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BW Businessworld

The Rise Of API Barons

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Ajit Kamat, CMD of Mumbai-based Arch Pharmalabs prefers to maintain a low profile. So much so that even his immediate neighbours are unlikely to know that the unassuming 40-year-old businessman’s firm is one of the largest API (active pharmaceutical ingredients,  or the key ingredient in a drug that actually cures a disease) and contract research and manufacturing firms in India.

An unlisted company, Arch Pharmalabs has 11 manufacturing facilities, with a turnover of more than Rs 2,100 crore. And, its investors include Japanese trading major Mitsui and ICICI Venture.

 Arch Pharmalabs represents a new breed of Indian drug manufacturers who deal only in the API and related space and act as suppliers to finished formulation makers, including global multinational companies. The success stories of more than 300 such companies (India has some 2,300 approved bulk drug units) have made India a global hub for API and drug intermediate supplies.

Already, India is the largest exporter of generic drugs in volume terms and the third-largest API manufacturer, behind China and Italy. It is estimated that one out of five drugs sold globally has an Indian connection. According to the Pharmaceutical Export Promotion Council (Pharmexcil), drugs worth Rs 63,500 crore were exported in FY12. Of this, 38 per cent were APIs (domestic firms consumed close to Rs 25,000 crore worth of APIs).

China remains the largest API supplier with 18 per cent of the global market, valued at more than $80 billion. Italy and India follow at 10 per cent market share each. According to a recent market research report by Netherlands-based ASD Media BV, “The API market revenues in both India and China are expected to grow at a CAGR (compound annual growth rate) of more than 17 per cent between 2011 and 2017, whereas the global API market revenue is expected to grow at a CAGR of 7.4 per cent during the same period.” The Indian API industry is set to overtake that of Italy.

India has the highest — 35 per cent or 2,661 out of a total of 7,684 — Drug Master File (DMF) or marketing applications to sell APIs in the US. Globally, more than 90 per cent of the API approvals for anti-retrovirals, anti-tubercular and anti-malarial are with Indian companies. More than 500 manufacturing plants in the country are registered with the US Food and Drug Administration (FDA), the largest outside the US. Over 800 plants have approval from the European Union and 845 plants have Australian regulatory approval.

Focused Gameplan
Unlike pioneers in this business such as Ranbaxy, Cipla, Dr Reddy’s Laboratories, Biocon and Lupin, which sell numerous APIs, the new-generation companies have created large capacities for niche drugs and become world leaders in their area of speciality. They prefer to operate in high-margin, low-volume, complex chemical products where completion is less.

Says Naresh Gupta, president of API and global TB at Lupin: “Small and medium-sized Indian API and bulk drug manufacturers have targeted small, niche segments and garnered large market shares in some advanced as well as emerging markets, effectively competing with their larger Chinese and European counterparts on quality as well as scale.” He cites companies such as Sai Advantium, Optimus, and Metrochem that have reaped success because of  their focused strategy.

Take, for instance, Hyderabad-based MSN Labs, which was started in 2004 by MSN Reddy, a pharmaceutical scientist who had worked with several drug majors. Reddy decided to focus on niche, complex-chemistry APIs. “Last year, we did business worth around Rs 600 crore and this year we will cross Rs 1,000 crore,” says Reddy, who is chairman and managing director. The firm has six API plants and makes 120 APIs which are sold mainly in regulated markets. Another 30 are in the pipeline. Its revenues have been growing at above 30 per cent for the past few years.

MSN faces competition from just 3-6 players for most of its products. In comparison, manufacturers of common drugs such as paracetamol, ranitidine or ibuprofen have 10-15 competitors, which reduces their margins.

