulated markets. Countries like, the US, Europe and Asia Pacific under highly regulated category with high entry barriers for the global API players because of robust Intellectual Property (IP) regime and stringent regulatory requirements to meet the product quality standards. Such an environment prompts a premium price for the APIs. In contrast, the semi regulated markets, which offer low entry barriers with not so stringent IP and regulatory requirements, attract more number of API players engaging in cut throat price competition.
However, a perceptible shift in API manufacturing has emerged from the western markets percolating into the emerging markets such as, India and China. In the Asia Pacific region, Japan and China enjoy the highest market share for API, about 43 per cent and 21 per cent, respectively. Whereas, India accounts for 11.5 per cent, while South Korea holds nine per cent market share. To avoid price erosions witnessed in the US, Indian API manufacturers have started exporting more APIs to Japan.
And so, India has emerged as one of the most-favoured API producing hub globally largely on its credentials as the best quality manufacturer of generic formulations as well as cost competitiveness compared to its foreign counterparts. It’s a fact that Indian companies have excellent chemistry skills due to their well-established generics exports industry, whereas Chinese companies are known for their bulk drug and intermediate sourcing. Secondly, most Chinese firms specialise in the production of low-value, large-volume intermediates and APIs.
On the other hand, Indian companies are known for producing high-value, low volume intermediates and APIs. All this well work in favour of Indian companies also because of their reliability and the ability to meet delivery schedules which is a big concern for global drug makers while sourcing from China today. Stringent regulatory regime in China has caused closure of many units which will surely work in favour of Indian drug companies like OSCL.
What are the pros and cons associated with FDI in the pharma industry? How is it going to impact the API industry in India?
The key focus of the present policy is said to put in place a regulatory framework for the drug pricing to guarantee availability of required essential medicines at reasonable prices, while providing sufficient opportunity for innovation and competition to support the growth of industry through generating employment and economic well-being.
However, bulk drugs or APIs does not fully reflect in the essentiality of the actual drug formulation as per the policy. It is therefore a subject of contention for various API manufactures that the ingredients which go in various formulations is not considered as essential for the healthcare needs of the masses. In fact, barely 47 bulk drugs out of the 74 have been notified in the First Schedule. This will surely have a cascading effect on the formulations manufactured from the concerned bulk drugs, which may affect the availability of many formulations. The basic preamble of pricing of the bulk drug and the formulation will make it more complicated without offering direct benefits to the consumer who is actually affected by the price of the final end formulation (product) made from APIs.
I feel that if the policy is implemented in the existing manner, the access to medicine scenario in the country may adversely impact production, availability and prices. India will then have to be heavily dependent for life-saving medicines from the domestic facilities of MNCs or imports. India is already import-dependent for intermediates and critical drugs. Today, over 72 per cent of India’s API/intermediates are imported from China.
In other words, the FDI policy in the pharma sector may weaken domestic capabilities and result in forcing the country to rely on MNCs for life-saving drugs.
What is your current API production capacity and how are you going to build it in future?
The current API production is 100 MTs which is getting scaled upto 600 MTs. We are incurring a Capex of roughly Rs 25 crores towards this expansion which is expected to be completed by October 2014.
What kind of policy makeover would you expect from the government in order to make India the leading API producer in the world?
The federal government needs to seriously look into levying anti -dumping duty on bulk drugs from China immediately. It’s a chilling fact that our government levies a low registration fee of Rs 2,000 per product for the Chinese pharma companies, whereas China imposes Rs 20,000 per product for Indian pharma companies. I feel it is a bizarre irony for API manufacturers like OSCL.
The government’s inability and lack of commitment to resolve the issue has snowballed into a major deterrent to the growth of the API production in India. In spite of the fact, the API manufacturers across the country has appealed to the government to take a decision on behalf of this, they don’t have the hope that any decision would be taken in the near future. Further delay in taking a decision could decelerate the API industry growth by 5-8 per cent. Apart from this, another issue is the lack of advanced infrastructure for the pharma sector like setting up dedicated API industry zones. In terms of production, plant moderniation and technology adoption and infrastructure, China is far ahead of India. India lags in modern industrial areas, environment control and connectivity. Here the government needs to rectify its botched up policy, else we will be in a sorry state of affairs.