Indian pharmaceutical industry has now come to gain the attention of the world for its competitiveness in low-cost production and R&D, ability in penetrating even to the highly regulated markets like the US and capability in successfully challenging the patents of pharma majors. Despite its competitiveness, the pharma sector seems to be gradually losing its production base in intermediates and bulk drugs and is under the pressure of mounting competition from other countries in external markets for formulations especially in Asia and Africa.

Since the economic reforms in 1991, the pharmaceutical sector has undergone substantial structural changes. In the production side, the industry has gradually shifted from indigenous production of intermediates and bulk drugs to their imports. Thanks to the de-linking of production of formulations to the indigenous production of intermediates and bulk drugs. The worse side of the import dependence is that it is concentrated on one country - China, putting the industry at the risk of any disruption in the supply from one country affecting the production base of the whole industry. The report of the Task Force on 'Strategy for Enhancing Exports of Pharmaceutical Products' has pointed out that Indian pharma sector has been sourcing its requirements of chemical intermediates and bulk drugs in large quantities from China over some time; at times almost 60 to 70 per cent of our requirement of intermediates. The report also points out that the fermentation sector, one of the segments of biotechnology that has been instrumental in shaping the Indian antibiotics segment in early decades of growth of Indian pharmaceutical industry has shifted to China due to the massive State support in infrastructure and energy inputs.


Increase in imports
The immediate fall out of the 'withdrawal' of domestic intermediates and bulk drugs sector has been massive increase in imports from China - from $1.6 million in 1990-91 to $788 million in 2007-08. India's dependence on China is such that it does not have the adequate manufacturing capacity to meet the demand for intermediates and bulk drugs, if supplies from China are stopped for unforeseen reasons. The recent crack down of chemical industry in China in order to enforce environmental legislation resulted in shortage of supply and subsequent hike in prices affecting not only the bottom lines of Indian companies but the very existence of a number of firms. Due to shortage of raw materials and their rising prices, close to 50 bulk drug manufacturing units have been closed down while others have cut down manufacturing of loss making drug categories. Recently, when Government of India mooted imposing safeguard duty on Chinese antibiotic bulk drugs, Indian industry resisted the move saying that there is only one manufacturer in India producing the penicillin and erythromycin bulk drugs and it does not have the capacity to meet the demand of the Indian market.

The other major structural transformation has been the change in the composition of export basket. The focus of exports has shifted from intermediates and bulk drugs to more value added segment of formulations. Formulations now account for 65 per cent of exports whereas its share in 1990-91 was 35 per cent. The larger Indian generic firms have entered into highly regulated and at the same time highly profitable markets of Western Europe and Northern America while keeping their 'high volume low value' markets safe, the smaller firms have increasingly entered into the less regulated and 'high volume low value' markets of Asia and Africa. As a result, the share of export earnings of larger firms have grown from about one-fifth in early nineties to about two-third by 2007-08 and that of the industry as a whole has increased from less than 10 per cent in 1990-91 to 35 per cent in 2007-08. In the scheme of changes, what needs to be noticed is the emergence of Asia and Africa as major destinations for exports. These two regions now account for more than 42 per cent of exports as compared to 22 per cent in 1990-91.

In Asia and Africa, Indian exporters of formulations are facing severe competition from China. China is following a strategy of focus on the 'high volume low value' non-regulated markets of Asia and Africa to which Indian firms especially the small and medium ones also focus their attention. China exports more than 80 per cent of its formulation exports to these two regions. Share of exports to these two regions has increased from 75 per cent in 1994-95 to 82 per cent in 2007-08. In exports to these two regions, China is far ahead of India in terms of rate of growth in the recent past, whereas India has the lead in America and Europe. This is shown clearly in the above table.

The threat perception from China is real and very recently the CEO of Ranbaxy, the second largest Indian generic firm, is reported to have said that unless we get our acts together, China will snatch our market from us. The Indian pharmaceutical industry needs to adopt measures, on the one hand, to enhance its cost competitiveness and on the other, to build up domestic capabilities for the production of intermediates and bulk drugs. A policy environment wherein the small scale sector actors would position them appropriately, as it did till a few years back, to address the back-end needs of the pharmaceutical industry becomes very crucial strategy of the time.

(Author is with Research and Information System (RIS) for developing countries, New Delhi).