Another Hyderabad-based company, Laurus Labs was started in 2005 and, in two years, it set up a large API manufacturing unit in Vizag, focusing only on anti-retroviral and cancer products. In 2011, its revenues crossed $60 million. It also launched its first commercial product in the US. Now Laurus is among the leading suppliers of anti-retroviral APIs and intermediates, and competes with other leading Indian HIV/AIDS generic drug suppliers such as Cipla, Strides Arcolab, Hetero Drugs and Mylan’s Indian unit, formerly Matrix Laboratories. Laurus manufactures APIs of about 10 anti-retroviral and cancer drugs, and is developing a similar number of products.

Then, there are firms that have been specialising in old molecules, for instance, Granules India (also based in Hyderabad). The company has had a dream run over the past five years, having grown at a CAGR of 27.5 per cent. It recorded revenues of Rs 654 crore in FY12. Contract manufacturing pharmaceutical formulation intermediates (PFIs), or ready-to-make capsules, helped it create a niche for itself in the global markets. Today, Granules, which has one of the world’s largest tablet manufacturing capacity at 18 million tablets per annum, supplies APIs, finished drugs and PFIs to over 300 customers in 60 countries. However, it focuses on 5-6 common off-patent drugs such as paracetamol, ibuprofen, metformin (diabetes drug) and guaifenesin (for cough and chest congestion).

“Our revenues are balanced from APIs, PFIs and finished drugs. More capacities are required to meet the demand,” says Bhaskar Krishna Arumugam, CEO of Granules India.

Harsha Chigurupati, executive director of Granules India, says the company may add a maximum of 3-4 APIs in near future, but will not try to focus on developing a big basket of products. “We don’t want to be one among the many; instead, we prefer to be the top-quality manufacturer in the products we make.”

The strategy works for many companies. Privately held USV Limited, which earns Rs 400 crore from API sales, and Rs 300 crore from a single product — metformin. Its dedicated facility for metformin has a manufacturing capacity of 10,100 metric tonnes (MT) per annum — one of the largest in the world. “Some of the largest multinational companies have been our customers for a long time,” says Prashant Tewari, MD of Mumbai-based USV.

Mumbai-based Wanbury also manufacturers metformin and has a capacity of more than 9,000 MT per annum. The firm manufactures 13 APIs and posted revenues of Rs 390 crore in FY12. It exports to  more than 50 countries, and is the largest exporter of tramadol (a pain reliever) to the US. “The global metformin API market is estimated to be around 30,000 MT per annum, growing 15 per cent year on year,” says K. Chandran, vice chairman of Wanbury.

The Trendsetters
The new generation of API makers is actually carrying on what companies such as Ranbaxy, Cipla, Dr Reddy’s and Lupin were doing in the past before they started concentrating on high-value formulations. Even though the share of API in the total sales of these companies has diminished, they continue to be large in APIs.

Cipla, one of the first Indian companies to develop APIs, currently manufactures more than 200 APIs from three plants. Ranbaxy has four manufacturing facilities for APIs and its Toansa facility in Punjab alone makes more than 100 APIs. Ranbaxy’s API sales accounted for $43 million out of its $2 billion in total sales in 2011. For Cipla, of the Rs 1,890 crore in gross sales for the half year ended September 2012, Rs 342 crore was accounted for by API and related
export earnings.

Lupin, one of the largest global suppliers of anti-TB drugs like rifampicin, pyrazinamide and ethambutol, and heart disease drugs such as cephalexin, cefaclor and their intermediates, generated Rs 840 crore from APIs out of a total revenue of Rs 7,000 crore. The company, which started off as a bulk drug maker, had 80 per cent of its revenues coming from APIs until a decade ago. Now, 88 per cent of its revenues are from finished formulations.

The case of Dr Reddy’s Laboratories is similar to Lupin’s. Dr Reddy’s began as an API manufacturer in 1984. But in FY12, Dr Reddy’s revenue from APIs and related business was less than one-fourth of its total revenue of over $2 billion. Still, the company is one of the largest API suppliers from India and about 68 DMFs were filed in the last year alone. The company still supplies APIs to over 60 countries. Its 250-acre facility in Srikakulam in Andhra Pradesh is one of the largest API making facilities in the country.

