Fermentation-Based APIs: Indian Pharma's Challenges & Opportunities

Over the last 20 years, India’s pharmaceutical industry has seen major upskilling, with over 650 FDA-compliant labs, the most outside the United States. Indian pharmaceutical companies have emerged as strong R&D partners for leading multinational pharma firms such as Pfizer, Bayer, and Merck. This growth has been fueled in part by a commiserate Indian reliance on imports of Active Pharmaceutical Ingredients (API) from China. APIs, such as Penicillin and Erythromycin, form the building blocks for the more complex intermediates and active formulations that comprise over 90% of Indian pharma exports. India imports nearly 70% of its APIs from China, with several dozen API types suffering from 100% import reliance on China. China’s API production concentration leaves India’s pharmaceutical industry vulnerable to supply chain disruptions, which China has demonstrated its willingness to engage in across other Indian industries. India is faced with a need to overcome its shortcomings in API production that will require upstream reforms and infrastructure investment.

How India fell behind in API production

Although India still possesses a sizeable API export industry, its domestic production of key fermentation-based ingredients such as Penicillin and Erythromycin was undercut by cheaper Chinese imports, sometimes by up to 30%. Chinese API production is made cheaper by co-locating in specific industrial clusters such as in Zhejiang, Shandong, and Jiangsu to take advantage of existing infrastructure, scaling, and proactive local government investments to turn Key Starting Materials (KSM) into APIs. India has lagged China in the diversity and scale of local chemical infrastructure and government support for API production. Indian drug intermediate firms currently face the pressure to split API suppliers, buying from China for cost-sensitivity and buying locally for stockpiling. Since the Covid-19 pandemic, Indian government has sought to reduce import dependence on China by creating more production-linked incentives (PLI) for the domestic manufacture of specific APIs as well as pharma-clusters. This article explores these mechanisms in more detail.

Recently, the APIs that have been given the highest incentives are specifically fermentation-based, where Indian industry has seen the highest erosion from Chinese imports. This year, India’s Pharma PLIs have been extended once more to add onto successful product categories, reflecting increased policy impetus to boost the depth and breadth of applicants especially in the fermentation category. Examples of the new additions include Erythromycin and Gentamycin. This is a positive step towards the development of a globally competitive fermentation API industry, of which India has faced difficulty. A key challenge is the fermentation API industry’s reliance on KSMs from the chemical and agricultural sectors, the latter of which provides critical biomass for fermentation strains to metabolize. 

The agricultural derivative industry must reach a high level of technical sophistication to provide the quality materials at amounts required for large scale API production. Crucially, the industrial capacity that fed into the rise of the Chinese API industry already had a significant presence due to Chinese strengths in using biomass to produce fertilizer. By 2017, nearly 40% of Chinese corn production was consumed by industrial processing. India will need to boost conversion of agricultural feedstock into KSMs for APIs such as high-quality corn steep liquor, meat extracts, and peptones. For example in 2023, China was by far the world’s largest producer of peptones, which are a major nitrogen source for pharmaceuticals and fertilizer, at over 9,000 metric tons.

This scale of KSM production was a key factor that contributed to the ability of Chinese API makers to ferment at scale and set competitive prices. India remained at just nearly 2,000 metric tons of peptones, which was one factor in making Indian APIs less cost-attractive than their Chinese counterparts. The Indian government should treat agriculture as both food supply and biomass feedstock, requiring investment in processing facilities and regulatory changes to boost direct farmer-to-processor sales. Such regulatory changes include permitting for private markets and retail wholesales.

Capital Challenges

Another major challenge facing the development of a competitive Indian fermentation API industry is the large amount of capital expenditure required for creating large scale fermentation plants. The cost of a cutting-edge plant can easily exceed over $75 million to equip with R&D centers, production sites, bioreactors, power, and pollution treatment. Due to experimental nature and length of fermentation cycles, researching and verifying different strains can take months, requiring high investment in equipment and operational costs. Fortunately, Indian pharmaceutical companies also have the highest rates of R&D investment of any Indian company, indicating a willingness to engage in risk taking for research.

Recognizing the economic potential of reducing reliance on Chinese API imports, India is stepping up to this challenge. India is quickly catching up on the production of the necessary agricultural byproducts needed for API production. The market for meat extracts in India is expected to grow to over $525 million by 2030. India’s domestic production of inputs for APIs is expected to increase as domestic API manufacturers seek to scale up production and while Indian agriculture looks for alternative sources of demand following U.S. tariffs. India’s growing agricultural derivative industry will likely boost suppliers for domestic API manufacturers, reducing the cost differential with Chinese competitors. 

On the needed infrastructural development, Indian states such as Gujarat, Telangana, and Andhra Pradesh are competing by offering land to build “Pharma Cities”, providing subsidies for R&D equipment, and are waiving Goods and Service Tax to attract investment. Moreover, these states are offering pharma-hubs with dedicated effluent treatment plants, consistent power and water, along with specific R&D incentives for firms that seek to set up fermentation plants. As a result, India’s leading pharma companies have invested in several facilities to manufacture common fermented APIs such as Penicillin-G, Potassium Clavulanate, 6-APA, and other novel proteins. The partnership between governments and private industry has boosted confidence in continued support for domestic API manufacturing. 

However, to match the scale of efficiency reached by Chinese API providers, India will need to integrate the upstream in KSM production and processing with the pharmaceutical industry by streamlining direct purchase agreements and enforcement of contracts between farmers, KSM producers, and API manufacturers. However for Indian pharmaceutical companies to compete globally, they will need state governments to support them through extending equipment reimbursements, employment-incentive programs, and building out infrastructure such as power, water, and sewage.

Conclusion

In sum, India will face short term challenges due to Chinese undercutting. However, production-linked incentive support for APIs, the growth of upstream inputs, and competition between Indian states to attract pharmaceutical investment provide a strong foundation for the Indian fermentation-based API industry to grow.