In Part Two of our Independence Day coverage, we identify trade and non-trade barriers faced by India Pharma Inc as it seeks to serve patients beyond boundaries by delivering cost effective quality medicines
In the first part of our Independence Day special coverage, the August 1-15 issue examined how the three ‘Is’ – Indigenisation, Innovation and Information – can be leveraged to help India achieve true independence in the pharmaceutical sector. A large part of this independence comes from financial stability. Hence, exports have bulked up the balance sheets of most of India’s pharma companies, right from market leaders to SMEs. India has bagged 20 – 22 per cent share of global pharma export volume, is one of the lowest cost manufacturing destinations and is expected to rank among top three pharma markets in terms of incremental growth by 2020.
Take for example, the jugalbandi between India and China, which has been built over the past few decades on complementary strengths. While India focussed on becoming a global source of cost-effective quality formulations, China excelled in making low cost active pharmaceutical ingredients (APIs) and key starting materials (KSMs). Companies on both sides expanded their geographic foot print across the world, thanks in part to this relationship.
But exports come with their own threats, with each country presenting a different challenge. Thus future growth in exports will not be a cakewalk. For instance, India’s equation with China has changed, due in part to geo-political circumstances. Many pharma companies in India, and other countries as well, found themselves overtly dependent on China for APIs. The first warning bell went off in 2008 before the Beijing Olympics. Faced with increasing pollution, not the least deteriorating air quality, China feared that its global image would suffer a huge dent when it hosted teams from across the world for the 2008 Olympics.
China decided to clean up its act and as a consequence, there was a crack down on polluting industries and factories. Many of these factories were API manufacturing units and as a consequence, supplies of key APIs dwindled. Formulators in India and other countries were left high and dry and had to scramble to find alternate sources of APIs.
The Beijing Olympics taught China a very important lesson: that while it is easy to ‘develop first and clean up later’, it is much more difficult to clean up the environment than previously estimates. Hence China continued to come down heavily on polluting companies and has expanded the scope to formulations. Recent examples include the substandard DTP vaccines supplied by Chinese vaccine maker, Changchun Changsheng Biotechnology, sold to the Disease Prevention and Control Centre of Shandong Province. This July, the US FDA and EU recalled formulations containing valsartan API supplied by Linhai, China-based Zhejiang Huahai Pharmaceuticals which had detected the impurity — nitrosodimethylamine (or NDMA) — in their API.
So, a decade later, are we in a better situation?
Dr Ajaz Hussain, President, National Institute for Pharmaceutical Technology and Education (NIPTE), estimates that for several years, about 90 per cent of API formulated in India was imported from China. “In recent years, the per cent API imported has declined and this trend is expected to continue. An interesting observation is the increasing import of formulation from China into India for the local market. Export of formulations from India to China has increased and likely to increase further in the next several years.”
A former Deputy Director of Pharmaceutical Science, US FDA, Hussain raises further questions, “To understand these macro trends one has to get to the micro trends; i.e., specific API and formulations. The key questions here are why it is more economical to import certain formulations from China for the market in India? How might these micro trends inform us of the evolving local pharma and environmental regulatory stance and government pricing policies in the two countries? And, what might be the consequences of these micro trends to shape the macro level dynamics; particularly in the context of intellectual property, API and formulations complexity and the changing regulatory stance in the US, EU, UK and Japan?”
A silver lining?
But could these fluctuating API supplies be a blessing in disguise? Global CDMOs seemed to have worked on risk mitigation strategies in the last decade and India is clearly part of these plans.
For example, take the case of Uquifa, an 80-year-old API franchise headquartered in Barcelona, Spain with manufacturing footprint across Spain, Mexico, Hungary and India. The company historically bought nearly 60 per cent of their KSMs from China, according to Saurabh Gurnurkar, Executive Director, Uquifa. “Given the challenges emerging from China, we have increasingly begun to build alternative sources in India and/or make the intermediate captive wherever the economics works out, says Gurnurkar.”
Vivimed Labs, a pharma and specialty chemicals company headquartered in Hyderabad, India, acquired Uquifa way back in 2011 for $55 million, so it is evident that the alternate sourcing plans are well advanced. In his view, the large component of the cost of goods sold (COGS) in their business, is the KSM cost followed by solvent costs, environmental costs. So any fluctuations in this component has a massive impact on product pricing.
