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Supply chain disruptions, higher energy and freight prices, and reliance on Chinese APIs are squeezing margins, raising the risk of higher drug prices and potential shortages.

India's pharmaceutical industry, the backbone of global generic drug supply, is coming under pressure as the Iran war disrupts energy markets and trade routes. 

India is the largest producer of generic drugs, which are cheaper pharmaceutical products made to match brand-name drugs in quality and performance as well as safety.

The country's $50 billion (€46.44 billion) pharmaceutical sector supplies roughly 20% of global generic drug volumes, with more than half of its exports going to highly regulated markets including the United States and the EU, according to figures from the Indian Brand Equity Foundation.

Indian manufacturers also supply about 47% of all generic prescriptions filled in the US, reporting from the IQVIA Institute for Human Data Science shows.

At the heart of the strain on India's healthcare manufacturing sector is its reliance on imported active pharmaceutical ingredients (APIs), the core components of drugs, 60%–70% of which are sourced from China.

Rising oil prices linked to the Iran war are driving up freight rates and the cost of key chemical solvents used in drug manufacturing — increasing the price of producing even basic medicines.

That pressure is already rippling through the supply chain. Prices of raw materials and solvents have surged, packaging costs have risen, and manufacturers face higher logistics and insurance bills.

"The disruption has exposed just how fragile the pharma supply chain is," said Javin Bhinde, a pharmaceutical industry expert and director of SynCore, a India-based business consultacy.

"Even basic petroleum-linked inputs — from solvents like methanol to staples like isopropyl alcohol — saw sharp price spikes, pushing up the cost of key drugs such as metformin and paracetamol," Bhinde told DW.

"While material supplies are now easing, prices remain high. API suppliers are already pushing for increases, and rising costs of packaging, freight and containers are adding further pressure."

Though many companies are still cushioned by a few months of inventory, industry executives warn that the real impact could emerge within months if resupplies remain uncertain.

For now, some drug prices have gone up, but only modestly. The larger increases are still seen in inputs and raw materials, which have not fully been passed on to consumers yet.

India's government has stepped in with a mix of short-term relief and longer-term measures, from waiving import duties on key inputs to allowing limited price increases on essential medicines.

"A prolonged conflict in the Middle East could begin to hurt India's exports not just to the region but also to other global markets," said Commerce Secretary Rajesh Agrawal earlier this month. 

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Agrawal warned that the Iran war is already straining supply chains, with pharmaceuticals among the sectors under pressure. He urged the industry to cut reliance on imports and push for greater domestic production.

But with the industry operating on thin margins under price controls, and experts warning of deeper structural risks, the question is whether these steps will be enough to prevent higher prices or even supply disruptions in the months ahead.

Dinesh Thakur, a former pharma executive who works as a public health activist, said the risks to drug supply are uneven but real.

"For chronic medicines, stockpiles can cushion disruptions for a few months. But for cold-chain products like vaccines and injectables, the vulnerability is immediate," Thakur told DW.

He argues the crisis has failed to reduce India's dependence on China for APIs, but is instead reinforcing it.

"While domestic production exists, it can cost 20%–25% more. With margins already under pressure from rising energy and freight costs, many smaller manufacturers simply cannot afford that sovereignty premium," said Thakur.

Thakur noted that building new API capacity can take years, arguing that the immediate priority should be keeping existing plants running despite higher energy costs, while building strategic reserves over time.

At the same time, a range of less visible pressures is building.

"Solvent prices have surged, insurance now includes conflict-related surcharges, and longer shipping routes are adding up to two weeks in transit," said Thakur.

Companies are holding more inventory, tying up cash, while packaging costs are rising so fast that, in some cases, the bottle costs more than the medicine inside.

The result is a mounting cost squeeze that policymakers have yet to fully grasp and that could begin to strain supply.

"If supply chain disruptions continue, pharma production is likely to be impacted, with rising costs or even global shortages," Soumya Swaminathan, a former chief scientist at the World Health Organization (WHO), told DW.

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Swaminathan pointed out that this is a good time for discussions with WHO, UNICEF, Gavi, the Vaccine Alliance, and other major purchasers of Indian products about the likely scenarios and mitigation measures.

"Just like during the COVID pandemic, special efforts were made to ensure that essential ingredients for vaccines could move across borders and that Indian companies like Serum Institute of India and Bharat Biotech could manufacture vaccines," she added.

Industry experts and trade bodies have estimated the disruption could cost Indian drugmakers roughly $300 million to $500 million, with losses potentially climbing further if shipping disruptions persist, trade bodies and executives say.

For now, manufacturers are relying on two to three months of safety stock.

"But the real impact could begin from June if resupply remains uncertain," said Bhinde. "Some plants have already faced shutdowns linked to energy disruptions and can take weeks to restart."

The bigger problem is structural.

"Generic drugmakers operate on thin margins under strict price controls, leaving little room to absorb cost increases of 30%–40%. That raises the risk of supply strain if pressures persist," added Bhinde.

Edited by: Keith Walker