Bulk Drug PLI Scheme Runs Into An Expected Hurdle

Industry response to India's incentives to boost local production of bulk drugs fell short of expectations, prompting the government to extend the deadline up to the end of March. Companies have mostly avoided one segment: fermentation-based pharma ingredients.

Ten slots under the scheme to offer subsidies for making bulk drugs—or pharmaceutical raw materials—are vacant. That led the government to extend the last date to submit applications beyond March 13. The scheme is aimed at cutting import dependence for bulk drugs, nearly 70% of which are supplied by China.

Applications are awaited under three categories. But nine of them fall under fermentation-based key starting materials, drug intermediates and APIs. The process uses living organisms to produce required pharma inputs.

BloombergQuint had reported in January 2021 how the companies and analysts were apprehensive about investments under this category.

“Fermentation products covered under the scheme are not easy to manufacture and the infrastructure set-up required is large," Saloni Wagh, director at Supriya Lifesciences Ltd., told BloombergQuint.

The company does not intend to apply under the scheme. "These projects may require longer-than-expected time to be set up and this could be the reason for reluctance of companies from applying for the scheme,” she said.

Fermentation-based products are "relatively complex" compared to chemically synthesised raw materials and then need higher capital expenditure, Hetal Gandhi, director at Crisil Research, said.

The scheme, introduced in July 2020, offers total incentives worth Rs 6,940 crore. The Ministry of Chemicals and Fertilizers received applications for 49 projects covering 33 of the 41 critical APIs. Companies have so far committed to invest Rs 3,685 crore.

Emailed queries to the ministry did not elicit a response.

In an earlier statement, the ministry said the industry responded well to the scheme with a committed annual production capacity of 83,270 metric tonnes as against a notified 44,000 metric tonnes.

And the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers said the extension was granted on the request of industries and associations.

While most manufacturing-focused API businesses have applied under the scheme, more incentives may be needed for companies to invest in areas of research and innovation, Vishal Manchanda, pharma analyst at Nirmal Bang, said.

He also cited the fear of not being able to sustain the production advantage. "Post the scheme period, businesses may lose their cost-advantage (as no incentives will be available) and there always remains a fear of China undercutting prices in the future."

In fact, Aurobindo Pharma Ltd., one of the applicants, cut investment from Rs 2,200 crore to Rs 1,850 crore by dropping one of their two proposed projects, Nityananda Reddy, managing director, had said in the third-quarter earnings call without citing a reason.

According to Krishnanath Munde, associate director at India Ratings, while the scheme was right at heart to reduce India's dependence on China for critical APIs and key starting materials, the quantum of incentive is insufficient considering the size of the industry and the time period of the scheme up to FY29.

The overall return on capital employed during the scheme period is 10-12%, according to India Ratings' calculations. "It would be dilutive for large companies that enjoy returns of around 20%."

The industry, Munde said, expected direct benefits such as tax incentives, faster environmental clearances, and higher incentives.