Background: medicine regulation, API manufacture and gaps in current research

Medicine regulations have been defined as the ‘combination of legal, administrative and technical measures that governments take to ensure the safety, efficacy and quality of medicines, as well as the relevance and accuracy of product information.’12 Regulatory compliance is generally understood in the scholarly and policy literature as ‘obedience by a target population with regulations’.13 For compliance to occur three key conditions need to be met. First, the target group must be aware of the rule and understand it. Second, the target group must be willing to comply either because of economic incentives, positive attitudes arising from a sense of good citizenship, acceptance of policy goals or pressure from enforcement activities. And third, the target group must be able to comply. Much of the work on compliance has centred on understanding the barriers to these three conditions being met and thus the barriers to compliance.14 However, compliance with rules does not always ensure that regulation is effective in achieving its goals. In this paper, we suggest that the complexity and opacity of transnational pharmaceutical supply chains may lead to the quality of the final product being compromised, despite regulatory compliance being achieved at each stage.

The paper focuses on APIs defined as ‘any substance or mixture of substances intended to be used in the manufacture of a drug (medicinal) product and that, when used in the production of a drug, becomes an active ingredient of the drug product. Such substances are intended to furnish pharmacological activity or other direct effect in the diagnosis, cure, mitigation, treatment or prevention of disease or to affect the structure and function of the body.’15 The manufacture of APIs from raw ingredients entails several intermediate stages, which often takes place in different production facilities, moving between countries in the process.16 The finished API is then combined with excipients, chemically inactive substances that help the medication remain stable and control absorption when the medicine is administered.17 Both APIs and excipients are crucial to the formation of an efficacious finished product. Most research to date has focused on the latter stages of medicine production: the combination of API and excipients (and packaging) to create the finished product, thereby overlooking the complexities and potential vulnerabilities that occur further upstream. It is this important gap that the current paper seeks to address. In contrast, the API-step is a crucial issue for regulators and the WHO Prequalification of Medicines Programme, which aims to ensure that medicines supplied by procurement agencies meet acceptable standards of quality, safety and efficacy covers both finished pharmaceutical products and APIs.18 19

Author reflexivity statement

See online supplemental appendix 1.22

The Indian pharmaceutical industry and API supply chains

The Indian pharmaceutical industry is the world’s third largest by volume and 14th largest in terms of value.23 It is the largest supplier of generic medicines globally with an estimated 3000 drug companies and 10 500 manufacturing units24 gaining it the informal title of ‘Pharmacy to the World’, something regarded by our interviewees as a source of national pride.

Our interviewees confirmed the importance of ensuring quality at the earliest stages of the manufacturing process. One, for example, was adamant that ‘It is the consistent quality of the raw materials that gives a good quality API, and consistent quality of the API that results in a consistent quality end product’ (Interview, A). In contrast to much of the published literature on SF medicines, which focuses on the final formulation (the branded or generic product), one of our interviewees noted that, ‘If there are six steps in making a medicine, most steps are in the production of the API and the last five or six steps are in the formulation of the final product’ (Interview, B) making a clear case for increased scrutiny of these earlier stages of the production process.

The sheer complexity of API supply chains was highlighted by all our interviewees. For example, 1 of the companies in our sample has over 600 suppliers of raw materials used in the manufacture of intermediates and APIs, of which approximately 280 were in China, 250 in India, 60–70 in Europe and about 10 in the USA (Interview A). In many cases, APIs are not manufactured in a single plant: some companies we interviewed would import raw materials from China and complete the first step of API manufacturing before exporting the intermediate (often back to China) for further processing, after which they will return to India for the final stage of manufacture into an API. Thus, API production involves the transportation of raw materials and intermediates across large distances, passing multiple borders, jurisdictions and regulatory agencies. Such long and fragmented supply chains are a major challenge for quality control and quality assurance and heavily reliant on regulations being adhered to by multiple and dispersed actors.

The quality assurance and quality control

Interviewee A leads a team of 15 people (13 field auditors and 2 staff covering administration and logistics) and is responsible for auditing each of the over 600 suppliers to their company; a responsibility they take very seriously because ‘when you manufacture, you have to be absolutely certain about the ingredients.’ They described the extensive quality control and quality assurance audits they must comply with. These include the Vendor Qualification document covering information on the chemistry of the materials, triennial quality control batch testing, document review, performance testing, proper packaging and mode of transportation, proper labelling with product details like the quantity, storage conditions, handling precautions, manufacturer’s details for traceability and product name; and quality assurance auditing which requires them to go to the supplier and check ‘every activity, every system, every person’.

Extensive regulatory guidelines have established processes and procedures for compliance that are evidenced through documentation. However, we question the assumption that this documentation always provides good evidence of compliance. During the interview, we witnessed a phone call from a supplier to the company whom they had been trying to audit the previous week. The auditees had denied access to some areas of their facility leaving the audit incomplete. The caller said that the paperwork was now all in order so they would just send it without requiring a further site inspection. Our interviewee insisted that they must be permitted to do a full site inspection. After the call ended, our interviewee observed that it would be extremely easy for some companies to just accept the paperwork and not to insist on going back for a full inspection. This left us asking: if the paperwork is in order, is that all that matters?