“We can see that there are four-five new projects of such nature that we have commenced in recent past to risk mitigate
ourselves better,” informs Gurnurkar.
But such strategies take time to plan and roll out. “Qualifying new sources takes time (regulatory, quality requirements) especially since 100 per cent of our business is focussed on the regulated pharma markets. However we are committed to work closely with our supplier base (existing and new) to ensure timely delivery of our product to our customer base and eventually the patient population.”
Widening the large-SME divide
The question is, are India’s contract manufacturers as prepared as their global peers with secure alternate supplier chains beyond China? And beyond this issue, India’s pharma companies, like all their rivals in other countries, face an even greater long-term threat: falling in line with regulations of various export destinations. Lines that apparently keep shifting in the sand.
Indeed, ”the changing regulatory stance in the US, EU, UK and Japan” as Hussain puts it, has become probably the largest barrier to the pharma exports from India. Even though India’s pharma exports to the US, a key market, registered a double digit growth this April, (a growth of 17.47 per cent as compared to a 10 per cent decline in the same month last year), there is speculation that the previous level of pharma exports will not be achieved. The reasons range from more protectionist regimes as well as increased competition in a commoditised space. But here too, the impact seems to affect some companies more than the other.
For example, according to Vickram Srivastava, General Manager, Global Demand and Supply (GDSO), Zydus Cadila, “We have not noticed any trade barriers except regulatory control for export of generic pharma drugs from India.” He see this as a clear indication of “our robust low-cost manufacturing edge and cost-efficient talent pool topped by strong R&D pipeline both for chemical-based drugs and next generation biologics and biosimilars.”
Contrary to common perception, he says, “Even China does not have any particular trade barrier for exports from India.” He admits that the long and non-transparent filing/approval cycle by Chinese FDA and heavy drug price control was a deterrent to companies in the past but points out that the Chinese market is now opening up and even the regulatory filing and approval timeline/process has been eased, encouraging some Indian companies to start looking at China as a potential export market for generic drugs.
Looking at other geographies, Srivastava opines, “In EU, US and many other developed countries like Russia, South Africa and Brazil, etc, the regulatory agencies have improved the filling and approval transparency clearly highlighting goal dates and approval milestones further easing export planning to these markets.”
Ironically, the largest pharma market in the world could turn out to be the darkest cloud on the horizon. “The only threat we see now is news of reversing of policies by the Trump administration in the US (which is by volume and value, India’s biggest export market for generic drugs) which could heavily tax imports of drugs manufactured outside US.”
Gurnurkar comments that they are definitely seeing a reset in expectations from regulators and customers pertaining to the regulated markets. “Be it Quality, Safety, Health & Environment (SHE), data sufficiency — the expectations are rising and evolving so manufacturers focused on the regulated markets have to cope with that,” is his take on the situation.
Larger companies seem to have borne the losses from export revenues and taken regulatory headwinds in their stride. This is understandable, given the much larger resources at their command. But the impact on smaller companies would tend to last longer and could even become a struggle to survive. (See box: Small is not beautiful?)
Rule or trade barrier?
Countries can resort to two basic kind of export barriers – trade and non-trade barriers (NTB) – to ring fence their local industries from overseas competition. Both kind of barriers are not new to India and the pharma sector is not immune to it, says Sahil Munjal, President & CEO – Exports, Ind Swift Laboratories. “While trade barriers are generally in the form of high direct taxes, it’s NTBs which are generally more detrimental and cannot be directly accounted for as these are veiled. According to WHO, NTBs include import licensing, rules for valuation of goods at customs, pre-shipment inspections, rules of origin (‘made in’), and trade prepared investment measures etc to just name a few.”
Vinod Kalani, Co Chairman FOPE & Promoter, Cris Pharma India, who represents various industry associations and is a promoter of companies like Cris Pharma India, Oasis Infotech, and Oasis Test House cites the ‘America First’ policy as well the US bypassing WTO agreements as some examples of NBTs. According to him, the definition of quality and implementation of quality parameters keeps changing from time to time, within individual countries, even while varying from country to country. He points out that adapting to these changing regulations slows down the process and adds to the costs as well.
