Ind-Ra Rated Pharma Formulators Unaffected by Ban on Few Chinese API Manufactures

The Drug Controller General of India (DCGI) ban on a few Chinese active pharmaceutical ingredients (API) manufacturers is unlikely to impact the credit profile of the Indian pharmaceutical formulators rated by India Ratings and Research (Ind-Ra). The ban was imposed on account of significant deviations in regulatory compliance set by Central Drugs Standard Control Organisation.

These API manufacturers do not supply to the large (revenue above INR10 billion at end-FY17) and mid-sized formulators (INR2.5 billion-10 billion) rated by the agency, as these API manufacturers are not approved suppliers. This is based on our channel checks and discussions with management of rated formulators. Also, in terms of the products sourced from indigenous contract manufacturers, there has not been any instance of API sourced from the banned manufacturers.

 

Some of Ind-Ra rated large pharmaceutical formulators have reduced Chinese API imports to 10%-15% of total API consumed in FY17 from 20%-25% in FY12, due to quality deviations. However, India's dependence on API imports from China has not moderated much (Figures 1 and 2). Many small and mid-sized manufacturers where backward integration may not make economic sense continue to be heavily dependent on imports (40%-45% of total API consumed). Economies of scale along with less stringent environmental norms have enabled Chinese APIs to remain price competitive compared to indigenously sourced APIs. Even formulators with a high level of backward integration (above 70%) are likely to have a high dependency on China for imports of key starting materials.

To de-risk their commercial portfolios, formulators typically source APIs, intermediates and starting materials from two or more credible suppliers with clean regulatory track record. APIs used in the manufacture of formulations sold to regulated markets such as the US, Europe and UK are pre-approved by the United States Food and Drug Association, European Directorate for the quality of medicines and UK Medicines and Healthcare Products Regulatory Agency, respectively. Moreover, each formulation sold to these geographies has an approved primary and secondary API source. APIs from Chinese manufacturers are generally preferred for commoditised formulations while high value critical formulations are manufactured using an indigenous API source.

Thus, the agency believes that events like these necessitate the need to fast track policies to promote indigenous, cost-effective API production infrastructure and reduce import dependence.

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