The Department of Pharmaceuticals had gone into a huddle as early as February this year when India had only three confirmed cases of Covid-19. A committee of inter-ministerial experts and importers and manufacturers of medicines met every day to keep a watch on happenings in China. Their worry was not just the spread of the disease. They were also concerned about the lockdown in China and its impact on supply of key raw materials used to make medicines in India.
Department officials later informed the parliamentary standing committee on chemicals and fertilisers chaired by Kanimozhi Karunanidhi on February 28 that their concern was that India was "unfortunately" dependent on China for 58 types of medicine raw materials - active pharmaceutical ingredients (APIs or bulk drugs), key starting materials (KSM) and drug intermediates (DI). The country's stocks of APIs and finished goods (medicines in tablet, capsule, liquid form, etc) would have lasted another three-four months, not more. "Most of our APIs are coming from China. There are not many other sources. The committee is reviewing the situation...We are not very sure whether this information is authentic or not. We have been told that excluding Hubei, in all other provinces, production has started. That means imports will start coming. But we have to keep our fingers crossed.?" This oral evidence given by department officials to the parliamentary committee illustrates the panic that had gripped the Indian pharmaceutical manufacturing sector due to disruption in supply of raw material from China. The officials listed steps taken to ensure supply of medicines such as granting permission to increase capacity and change product mix without delay in environmental clearance and quicker import licences to manufacturers in other countries. They also said that setting up manufacturing capacities immediately is not possible as it will require two-three years to build a new plant and one-two years to re-operationalise close to two-dozen facilities that were shut by 2005 due to competition from China.
So, it is not surprising that five months later, on July 21, the government notified a grand plan to avoid such panic and helplessness in future. The plan included two schemes - Production Linked Incentive (PLI) Scheme for companies for manufacturing critical KSMs, DIs and APIs and a scheme for promotion of bulk drug parks by state governments. Detailed guidelines were released a week later. The deadline to apply for the PLI Scheme ended in November while some states (14 of them including UP, Haryana, Punjab, Gujarat, Andhra Pradesh, Telangana, Karnataka, Maharashtra and Tamil Nadu are known to have shown interest) selected by the Centre for building bulk drug parks are to be made public by mid-December. "From discussions with stakeholders and various associations, we know that the scheme has been well received. Companies will place their bids closer to the November 30 deadline," says P.D. Vaghela, former Secretary, Department of Pharmaceuticals, under whose leadership the scheme was announced. Soon after Vaghela was assigned his new role as chairman, Telecom Regulatory Authority of India in September, the government sweetened the PLI Scheme by relaxing the several conditions that were considered restrictive. The revised scheme allows export of products as against the earlier stipulation that the incentive will only be given for domestic production. It has also made investment requirement more flexible by taking out the lower and upper investment limits and allowing companies to produce as much as they want for exports as well as domestic sales as long as the overall criteria is met.
The $43 billion Indian pharmaceutical industry is the third largest in the world by volume and 14th largest by value. India accounts for 3.5 per cent of drugs and medicines exported to 200-plus countries. However, heavy dependence on import of key basic raw materials (bulk drugs account for 63 per cent of India's total pharmaceutical imports) remains its weakest point. The plan for self-reliance in bulk drugs is thus integral to India's plans to remain the world's medicine factory and provide affordable medicines to citizens. Will the schemes work?
When Dinesh Dua started his career as a pharmaceutical industry professional in 1979, India was meeting almost all its raw material or bulk drug requirements through imports. Forty one years later, Dua, now the Chairman of the Pharmaceutical Exports Promotion Council of India and Chief Executive Officer of Chandigarh-based Nectar Lifesciences Ltd, finds that the situation is more or less the same for a long list of products, including some in National List of Essential Medicines. The period of self-sufficiency, the 90s decade, was brief, he says. What makes the situation more serious is that the bulk of this dependence is on one country, China, which accounts for 67.6 per cent of Indias bulk drug and other raw material imports.
"China started (making bulk drugs and intermediates) in late 90s and in five years, from 2001 to 2005, displaced India from number one position. It did so by creating huge clusters spread over 10,000-plus hectares. For the first five years, there was moratorium on loan repayment and utility, power, water and other charges. Technology facilitation happened through all top universities of China. That's how they became numero uno," says Dua.
Low prices of products from China forced Indian bulk drug makers to discontinue production of several key raw materials. The Indian formulation industry's dependence on China rose to 95 per cent in some cases. "The dependence in case of commonly used medicines such as Metformin and Ciprofloxacin is 100 per cent. Taking advantage of the situation, China is increasing prices of several basic raw materials. For instance, the neurology segment has seen a 10 times increase. If imports continue at the same rate, by 2032, India will be shelling out $163 billion for raw material imports, predominantly to China," says Dua.
