Companies have chosen India as a sourcing destination for many years due to India’s lower cost structure for manufacturing, labor, materials and equipment. India possesses a large talent pool of chemical engineers and scientists and a large manufacturing capacity focused on regulated markets. China also has a talented pool of scientists and engineers, a low cost base, better infrastructure than India, and also an improving GMP and patent protection environment. Further, China has easy access to a wide variety of intermediates and chemicals. Where China leads, and in some cases has overtaken India, is in classes of fermentation-based active pharmaceutical ingredients (APIs), steroids, intermediates and many base chemicals.
Despite the significant growth of the Indian and Chinese active ingredient sourcing markets, there are clearly challenges in those markets as well, including rising costs. Salaries in China and India are increasing much faster than in more regulated markets. Additionally, high turnover in China and India adds to labor costs. Environmental compliance is a major expense in China. Manufacturing facilities in China are undergoing significant changes from a regulatory and environmental enforcement perspective. While a number of these changes may not be actually shutting plants down, they are, in many cases, having a dramatic impact on production capacities which have a knock-on effect in terms of supply chain interruptions, shortages and price hikes on certain products.
As the price of goods in China increases, this negatively affects profit margins for Indian companies. The Indian government is looking to reduce dependence on China by encouraging backward integration of domestic firms, as well as promoting alliances with Italian API manufacturers and seeking technology transfer agreements from Italian companies. The Indian government is also encouraging Chinese manufacturers to shift production to India, as well as supporting and setting up large complexes for production of certain drug intermediates and raw materials. However, because of the scale of the relationship between the Indian and Chinese industries it will probably take many years for any appreciable changes to take place.
In order to discuss the landscape of API manufacturers, Clarivate Analytics has developed a rating system based on a combination of metrics. We assess the capabilities and experience of API manufacturers according to a proprietary scheme based on objective regulatory data. Companies range from those focused on supplying their local market to companies with years of experience supplying highly regulated markets.
Even though India has many U.S. FDA-inspected facilities, FDA approval does not necessarily mean consistent quality. As we’ve seen over the past few years, several Indian companies have run into quality issues and have been subject to import bans from the FDA. In addition to the increasing cost of labor, energy and environmental compliance, China is also struggling internally with the rising cost of inflation, exchange rate fluctuation and reduction of export subsidies. Many Chinese companies focus on achieving quick targets rather than long-term opportunities and sustainable profits. So far, China has limited experience in the support of patent challenges, which may discourage many aggressive generic companies from sourcing from this market.
It is expected that India’s reliance on China for many active ingredients and advanced intermediates will continue, and as costs rise in China so too will costs rise in India. We also expect to see increasing competition for India on the global market from China for low priced APIs.
As costs rise in India and China, more companies are looking to other, lower cost regions as alternative suppliers. However, when we compare the number of API manufacturing groups in these countries with India and China, there are significantly fewer. Most of the companies within those other regions are focused on supplying their local markets, and have little experience in highly regulated markets.
Of the emerging markets, South Korea and Taiwan offer more experienced suppliers than other regions. It is likely that Indian companies will continue expanding into more emerging markets through partnerships. As environmental regulatory oversight increases, the cost of raw materials will rise. Additionally, salaries will rise as more training is needed to ensure alignment with new regulations. We also expect to see an improvement in the quality and technical packages from many Chinese companies. However, given the large population of China, many companies will stay focused on the local market as well.
For more insights on the global API manufacturing industry, connect with the author of this article Molly Bowman and other generics and API experts at CPhI Worldwide. Schedule an introductory meeting today, or join us for informative, data-driven presentations onsite.