Giving examples of NBTs, Lokesh Sharma, Head, Public Health – Africa, Middle East, South Asia, IQVIA says, “Several countries like Russia, Vietnam, Iraq, Zimbabwe, Pakistan, Nepal and Nigeria are notifying negative lists for pharma imports with an objective to protect domestic industry. Some countries have come out with domestic policies compelling local manufacture. EU has started a system of written confirmations to be issued by Central Drugs Standard Control Organisation (CDSCO) for every exported API even after the product has an active Drug Master File (DMF) from reputed regulators like US FDA.”
Thus higher regulatory standards, at least in the beginning, will depress exports. As Sharma says, “With PIC/S becoming an important global compliance and standard criteria, it will act as one of the very crucial trade barriers for India as India would need to develop and promote harmonised GMP standards and guidance documents as per PIC/S standards. Insistence on site inspections in spite of holding WHO Good Manufacturing Practice (GMP) /Pharmaceuticals Inspection Co-operation Scheme (PICs) approvals is increasing.”
Among tariff barriers, Sharma’s list includes high import duties, regulatory delays, registration procedures and multiple regulatory agencies across countries. He draws attention to European Union’s (EU) new trademark legislation which stipulates stricter enforcement measures on goods in transit through its territories which not only blocks trading of goods within the bloc with logos found similar to the ones registered in the EU, but also permits the seizure of such consignments at EU ports and airports even if they are meant for a third country. This legislation has raised considerable concern for Indian drug manufacturers shipping items to Latin America or Africa using European ports and airports in transit.
Sharma therefore reasons that the new law could be an attempt to create a trade barrier to check India’s exports of low-cost generics to the markets in Latin America and Africa as large pharma companies, many of them based in the EU, feel threatened by India’s low-cost but high-quality medicines.
Referring to the same issues Kalani says, “There are variations in the definitions of counterfeit and spurious drugs in various regulated markets resulting in seizure and award of punitive damages against Indian exporters. Especially in the EU, the definition covers even generic versions of innovator drugs without authorisation even if they meet quality standards as well as trademarks and copyrights leading to monopolistic practices. Even exports of such drugs to a country where patents are not granted to them and fully legal are liable for seizure if such products touch European ports during transit.”
In the same boat
To be fair, India is not the only country to face such trade barriers. As Munjal of Ind Swift Laboratories points out, “Turkey has put restrictions on import of finished product from overseas countries due to their localisation project, however this is imposed on all countries, not only India.”
While the member countries of the APAC region do not currently impose any sort of trade / non trade barriers for Indian pharmaceuticals and India has a good access to this market, certain countries in other trade blocs do pose problems due to their internal issues. For instance, he points out that in the MENA region, there are no trade barriers except in countries like Syria , Yemen and Iraq due to the current fluid political situation.
Similarly, for Iran, the biggest impediment is its isolation from the international banking system arising due to US sanctions. Secondly the government in Iran has imposed high tariffs on imported medicines to support the domestic pharma industry.
Continuing this trend, Munjal says that the LATAM market, except for Venezuela, also poses no barriers in pharma from India. Venezuela was one of the most profitable markets of LATAM but is currently out of reach due to the collapse in economic activity. Europe too does not impose any trade/non trade barriers for Indian companies for pharma trade.
In the case of Japan, Kalani points out that exports are restricted due to language barriers. Other mandates like the need for pharma export companies to keep an inventory of products for five years and partner with Japanese enterprises for local marketing add to the barriers.
The language barrier also comes up in Africa, EU, Commonwealth of Independent States (CIS), LAC, and the Asean countries as they provide information in their local languages. In the absence of websites in English, information on drug registration, registrations granted, markets, etc. is not freely available to Indian exporters.
The devil in the details
He also points to other discrepancies. For instance, while the US, Canada, Europe, South Africa, Australia and various countries accept bio equivalence (BE) studies conducted in India as per international guidelines, Japan, Mexico and now Thailand, want the BE studies to be conducted on their local populations in their countries. He explains that a BE study merely compares the drug levels as compared to the original drug in-vivo, there is no clinical efficacy evaluation. With each additional BE study costing more than ` 40-50 lakhs for each additional country, the impact on Indian pharma exports will be extensive if this technical barrier is adopted in more countries.