"When I joined, I realised how critical is the requirement of API production in the country. The Rs 100 crore given for API manufacturing (size of an earlier scheme) was nothing. We had to do more," Vaghela told Business Today days before he moved to TRAI. The older scheme was closed and the government announced the new PLI package giving incentives to API manufacturers on the basis of sale of 41 specific products (which cover all identified 53 APIs where import dependence is huge) in a graded manner for six years. For fermentation-based products, incentive for FY24 to FY27 would be 20 per cent, for FY28 15 per cent and for FY29 5 per cent. For chemical synthesis-based products, incentive for FY23 to FY28 would be 10 per cent. There are conditions. The 52-page operational guidelines mention investment thresholds, production targets, etc. And these have to be green field investments. The number of applicants to be selected for production of each raw material is also fixed. In some categories, it is two, in some, four. The revision to the PLI Scheme announced in September relaxed some of these conditions to make it further attractive.
The conditions for the Bulk Drug Park Scheme are simpler. Financial assistance will be provided for creation of common infrastructure in three bulk drug parks proposed by selected state governments. The maximum assistance for each state will be Rs 1,000 crore.
How the Scheme Works
Take the case of a fermentation-based product, say Penicillin G. Among the applicants, only two companies which fulfill all investment, production and networth criteria will get selected. Each will have to make at least 5,000 metric tonnes of key starting materials or drug intermediates of Penicillin G from a greenfield facility built for this purpose. After commercial production starts, 20 per cent pre-fixed value of the volume produced will be given as incentive from 2023-24 to 2026-27. The percentage will be 15 per cent for 2027-28 and 5 per cent for 2028-29. However, there is a cap on volume of production that will be eligible for the incentive. In other words, the government knows the maximum outgo as the price on the basis of which the percentage of incentive is calculated is known; the maximum volume that can get the benefit is also known. Thus, for Penicillin G, the maximum incentive the government will have to provide for each selected applicant will be Rs 120 crore for first year, Rs 90 for second year and Rs 30 crore for third year. For chemically synthesised products, for which there is more interest, a flat 10 per cent incentive will be given for production of the particular product from 2022-23 to 2027-28. The amount will be transferred to the applicants account.
The companies that can avail maximum benefit out of the scheme will have to start producing at the maximum threshold right from April 1, 2023, in case of fermentation products and April 1, 2022, in case of chemical products. Any delay in commercial production, or delay in achieving optimal volume, will see reduction in the incentive as it ends on last day of financial year 2028-29 and 2027-28 for fermentation products and chemical products, respectively.
The industry did welcome the scheme but had expressed some apprehensions, especially before the revised scheme got announced. For instance, B.R. Sikri, Chairman of Federation of Pharma Entrepreneurs, said that while people will come forward with a positive state of mind, there was a very strong chance that China may dump these products at a much lesser price once India starts production. "Unless countered with quick anti-dumping measures, it may make production of such items unsustainable for the Indian industry. There is need for a written assurance from the government that quick action by way of anti-dumping investigations and duties will be taken in such cases. We understand that the government is seriously considering this proposal," he says.
Sikri had also wanted the government to factor in future fluctuations in prices of chemicals, other inputs, power, manpower, etc, while providing the incentive. He, though, appreciates the timing of the Atma Nirbhar Bharat Scheme and says enthusiasm of the industry will receive a boost if government looks at operational issues too.
M. Narayana Reddy, President Emeritus, Bulk Drug Manufacturers Association and MD, Virchow Laboratories, Hyderabad, has doubts about the scheme. "There is no assurance that we will get the benefit over five years because, if you start today, you will be up and running in two-three years, not before that. After that, we will have only two years to avail the benefit," he says.
The industry had all the while maintained that 60-70 per cent chemical synthesis products eligible for PLI can be manufactured within no time if government can offer incentives to make it viable as existing manufacturers have the capacity and technology to produce some of the products in the list immediately.
While the revision to the existing scheme does not consider all these aspects, the government announced a new scheme recently as part of expanding PLI to 10 more sectors (pharmaceutical is just one among the 10 sectors) which provides hope.
"The Phase II PLI Scheme is entirely different. It has almost 15 sub-sets, including biologicals, formulations, near patent expiry molecules and bulk drugs. The government will come out with the micro details in the next 10-15 days", Dua says. According to Sikri, unlike the old scheme, the new scheme has no restrictions. "You can go for any number of products, and any number of companies. The thrust is on investment, R&D, turnover criteria and exports. Even brown field expansions will be eligible", he says. The government plans to spend Rs 15,000 crore over five years to promote the pharmaceutical sector through the new scheme. Bulk drug manufacturing, being one of the three key components of the scheme will get yet another boost, it is hoped.
Meanwhile, the three state-level bulk drug park projects are likely to be announced within weeks. Dua wants the list of winning states and locations to be announced before the deadline for participating in the PLI Scheme ends. "It will provide a big capex advantage to the companies. You can then make use of the common facilities offered by the bulk drug parks and the incentives offered through PLI", he says.
The faster the common infrastructure is built, the bigger will be the chance of getting companies to set up bulk drug manufacturing plants there. Some concrete progress on this front, in a time-bound manner, will go a long way in beginning the journey towards Atma Nirbhar Bharat.