CASE STUDY | Active Fine Chemicals Limited

Full steam ahead: Real challenges in the world

of API production

Abrar Hassan Saadi

Saif Mahmud

Hassan Mahmood

Duti Gomez
Evidence informed policy making in Bangladesh

October 15, key personnel from Ministry of Commerce, FBCCI and entrepreneurs from different
sectors are discussing on new policy formulation to help local thrust sectors flourish. As per new
export policy draft from 2012-2013, the Bangladesh Government envisaged 10 sectors as thrust
sectors. These thrust sectors include software, plastics, Pharmaceuticals, textile, leather tourism
and more. The discussion focuses on the key problems these sectors face and follow an Evidence
informed policy making (EIPM) approach to ensure new policies effectively assists these sectors.
Previously, Bangladeshi ready-made garments (RMG) industry was considered to be the major
thrust sector. But, in recent years sectors such as pharmaceuticals and leather have improved
tremendously. According to IMS Health, annual pharmaceutical sales in the local market may
reach BDT 160 billion within 2018 (LightCastle Partners, 2015). Among the entrepreneurs are
present top executives from Active Fine chemicals Limited, a renowned local raw materials giant
for Pharmaceuticals.

Company profile

Active Fine chemicals limited (AFC) is a local conglomerate that was established with a vision to
serve the healthcare industry of Bangladesh. Besides being one of the prominent Active
pharmaceutical ingredients (API) manufacturer in Bangladesh, the corporate group also specializes
in agro biotech, hospitals and financial services. Out of the locally manufactured 30 APIs, AFC
alone accounts for 22. In an interview with the Corporate groups Associate Vice President (AVP,
Corporate Affairs) Mr. Tanvir Islam, Active Fine Chemicals (AFC) Limited wants to expand its
production capacity and capture larger market share in the Asian region. He has been working with
the firm for more than 2 years and helps the firm achieve its organizational goals through strategic
decision making. Recently, the company started exporting API to the Asian market. Although
their export revenues are still small compared to their total earnings which is above BDT 1 billion,
Active Fine Chemicals plans to rapidly penetrate Asian markets with its high quality and globally
affordable prices Until recently, the company discovered a huge potential of API market in Asia
region. API industries are inherently capital intensive firm, having huge cost in research
&development which has rare success rates plus the additional large capital expenditure required
for infrastructure building. Despite all these constraints, the firm wants to capitalize on
competitive edges like low labor cost, TRIPS treaty, and availability of affordable and talented
human capital. But, there are root level deficiencies in policy directions formulated by previous
Government that needs new shed of light. It is a challenge for the firm to convince the Government
in understanding the true potential this sector has. By capitalizing on the existing competitive edges
this region has and help from the Government, they plan to revolutionize local drug manufacturing
companies by providing high quality APIs at globally affordable prices.

Rolling in the deep: Local Pharmaceuticals sector

A research by IDLC unveils that up to mid-1980s, local pharmaceuticals market was dominated
by MNCs. After the formulation of 1982 drug policy, the scenario started changing. From a BDT
100 crore exports in early 80s, the industry earned BDT 11,000 Crore in 2014. This is a local
industrial revolution for Bangladesh (Shawon, 2011). But, after 30 years of progress, there are core
issues that can materially affect the long term prospects of pharmaceuticals industry.

It will be possible to export medicines worth $10 billion to the

US market alone if the government provides better policy
support and incentives.- Mohammed Farashuddin, Former
Governor of Bangladesh Bank
According to a research by EBL securities, 90% of the pharmaceutical raw materials (APIs) are
imported (EBL Securities Limited, 2015). These imports are mainly made from China and involves
foreign outflow of millions of dollars every year. With rising pharmaceuticals production and
exports, foreign dependence is only rising sharply. China is the global leader in API formulation
and exports. Chinas competitive edges in the industry includes technological foundation,
infrastructure support and Government benefits. Being a highly sophisticated product, API
manufacturing requires stringent quality control which is followed by only a handful of the
Chinese API manufacturers. Furthermore, 77% of total API production in China is exported and
combined with the fact that Chinese government enable its citizens to avail foreign medicine at
local rates by copay policies, indicates to the fact that even China doesnt fully trust itself.

Currently, 41 pharmaceutical manufacturing sites in China and

five in Hong Kong are included on FDAs import alert list, which
 is a list of all the sites banned from shipping products to the
US. - Regulatory Affairs Professionals Society (RAPS)

A significant portion of the Chinese API manufacturers dont maintain the required standard in
API manufacturing. Among many loopholes of the Chinese State of Food and Drug Administration
(SFDA) is that the SFDA requires to regulate pharmaceutical manufacturers, and not chemical
manufacturers. But, many of these chemical makers manufacture APIs. Pharmaceuticals experts
from all over the world expressed their deep concerns about Chinese APIs (Lee & Hirschler,
2012).But why countries keep importing substandard APIs from China? Because if china stops
API production or exports, a significant portion of the pharmaceutical industry would collapse,
worldwide. The only way to stop relying on these substandard raw materials is by establishing
local API industry and relying on local production where quality control audits meet far higher
standards than Chinese. Otherwise, there are too many news online that reveals deadly
consequences of availing medicines made from Chinese APIs on top of the fact that everywhere
Bangladesh loses hefty amount of dollars every year which it could actually earn by itself by
formulating effective policy directions to capitalize on local resources.