On the documentation side, he points out that the registration of drugs is extremely detailed, and it is often very expensive to provide such dossiers such as DMFS or ANDAS, etc. The complete process details, site plans and all intricate details are demanded and have to be provided. He also hints at another aspect, which could have more severe long-term implications. As Kalani puts it, “The cost of documentation and review not only costs a lot of money but also provides free access to knowledge to employees in such agencies which benefits their system.” Thus in chasing export revenues today, are we trading away our tomorrows by giving away our trade secrets? And will we be able to move to the next level fast enough to prevent being obsolete?
Moving to the US, Kalani avers that despite the challenges of price erosion, the US continues to be an attractive market for Indian firms. But here too, the challenges are only going to increase as it is in the process of negotiating or has concluded Free Trade Agreements (FTAs) with several countries which are pharma producers, for example, Thailand, Morocco, Chile etc. These agreements stipulate IPR related provisions such as data exclusivity, which prohibit pharma exports from other countries such as India. These stipulations by the US in its FTAs with different countries may be going beyond TRIPS
and obviously such FTAs have implications for export of generic medicines from countries like India.
In CIS countries, the queries raised during the registration and approval process varies from reviewer to reviewer. The standards in these countries also vary and it takes as long as two years for drug registration in these countries. Drug registration fees are also high in these countries, points out Kalani.
Lending a helping hand
The barriers seem insurmountable but they are common to all India’s peers vying for a slice of the global pharma exports pie. What could make the crucial difference is political will to recognise that the pharma sector is not just a source of foreign exchange revenues, but also key to India’s image as a knowledge economy and contributor to the social cause of reducing disease burdens.
The Government of India (GoI) has been stepping forward to resolve these issues through diplomatic and trade channels. Citing a recent example, Srivastava of Zydus Cadila recounts, “Recently in April this year, the Department of Revenue under the Ministry of Finance had notified bringing Tramadol under the Narcotic Drugs and Psychotropic Substances (NDPS) Act 1985. This meant all imports, exports and domestic movement of formulations and active having Tramadol would need a No Objection Certificate (NoC) from Dept. Commissioner’s office. Pharmexcil represented the industry’s case to the GoI asking for time to allow industry to get the necessary framework ready to meet the government requirement with success. The notification was postponed till August allowing import and export to continue and allowing companies to set up their process to manage NoC in advance to avoid delay in planning.”
Sharma of IQVIA too mentions that post the Indian Prime Minister’s recent visit to China, China has taken the decision to remove import duties on 28 medicines, including cancer drugs, thereby reducing the trade imbalance between China and India.
Munjal of Ind-Swift Laboratories too mentions that the ease of doing business with APAC and MENA countries is a result of inter-governmental negotiations and goodwill. He emphasises the interplay of industry, associations and the government when he says, “I think associations like Pharmexcil play a pivotal role as it is our duty to apprise the government of the actual issues being faced by us. The government will take up the issues in the stride we project/represent, though ultimately it’s for the government to take up the issues with respective governments and ensure timely redressal/reversal.
But Munjal too feels there is a lot of scope of improvement and furthering the coordination between industry associations (Pharmexcil) and the government. He specifically suggests that the government should be more open and liberal to industry suggestions, must ensure prompt actions and more importantly organise frequent industry outreach programmes.
While there is a lot of support from government agencies available on home ground, companies often need help in the overseas markets itself. Sharma of IQVIA points out a crucial missing link when he states that currently, we do not have government affiliated associations present in any of the foreign countries to help the Indian players liaise with the foreign
counterparts in setting up businesses.
“We feel that we need to have government and industry associates located in countries that pose a huge opportunity for Indian companies,” reasons Sharma. “Government associations like Export Promotion Councils and Federation of Indian Export Organisation should have country-specific local teams to initiate promotional activities that would help us strengthen business ties with relevant local entities. We should also create an ombudsman and have a proactive approach towards resolving export related problems and disputes within stipulated timeframe.”
Srivastava also points out to other long-term policy and image building initiatives. “Allowing 100 per cent FDI, creation of SEZs for the pharma sector, export benefits, etc backed by stable and transparent government polices have further encouraged global industry leaders to come to India (many a times through M&A route) and invest to meet both India and global demand of life saving drugs. The role of both the government and Indian pharma companies, has been especially commendable in projecting India as the premier country in supply of cost-effective superior quality sophisticated ARVs (drugs for HIV/AIDS treatment) across the globe and in Africa.”
