Winter is Coming! —Events of the Chinese API Industry in 2017

Winter is Coming! This line of the Game of Thrones well-known in the world may be used to best describe the current situation of the Chinese API industry.

The API industry was pride of the pharmaceutical industry of China, the world’s biggest exporter of APIs and second largest producer of APIs, but it seems to become a rat crossing the street obnoxious to everyone. Production suspension! Production reduction! Anti-monopoly! Relocation boom! Those hot words that frequently appeared in 2017 undoubtedly show that the Chinese API industry is in the awkward winter. In my opinion, the principal contradiction in the Chinese API industry is the contradiction between environmental protection and prices, and whether the DMF system that was just released at the end of 2017 could completely solve this contradiction is still unknown. Here, starting from this principal contradiction, I’d like to review the big events of the Chinese API industry in 2017, and discuss with you regarding the future directions of the Chinese API industry behind those events.

Environmental protection VS prices

The contradiction between environmental protection and prices has been the principal contradiction of the API industry, and for a long time, it seems to be a problem of "fish and bear’s paw": to achieve environmental protection, the production reduction of the API manufacturers will undoubtedly result in the rise in API prices; to achieve good prices, the operation of a large number of API manufacturers will also undoubtedly lead to environment pollution.

Environmental protection—strictest in the history of China

January: Zhejiang Province issued and started to implement the Emission standard of air pollutants for chemical synthetic pharmaceutical production, which is the first local standard for the air pollutants for chemical synthetic pharmaceutical production in China.

March: the Ministry of Environmental Protection, Ministry of Finance, National Energy Administration, and the People’s Governments of Beijing, Tianjin, Hebei Province, Shanxi Province, Shandong Province and Henan Province introduced 2017 Plan on Air Pollution Prevention and Control in Beijing, Tianjin, Hebei and Surrounding Regions, requiring all the pharmaceutical and pesticide enterprises in "2+26" cities to suspend production in the winter heating season, covering Tianjin, Beijing, Shijiazhuang, Jinan, Zhengzhou, and Taiyuan, etc.

November: the Ministry of Industry and Information Technology and Ministry of Environmental Protection of China, etc. jointly issued a notice requiring API enterprises in 28 cities to suspend production in turn and all those involving VOCs emission procedure to suspend production in the heating season (November 15, 2017 to March 15, 2018), and also requiring the health and family planning department of each place to make suggestions for supply guarantee of API varieties that shall be implemented off-peak production in principle as specified, by taking into account monitoring results of pharmaceutical products in short supply, varieties of national essential drugs of China, pharmaceutical products for first-aid (rescue), and other pharmaceutical products that are clinically required or easily in short supply, etc.

December: the famous pharmaceutical enterprise North China Pharmaceutical was filed a case and punished due to violation of the Law on the Prevention and Control of Atmospheric Pollution.

December: 10 authorities including the Ministry of Environmental Protection and the National Development and Reform Commission (NDRC) of China in association with governments of Beijing, Hebei and other 4 provinces (municipalities) issued the Priority Action Plan for Comprehensive Management of Air Pollution during Autumn and Winter of 2017-2018 in Beijing-Tianjin-Hebei and Surrounding Regions to specially emphasize that pharmaceutical enterprises involving API production will be stopped production in principle if they violate the emission procedure.

December: the State Council of China issued the Notice on the Attribution of Environmental Protection Tax Revenue to clearly point out that the Environmental Protection Tax Law will come into force on January 1, 2018. An insider expressed that pharmaceutical enterprises of some size in China would have to spend over RMB 100 million cost for sewage treatment alone, which excludes the waste gas and solid waste, etc., if calculated according to the Environmental Protection Tax Law.

2017 can be called the strictest year for environmental protection regulation of the Chinese API industry. Some API enterprises reduced production by 80%, dozens of pharmaceutical enterprises faced production halt, and over a hundred pharmaceutical enterprises needed to relocate; more seriously, the pollution control costs will increase by order of magnitude. An insider pointed out that with the implementation of the Environmental Protection Tax Law, pharmaceutical enterprises of some size in China would have to spend over RMB 100 million cost for sewage treatment alone, which excludes the waste gas and solid waste, etc., if calculated according to the Environmental Protection Tax Law.

Prices—anti-monopoly

November: the NDRC of China officially released Guide to the Price Behaviors of Operators Dealing in Pharmaceutical Products and Active Pharmaceutical Ingredients in Short Supply, to deal with problems in the production and circulation of pharmaceutical products and APIs in short supply.

There are 13 articles in total in the Guide. Article 1 and Article 2 define relevant concepts in the field of pharmaceutical products and APIs in short supply, and list considerations in relevant market definition and market dominance determination. Articles 3-12 define the forms of various price monopoly behaviors, determination of illegality, and exemption conditions of price monopoly agreements, etc. in the field of pharmaceutical products and APIs in short supply. Article 13 reminds relevant operators not to, in respect of the pharmaceutical products and APIs in short supply, fabricate and spread price rise information, or collude with each other to control the market price, or commit other behaviors in violation of the Price Law. The NDRC also expressed to continue to investigate and evaluate the overall competition situation of the pharmaceutical products and APIs in short supply, increase law enforcement efforts, respond to social concerns, and update and supplement the Guide in due time according to law enforcement practice. The difference from the draft for comment introduced in August is that the formal draft defines behaviors of operators dealing in pharmaceutical products and APIs in short supply in violation of the Anti-Monopoly Law and also behaviors in violation of the Price Law.

Many API enterprises were restricted production or required to halt production due to rise in environmental protection regulation, which led to the API price boom and API outage of the upstream industry of the pharmaceutical industry. For example, in November, relevant person in charge of the National Health and Family Planning Commission of the P.R.C. explained the reasons for "children with leukemia suffering shortage of relevant cheap Chinese-produced drugs": the small clinical dosage, rise of API price, rise of cost, difficulty in procurement, and decrease of number of manufacturers, etc. led to that shortage. In my opinion, the implementation of the Guide could only contain the rise of API prices temporarily, instead of fundamentally solving the problem.

DMF system is the way of fundamental solution?

November: CFDA issued the Announcement on Adjusting Matters Concerning the Review and Approval of Active Pharmaceutical Ingredients (APIs), Pharmaceutical Excipients and Pharmaceutical Packaging Materials on its website, to cancel the approval of pharmaceutical excipients and packaging materials and containers in direct contact with pharmaceutical products, and conduct review and approval of APIs, pharmaceutical excipients, and pharmaceutical packaging materials together at the time of approval of registration applications of pharmaceutical preparations. The era of API approval numbers formally came to an end, and the DMF filing system has arrived. Implementation of the DMF system and lowering the access threshold of API manufacturers can greatly solve the problem of API price monopoly, however, it is unrealistic for a DMF system alone to drag the API industry out of the mire.

The API industry needs the joint efforts of the regulators and API enterprises: for the former, in my opinion, the environmental issues are important, however, they shall proceed step by step, instead of taking the "great leap forward" sweeping approach, and shall give API enterprises the buffer and transition time; for the latter, they shall take the initiative to constantly improve the production process and technology to reduce emission and improve product value, just like the European and American pharmaceutical companies, instead of avoiding the short-term pressure by passively relocating or reducing production, etc.

Winter is coming, but can spring be far behind if winter comes? I believe that the Chinese API industry will shine more brilliantly after the historical sickness is cured.