Incentives scheme may not wean drug firms off sticky reliance on China

India’s push to increase domestic production of critical drugs through the production-linked incentive (PLI) scheme will fall short in cutting down reliance on Chinese imports, ratings firm CareEdge said in a report.

Total project completion in the pharmaceutical and drug sector will hit an all-time high of $516 million in FY24, but Chinese imports of crucial drugs will continue to remain high, CareEdge said in the report. 

The growth in India’s pharma industry, which is projected at 7-9% in the next two years, is expected to boost demand for active pharmaceutical ingredients (APIs). Major projects such as the $244 million Penicillin G (Pen G) plant by Aurobindo Pharma in Kakinada, Andhra Pradesh, will meet the incremental APIs requirements through PLI schemes. However, the nation’s high dependency on Chinese imports will continue, the report said.

This reliance on China, accounting for around 43% of total pharma imports, presents a significant challenge for India’s pharmaceutical industry. With over 50% dependency on key starting materials (KSM) for life-saving drugs, concerns over the availability, cost, and supply of essential medicines are growing.

D. Naveen Kumar, associate director at CareEdge Ratings, said: “Indian pharma players have relied heavily on the import of bulk drugs from China due to the availability of raw materials at lower prices.” He further stated that “combating the pricing war with Chinese players would be extremely challenging”.

By January-March next year, this reliance on Chinese imports will likely decrease to 69% as big projects become operational. As more projects get off the ground in FY25, this reliance is projected to reduce further to around 65% in FY25, the report said.

China’s contribution to India’s bulk drug imports has seen substantial growth, rising from 64% in FY14 to 71% in FY23 in value terms. Total bulk drug imports have grown at a CAGR of 7%, compared to China’s higher CAGR of 9% over the same period. While these imports dominate India’s pharmaceutical industry, contributing 55% to 60% over the last decade, they also underscore a critical vulnerability in the country’s healthcare landscape.

Despite these challenges, the report noted some positive signs. 

“With the amelioration of raw material prices, along with deriving benefits from enhancing manufacturing capabilities for high-value drugs, specialty chemicals, etc., it is expected that the operating margins of bulk drug entities will improve from 18% in FY23 to about 20% by FY25,” Kumar said.