While the industry is achieving self-sufficiency, it yet procures

90% of raw materials from 98 indenters around the world as
only one company (Active Fine Chemicals) produces raw
materials independently.- research by EBL Securitites Ltd

Any backward linkage industry (an industry that supplies raw materials to companies to create end
products, i.e. semiconductor industry for Computer chip firms, APIs for Pharmaceutical drug
producers) serves as an important foundation to any other industry for the production of end
product. Although our pharmaceutical exports are on an uptrend, due to heavy import reliance of
raw materials, loss of foreign currencies, no influence in pricing and sub standard quality, we can
suffer in the long run. Bangladesh needs compatible policies for local API industry to reduce its
foreign dependence.
Keeping up with the fact that even the most Melanie Lee and Ben Hirschler | Reuters
developed countries like USA and countries from
Interviews with more than a dozen API producers
Europe are dependent on API imports from China
and brokers indicate drug ingredients are entering
and finds it very difficult to stop doing so even
the global supply chain after being made with no
after growing so much concern by observing
oversight from China's State Food and Drug
Chinese API manufacturing industry, Bangladesh
Administration (SFDA), and with no Good
is a smaller country and thus have more
Manufacturing Practice (GMP) certification, an
complexity in the issue.
internationally recognized standard of quality
Can AFC Limited scale up to its full potential? assurance.

High corporate taxation for the local API --------------------------------------------------------------

producers coupled with the fact that import duties
"There is falsification of APIs going on, we know
on substandard API imports are reduced from
it," said Lembit Rago, coordinator for Quality
25% to 5% gives an added advantage to Chinese
Assurance and Safety in Medicines with the World
unregulated producers. Being a capital intensive
Health Organization (WHO). "The regulated
and research & development oriented firm, Active
markets like Europe and the United States are
fine chemicals limited incurs significant costs.
relatively safe because they have well-resourced
But these factors force a decline in availability of
regulatory authorities. But the situation is different
the funds required for R&D and capital
in places like Africa, where there are a lot of local
investment. As a result, it is increasingly
medicine manufacturers who all use APIs from
becoming difficult for AFC to contribute to its full
China."
potential both locally and globally. Due to lower
cost in importing substandard APIs from China, --------------------------------------------------------------
foreign dependence is growing exponentially with
"There is falsification of APIs going on, we know
the added headache of high impact threats.
it," said Lembit Rago, coordinator for Quality
Furthermore, the extension of TRIPS treaty
Assurance and Safety in Medicines with the World
enables Bangladesh copyright-free protection in
Health Organization (WHO). "The regulated
pharmaceuticals production and export to a global
markets like Europe and the United States are
extent. Not being able to capitalize on this means
relatively safe because they have well-resourced
no benefits after TRIPS expiration (2032) and
regulatory authorities. But the situation is different
forever dependence on low quality API imports
in places like Africa, where there are a lot of local
from China that can potentially harm the citizens
medicine manufacturers who all use APIs from
of the country and well as its foreign clientele.
China."
Furthermore, Chinese Government provides up to 100% reimbursement on its export oriented
products (Gross, 2010). This signifies why China could scale up their API production to a whole
new level in the last 10 years and why Bangladesh is lagging despite having common competitive
advantages such as low cost labor and affordable talented human capital. AFC limited is
constrained by facing difficulties in policy directions that are hampering the company along with
companies in similar industry to capitalize on its growing pharmaceuticals production and exports
and international treaties like TRIPS that enable Bangladesh to produce and export drugs that it
couldnt otherwise. Lack of export incentives and reimbursement also demotivates the local
producers, giving an up-boost to foreign substandard API exporters.

AFC limited seeking compatible policies

After years of ongoing research on thrust sectors and Governments initiative, an Evidence
informed policy making (EIPM) draft has been passed on to the Ministry of Commerce. This policy
draft has significant implications on the overall Pharmaceuticals industry of Bangladesh. Whether
Active Fine chemicals (AFC) limited can convince the Government to allow reduced taxation for
at least next 10 years and provide export and R&D incentives to help create a self-sustained highly
reliable pharmaceuticals industry that can take over the Asian market in the upcoming years. R&D
is a process with rare success rates. These benefits will allow Active fine chemicals limited and
similar companies to develop required infrastructure, expand production capacity, fully meet local
API needs and contribute larger share on foreign revenue earnings. It is also a matter of great
concern for one of the most important thrust sectors (pharmaceuticals) as its long term prospects
depend greatly on the policies that will shape its backward linkage sector- API production. But if
they fail to convince the Government, who would take the blame?
Bibliography
EBL Securities Limited. (2015). Pharmaceutical Sector Overview . EBL Securities Limited.

Gross, A. (2010, October). Reimbursement in China. Consultants' Corner.

Lee, M., & Hirschler, B. (2012, August). Special Report: China's "wild east" drug store. Retrieved from
Reuters: http://www.reuters.com/article/us-china-pharmaceuticals-idUSBRE87R0OD20120828

LightCastle Partners. (2015, December). Retrieved from Lightcastlebd:

http://www.lightcastlebd.com/blog/2015/12/market-insight-how-the-bangladesh-
pharmaceutical-sector-is-performing-in-2015

Piyush Chandraa, C. L. (2013). VAT rebates and export performance in China: Firm-level evidence.
Journal of Public Economics, June.

Shawon, S. A. (2011). Pharmaceutical Industry of Bangladesh. IDLC Finance Limited.