But governments too have their limits. If pharma companies want to increase their exports, they will have to be more proactive. They will have to anticipate and plan in advance for further trade barriers as well as NBTs in order to gain market access to sustain and expand their geographic footprint.
“The key to entering other geographies like China, South America, APAC etc,” according to Srivastava of Zydus Cadila, “would be decoding the regulatory path way.” He also emphasises that many Indian companies have learnt the hard way that it is crucial to have distribution networks/local tie-ups in the export destination country.
Munjal opines that “an uncompromising focus on patient safety and quality at reasonable cost should be the basic guiding principal for all of us” to reach these goals. On the strategy front, Sharma suggests that Indian pharma companies should look at strategic alliances and partnerships with the local manufacturers and/ or distributors for market penetration in other geographies. “Additionally, the business processes including bidding and procurement vary across geographies. Hence, before promoting our pharma product imports to foreign countries, we need to have a deep understanding of the processes and market requirements, especially related to quality of medicines, of each geography. Only after that, the Indian companies can build a differentiated product portfolio that not only would be aligned to the prerequisites of the targeted geography but will be also mapped with the local country demand.” His third suggestion is that large cap Indian pharma companies who spend 10 per cent of their revenue on R&D, should collaborate with academia and industry to develop new chemical entities and differentiated product portfolio as per the need of the markets they are keen on entering.
Hussain also reminds us of the responsibilities of the importers, saying, “Importing manufacturers are responsible for controlling and assuring quality of the raw materials they accept. A combination of analytical tests, supplier quality agreements and other considerations under a quality management system are the responsibility of the importer. Deviations from these fundamental requirements point to, at minimum, lack of competence and, on the other side, a deliberate economically motivated disregard, for quality and safety.”
He cites the heparin tragedy in 2007 and as a way forward, Hussain advices that compliance with existing laws, regulations, and established international guidelines would ideally be an immediate, short-term solution. But he feels that the foundation on which manufacturing controls of many of existing products are based are weak and error prone. The way forward is strict compliance which can reduce efficiencies, increase rate of out of specification (OOS), but this might also reduce profits.
He points out that breaches in assurance of data integrity (BAD-I) is a symptom of this problem. “To a large extent US FDA and EU regulatory scrutiny of BAD-I had been on QC lab data; manufacturing batch records and in-process controls remain vulnerable.”
Concluding on a note of caution he says, “I would recommend senior managers and management to be engaged like never before and work hand-in hand to prevent a failure. Supplier quality agreement should be carefully reviewed and vulnerabilities mitigated. They should take steps to ensure business plans, targets and quotas reflect actual efficiencies and OOS rates. They should invest in professional development as well.” Thus, while the opportunities exist, further gains in the global pharma export market will need superior staying power and strategy. But one thing is clear. India Pharma Inc will remain a sizable presence across the globe.
Small is not beautiful?
Vinod Kalani, who represents various pharma industry associations like the Federation of Pharmaceutical Entrepreneurs India (FOPE), Confederation of Indian Pharmaceutical Industry (CIPI), Indian Drug Manufacturers’ Association (IDMA), and Rajasthan Pharmaceutical Manufacturers Association (RPMA) points out, “In India our policies are revised keeping in view the global requirements (which keep on changing). This results in very frequent changes in our country’s regulatory requirements for the Indian pharma companies. This is a very tricky subject as some times it is felt that all these frequent changes are pro big operations. For MSMEs, they become a big challenge to adopt or survive the change.” Industry members of FOPE, CIPI, IDMA and RPMA span the gamut of the pharma sector in India in terms of market cap, from SMEs to MSMEs as well as transnational corporates.
Increased registration fees, prolonged time lines and detailed documentation are common issues which seem to hit SMEs harder than larger companies. The basic documentation work required for registration of the plant and products in various countries, which was much faster and cheaper earlier, was one of the factors for the fast growth in pharma exports from India over the last two decades. This is no longer the case.
As Kalani further explains, “Several countries like the US, Russia, China and Brazil have increased registration fees and have prolonged time lines (three- five years) for registration making it prohibitive for mid-size pharma companies to start exports. Now it takes one to three years to register the unit and the products even in African countries. Many ROW markets like Vietnam, Combodia, Sri Lanka etc too have introduced barriers like one company can register a molecule with one brand only while in the past there was no such restriction.”
Common barriers to pharma exports