Drug Industry’s China Habit Will Take Time to Kick - The Wall Street Journal

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India has rolled out nearly $1 billion worth of incentives to encourage pharmaceutical companies to... — India has rolled out nearly $1 billion worth of incentives to encourage pharmaceutical companies to manufacture 53 ingredients and key materials for making drugs locally.
Photo: prakash singh/Agence France-Presse/Getty Images

July 27, 2020 8:06 am ET

The Covid-19 pandemic has prompted many countries to re-evaluate China-dependent supply chains for essential goods such as drugs. India may take particular advantage, but only with plenty of patience.

The country has rolled out nearly $1 billion worth of incentives to encourage pharmaceutical companies to manufacture 53 ingredients and key materials for making drugs locally. India has a strong generic-drug industry—it supplies more than 40% of generics in the U.S., according to Credit Suisse—but relies on China for the products’ ingredients.

China accounts for 68% of India’s imports of active pharmaceutical ingredients (API), according to Goldman Sachs, and close to 100% of inputs for certain drugs. This overdependence became a big problem earlier this year, when many Chinese drug factories were closed due to the pandemic. Prices shot up and India had to temporarily restrict exports of dozens of ingredients and drugs that use them, including some common antibiotics. Prices of these active ingredients have since fallen back, but the recent border tensions between the two countries mean India will likely continue to promote the policy.

India also could benefit from moves by foreign drugmakers to secure a second supply source for key ingredients. There has been talk in the U.S. and Europe of reshoring the pharmaceutical supply chain, but that could impose substantial costs. Having another source in a developing country such as India might be a useful compromise.

Under the Indian government’s plan, incentives for some products could amount to 20% of sales. That would significantly bridge the pricing gap between Indian and Chinese makers. Chinese active ingredients are 20% to 30% cheaper than Indian ones, according to a report by KPMG and the Confederation of Indian Industry. The program is likely to drive some new investment in India. Average annual revenue growth for the country’s manufacturers over the next six years could rise by 4 percentage points to 14%, according to Goldman Sachs estimates.

But providing subsidies is likely just a first step. “There is no magic bullet. The creation of an API industry which can be resilient to face China or any other countries in the future requires consistent effort. It’s a complete ecosystem development,” said Sanjay Singh, a KPMG partner in India.

As the world’s biggest API exporter, China enjoys economies of scale that lower raw material costs, which make up two-thirds of production costs. The country’s better infrastructure, ease of doing business and supportive government policies also have helped to reduce production costs. India hopes to catch up by building three drug parks with the necessary infrastructure. This is the right move, but will need to be complemented by other policies, including cutting red tape.

India’s big generics industry puts it in a good position, but challenging China will still take a lot of time and effort.