However, the country is way behind China still. This is attributed primarily to the fact that while over the years, Chinese firms aggressively forayed into the scaling of API businesses, there was also a simultaneous erosion of interest in the API business from Indian players (read why in the box titled “Indian API story”). This has allowed Chinese companies to entrench themselves with many formulation companies. Changing an already established API vendor for a particular drug already being manufactured is a huge hassle (time-consuming approvals are needed) in this rigidly regulated environment. Moreover, since formulation companies In India and globally continuously face price erosion for their products, they are forced to seek their inputs (including API) at low costs. China is able to offer lower prices in many APIs; since production costs in China are, on average, 10 and 20% cheaper
ix x xi. This allowed Chinese firms to consolidate their markets.
Direction of Solution: A two pronged strategy to revive Indian API
Weaning away formulation companies from their established API partners for blockbuster drugs already being manufactured by them is likely to be an uphill task at this stage. So, if Indian Pharma companies have to really be competitive and a volume player again in API, the best opportunity for them will be to adopt a double-pronged strategy. For this, API players have to:
1. Develop rapid R&D capabilities to establish sustainable vendor relationships for APIs of drugs newly free of patent or for low-competition generics
A good opportunity for creating a market for Indian APIs through the R&D route is presented by the fact that there are a large number of niche, low-competition APIs that can be supplied to the regulated markets
xii. And there is a completely new emerging market for animal health which has very little competition. Most of the APIs in this market are currently made by the innovator companies in their in-house facilities, but there is an increasing trend of third-party sourcing.
Moreover, the next big patent cliff is coming in the next few years. API companies that have much shorter R&D lead times than the competition so that they are front runners in developing the targeted APIs, seed many potential formulation companies and lock them in supply partnerships as soon as these drugs expire will enjoy a tremendous advantage.
However, the challenge will not be over with establishing partnerships. Over time formulation companies will experience dramatic price erosion in their markets, and so they will expect their API partners to play their part in reducing input costs. So API R&D will have to work on process innovation is able to identify the route for the lowest cost of production for these molecules at the highest yield. This is necessary to help secure and sustain price competitiveness and, consequently, higher SOB with customers.
2. Ensure operational capabilities (quality & reliability of supply) in addition to price competitiveness that can completely offset the Chinese cost advantage xiii
While leveraging R&D can help establish a foothold in formulation companies to increase market share over time, it is necessary to take significant steps in operations. This means that manufacturing plants must provide greater value to customers than just price parity with Chinese counterparts. In order to achieve this, Indian API players must offer not only competitive prices and high quality (which India is already known for) but also reliability of supply. This will differentiate Indian API companies and reshape the competitive landscape.
However, it must be noted that if these efforts in R&D or in Operations require significant additional investment, it will wipe out any hard-won margin and profitability. So the only viable direction of a solution for API players is to
Increase new API molecule filings with much shorter and more competitive development lead times by using the current R&D team strength/ without additional resourcing.
Increase tonnage of API output manufactured while also ensuring high reliability of customer orders without any capacity investment or increase in costs.
While this may sound too ambitious, the good news is that there are huge wastages in both R&D and Operations that are going unnoticed/ignored by companies. If we can eliminate them, these objectives can be met.
How to enable Rapid R&D
1. A vicious mismatch of capacity and load
Currently, most API R&D facilities in India are highly inconsistent in terms of output every year. Lab development lead times of API itself in many companies are very lengthy, spanning 15-18 (best are at 8-9 months) months even for a simple molecule. The whole journey till filing can span 26-30 months (best case, they are able to do this in 16-17 months). This situation exists since, in this environment, there is a perennial mismatch experienced between capacity and load.
If you examine the workload on expert resources, which are crucial for these projects to progress in the R&D pipeline, it can be seen that they are caught in a vicious loop of wastage of time through task elongation, interruptions and bad muti-taking (see image). Therefore, in spite of the best efforts from all, a lot of stress and projects are delayed, and the ability of the company to be a front runner to market the new API becomes an issue.
