Bulk of the active pharmaceutical ingredients (APIs) required by the pharma industry across the world is produced in China and India. The COVID-19 pandemic has exposed the risks of global supply chains being focused on a single country, which currently is China. COVID-19 has sent alarm bells to national security establishments in many countries, including India, on the risks of relying on a single country for the supplies. So far, the economic efficiency argument prevailed, but now the security dimension is on the forefront, which would result in many countries adopting measures to reduce reliance on China. In such a scenario, India is likely to become the preferred country for sourcing APIs.
Many countries have declared intention to resort to Compulsory Licenses (CL), if required, for ensuring the adequate supply of drugs for treating covid-19. (Compulsory licensing is when a government allows someone else to produce a patented product or process without the consent of the patent owner or plans to use the patent-protected invention itself, according to the World Trade Organization.) Israel issued a CL in March to import generic versions of Kaletra of AbbVie, which is used for treating HIV/AIDS and has been found to be useful in covid-19 cases. The Indian Patent Act, 1970, has a provision that enables export under CL. Exports under CL, if countries resort to it, would be an immediate opportunity for Indian pharmaceutical industry. But India’s gains from the opportunity in the API business would depend on how swiftly its policymakers respond to it.
While India is an exporter of certain APIs, it is quite dependent on China for many others, especially those produced through fermentation, and intermediates (chemical compound which is in the process of becoming an API from a raw material is called an intermediate). When supplies from Wuhan were affected, the price of paracetamol went up 40 per cent in India. In order to eliminate the dependence on China for APIs and intermediates and to promote their domestic production, the Union Cabinet, on March 21, decided to launch a scheme at a cost of Rs 10,000 crore. Under the initiative, Rs 3,000 crore will be used to create common facilities in three API Parks, which are expected to be established by the private sector, while Rs 6,940 crore will be used for the Production Linked Incentive (PLI) scheme over a period of eight years. Though this is a welcome initiative, it may not achieve the objective unless additional measures are incorporated to overcome the constraints India has compared to China.
It is expected that common utilities at API Parks and PLI are sufficient to offset the price disadvantage that Indian API manufacturers have as compared to their Chinese counterparts. But it might not turn out to be so. Price competence that Chinese firms have acquired has two key aspects—their larger scale of operations and superior technologies. The average size of SEZs in India is about 1 per cent of the average size of SEZs in China. They use technologies that rely on cheaper raw materials like cauliflower for fermentation whereas our firms use glucose and lactose which are much costlier. Moreover, it may take about eight years to set up API Parks and begin commercial production. By then, the Chinese are likely to have come up with even better technologies that further push the prices down. This possibility would amount to business insecurity for the potential Indian investors in the proposed API Parks.
As we have a structural disadvantage in terms of the size of SEZs, we need to focus on cost-effective and greener technologies. This technology component has been missing in India’s recent initiatives to boost domestic production of APIs and intermediates. Development of appropriate technologies has to be done in a mission mode and the large network of Council of Scientific and Industrial Research laboratories and public sector universities can be used. The business insecurity will be overcome if API Parks with common utilities are established by the government and then enterprises are invited to establish their production units there. This will considerably reduce the cost for producers and partly offset the disadvantage India has in terms of size of operations as compared to China.
(This was published originally in DownToEarth, 1-15 May, 2020)