Chinese API Industry is in the Change (II)

Increasing international competition to envision deeper level of cooperation


In recent years, in the context of decreasing number of domestic API manufactures, the number of domestic API exporters has increased year by year and reached a record high of 11,000 in 2017, an increase of 19% in five years. This suggests that a growing number of companies begin to pay attention to the international API market. Some of them are manufacturers that choose to bypass traders to export APIs directly, some of them are companies originally focusing only on the domestic market that go abroad, and others are traders not engaged in API business that enter the API industry. The surging of API exporters indicates the heat of the API industry, but also results in more intense competition. The most obvious change is the decline of the average export price, which has fallen by 13% in the past ?ve years.


In fact, the development of Chinese API industry has faced tremendous pressures in recent years. On the one hand, the sharp increase in labor and raw material costs, together with environmental and safety policies, gave birth to the continuous increase in the operating costs of Chinese API companies, which further weakened the international competitiveness of Chinese APIs. Meanwhile, India’s policies and measures to support the pharmaceutical industry to extend to the upstream of the industrial chain accelerated the breaking of the original market pattern and intensified market competitions. On the other hand, the stricter regulations on APIs in the international market imposed more pressures on corporate compliance. The organizations that conduct on-site inspections in China include drug administration agencies from both stringently regulated markets such as the US, the EU, and Japan, and less regulated markets such as Brazil, Mexico, and India. Moreover, the unstable supply chain of chemicals affect the whole API industry, making API companies unable to complete the order on time, giving a blow to the international market’s confidence in Chinese API companies, forcing many European and American end users to seek cooperation with more API suppliers in other markets such as India, and causing the production of some API varieties to transfer to other countries.


The international development of Chinese API industry has also been plagued by trade frictions. Since 2010, Chinese pharmaceutical products have encountered a total of 73 cases of trade friction, of which APIs account for over a half. Even superior APIs including amoxicillin, paracetamol, ofloxacin, ceftriaxone, and gliclazide investigations have been subject to  anti-dumping investigations, exerting some negative impacts on the export of Chinese APIs. In recent years, Chinese pharmaceutical industry has been involved in an growing number of trade friction cases, among which India, the United States, the European Union and other major export markets of Chinese APIs top the list. Recently, the United States announced the proposed tari? list for Chinese export products, covering 28 HS codes of APIs, and some APIs were included in the list, causing uncertainty to China’s APIs export to the U.S.


Fortunately, Chinese API industry has been deeply involved in the international pharmaceutical industry chain. Many domestic API manufacturers are long-term stable suppliers of multinational pharmaceutical companies, for example, SHINVA is the levodopa supplier of Merck KGaA and Roche, and Yongtai the sofosbuvir intermediate supplier of Gilead. The irreplaceability of Chinese APIs in the global market has increased, which is evidenced by the recently reported delivery suspension of the German generic drug company STADA due to shortage of Chinese APIs. Some new changes in the international API market have also provided new opportunities and new ideas for the development of Chinese API industry. For example, the newly launched CRO and CMO in recent years have improved and fueled the R&D and production capacities of Chinese API companies, and provided opportunities for Chinese companies such as WuXi AppTec, Asymchem, and STA Pharmaceutical Co., Ltd., Jiuzhou Pharma, and Tianyu Pharma to achieve “curve overtaking”. At this point, Chinese API companies have a new role in the international pharmaceutical market.


M&A has become a normal, and the leading enterprises with concentrated capacity have emerged


M&As in Chinese API industry have been a normal in recent years. Fosun Pharma acquired Hunan Dongting Pharmaceutical Co., Ltd. with 580 million yuan in 2012, Yabao Pharmaceutical Group Co., Ltd. (Yabao Pharmaceutical) acquired Qingsong Pharmaceutical with 610 million yuan in 2016, and Xianju Pharma acquired two Italian steroid API plants with 837 million yuan, showing the growing amount of M&As and the expansion from demostic M&A to international M&A. M&As have four major purposes. First, to increase production capacity and gain scale competitiveness. For example, Yangtai Dongcheng Pharmaceutical Group Co., Ltd. obtained the low-cost Thailand production base of Sino Siam Biotechnique by M&A. Second, to supplement the product line and overcome the shortcomings of individual products in the product lines. For example, Xianju Pharma’s M&A has made up for its lack of high-end steroid APIs. Third, to control the upstream and reduce the production cost of its own formulations. For example, Yabao Pharmaceutical, via M&A of Qingsong Pharmaceutical, obtained the APIs and intermediates R&D and production capabilities of Qingsong Pharmaceutical, which ensured the synergy between the upstream and downstream of its industrial chain. Fourth, to obtain certi?cation resources to access to the international market. ABA Chemicals’ M&A of the Malta pharmaceutical plants is such a case. Via the M&A, ABA Chemicals aims to obtain many more certi?cations from the Europe and the U.S. and increase market shares.


Increasing the concentration of capacities is one of the important means for cutting overcapacity in Chinese API industry, and is also the only way for the development of the industry. Under multiple e?ects of M&As, transformation and upgrading, and survival of the ?ttest, the capacity of Chinese API industry has become more concentrated year by year, and leading enterprises in the segment sectors have gradually consolidated their superiorities. CSPC, Huahai Pharmaceutical, United Laboratories, Acebright, Zhejiang Medicine and Zhejiang NHU Co.,Ltd., Xianju Pharma, and Hepalink are the leaders of vitamin C and ca?eine industries, Puli and Shatan antihypertensive APIs, penicillin APIs, anti-viral APIs, vitamin E, steroid APIs, and heparin APIs respectively. Leading enterprises contribute to the scale development, the lower production cost, and healthier pro?t margins of the industry.


At present, the third industrial revolution led by life sciences is sweeping the world. The pharmaceutical industry concerns human life and health. The “Healthy China” initiative was proposed at the 19th National Congress of the Communist Party of China, which points the way for the development of Chinese pharmaceutical compenies. As an important part of Chinese pharmaceutical industry, API industry also face unprecedented development opportunities. Chinese API companies should grasp and follow the general trend, seize opportunities in the transformation and upgrading process, and strengthen abilities based on innovation, technology and quality and bene?t the people.


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