Can India’s ‘pharma city’ break China’s grip?

On the edge of Hyderabad in southern India, a vast patch of arid shrubland the size of about 14,000 football fields is becoming a testing ground for a model that could help wean the world off its dependence on Chinese drug ingredients.

This empty site of the Hyderabad Pharma City, marked out by scuffed signposts and a rubble-strewn access road, is expected to attract about $8.4bn and employ 560,000 people in hundreds of sprawling plants. Within two years, once land is allotted, officials say, it will be rolling out vital raw ingredients for medicines like penicillin, ibuprofen and anti-malarials that make their way around the world.

At the heart of the endeavour is India’s attempt to wrest control from China, which supplies almost 70 per cent of the active pharmaceutical ingredients – or the bread-and-butter chemicals – that go into the medicines produced by the Indian pharmaceutical industry. It's a vast project that shows how governments are growing increasingly concerned about China's stranglehold over drug supplies — as well as the challenges they face in loosening it.

India’s ability to secure not just its own drug supply but that of Africa, the Americas and Europe is at stake, since it supplies most of the generics sold in American pharmacies and hundreds of countries globally. India’s reliance on China to keep raw material supply going is increasingly fraught because the two countries often engage in skirmishes along the border, and China has in recent years increasingly used its trade advantages against other countries during political disagreements.

Prime minister Narendra Modi has eagerly promoted his country as the “pharmacy of the world”, but the glaring dependence of India’s $42bn drug manufacturing industry – much of which is headquartered in Hyderabad – was exposed at the start of the Covid-19 pandemic. In early 2020, China locked down Hubei province, its own medicine manufacturing heartland, as the coronavirus spread outside of Wuhan. That caused missed shipments and shortages, with API prices surging as much as 100 per cent in India and around the world.

“Supply chains got completely disrupted, China shut down,” recalls Samina Hamied, the vice president of Cipla Ltd, one of India’s largest drugmakers. “We had to deal with distorted supply chains on one end and, obviously, on the ground, craziness on the other.”

China accounted for 28 per cent of the $236.7bn global API market in 2018, according to data compiled by Dongguan Securities Co. China hasn’t ever halted drug supplies for political reasons, and kept them flowing even at the height of the trade war with the US. Yet western countries have grown increasingly uneasy over the fact that supply of their commonly used medications are reliant on a major geopolitical rival amid an ever-widening ideological rift.

US lawmakers have recently introduced a batch of legislation to protect the country’s pharmaceutical supply chains from China. “It’s time to bolster onshore manufacturing of pharmaceuticals to ensure Americans never have to rely on China for life-saving medicine,” says Republican senator Tom Cotton from Arkansas.

Multiple Indian efforts to redress the South Asian country’s reliance have sprouted, from the Hyderabad facility which is an effort of the state government, to a plan by Modi’s administration for three parks.

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The state government’s plan is the farthest along with 19,000 acres already acquired. Companies including Sun Pharmaceutical Industries Ltd, Dr Reddy’s Laboratories Ltd and Zydus Lifesciences Ltd have already said they will consider building plants there, and officials say about 450 Indian and international companies have expressed interest.

The Indian city of Hyderabad is a sprawling metropolis spread across hills and picturesque lakes, and has been at the forefront of attempts to transform the country into a scientific research hub. The planned Pharma City, set about 22 miles south of Hyderabad’s airport, will focus on bulk drugs and promises to ram through India’s treacle-like web of red tape around environmental clearance and land-acquisition by providing drugmakers plots with ready-made approvals for the heavily polluting industry.

The man leading the initiative is Shakthi Nagappan, a slight, bespectacled 36-year-old government employee. Working out of an administrative office in central Hyderabad, Nagappan spouts the jargon of a start-up founder. The walls of his side office are decorated with inspirational quotes and canvas-print portraits of figures like Barack Obama and Elon Musk.

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Over cups of sugary tea, Nagappan sketches out how he wants the massive project to emulate the success of Genome Valley, a research and development cluster set up two decades ago to the north of Hyderabad, which now houses labs for companies including Novartis. Nagappan says the upcoming Pharma City to the south will compete with China’s ability to drive down costs.

The main idea is to help Indian pharma companies cut costs and become more competitive on price by providing them with land where environmental clearances are sorted, waste disposal facilities are already built and other infrastructure is ready.

“When we started planning Pharma City, we started looking at various regions, including China. What makes China more attractive?” he says, citing various advantages from cheaper capital and infrastructure, along with the ability to streamline approvals. “Within Pharma City we’ve brought in elements that can bring down capital and operating costs for the industries in a range of anywhere between 25 per cent and 30 per cent.”

Some Indian companies have largely pulled away from making pharmaceutical ingredients in recent years as the Chinese API industry gained an inherent advantage because of economies of scale and support from its government in the form of financial incentives.

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But after the Hubei shutdown of 2020, the Modi government drew up plans to allot land for three major bulk drug parks. It also sought to provide more than $1bn in funding to encourage companies to manufacture ingredients domestically, part of Modi’s nationalistic “Make in India” campaign that now looks to capitalise on firms searching for an alternative to China.

Still, progress has been slow on both the state and national fronts, mired in tender processes and missed deadlines. The Pharma City plan was announced in 2015, and it will supply finished products only some years down the line.

There’s also a shortage of applicants wanting to make a number of “critical” active pharma ingredients, the kind that China churns out. “The chemical industry cannot be conquered in a year, you need decades of investment to do that,” says Satyanarayana Chava, the head of Laurus Labs Ltd, one of India’s biggest makers of API. “The entire world’s dependence on China will continue.”

Some delays are indicative of the wider challenges around getting infrastructure projects done at speed in India. It will likely take the country a number of decades to reach Modi’s goal of self-reliance, says one western diplomat. Right now it’s easier for Indian pharma firms exporting to western markets to buy ingredients from China that have already been approved by foreign regulators, rather than spend millions of dollars running clinical trials, they add.

In Hyderabad itself, some of India’s biggest pharma tycoons are openly blunt about Modi’s drive.

“As far as commerce goes, nationalism doesn’t work,” says GV Prasad, the co-chair of Dr Reddy’s Laboratories. “If China is offering something cheaper, we’ll buy from China,” he says, pointing out the Chinese-made furniture in his office. “In the end, it’s business.”

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