Indian pharma's Chinese crisis: Firms fear profit hit on cost hikes

Domestic pharmaceutical companies' over-dependence on China for active pharmaceutical ingredients is costing them, dear. 
In the last two months, prices of active pharmaceutical ingredients imported from China has gone up by 30-50 per cent resulting in increased expenses and hit on margins for companies.  A 30 per cent increase in API cost could impact margin on domestic sales by 1.5 to 3 per cent, said Amey Chalke, an analyst with HDFC Securities.
 
APIs refer to raw materials and intermediaries which are used in drugs. Over the last decade local drug makers have curtailed production of these raw materials and in some cases stopped producing them altogether because of high costs.
 
According to a KPMG-CII report released today imports of APIs grew at CAGR of 11 per cent from $ 800 million in 2004 to $ 2.8 billion in 2016. China alone contributed to 60 per cent of imports by volume and 70 per cent by value in 2016.
 
“The drug regulator in China has increased the oversight of local manufacturers and their cost of production has increased to meet good manufacturing practice compliance. The cost of APIs from China has increased by 30-50 per cent,” said D G Shah, secretary general of Indian Pharmaceutical Alliance.
 
Chinese companies are also believed to have suspended production or shut down units to make rectifications in their plants resulting in supply disruptions. A few companies have indicated an inability to supply APIs to Indian manufacturers from next year.
 
“We are gathering data from our members and will share it with the National Pharmaceutical Pricing Authority (NPPA). The NPPA needs to consider a price revision,” said Indian Drug Manufacturers Association former national president S V Veeramani.  Prices of over 350 essential drugs are fixed by the NPPA. There is a 10 per cent price cap on drugs outside the list and companies are allowed a hike upto 10 per cent each year.
 
“Such a high dependency (on a single source) means that any disruption in the supply of APIs can potentially result in significant shortages of essential drugs in India,” said Ravind Mithe, partner, strategy & operations, KPMG. The high dependence has also been dubbed as a health security risk and
 
The KPMG-CII paper suggests that the government help local manufacturers by creating API clusters, providing low-cost utilities and financial incentives among others.
 
The high dependence on Chinese imports has also been dubbed as a health security risk and two months ago Drug Controller General of India had decided to draw up an action plan to mitigate risks in case of disruptions.

This was in the backdrop of tensions with China on the border issue. The IDMA had also proposed suggestions including higher registration fees on imports and increased inspections of APIs from China. Other suggestions included a revival of state-owned units such as Hindustan Antibiotics and encouraging imports from other countries.