2. Changing paradigms to build speed
Fortunately, there is a way to emerge out of this vicious loop. If the principles discussed below are implemented, it may enable a faster flow of projects in the R&D pipeline:
Instead of the current practice of capacity scheduling, limit the WIP of development projects in the system and ensure that a new one is taken up by only any one of the currently being worked upon projects is completed. This will prevent capacity loss due to interruptions.
Since disruption of work is unavoidable if the full-kit of information, materials and approvals is not available beforehand, a separate preparatory team can organize a full-kit before a project enters the WIP list.
Plans go haywire quickly by trying to manage projects using deadlines by triggering multi-tasking when everything becomes urgent. Moreover, using a WIP limit makes it impossible to use predefined date commitments. Therefore, use a common global priority system to ensure sync between teams.
Use daily management and predefined issue resolution frequency rather than the usual process of intervention close to committed dates to enable task completion at the fastest possible pace.
Eliminate individual task level buffers and track buffer consumption at the project level vis-à-vis the work completion, to get visibility of all the projects in the company’s R&D pipeline and take timely expediting/corrective actions wherever judicious.
(For more details, visit
Once these steps are implemented, a group of 50 chemists and 100 analysts who would, in the earlier way of working, typically give an output of 8-10 projects per year would start delivering 15-18 projects per year! The speed with which projects are completed can be leveraged to establish partnerships early with formulation companies.
How to leverage operations for competitive advantage
Similarly, a closer review of current manufacturing practices in this industry will indicate that there are several sources of capacity wastages that result in burgeoning lead times and longer working capital cycles
xiv API companies. Let's examine the causes of these wastages and why they mostly go unnoticed.
Sources of capacity wastage
1. Wastage due to starving bottlenecks
Each API molecule manufactured needs to take a predefined route of steps for manufacturing, and set-up change tends to be time-consuming. Each route will have its own bottleneck or capacity-constrained resource. Any idle time on these bottlenecks costs the company in terms of reduced output and increased lead time. It will be interesting to note that some of the capacity wastage is created during the planning stage itself. The reasons are as follows
Starvation due to month-end skew
Most of the API plants are run with monthly schedules. Output is committed by the plant for a month and any delay/rework during the month needs to be covered by expediting the last stages of manufacturing during month end. Often these last stages are non-bottlenecks for a product.
In order to deliver volume for the month, manpower is shifted from bottlenecks to non-bottlenecks resulting in starvation at the bottleneck and wastage of capacity.
This manpower shifting prepones the output declaration from the first week of the next month to the last week of the current month, creating a backlog for the next month before it starts. This again puts pressure on production at month-end of the subsequent month-end cycle repeats.
Machine efficiency losses
Machine efficiency is at its best if the processes are strictly adhered to, and the technical parameters are precisely achieved.
However, very often, due to the ageing of machinery inefficiency of utilities, the necessary parameters are not precisely achieved In the stipulated time. For instance, in spite of following procedures correctly, it may take more time to reach the required temperature during drying.
If this can be prevented by continuously tracking to ensure that the machines function at their best, the time saved will be equal to the output earned.
While this may sound very simple, such improvement projects are usually overlooked for two reasons. Firstly a consistent demand capacity gap is rarely experienced in planning. This is because annual sales targets are anyway based on estimated capacity based on previous experience (with wastages built-in).
Secondly, because of margin pressure, the top management tends to be more focused and drive cost reduction projects than productivity improvement projects.
2. Wastage due to planning horizon
Monthly production plans are a combination of actual orders and 3-month forecasted orders since most API companies have to serve unregulated markets (transactional deals; difficult to predict) in addition to the regulated markets (more predictable). So, closer to due dates, very often, the order quantity/ priorities get changed. So this means that set-ups have to be changed, a few WIP orders set aside, and some other urgent order/s processed. When urgencies of this nature hit an API company, they perceive themselves as short of capacity (pain felt- expediting, sale loss or delay in delivery).
