A Tonic For Indo-China Relations

China's expertise and massive market for medicine coupled with India's cost-effective quality formulations could be a match made in heaven.

India takes great pride in its reputation as 'pharmacy to the world.' Today, India exports drugs to almost every major market in the world except China. India has established itself as a key source of cheap generic drugs and contributes almost 20 percent of the world's non-branded formulations, maintaining a big lead over China. Exports account for nearly 60 percent of India's total pharmaceutical revenues, and India's total pharmaceutical market (domestic and exports) is estimated to be over US$30 billion.

However, India is far from self-sufficient and imports nearly 92 percent of all raw materials (also known as active pharmaceutical ingredients, i.e. APIs or intermediaries, which Indian manufacturers process, mix, and make into formulations that are sold as finished medication), of which China supplies as much as 80 percent. Manufacturing companies have tried and failed to match the price of Chinese raw materials, and several API units in India have gone out of business in the past few years. One could argue that China is as dependent on India to unload these raw materials, but the reality is that it is easier to find other markets than to create a manufacturing base.

Dreams Of Self-Sufficiency
In an extremely ambitious move under its Pharma Vision 2020, India aimed to become a global leader in end-to-end production of pharmaceuticals. The year 2015 was designated the 'Year of Active Pharmaceutical Ingredients' by the government under its 'Make in India' program. While this was supported by policy such as exemption of customs duties on certain bulk drugs, these are still baby steps towards achieving that aim. In 1991, China contributed 0.4 percent of India's bulk drug imports, and in 2018, this figure had grown to 80 percent by volume. This is a clear evidence of the surging growth in the Chinese API manufacturing as well as India's failure to keep up. India has, however, made up in terms of finished formulations, and India's total pharma exports in 2018 were valued at around US$17 billion, compared to China's US$10 billion plus.

High dependence on imported intermediates has remained on the government's radar for a while, and in 2013, a committee was formed under then Health Secretary VM Katoch to recommend ways to reduce India's dependence on imported APIs. The Katoch Committee submitted a report in 2015, but its recommendations are still under consideration.

Bonding Over Drugs
On the positive side, imports from China almost singlehandedly sustain the Indian pharma industry. If not for the cheap raw material, it would have been unlikely for India to become a leader in generics. Chinese players have also pressured Indian China's expertise and massive market for medicine coupled with India's cost-effective quality formulations could be a match made in heaven. API manufacturers to keep their prices competitive. India's trade relationship with countries like the United States depends heavily on the pharmaceutical sector. In 2018, for instance, India exported around US$6 billion worth of pharmaceutical products to the United States, which constituted over 11 percent of India's total exports of goods to the U.S. Since India is not yet equipped to manufacture raw material at this volume, Chinese APIs have been supporting the sales. India's cost of production of drugs is almost half that of Europe, and this is only possible because China's cost of API is almost a fourth of the cost in India.

Better access to medicine is high on India's agenda, and lower costs of medicines have led to a higher penetration of healthcare. Recognizing past success in terms of dominating the global generics market and reducing out -of-pocket expenditures with affordable medication, the government of India has further strengthened its resolve to promote generics via 'Pradhan Mantri Bhartiya Jan Aushadhi Scheme' (Prime Minister's Indian Public Medicine Scheme). The scheme works through special stores that sell only generic medicines to the public. Already more than 850 such outlets are operating across the country and the government plans to expand this program several fold to ensure quality medicines for all at affordable prices. In India, where disease rates are among the highest in the world and the economic divide between the rich and the poor is gaping, the future of public health depends greatly on the success of initiatives like these.

The availability of raw material has also made it possible for India's pharmaceutical industry to flourish. Of more than 10,000 drug manufacturers in India, about 77 percent make only formulations and depend on external sources for API. The Indian market is price sensitive. As long as raw materials meet the requisite quality standards, companies will buy from the cheapest available intermediary since there is no difference in quality. The impressive growth of India's pharmaceutical industry has been propelled by formulation manufacturers, who in turn rely on China's exceptional ability to process raw materials at low prices.

Time for Some Checks
At the same time, India depends on Chinese resources for many essential drugs, including amoxicillin, ampicillin, ciprofloxacin (antibiotics), paracetamol (analgesic), and metformin (a diabetes drug). Penicillin, the drug that started the antibiotic revolution and remains a key treatment, is no longer produced domestically, but imported almost entirely from China.

The government has imposed some checks on imports. For instance, every pharmaceutical ingredient being imported into India must be pre-registered. This has helped keep track of not only quality and adherence to standards, but also the volume being imported. To help the few remaining API manufacturers in India, anti-dumping duties have been imposed on some products that are made indigenously such as Vitamin A, C and Ceftriaxone Sodium Sterile. However, since this anti-dumping duty is imposed only on these specified items, formulation manufacturers have found ways to circumvent these duties by importing the precursor form of the intermediate (for instance, importing crude Ceftriaxone Sodium and sterilizing it in India).

Rocky Road Ahead
Among the recommendations of the Katoch Committee are pertinent ideas such as pharma hubs or parks where support is given for API production, investment in R & D, effluent treatment and patents. Already, a pharma hub is being developed in Hyderabad, and others are being planned across the country. Industry experts feel that India has the capacity, but regulatory support is needed to encourage Indian players to make intermediates.

Needless to say, it is important for India to diversify sources of resources to safeguard its exports, and for China to diversify its market, the country must overcome supply and market risks and ensure that no single player (or country) maintains a monopoly or the power to control prices. Presently, China imports finished drugs from Western countries, and since Indian drugs already meet the high quality standards prescribed by the United States, they would also meet Chinese standards. This could help balance the trade gap, and also open another market for India, while reducing China's cost of end drugs.
With Donald Trump's call to 'manufacture in the United States' (along with a promise to drastically cut regulations and approval processes) expected to adversely impact India's pharmaceutical exports, it is an important time for India and China to acknowledge their respective strategic advantages and work together to collectively become more powerful global players. With China's API expertise and huge market for finished medicines, and India's cost-effective but quality formulations, each country offers something to the other.