Pharma's bitter pill: Falling API prices signal Chinese predatory play

Prices of active pharmaceutical ingredients (APIs) have been declining over the past several months, boosting the margins of drug manufacturers. However, many industry insiders attribute this to a predatory pricing strategy by Chinese companies, and they believe that stability in prices is still a long way off.

The prices of key APIs, such as paracetamol, penicillin (antibiotic), sitagliptin (antidiabetic), metformin (antidiabetic), and telmisartan (antihypertensive), have dropped sharply in recent months.

For instance, the price of paracetamol API now stands at $4.6 per kilogram (kg), down 53 per cent from its peak and 31 per cent year-on-year (Y-o-Y). Similarly, the price of amlodipine (antihypertensive) has decreased 60 per cent from its peak to $64 per kg, a 26 per cent Y-o-Y decline and a 36 per cent month-on-month drop, according to an analysis by Axis Capital.

Sudarshan Jain, secretary-general of the Indian Pharmaceutical Alliance, which represents large pharmaceutical (pharma) companies in India, said that turbulence in API prices is likely to continue for some time due to the country’s dependence on imports. He added that while prices have been falling, they tend to rise again after a few months, depending on the specific API.

An industry expert pointed out that Chinese companies typically resort to predatory pricing whenever API production increases in India.

“It will be some time before we see price stabilisation. The production-linked incentive (PLI) scheme and increased production have helped, but we are still some distance from reducing our dependence on Chinese companies,” said a veteran industry insider and former managing director of a multinational firm.

 

A senior official from the Indian Drug Manufacturers Association echoed this sentiment, attributing the price fall largely to China’s predatory pricing.

“This is a deliberate attempt by Chinese companies to undermine our PLI scheme, which aims to boost local production. This pricing pressure is likely to persist for some time,” he said. 

Industry insiders have identified several factors behind the drop in API prices: Chinese companies lowering their prices for both APIs and intermediates, an increase in self-sufficiency in the production of key APIs like paracetamol, and existing stockpiles within some companies.

India is nearing self-sufficiency in the production of penicillin APIs and key starting materials after nearly three decades.

“In the 1990s, India had several penicillin API manufacturers, but Chinese companies slashed prices by more than half. As a result, formulation manufacturers switched to Chinese imports, and local production units shut down. Since the prices of drug formulations are capped, formulation makers had to control input costs,” said a senior executive from a Gujarat-based firm.

Penicillin products are expensive, and it took years to restart production — this only became viable again due to the PLI scheme promoting bulk drug manufacturing.

Analysts from Axis Capital expect the strong start to 2024-25 (FY25) to continue, given “sustained lower input costs (API prices), a benign US price environment as active drug shortage remains high (excluding 21,) even as new drug shortage in calendar year 2024 has come down Y-o-Y”.

In the near term, the fall in API prices has provided relief to drug companies. Axis Capital analysts noted that gross margins for their pharma coverage expanded for the sixth consecutive quarter, rising by 270 basis points (bps) Y-o-Y (up 70 bps quarter-on-quarter) to 70.2 per cent, driven by improved business, product mix, specialty drugs, lower price erosion in the US, and reduced input costs.

As for the Indian market, volumes have recovered over the past three months, with the FY25 growth outlook for the Indian Pharma Market projected at 8-10 per cent.

Regarding bulk drugs under the PLI scheme, the target for 2023-24 (FY24) investments was Rs 809 crore. However, actual investment reached Rs 1,195 crore by December 2023, according to government data. Cumulatively, Rs 3,586 crore has been invested under the PLI scheme for bulk drugs, which has a total outlay of Rs 8,500 crore.

Production or sales of bulk drugs under the PLI scheme in FY24 (up to December) amounted to Rs 309 crore, with cumulative sales of around Rs 844 crore for bulk drugs produced under the scheme. The government is targeting Rs 46,400 crore in sales of bulk drugs under the PLI scheme.

It has been reported that the government has also taken note of the issue of dumping in relation to certain drugs being manufactured under the PLI scheme.