The Japanese government's aggressive promotion of generics by providing incentives to the industry and physicians is a godsend to India as it makes Japan look at India to outsource its API manufacturing to capitalize on both quality and cost, besides eyeing collaborations with leading companies. Strong technical expertise, increasing compliance with international standards are other attractive factors of the India API sector which is luring international players.

In terms of global ranking, India is now the third largest API producers of the world just after China and Italy and by end 2011 was  expected to be the second largest producer after China. However, in Drug Master File (DMF) filings India is currently ahead of China.

In addition, India scores over China in 'documentation' and 'Environment, Health and Safety (EHS) compliance. All these have contributed to India having around 161 US-FDA approved world class manufacturing facilities, which is considered the largest outside the US. India is likely to be the fastest growing API supplier during the next five years.

The government of India has inked the first multilateral trade agreement referred to as the India-ASEAN Free Trade Agreement (FTA)  in 2009 at Bangkok and together with  the Look Far East Policy of 1993 are expected to help the country to brighten prospects of growth . This makes it  easier for Indian pharma to look at Japan, according to the Institute of Economics and Social Change.

The Japanese pharma market stands at US$ 96.5 billion. This market is largely innovator-based. “We see an increasing number of Japanese pharma companies seeking partnerships with Indian pharma  manufacturers,” according to industry observers.

Japan is an upcoming market for collaborations given the opening-up of generics market  by the Japanese government and this gives the much-needed boost to API players,  said Anjan K Roy, managing director, RL Fine Chem.

Rapid growth is expected in API, over the long- term, growth and profitability would be driven by newer markets such as Japan and emerging markets including Russia, Brazil, China and Mexico as well as countries including South Africa, Turkey and Indonesia. These will be driven by generic spends, said the Fitch Ratings 2012 Outlook: Global Pharmaceuticals published on December 14 ,2011.

Fitch expects global pharmaceutical companies to look at outsourcing non-core activities such as manufacturing of intermediates and APIs to low-cost destinations including India, as one of the measures undertaken to limit operating margin erosion as well as concentrating on core activities such as new drug development. As a result, Indian CRAMS business, which provides outsourced drug research and manufacturing activities, will remain strong.

The top 25 Indian companies in the country are looking at a strategic entry into Japan through acquisition, collaboration or entry through distributors. Companies present in the region are Daiichi-Ranbaxy, Lupin, Glenmark, Zydus.  These companies including Micro Labs, Bal Pharma and Biocon from Karnataka are keen to leverage the advantage of an early entry into Japan. Rising healthcare costs, ageing population and high cost of drug development in Japan will offer Indian generic majors greater opportunities to tap the Japanese market, said officials from the  Japan External Trade Organization (JETRO).

Bal Pharma, specializing in prescription drugs, generics, over-the-counter drugs, intravenous infusion and bulk actives, is looking to tap emerging business opportunities in Japan in the areas of API, generics and contract manufacture of formulations.

The company entered the Japanese market three years ago with two APIs - Glicalazide, an anti-diabetic and Ebastine, an anti-histamine . Once the company consolidates its presence in Japanese market with these two APIs, it will be looking  at increasing the product range to add Amiloride, a diuretic and Benzydamine, an anti-inflammatory.

Japan is the largest market for  APIs  in the Asia-Pacific region contributing 42.8 per cent of the region's total API market revenues. China is the second largest and the fastest growing API market in Asia-Pacific. China currently holds a share of 20.8 per cent in the region's total API market revenues. India accounts for 10.3 per cent , while South Korea holds an 8.1 per cent share of the market.

The top three markets for APIs are the US, Europe and Asia Pacific in which Asia-Pacific is the fastest growing . The region is the third largest regional market for APIs by revenue in the world after North America and Europe.

In 2010, contribution of generic API from the Asia-Pacific market was at 71.5 per cent , with patented APIs contributing for the rest, where Japan enjoys a larger share than India and China. While this is the current scenario, many experts in this field feel that important players from the regulated markets will soon start making significant inroads in India.

Now API manufacturing is fast moving from established Western markets to more emerging regions, particularly India and China. Fluctuating prices of raw materials in these countries is a cause for concern for many API production companies, as when material costs are high, profit margins are eroded – a factor which could influence growth in the Asia-Pacific API market.

To avoid price erosions now seen in the US, Indian manufacturers have started exporting more APIs to Japan

There has been an increase in influence of API players from emerging economies such as India and China after the economic recession. The recession has restricted the growth of innovative sectors in developed economies such as the US and Europe, as the innovative sector requires huge investments. This has helped fuel the growth of generics market in Asian countries such as India and China.

Italy, which was the leader in API market, is losing its share to India and China as they offer the advantages such as availability of skilled labour, low-cost manufacturing, low environmental cost, huge incentives by the government, and relative laxity in the regulatory approvals of APIs. All these factors have helped these emerging countries to make their global presence felt in the API market.

The Asia-Pacific API market grew consistently at a Compound Annual Growth Rate (CAGR) of 6.7 per cent from 2005 to 2010. The year-on-year growth rate also increased continuously in this period. It is expected to witness an even higher growth rate . According to some reports,the Asia-Pacific API market's revenues will grow at a CAGR of 9.6 per cent from 2010 to 2016.

The generic sector dominates the Asia-Pacific API market. The generic APIs held a share of 71.5 per cent in the region's API revenue in 2010, while innovator APIs held a share of 28.5 per cent. The share of innovator sector APIs is higher in Japan and lower in China and India.

India is the third largest API market in the region accounting for a share of 10.3 per cent. South Korea is another important API market in Asia-Pacific, accounting for a share of 8.1 per cent in the region's total API market revenues.

In 2007 the API output value in India was around US $4.1 billion registering a 5 year CAGR of around 19 per cent and ranking fourth in the world API output. According to some estimates, Indian API export value is expected to increase to US $12.75 billion in 2012.

Currently in India about 400 different types of APIs are manufactured in around 3000 plants.

India is one of the key global hubs in the API space, with competitive edge mainly in 'non-fermentation technology' product areas. This leaves a wide and perceptible technological gap in the areas of products requiring 'fermentation technology'.

India is much ahead of China in pharmaceutical formulations manufacturing, especially in the area of exports to the regulated markets like, the US and EU. Over 25 domestic Indian companies are currently catering to exports demand of the US market. Some of the the global manufacturers have already set up their formulations manufacturing facilities in India and some more are expected to follow suit over a period of time. Hence, fast growing domestic demand for APIs, especially for exports, will drive the business plan of the global API players for India.

Indian API manufacturers although currently have a cost advantage compared to their counterparts in the regulated market, this advantage is not sustainable over a period of time because of various reasons like sharp increase in cost related to more stringent environmental and regulatory compliance, besides spiralling manpower and other overhead costs.

According to a study, the market share held by Indian API manufacturers in the global API merchant market (generic APIs and branded/innovator APIs) which was 6.5 per cent in 2005 and 12 per cent in 2010 is expected to increase to 22 per cent by 2015. India’s share of the global generic API merchant market has increased from 13.5 per cent in 2005 to 22.1 per cent in 2010 and is expected to increase to 33.3 per cent by 2015. Export sales of generic APIs from India increased at an average of 18.9 per cent between 2005–2010 compared with an annual average of 15.9 per cent to the country’s domestic market.

In the meanwhile according to a report, APIs from India, China and elsewhere now constitute 80 per cent of the active ingredients in the US drugs. The overall API market was valued at $101.08 billion in 2010, and is expected to grow at a steady CAGR by 2016.