The Covid-19 pandemic has proved to be a global health crisis, whose cascading effect has already grappled the global economies. With multiple spread waves and new virus mutants, the hope for economic recovery seems to be imperceptible. The World Bank envisions a baseline forecast of 5.2 percent contraction in global GDP in 2020 which may plunge most countries into recession in 2020, with per capita income contracting in the largest fraction of countries globally since 1870. India alone lost Rs 32,000 crore ($4.5 billion) every day during the lockdown, slowing the economy at an estimated 8% by Fitch Ratings. Although all the sectors are seeing an impede in growth, the pharma industry has turned out to be the blue sky after the storm, with resilient capabilities and future potentials.
Now with the White House considering a temporary waiver of some Trade-Related Aspects of Intellectual Property Rights (TRIPS) rules, India will be able to expand its vaccination exports and research capabilities to African markets without inviting any sanctions from WTO. Southern and western regions of Africa are the largest importers of Indian medicines. These include several generic drugs that cost only a fraction of those produced by Western companies.
The catastrophe has opened up the deep gaps in the interdependencies born out of globalization. The global supply chains have been disrupted and trade deals halted with zero global mobility. The crisis has upheld the urgency of self-sustaining economic war chest and has given a thrust to the Aatmanirbhar Bharat dream. It’s now clear that the world, including India, is so dependent on China for essential supplies of medicines. In fact, 50% of the Active Pharmaceutical Ingredients (APIs) used in India are imported from China. This technically makes China control the prices and supply of these ingredients, which are used in generic drugs. Since generic drugs manufacturing compose 70% of the Indian pharma industry, this high concentration in supply chains has increased the unsystematic risks for the industry. However, this fact has proved to be a silver lining for the Indian pharma sector, which has established itself as a global leader over the last 50 years. During such unprecedented times, the world is looking towards India to provide an alternative for a supply viscous China and steer them through the pandemic.
India holds a fifth of all global manufacturing sites catering to the US market and is the only country with the largest number of Pharma plants that are US-FDA compliant. Moreover, the Indian API industry is ranked third largest in the world contributing 57% of APIs to prequalified list of the WHO. According to a McKinsey report, the driving factors for growing the domestic market in India are the accessibility and the affordability of drugs and quality healthcare facilities. The affordability of drugs will rise due to sustained growth in incomes and an increase in insurance coverage. The government has outlaid greater spending on healthcare and sponsored programs to break the bottleneck in the accessibility of standard facilities in Tier 2 & 3 cities.
Emulating China, India has approved 100% Foreign Direct Investment (FDI) under the automatic route for greenfield pharma and has introduced Production Linked Incentives of up to Rs 6,940 crore in 2020 to create global champions out of India who have the potential to grow in size and scale using cutting edge technology and thereby penetrate the global value chains. Moreover, a weighted deduction of 200 percent is available for scientific research on in-house R&D expenditure. Various state governments have recently come up with their healthcare policies to promote huge Bulk Drug Parks with a total financial implication of Rs 3,000 crore for 2020-2021. Uttar Pradesh, for instance, is emerging as a top industrial destination with investment-friendly reformative policy approach. Through these policies, the state puts the high impetus on creating manufacturing giants to compete for global standards in the international market.
These conducive measures are already proving buoyant for the sector. Substantiating the fact is the multi-growth cycle experienced by the top players in the industry. For instance, Divis Lab, which is a pure-play generic active pharmaceutical ingredients maker reported record sales in Q1FY21 with net profits rising 80.61 percent to Rs 492.06 crore. Large-cap and mid-cap companies like Aurobindo Pharma, Sun Pharma, Aarti drugs, Dr Reddy’s and Lupin, which have a huge API business stand to potentially benefit from this shift. Such anticipated growth has already priced in their share prices, which have skyrocketed as much as 80% in the last year. Companies like Macleods Pharmaceuticals Limited, Hetero Drugs, Dasami Labs Pvt Ltd are already exploring API manufacturing in India on account of efforts to increase the in-house manufacturing of intermediates and additional revenues from the new capex.
The tectonic shift induced by the pandemic, the change in the stance of the government towards the pharma industry along with the confidence of MNCs in the country has generated a plethora of opportunities in multiple sub-sectors, namely, API & generic drug manufacturing, vaccine development and production, clinical trial market and bioinformatics. India currently exports vaccines to about 150 countries and meets around 50-70% of the world’s vaccine demand. An estimated two out of every three immunised persons in the world have received a vaccine manufactured in India. Moreover, the best benefit of conducting clinical trials in India is the potential for cost savings. Clinical trials account for over 40% of the costs of developing a new drug. In India, the cost of conducting a trial here is lower by 50% than in Western Countries. The expertise gained in manufacturing generics through reverse engineering has helped the Indian pharma companies to streamline the process for getting manufacturing up and running. Costs here are only two-fifths of those involved in setting up and running a new manufacturing facility in the West due to significantly lower margins, given the low development and labour costs. To facilitate the storage, management, retrieval and analysis of large pools of data, a new subsector of the IT sector has emerged—bioinformatics. India’s existing knowledge capital in IT provides a natural base for the development of bioinformatics research and operations.
Although the total market size of the Indian pharma industry is expected to reach $130 billion by 2030, the Indian pharma industry is still valued as the 14th largest with its exports contributing to only 3.5 of the total pharmaceutical exports globally (by value). Indian pharma industry did well in formulations and indigenous medicines sector but with the gradual liberalisation and price ceiling policies (DPCO, 2013), the pharma market was flooded with cheap imports from China. The strict price control policies of the government neither allow the manufacturers to invest in R&D of new drug formulations nor does it ensure universal accessibility. Moreover, India spends only $120 per capita per year on infrastructure, which is one-tenth of what the top six countries, including China and Japan, invest on average $1,200.
India needs to work on the healthcare infra, medical training, more accommodative pricing policy, fast project clearances, improve quality standards of medical production and interlinked logistic systems to reach the pinnacle as the epitome of the medical hub. On apriority basis, ease of doing business needs to be improved for reducing the number of days of to a start a business, which is a major hindrance in the inception process. The Drug Price Control Order, 2013 needs to be revised to relax the norms of price ceilings to incentivise the drug companies to have indigenous API productions, instead of cheap imports. The logistics chain needs to be decentralised with local delivery centres and data driven systems for efficient supply-chains.
The pandemic has proved to be an inflection point in the growth of the Indian pharma industry, where for the first time, India is following the East-first policy to embrace self-reliance. However, to make the Aatmanirbhar discourse clear proactive interventions are need to ensure amicable international trade deals through indigenous supply chain and well-integrated logistics. With an anticipated Free Trade Agreement with US, everything boils down to the recourse policies which India will adopt to harmonise its efforts against the economic downturn.
Rajesh Mehta is a leading consultant & columnist working on Market Entry, Innovation & Public Policy. Uddeshya Goel is a financial researcher working closely with Rajesh Mehta on multiple projects. Views expressed are personal.