The government's decision to incentivise domestic manufacturing of active pharmaceutical ingredients (API) and key starting materials (KSM) could curtail supply-chain disruption risk for Indian drug makers, Fitch Ratings said on August 10.

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The ratings agency said that the incentives address core issues of pricing competitiveness and funding and may assist the investment decisions of local pharma companies in the current environment. "India is one of the world's leading suppliers of drugs - mostly generic formulations - but depends on imports for its requirement of APIs and KSMs, particularly China, which accounted for more than 60 percent of requirements in some therapy areas," Fitch Ratings said in a statement.

"The government announcements follow recent developments, including plant closures in China due to the coronavirus pandemic earlier in the year and the more recent border standoff with China, which underscore supply-disruption risk due to overdependence on imports."

As per the statement, India's reliance on pharma ingredient imports has risen over the past few decades due to the higher cost of domestic production, with the price gap reaching as much as 20-30 percent, particularly for energy-intensive fermentation-based ingredients used in anti-infectives. Import dependence is more than 90 percent for some life-saving drugs, including penicillin and ciprofloxacin. "We believe the government announcement, which includes production-linked incentives and financial assistance schemes aggregating to $1.3 billion, will help address the two keys issues; the higher cost of domestic production compared with imports and funding requirement to set up the necessary infrastructure," the statement said.

"The production-linked incentive scheme - which accounts for Rs 0.9 billion of planned outlay - offers an incentive of up to 20 percent of sales for fermentation-based products and up to 10 percent for chemical synthesis-based products for the next eight to nine years. This should help to bridge the price gap and make domestic production more competitive."

The government has also allocated $0.4 billion under the capex assistance scheme to fund up to 90 percent of the investment need to build common infrastructure facilities in three bulk drug parks. "We believe this will aid the investment decisions of Indian pharma companies, particularly in the current environment where the focus in on conserving cash," the statement said. "While these incentives aim to encourage incremental investment to ensure uninterrupted supplies for domestic needs, companies with existing API production capabilities could benefit from export opportunities over the medium- to long-term as pharma companies globally look to diversify their sourcing - a theme that has gained relevance due to the pandemic."