India-China Standoff Threatens To Disrupt World’s Biggest Exporter Of Generic Drugs

India’s trade pushback against China threatens to disrupt the world’s biggest generic-exporting industry during the pandemic.

General views of drugs (Photographer: Dhiraj Singh/Bloomberg)
General views of drugs (Photographer: Dhiraj Singh/Bloomberg)

India's trade pushback against China amid a border standoff threatens to disrupt the world's biggest generics-exporting industry during the pandemic.

Shipments of active pharma ingredients, or raw materials for drugs, and key starting materials that go into making APIs are stuck at ports as customs authorities have delayed clearance. The disruption is so acute that the Pharmaceuticals Export Promotion Council of India wrote to several departments, including Finance Ministry and the Prime Minister’s Office, seeking an intervention. They are yet to get clarity.

“On June 22, we were informed by the clearing and forwarding agents that they have been asked by the customs not to clear Chinese goods across all segments,” Dr. Dinesh Dua, chairman at Pharmexcil, told BloombergQuint. “APIs, KSMs, and intermediates worth Rs 200 crore are stuck at three major ports and airports in Maharashtra and Delhi. The pharma industry will come to a grinding halt as 90% of the companies are dependent on key starting materials, APIs and intermediates.”

India, the world’s biggest maker of generic drugs, sourced $3.5 billion worth of bulk drugs in 2019 from China, according to the Ministry of Commerce. That’s 67% of the total pharmaceutical raw material imports. For certain drugs like antibiotics or penicillin, Motilal Oswal said, 90% of raw materials come from China. Even for APIs made in India, 85% of key starting materials and chemicals are imported from India’s larger neighbour. Disruption will not only impact drugmakers, but also Indian API suppliers which rely on Chinese imports.

Tensions at the border continue after 20 Indian soldiers and an unknown number of Chinese died in a deadly scuffle. India has blocked several Chinese apps and is reportedly planning more tariffs on a host of items in what could cause supply disruptions for makers of mobile phones to pharmaceuticals.

If bulk drug shipments are not cleared in the next few days, Dua warned there will be drug shortages, exports will take a hit and buyers in 206 countries that India supplies drugs to will lose confidence. “We lose out on the domestic market, prices will go up and we will not be able to export. We export $2 billion worth of drugs a month so where are we going to end up. This is a crisis situation.”

Prices of bulk drugs were already rising as the virus outbreak disrupted supply chain. “The average cost of active pharmaceutical ingredients and key starting materials has risen 20-25% when compared to pre-Covid prices,” Sudarshan Jain, secretary general, Indian Pharmaceutical Alliance, told Bloomberg Quint.

An import ban on China would lead to an increase in raw material costs in the short to medium term, till domestic facilities begin operations, Motilal Oswal said in a note. That would impact margins of India players.

But the pandemic is not the only reason. China’s environmental controls sent them higher in the past year.

Impact On API Makers

Disruption in supply will also impact domestic API makers that are sourcing inputs from China. Indian suppliers of APIs have a high dependence on Chinese imports.

  • Laurus Labs buys a significant amount of key starting materials from China, Dr. Satyanarayana Chava, chief executive officer, had said in a conference call after the earnings for quarter ended December.
  • Solara Active Pharma Sciences imports around 30% of its raw materials from China, according to its earnings call for the quarter ended September.
  • Granules India Ltd. imports the intermediate for paracetamol and metformin from China, and it constitutes about 38% of its raw material purchases, Prasad told Bloomberg Quint.
  • Aurobindo Pharma’s dependency on the China market is high, the company said in its 2019 annual report.
  • Cipla Ltd. had acknowledged in its third-quarter earnings that “a lot of” its value chain is linked to China.
  • Divis Labs, though sources raw materials from China, has backward-integration for raw materials. It started expanding capacity much earlier than the Covid-19 disruption, when China’s pollution controls caused supply disruption. That, according to Axis Capital, could lead to 10% growth in the ongoing financial, and even better in the next two years.

BloombergQuint's emailed queries to Dr. Reddy's Laboratories Ltd. Cipla, Laurus Labs, Aurobindo Pharma and Solara Active Pharma Science remained unanswered.

Incentives To Boost Local Output

In March, the Modi administration passed bulk drug and medical devices policy to reduce dependence on China.

The scheme targets building infrastructure in three bulk drug parks with an investment of Rs 3,000 crore in the next five years, according to Jain of Indian Pharmaceutical Alliance. It also allocated Rs 7,000 crore for production-linked incentives to boost domestic manufacturing of key starting material, intermediates and APIs, he said.

Final guidelines are awaited.

According to C Krishna Prasad, chairman and managing director at Granules India, which makes bulk drugs, the incentives may not be enough as the Chinese can cut prices aggressively when they need the business as in the past. He expects bulk drug prices to fall. “The natural forces will correct the market over a period of time but large-scale manufacturing of some key intermediates has to be the long-term solution.”

The government's focus to reduce dependence on imports from China is not just new. Granules India said in its earnings call that it started nearly eight years ago.

Still, the lead time for setting up API or KSM facilities and subsequent regulatory approvals are additional hurdles, according to Motilal Oswal. “We expect plans to reduce dependency on China to be gradual rather than ad hoc.”

Sanjeev Jain, co-founder Akums Drugs and Pharma Ltd., said to encourage API setup in India, the government needs to ensure land acquisition, water treatment plants, and reforms in environmental and labour laws. “If this happens, India will replace China in less than five years in spite of marginally higher pricing.”