The pandemic, while making countries realise the shortage of healthcare facilities, also exposed the fragility and interdependency of the global supply chain for pharmaceutical drugs. As an example, several intermediates essential in the production of APIs depend on a limited number of suppliers clustered in one region of the world. Similarly, industry experienced fragile incidents relating to logistics of transporting raw materials, excipients, APIs, and finished forms across regions. In order to overcome these challenges, there was a dire need of urgent and concrete steps to ensure that India is not only self-reliant, but is also capable of reducing over dependency of the world only on a few countries. The article analyses the challenges that India could face post implementation of PLI schemes and provides certain recommendations.
Announcement of Production Linked Incentive (PLI) scheme
Under the theme of “Atmanirbhar Bharat”, the Government announced the plans to localise manufacturing of 53 critical APIs (active pharmaceutical ingredients) and intermediates by launching the PLI scheme. The PLI schemes for Bulk Drugs and Medical Devices have received a very encouraging response from the industry. Considering the suggestions made by the industry, the schemes were revised and were made more practical, attractive and business oriented. The benefits under the revised schemes were extended to exports whereas initially restricted to only domestic sales. The revised guidelines also made changes in the minimum annual production capacity for 10 products. The real test is always as to how it excites the businesses. Since PLI scheme for Bulk Drugs has received 247 registrations across all four categories of products out of which a maximum of 136 applicants will be selected under the scheme, definitely suggests that it is enthusing the industry.
While the approach of the government in respect of the PLI scheme and related guidelines has been a welcome step, the effective implementation of this scheme will address the need of the country to attain self-reliance and reduce import dependence in critical APIs /KSMs.
However, it is pertinent to note that from commercial perspective, India will need to match the prices offered by Chinese companies. For this, India will need to invest phenomenally high in API manufacturing so that the buyers of Chinese APIs move towards India. In this context, a suggestion was made to include in the PLI guidelines some assurance that in the event of predatory moves by Chinese exporters, the Indian Government will respond appropriately to neutralise the price difference. Unfortunately, there is no mention of such a proactive measure yet. Such measure would surely give some degree of confidence for the continuation of business.
Scheme on Bulk Drug Parks
Alongside PLI scheme for APIs / KSMs, the Scheme on Promotion of Bulk Drug Parks has also been launched, to increase the competitiveness, easy access to standard testing and infrastructure facilities, and value addition in the domestic bulk drug industry. A bulk drug park is required to have a designated contiguous area of land with common infrastructure facilities (Central Effluent Treatment Plants and Captive Power Plants, Steam and Cooling systems, Solvent Recovery and Distillation Plant, Advance Common Testing Centre, etc.) for the exclusive manufacture of APIs / KSMs, and also a common waste management system. The bulk drug parks, in case managed properly, are expected to bring down manufacturing costs of bulk drugs in the country and increase competitiveness in the domestic bulk drug industry.
Setting up a bulk drugs park is more difficult, because it needs larger investment commitment. Though the PLI scheme for drugs has got a whopping response, it is important that India provides the heady mix of free land, effluent treatment and cheap power that attracts the bulk drug majors to India. More importantly, there is a requirement of putting together a policy that ensures stability and viability in the long-run to the large producers setting up sizeable plant capacities.
A few more aspects around the ecosystem of pharmaceuticals which are critical, viz. contract manufacturing and research & development. The proposed parks should be conceptualised in a manner that aim to create an eco-system for “Contract Manufacturing” and companies should be able to outsource their production to these parks. This is expected to play a vital role in reducing the overall cost of production and increasing competitiveness. This would also help bring about a radical change in sourcing strategy, where companies can explore joint procurement of certain input materials, thereby reducing input material cost. Further, the supporting infrastructure like cold chain infrastructure in air and sea ports also needs to be developed / augmented given that such facilities often need to hold three to four months of inventory in a typical global supply chain context. Also, the parks encompassing R&D centres and training centres could enable companies to outsource R&D activities, and share development costs rather than each company investing in specific R&D centres.
These parks require bringing in equipment of global quality and scale, which would also enable larger global companies to consider India as one of their manufacturing bases. Accordingly, the government should consider reducing import duties for machineries especially for API manufacturing.
All in all, though the Government has issued the schemes in line with the objective of Atma Nirbhar Bharat, and industry players are opting for the same, some of the factors that cannot be ignored are, the pricing of API in the hands of Indian manufacturers, market realisable value of formulations / API, demand in various geographies including local demand, logistics costs, etc. Collectively, the economic circumstance need to enable the investors and players developing a positive value proposition for manufacturing and expansion in India. It is a continuous journey and proactive steps on the part of policy makers will help the API manufacturing industry to revive and shine.
(The authors are Partner with Deloitte Haskins & Sells LLP. Views expressed are personal.)