API cost increase to hit pharma firms' profit

Domestic pharmaceutical companies' are worried, as their dependence on China for Active Pharmaceutical Ingredients (API) is costing them dearly. 
 
In the past two months, the prices of API imported from China have gone up by 30-50 per cent. This has hit their margins. A 30 per cent increase in API cost could impact the margin on domestic sales by 1.5 to 3 per cent, said Amey Chalke, analyst with HDFC Securities.
 
API refers to raw materials and intermediaries used in drugs. Over the past decade, local drugmakers 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 on Wednesday, imports of APIs grew at compound annual growth rate (CAGR) of 11 per cent from $800 million in 2004 to $2.8 billion in 2016. China contributed to 60 per cent of import by volume and 70 per cent by value in 2016.
 
“The drug regulator in China has increased the oversight on 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 disruption. A few companies have indicated inability to supply APIs to Indian manufacturers from next year.
 
“We are gathering data from 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 350 essential drugs are fixed by  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 single source) means any disruption in the supply of APIs could 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.”
 
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 revival of state-owned units such as Hindustan Antibiotics and encouraging imports from other countries.