Hyderabad-based Aurobindo is another big player, with more than Rs 2,000 crore in sales coming from API products like cephalosporins, out of its annual revenues of Rs 4,326 crore in the fiscal year 2011-12.

Taking On The Dragon
So, what makes India a preferred destination for APIs, which is largely a commoditised business involving huge volumes and thin margins?

“Factors such as increased focus on generics adoption globally, the rising number of blockbuster drugs patent expirations, constant demand for reduction in manufacturing costs and strong growth in the overall pharmaceutical market are the driving forces that are reshaping the global API industry and are behind the resurgence of Indian API companies in the global space,” says Gupta of Lupin.

Gupta adds that India has emerged as one of the most-favoured API producing nations globally largely because of its credentials as the best quality manufacturer of generic formulations as well as its cost competitiveness compared to its foreign counterparts.

“While companies from India have excellent chemistry skills due to their well-established generics exports industry, companies from China are preferred for their bulk drug and intermediate sourcing,” says a Frost & Sullivan research on the global API market.

According to experts, most of the Chinese firms specialise in the production of low-value, large-volume intermediates and APIs. Less than 100-200 firms are engaged in the manufacture of higher-value APIs for the developed markets. Besides, a majority of API makers in China also doubles as pharmaceutical companies, selling formulations.

However, “the perception of China being viewed as a low-quality, low-cost manufacturer will not remain forever and that will be the biggest challenge to Indian API exporters. Their chemistry skills are as good as ours, if not superior,” says Ajit Mahadevan, partner, life sciences at Ernst & Young.

Moreover, China has advantages compared to India. In 2009, China traded APIs worth $24 billion, with an year-on-year increase of 2.89 per cent. Then, China has more than 3,700 API products with good manufacturing practices (GMP) certificates from the Chinese drug regulator SFDA, as well as the ability to produce more than 2,000 kinds of APIs. Chinese bulk drug makers also have other advantages such as cheap bank rates and incentives from the government, which help them to compete in the highly commoditised API business.

But, USV’s Tewari is optimistic. He says that what works in favour of Indian companies is their reliability — their ability to meet delivery schedules — which is a big concern for global drug makers while sourcing from China. He notes that the stringent regulatory regime in China has caused closure of many units and is working in favour of Indian drug companies.

The prices of China-made APIs are also rising. “Prices of metformin from China have doubled in the past 1-2 years,” points out Tewari. On the other hand, Indian API manufacturers can reduce costs further: “Our scientists have the capability to reduce the cost of production. Using technology-yield improvement and reducing process cycles in the making of an API from, say, 16 to 8 will considerably help in cost savings,” says J.P. Parswani, executive director at Cadila Pharmaceuticals.

MSN’s Reddy says that competition from China is not severe in APIs exported to regulated markets; the Italian and Spanish manufacturers are the primary competitors. “China competes with us in the case of drug intermediates and chemicals,” he says. (The global merchant API demand is valued at about $50 billion and out of this, demand from the US and Europe constitutes over 60 per cent).

Wanbury’s Chandran says that API business margins are mainly based on the product and market mix of companies. Product portfolios with higher share of recently patent-expired drugs enjoy higher margins compared to older commoditised drugs. Higher share of exports to profitable US and European markets imply better margins. “Still due to intense competition among multiple domestic and Chinese players, EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins vary between 15 per cent and 20 per cent.”

The big growth is also bringing in more stringent regulatory scanners. “The European Union (EU) insists that from 2 July, all APIs imported into Europe will require a certification from the authorities of the country of origin that each of the product and batches meet EU Good Manufacturing Practices (GMP) norms under their Falsified Medicines Directive,” notes P.V. Appaji, director general, Pharmexcil.

The US FDA had two years ago opened an Indian office to inspect facilities in India on a regular basis. Industry experts feel such stringent regulations are, in a way, good for the Indian industry, which has created credibility among global pharma — thanks to the initiatives of API makers.


(This story was published in Businessworld Issue Dated 04-02-2013)