The Indian government’s recent incentives to boost domestic manufacturing of active pharmaceutical ingredients (APIs) and key starting materials (KSMs) can improve backward integration over the next few years and curtail supply-chain disruption risk for Indian drug makers, Fitch Ratings said on Monday.
The incentives address core issues of pricing competitiveness and funding, and may assist the investment decisions of local pharma companies in the current environment, it said.
India is one of the world’s leading suppliers of drugs — mostly generic formulations — but depends on imports for its requirement of APIs and KSMs, particularly China, which accounted for more than 60 per cent of requirements in some therapy areas.
The government announcements follow recent developments, including plant closures in China due to the coronavirus pandemic earlier in the year and the more recent border standoff with China, which underscore supply-disruption risk due to overdependence on imports.
India’s reliance on pharma ingredient imports has risen over the past few decades due to the higher cost of domestic production with the price gap reaching as much as 20 to 30 per cent, particularly for energy-intensive fermentation-based ingredients used in anti-infectives.
Import dependence is more than 90 per cent for some life-saving drugs, including penicillin and ciprofloxacin.
“We believe the government announcement, which includes production-linked incentives and financial assistance schemes aggregating to 1.3 billion dollars, will help address the two keys issues: the higher cost of domestic production compared with imports and funding requirement to set up the necessary infrastructure.”
The production-linked incentive scheme — which accounts for Rs 90 crore of planned outlay — offers an incentive of up to 20 per cent of sales for fermentation-based products and up to 10 per cent for chemical synthesis-based products for the next eight to nine years.
“This should help to bridge the price gap and make domestic production more competitive,” said Fitch.
The government has also allocated 0.4 billion dollars (about Rs 3,000 crore) under the capex assistance scheme to fund up to 90 per cent of the investment need to build common infrastructure facilities in three bulk drug parks.
“We believe this will aid the investment decisions of Indian pharma companies, particularly in the current environment where the focus in on conserving cash,” said Fitch.
While these incentives aim to encourage incremental investment to ensure uninterrupted supplies for domestic needs, companies with existing API production capabilities, including Fitch-rated issuers, Glenmark Pharmaceuticals and Jubilant Pharma could benefit from export opportunities over the medium- to long-term as pharma companies globally look to diversify their sourcing — a theme that has gained relevance due to the pandemic.
Such companies may not need to make large investments to participate under the incentive schemes, which could limit the impact on financial leverage while improved vertical integration supports their credit profiles.