India to remain dependent on imports for its active pharmaceutical ingredients (API) requirements at least in the

medium term. The expectation is based on the countrys inadequate API manufacturing infrastructure and
governments insufficient policy support.

The draft policy 2017 emphasises reducing API imports (60% of the total requirement) through indigenous drug
manufacturing. Around half the imports are from China. However, low profitability, high capex and working
capital requirements, and price competition are the major deterrents.

China has a competitive edge globally in API manufacturing, with exports growing at a CAGR of 4.13% during
2012-2016. Less stringent environment norms have enabled large-scale production in the country, making it a
market leader. However, Chinas revamped environment environmental protection law to control pollution may
disrupt production in many unorganised API manufacturing units. In such case, import-dependent countries
especially India would be majorly affected.

Among the top emerging and developing economies, India is a major importer of bulk drugs from China at 54%,
followed by Indonesia at 24%, Brazil at 12% and South Africa at 8%. Given most of the developed markets
import in the range of 2%-3% from China and the reasons mentioned above, India is unable to scale its
production capacity.

To reduce Indias import dependence, the Katoch Committee in 2015 suggested reforms such as setting up of
mega bulk drugs park in five to six states with financial aid from the centre and state governments, reviving
public sector units and offering tax benefits for R&D spend. However, the recommendations are yet to be
implemented.

Additionally, the draft policy document states imposition of the peak customs duty on imports of all API which
can be manufactured locally. Against the backdrop of challenges to local manufacturing and falling industry
margins, the agency expects a further contraction in EBITDA margins if the recommendation is implemented and
assuming all the currently imported APIs can be indigenously developed. Moreover, with heavy reliance on
imports, the increased customs duty might not discourage imports but rather would increase drug prices.

The initiative to discontinue loan licensing or contract license could have two possible implications: first, the
companies would incur capex and set up their own manufacturing units; secondly, there will be backward
integration. Both of the events are unviable given the companies will not be able to match the cost efficiencies of
contract manufacturer organisations (CMOs). Also, many CMOs manufacture drugs for different companies under
one licence so the integration becomes complicated. Furthermore, most of CMOs fall under the MSME category,
constituting 25% of the total market; thus, the implementation of this initiative could have a major negative
impact on the market.

Another initiative of prescription of drugs by generics, not by brand will leave the patients at the mercy of the
pharmacists as they will be motivated to sell high-margin drugs. Fixed dose combinations and patented drugs
can be sold as branded drugs; hence, this may allow companies to modify generics and sell drugs as fixed dose
combinations in varying combinations. The agency expects laws enabling pharmacists to substitute the
prescribed branded medicines with suitable generics should be introduced to address this issue before the
initiative is implemented.