Drug traffic

Drug traffic

Poor pollution control fuels boom

For Medak the watershed year was 1975, when the government launched an initiative to industrialize an 'industrially backward' area. The Patancheru Industrial Estate was set up, with subsidies and other incentives. The area offered advantages in terms of availability of land and water, proximity to Hyderabad and location on the national highway linking Hyderabad to Mumbai. By 1995 there were more than six estates near Hyderabad with about 400 units.

Pharmaceuticals drove the boom. Says M Narayana Reddy, president, Bulk Drug Manufacturers Association (bdma) "Of our 500-odd members almost 50 per cent are from Hyderabad. Forty per cent of the total Indian production of drugs takes place in Andhra Pradesh. Of this 80 per cent are in the districts around Hyderabad." Bulk drugs are the active chemicals in powder form, used as the main ingredient in medicines. Drug companies can themselves manufacture bulk drug for their branded or generic medicine or outsource this process. Estates in Medak have both kinds of manufacturing.

According to a 2005 report of the Federation of Indian Chambers of Commerce and Industry (ficci), the Indian pharmaceutical industry is valued at approximately us $8 billion. Globally, Indian industry ranks 4th in volume and 13th in value, with over 20,000 units. Of these around 260 are in the organized sector. Most companies specialize in bulk drugs. This is clearly where business makes sense.

The outsourced drug business is part of India's competitive advantage. According to a May 2007 report by the us International Trade Commission (usitc), India is growing in the contract-manufacturing segment. Most Indian companies are partners of multinationals, providing 'contract research and manufacturing services'. In other words, developed countries outsource to India the manufacture of ingredients.

Industry admits that the business is changing to respond to global needs and rules. According to the ficci report, after the wto-mandated intellectual property regime came into force, Indian pharmaceutical manufacturers could not manufacture patented drugs. New business models included contract research (drug discovery and clinical trials), contract manufacturing and co-marketing alliances. In 2005, the Indian drug and pharmaceutical contract research and manufacturing services market was estimated at us $532 million with contract manufacturing accounting for nearly 84 per cent. The rest consisted mainly of research (excluding clinical trials). Both contract research and manufacturing grew by more than 40 per cent in 2004-05. Industry experts say Indian companies have the capacity to gain 35-40 per cent of the global market.

Bulk drugs account for nearly 60 per cent of the pharmaceutical export business. "India's largest single export market continues to be the us, which is the world's largest drug market. Exports to the us grew from us $429 million in 2003 to us $589 million in 2005, or by 37 per cent," says the usitc report. For individual products, India's leading drug exports include antibiotics and vitamins. Antibiotics exports are on the rise. They increased from us $55 million in 2002 to us $271 million in 2005. During the first half of 2006 (January-June), the figure was us $179 million.

Indian companies benefit from a greater acceptance of generic drugs among the us public, tremendous pressure on healthcare providers to reduce costs, and impending expiration of patents on drugs with annual sales of $50 billion," says William Greene, the author of the trade commission report.

Cutting costs
Manufacturing costs in India are 30-40 per cent lower than those in the us and western Europe and labour costs are one-seventh of that in the us-- that's why outsourcing works. The usitc report quotes a Confederation of Indian Industry estimate that says it costs us $100-200 million to develop a new drug in India compared to us $500-900 million in the us.

Cost-cutting on pollution control is an important factor behind this competitive advantage. Industry accepts that investment on pollution control is a significant part of the cost--with some estimates putting it at up to 20 per cent of capital investment. Lax regulations make cost-cutting possible. "For effluents at new us drug plants, the environmental protection agency sets strict limits on at least 34 chemical compounds, from acetone to xylene. But in Patancheru, where normally only the total quantity of pollutants is tracked, there's almost no information about specific toxic compounds. That's serious because some of the drug industry's solvents, by-products and ingredients can harm people even at low concentrations," says Stan Cox, senior research scientist at the Land Institute, Salina, Kansas. He has studied the Indian pharma industry and Patancheru in depth.

While industrialized countries outsource production to India to cut costs, the big Indian companies sub-contract many, including the most polluting, processes to small-scale firms, which are notorious for lack of pollution control. This enables the big names to claim zero-discharge records (see box Contract killing).

In recent years, the Indian bulk and intermediate drugs sector has been hit because China has driven costs down further, flooding the world, including India, with its extremely low prices for these drugs. Indian companies, many of them located in Medak, were forced to shut or cut production because they could not compete. But business is looking up again. The price of Chinese drugs has gone up after a cut in export incentives and, reportedly, because China is cleaning up its pollution.

In India, as environmental regulations and costs for pharma industry have increased, it makes business sense to downgrade its pollution standards. Industry finds it cannot afford to comply with environmental safety measures while facing cutthroat competition. Environment management costs are between 30 per cent and 35 per cent. According to industry sources, bigger companies have already started running small units to meet in-house requirements under different names. On the other hand, outsourcing has established a symbiotic relation between large and small players.

The regulators' stick is faced by small-scale industries, which are not financially equipped to handle costs of pollution. "Environmental regulations have seen the small-scale players shutting shop. We ought to find better production and environment management technology," says Narayana Reddy.

But this avoids the basic question. The cost of pollution should be paid not just by polluters but by consumers too--not by innocent bystanders.
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