Bulk Drugs Makers Set For A New Phase Of Growth
The makers of pharma ingredients have announced capacity expansion as demand rose during the pandemic and India pushed to cut reliance on Chinese supply.
Active pharma ingredient makers gained “tremendous momentum” during the pandemic, Neel Fofaria, partner at pharma consultant MP Advisors, told BloombergQuint. “Companies with focus on complex, highly potent APIs (HPAPIs), antibiotics and controlled substances market, demonstrated higher growth rates due to relatively lower competition and greater barriers to entry.”
Solara Active Pharma Science Ltd., Laurus Labs, Neuland Laboratories Ltd., Flagship Biotech International Pvt. are pivoting to highly complex technologies such as HPAPIs, biologics, peptides, oligonucleotides and sterile APIs to create niche for global footprint, he said.
That came as India looked to boost local manufacturing after a deadly border clash with China. According to a report published by PWC India in 2020, India imported 50% of its API requirements, with China contributing 70% of inbound shipments by volume. The government also extended the performance-linked incentive (PLI) scheme to bulk drug manufacturing.
Profit Growth, Capex
As demand rose, the profits of API manufacturers rose between 44% and nearly 400% year-on-year in the financial year-ended March.
And the outlook is optimistic. That has prompted many companies to set aside sizeable capital expenditure for expansion.
- Divi's Labs has allocated Rs 600 crore for the first phase of its approved plant in Kakinada, Andhra Pradesh.
- Laurus Labs expects to spend Rs 1,500-1,700 crore in the next two years—half of which is for its API arm.
- Aarti Drugs has proposed to spend Rs 550 crore in the next 2-3 years for backward integration and capacity expansion.
Most of the capex will be for non-anti-retroviral APIs, Satyanarayana Chava, chief operating officer at Laurus Labs, said in response to BloombergQuint's queries. Along with formulations and aided by growth in custom synthesis, that will drive the company's $1 billion revenue target in FY2023, he said. "Indian companies have realised the importance of scale, regulatory compliance and manufacturing and are gearing up to meet the demand."
While other companies haven’t disclosed specific numbers, they, too, have acknowledged the need for expansion based on opportunities in the near future.
BloombergQuint awaits response to queries emailed to Divi's Labs, Neuland Labs, Aarti Drugs, Solara Active Pharma Sciences and Shilpa Medicare.
The PLI scheme and the strong government support extended to manufacturing of APIs has received a favourable response from the industry, Sujay Shetty, partner, health industries at PwC India. "Good growth in APIs is projected to solve the issue of supply bottlenecks."
The anti-China sentiment has led to certain companies having good infrastructure gain advantage and outperform their milestones mainly on the back of price hikes on account of shortages, Fofaria said. “For the foreseeable future, at least the next two years, these (API manufacturing) companies will do well capitalising on the immediate opportunity afforded by Covid-19.”
Laurus Labs' Chava said the company is evaluating the PLI scheme and will decide in due course.
Competing With China
Yet, there may be a long way to go before Indian drugmakers can match their Chinese peers in scale and capability.
A report by KPMG and the Confederation of Indian Industry released last year said in China “availability of subsidies, tax incentives, sophisticated manufacturing technology and infrastructure support has translated into better economies of scale and hence lower manufacturing cost”. The cost of production, it said, is estimated to be 20-30% lower than in India.
The report also cites other issues that could hinder Indian companies from competing globally with China. These include:
- Lengthy approval timelines—a year in China versus three years in India—to set up a new API unit.
- Lower economies of scale compared to China as most of their plants have 10 times more overall capacity.
- China’s special economic zones which can be 10-15 times larger than their Indian counterparts.
- Higher costs of key starting materials.
PwC's Shetty cited stringent environment approvals in India as one of the major concerns for setting up API facilities.
Nimish Mehta, partner at Research Delta Advisors said India’s dependence on China for raw materials to manufacture API is almost 95%.
That’s because most companies aren’t sufficiently backward integrated, Fofaria said. And while this will continue, companies like Divi’s are targeting that, he said.
Chava said a majority of Laurus' products are backward-integrated up to key starting materials, reducing dependency of intermediate sourcing materially in last three years. Overall reliance on China will vary with product, he said.
Shetty had told BloombergQuint earlier that response to PLI in the non-fermentation category has been good as it is less capital intensive and doesn't involve environmental challenges. This category of bulk drugs are entirely based on micro-organisms. Fermentation-based product APIs require higher capital. "Getting environmental clearances is a challenge and the timelines are can take in excess of six months. These need to be brought to down to at best 60 days."
Still, there are encouraging signs, according to Fofaria. “Indian API companies have managed to become preferred vendors and suppliers to global markets while earning lower margins than their Chinese counterparts despite their dependency on Chinese raw materials.”
According to Chava, generics companies will not shift sourcing due to the anti-China sentiment. But, he said, China-plus-one strategy will be good for contract development and manufacturing companies.