Explained: What is Active Pharmaceutical Ingredient (API) and the effect of its price rise on Indian Pharmaceutical Industry?
What is Active Pharmaceutical Ingredient (API)?
The active pharmaceutical ingredient (API) is that part of the drug responsible for producing the intended effects to be provided by the medicine. Some drugs including combination therapies, have multiple active ingredients to treat various symptoms associated with the disease or act in different ways.
The medicine you eat in regular life is made of the following ingredients
i) Active Pharmaceutical Ingredient- which is chemically active and produces effects that can cure the disease.
ii) Chemically Active Excipients- Those which deliver the API to the body
What has happened?
The cost of raw materials required for manufacturing the drugs have been increasing since November 2020. Some experts have been suspecting that China is purposely fluctuating the prices since it is the leading supplier of raw materials.
- The price of Paracetamol has been increased by 103% since November 2020. It has increased from 320/kg to INR 650/Kg. The price of para aminophenol has increased from 3.2$ to 7.5$ per kg.
- Maximum APIs for India have been imported from China and have increased from 56% to 66% from 2016 to 2018. The rest was imported from the European Union but the quantity has now decreased from 16% import to 11% in 2018.
Why does India import API?
The Indian Pharmaceutical Companies import almost 65-70% of their total bulk API requirements from China. Till the 1980s India used to import around 30% APIs. In the early 1990s, the Chinese Government encouraged and invested heavily in both chemical synthesised biotechnology. These are the two key processes for API production.
The API market is heavily dominated by China because of the cost and technology advantages. India however failed to address those challenges. It was in 2015 the government had set up an experts panel that recommended the establishment of API production parks and government incentives for R&D.
What has the Government done?
- In March 2020, the cabinet approved an investment of INR 9940 crore to increase API production out of which INR 3000 was for mega parks. INR 6940 crore was for support of industry domestic production efforts which happened for the coming 8 years.
- The Government provided INR 6940 crore to support the industry domestic production efforts over the next 8 years.
- Almost 27 APIs were planned to be made through chemical synthesis in India and 26APIs were to be made through fermentation.
- The production could have been scaled up within 3 months. The APIs that were to be produced by fermentation are long term capital investments but by then China would again vary their rates which is why the companies were reluctant.
- The Government then started a Production Linked Investment Scheme or a PLI scheme for domestic production.
Why did the companies not respond to the Government's plans?
- The pharmaceutical industry did not respond to the Government's plans because at that time it felt that any investment would be a risk and it was not possible to compete with China .
- They felt that since the outcome of investments would take time, China may become even more competitive by then.
Why is China increasing prices of API?
China in its competitiveness towards India is trying to control the pharmaceutical market. India has launched many Production linked incentive schemes which is why China is trying to increase the market prices of many APIs.
India at present is the largest producer of generic drugs in the global market. Once China increases prices it would be difficult for companies to compensate for their losses due to increased production.
Also other factors affecting the prices are the rising oil prices, container shortages which now makes them cost around 1500-1800$ per barrel and rising cost of production of APIs in China due to COVID 19. China has pledged to become carbon neutral by 2026 which is why many factories producing APIs have been shut down.
As per the pharma industry the price hike is global and not just related to India.