Marginal costs and gains

A dominant theme in all our interviews was the costs of doing business. While manufacturers want to make affordable products for consumers/patients and be part of the value chain, they also need to ensure their own survival by making a marginal profit. Companies that fail to do this can rapidly go under in a very tough and competitive market. One company director told us that 90% of the companies that started out at the same time as him had since folded (Interview C).

The need for profit drove almost all the decisions the companies were making. For example, the choice to manufacture intermediates rather than finished formulations was based on the higher costs and risks of formulation production and the difficulties of penetrating the market with a new brand. One interviewee noted that many companies that manufacture formulations engage in ‘contract manufacturing’, that is, making formulations for someone else because market penetration is so difficult (Interview B). Our interviewees estimated the cost of setting up an intermediary-producing company in India was at least US$3 million and required one hectare of space and 20 reactors. After the initial investment the lifetime of pharmaceutical manufacturing equipment is approximately 40 years, but it will start to deteriorate after 7 years because of the corrosive effect of the chemicals. At this point a company will either sell up or reinvest in new equipment (Interview C).

Owners of companies are responsible for the quality of their product but as with any manufacturing enterprise, there are clear incentives to maximise profits. Thus, ‘when a company director is directly involved in production decisions, there is a temptation to cut costs’ (Interview A). One significant production and cost decision is how close to get to the precise dose of API required for a particular medicine. The legal minimum is 95% and achieving higher degrees of purity carries escalating marginal costs. We were told that while some companies will set their own exacting limits of not less than 99% API others will ‘release a batch at 95%’ (Interview A) which, it was noted, could compromise the efficacy and stability of the finished product.

Establishing trust over complex supply chains

Similar financial pressures drive API manufacturers in India to source raw materials and various stages of intermediates from multiple suppliers in China and other countries. While this helps to keep costs low in some parts of the manufacturing process, arranging procurement and ensuring supplier compliance in the production, packaging and transportation of raw materials across borders present significant challenges. Manufacturers need to either outsource procurement, quality control and quality assurance auditing to local companies or have their own employees based in the supplier countries.

Outsourcing means finding trustworthy partners. One CEO of a small-to-medium-sized company told us that, when he started out, he made some serious mistakes in collaborating with intermediaries who were either incompetent or with whom there were communication difficulties in negotiating prices. He now has two employees whose role is to identify and verify potential suppliers online. He gave an example of the company investing considerable resources doing due diligence on a potential supplier in China by ‘looking at the track record of the company, at their capabilities, doing a market survey, sending employees to meet with the company and using Chinese contacts and consultant’ (Interview B). Contacts are also made at conferences and exhibitions and through personal connections. However, once contracts have been signed, the requirement for ongoing auditing for quality and good manufacturing practice becomes a key component of their relationship.

Market forces

Our research has highlighted some of the challenges that face API manufacturers in India and has pointed to the potential vulnerabilities for medicine quality that may ensue. The pharmaceutical manufacturing market in India is overcrowded, with a high attrition rate, increasing the pressure to cut costs. The challenges are particularly pressing for small-and-medium-sized enterprises (SMEs) who, as the Office for Economic Co-Operation and Development has noted, typically incur higher costs for ensuring regulatory compliance than larger companies.25

One way of achieving financial viability is to outsource several stages of the process to other companies, either within India or overseas (most often to China). As a result, a single API manufacturer in India can deal with several hundreds of suppliers of raw materials and intermediates, with products moving back and forth across borders and jurisdictions many times before the API is complete (even before formulation of the finished product). Trying to keep track of all these partners and ensure that regulatory compliance is achieved at each stage is an expensive and time-consuming process. Inevitably, there are temptations to cut costs, either by circumventing some of the checks or going for minimal regulatory compliance (for example, 95% rather than 99% API).

Other market considerations may be at play and need further investigation. For example, if an assembling manufacturer requires APIs within time-limited windows they may face constraints imposed by monopolistic/oligopolistic supplier(s), willing to supply only a lower grade input in that window of time, driving the price up and increasing the cost for the assembling manufacturer. This, in turn, is likely to lead the assembling manufacturer to not only accept the lower grade input, but also reduce the quality of their output that they supply to the next party in the supply chain to cut costs. In other words, the specificity of windows of time when inputs are required by an assembling manufacturer, may result in them contracting with monopolistic suppliers, who have a ‘take it, or leave it’ attitude—leading eventually to the natural, absorption of lower grade inputs.

The effects of all of this are not fully known but, in combination with cost-cutting mechanisms in other parts of the supply chain such (such as poorer quality packaging), the overall impact on medicine quality and durability could be significant, despite technical compliance at each step of the chain. This presents a significant challenge as India continues to grapple with weaknesses in pharmaceutical regulation and variable standards of the quality of Indian medicines.26–28