However, companies never perceive themselves as having wasted capacity since they almost never have excesses of FG inventory (evidence of capacity stealing) in their warehouses (which logically should have been created due to forecast inaccuracy). The reason for this is the buying practice of formulation companies. Since they tend to change their priorities at the last moment, most of them are amenable to picking up any FG that has been created at their behest or at least adjusting it in the credit terms. Voila – no excess inventory on the books!
Interestingly, this is one of many capacity wastages that can be traced to formulation companies.
3. Wastage due to ordering practice of formulation companies
Because of their buying practices, formulation companies (whether captive or otherwise) end up keeping 4 months to one year of API inventory in their warehouses. They also trigger orders and replenish when the stock levels fall below a particular, very conservatively calculated, “minimum” level (3 - 6 months of sale)on an urgent basis. While this stock may be being maintained in the formulation company’s books, stealing the capacity to make this ahead of the required time becomes a source of capacity wastage for the concerned API company. Further, it is inevitable that when there is so much inventory being held that some of it will expire and will have to be sent back to the API vendor and repurposed. This becomes an additional source of capacity wastage.
Eliminating capacity wastage
Reducing wastage of capacity due to this heavily buffered ordering practice of formulation companies is possible only if ~100% reliability at shorter lead times can be consistently demonstrated by their API partners. For this, API companies have to abandon the monthly planning approach and instead implement processes in their procurement, quality control and manufacturing that enable the flow. The major steps involved in enabling alignment of capacity to market pull are:
Decoupling of RM procurement lead time from manufacturing lead time by maintaining stock replenishing based on consumption. This will ensure the high availability of RM at reduced stock levels since forecast errors do not affect it.
During planning, ensure optimization of product mix for throughput maximization.
Implementing these ensures that flow improves and month-end skew is eliminated. Some of the gains from these efficiencies in terms of higher output (30-40% increase), at lower WIP (~40% reduction)/FG (25-30% reduction) inventory and shorted working capital cycles can be passed on to the customers to bring better price competitiveness if required.
At the same time, the high availability (>90 % daily of made-to-stock items) that the new system enables can be leveraged to gain a decisive competitive advantage by offering ready delivery of API to formulation companies. Since formulation companies are also very keen on reducing working capital stuck in the RM, such a reliable vendor who can reliably offer small and frequent offtakes as and when they need it will be viewed as Godsent and is sure to gain higher and higher SOB from them over time.
Conclusion: API can be done right xv xvi
Below is a simple simulation of how such an Indian API company can stack up against a Chinese API company once it has become an efficient partner to formulation companies. Clearly, profitability can be increased significantly by increasing output from the same capacity and converting this into sales without increasing fixed costs. So if most of the API companies adopt these practices, it can indeed turn India into a globally competitive API manufacturing hub.
These steps will surely help the Indian Pharma industry re-establish its footprint in the API business. However, it must be added that since more than 75 per cent of India’s KSMs imports originate from China
xvii, there is still a significant supply risk. Supply disruptions in KSA may squeeze margins and raise product prices. So API companies will next need to find ways to strengthen the moat around their business by integrating backwards to KSM and other basic intermediates.
How can that be done? That’s another story.
End notes and References:
i) APIs are also known as bulk drugs, that deliver the intended outcome for patients; APIs are needed for manufacture of drugs including capsules, tablets, etc,.
iv) The companies who produce and sell APIs need their product to get registered with US FDA by filling a Drug Master File [DMF] which makes sure that the facilities of the API manufacturing company are in proper shape and are safe.
viii) Advantages that’s giving China a cost advantage include - scale (some Chinese facilities are said to be 10-15 times larger than the average Indian facility), local supply of KSAs, other chemicals and intermediates (while Indian manufacturers have to source most of these from China), and significant government backing (e.g cheaper electricity) ix)
iii) Advantages that’s giving China a cost advantage include - scale (some Chinese facilities are said to be 10-15 times larger than the average Indian facility), local supply of KSAs, other chemicals and intermediates (while Indian manufacturers have to source most of these from China), and significant government backing (e.g cheaper electricity) iv)