API (Active Pharmaceutical Ingredient) is a chemical compound that is the most important raw material to produce a finished medicine & produces the intended effects to cure the disease. For instance, Paracetamol is the API for Crocin and it is the API paracetamol that gives relief from body ache and fever.

API is made by several chemical compounds. The chemical compound which is in the process of becoming an API from raw material is called an intermediate. The long manufacturing process is continued until it is purified and reaches a very high degree of purity. An API manufacturer first develops the chemical compound in a laboratory. Later, the production department manufactures high quantity of APIs using large reactors. It is then checked for purity before selling it to drug-makers. If an API is not ultra-pure, medicine cannot meet the strict quality criteria. So the quality of an API plays a very important role.

Interesting History

During the early 90s, India was self-reliant in manufacturing APIs. When China entered the market, it started selling APIs, which were 40% (Now 20%) cheaper than Indian APIs. China as a producer of API, captured the Indian market with cheaper products. Their cost of operation was one-fourth of India’s cost. Even the cost of finance in China is 6–7% against India’s 13–14%. So, due to low-profit margins and non-lucrative industry, Indian pharma companies over the years stopped manufacturing APIs to cut cost and increase their margins. Not just APIs, India even stopped producing materials used to manufacture APIs, which are called intermediates. China is now the global leader in the production and export of APIs, accounting for around 20% of the world’s API production and India imports around 70% of their API requirements from China.

The other alternatives for buying APIs, when China is unable to supply, are the US, Singapore, Italy and Hong Kong.

Today, The Indian pharmaceutical industry is the third largest in the world in terms of volume and fourteenth largest in terms of value. India is currently the largest producer of generic medicines with a share of 20% of total global production globally, catering to over 60% of world’s demand but in the case of raw materials — intermediaries and APIs — China enjoys the number one position on the global stage.

A KPMG report suggests the Chinese API market has now diversified to over 2,000 API molecules and more than 7,000 API manufacturers, with the number of manufacturers’ increasing by five times in the last five years. Today, China’s pharma industry boasts an annual production capacity exceeding 2 million tonnes.

COVID-19, Boycott china and Government Intervention

Covid-19 pandemic and ongoing trade wars have exposed the pitfalls of over-dependence on Chinese APIs. India is no exception. The government’s Rs 10,000-crore production-linked incentive scheme to boost domestic manufacturing of critical bulk drugs and APIs approved by the Cabinet in March — will be given to companies investing on greenfield plants to manufacture 53 crucial APIs of anti-TB drugs, steroids, vitamins, etc, with the rider that they must supply to domestic drug makers.Result: Stock of India’s top 7 pure-play API producers surged up to 110% in 50 days.

) Divi’s Laboratories Ltd (India’s Largest API producer)
2Granules India Ltd
3) Aarti Drugs
4) Solara Active Pharma Sciences Ltd
5) Sequent Scientific Ltd
6) Laurus Labs Ltd
7) IOL Chemicals

Long manufacturing cycles and strict quality standards that resulted in low margins for Indian companies that’s why some life-saving drugs, including penicillin and ciprofloxacin has import dependence is more than 90%.

India currently has around 1,500 plants that manufacture. Some of the most important APIs, such as paracetamol, are Chinese imports.

Investment opportunities:

Nifty Pharma has under performed the market since last 6 years and now on a fresh breakout with multiyear opportunity. This is the chart of NIFTY Pharma Index which is on fresh breakout with resistance level of 14,040.

Top Indian Pharma Companies: Sun Pharma, Dr Reddys Labs, Divis Labs, Cipla, Lupin, Aurobindo Pharma, Torrent Pharma, Cadila Health, Abbott India, GlaxoSmithKline, Pfizer, Sanofi India, Alembic Pharma, Natco Pharma, Laurus Labs, Ajanta Pharma, Glenmark, AstraZeneca, Procter&Gamble, Eris Life, FDC, Wockhardt, Alembic.

Top 5 Stocks for next 3–5 Years: Divis Labs, Lupin, Aurobindo Pharma, Glenmark & Abbott India Limited.

India has adopted a right approach — to find alternative sources in the immediate term and to develop domestic capabilities in the medium to long term. There is a lot of private equity money and overseas funds are heading towards that sector now. And if the tensions with China continue, India will have to bring a lot of API manufacturing from China to India. In short, we are heading into a multi-year boom on API manufacturing and the entire ecosystem which feeds into API manufacturing.

Global API market is worth $200 bn and Indian contributes 8% of it. This movements may attract $2–3 bn investment opportunities in Pharma sector in next couple of years. Which proves to be the multiyear opportunities for investors.

By Vishal

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