The raw material drug market is resurging, companies accelerate expansion

With policy support, the business model of API companies is undergoing changes.

Since India restricted the export of some APIs in order to ensure the supply of domestic drugs in early March, China, as a major producer of APIs, faced the market that India voluntarily surrendered, and many listed companies have started to increase production and expand capacity.

According to incomplete statistics, nearly ten API companies have increased capital and expanded production so far. On July 29, Shisiyao Group (02005.HK) revealed that the company is considering the possibility of splitting its API and medical materials integration platform and independently listing on a recognized stock exchange in Mainland China; on July 28, Hunan Jingfeng Pharmaceutical (000908.SZ) also reviewed and approved the cooperation framework agreement to invest 282 million yuan in the Changde Economic Development Zone and Deyuan Investment in Changde City, Hunan Province to build the "Changde City API and Preparation International Industrial Park Project"; At some time, Aoxiang Pharmaceutical (603229.SH), Anglikang (002940.SZ), Guangshengtang (300436.SZ) and Fuxiang Pharmaceutical (300497.SZ) also announced refinancing to expand the production of APIs.

On August 6, Li Tao (pseudonym), the head of the API section of a listed company in Hebei, said in an interview with a reporter from 21st Century Business Herald: “The epidemic has made preparation companies realize that they cannot complete normal production without APIs. Under the background of high concentration of producing countries, blindly dependent on imports, it is easy to be restrained by other countries. Therefore, making medicines from scratch, or having the technology and production conditions to make APIs has become the key layout direction of many large pharmaceutical companies. The integration of medicine and preparations will become the inevitable way for Chinese companies to survive, and it will also have a profound impact on the future development of APIs."


Outbreak Stimulus

Whether it is the spin-off and listing of companies or non-public issuance of refinancing to expand the production of APIs, the importance of manufacturing APIs has been highlighted under the stimulus of the epidemic.

As one of the major producers and exporters of raw materials, India, in order to ensure priority to guarantee domestic supply during the epidemic, on March 3 this year, the Indian Foreign Trade Administration issued a notice that restricts including paracetamol, tinidazole, erythromycin and clindamycin The export of 26 kinds of raw materials and their preparations including vegetarian.

In Europe and the United States, 26% and 24% of generic drugs rely on imported Indian APIs. If the above policy continues, it will have a major impact on the world's drug supply.

The research report of Orient Securities shows that at present, China and India have occupied an important position in the global supply of raw materials, and the two together account for about 21% of the global standard market supply. From a structural point of view, about 70% of Indian APIs are chemical pharmaceuticals, and most of them are concentrated in the field of specialty APIs; from the production side, the export concentration of India's regulated market is relatively high, mainly for several large pharmaceutical companies, such as SunPharma , AurobindoPharma, Lupin, etc. If the Indian epidemic causes a certain gap in the supply of the global API industry, China is the region most capable of undertaking related production capacity.

According to Mordor Intelligence data, the global API industry (including patented APIs) market size reached 165.7 billion U.S. dollars in 2018, a year-on-year increase of 6.9%. It is estimated that by 2024, the market size will increase to 236.7 billion U.S. dollars, with a compound growth rate of 2018-2024 6.1%, the market size maintained steady growth.

In fact, as China is also a major producer of APIs, it is imperative for pharmaceutical companies to accelerate their deployment in the API market. Li Tao pointed out: “Intensified market-oriented competition and superimposed macroeconomic policy control, with the third round of national centralized procurement, will have an increasingly significant impact on the field of APIs. Centralized procurement needs to reduce the price of drugs to reduce the cost of medical insurance payments, and then reduce the price of finished products. It is necessary to proceed from the two directions of reducing the cost of raw materials and management costs. This means that the reduction of the cost of preparations needs to be supported by the optimization of the manufacturing of raw materials."

Taking Shijiazhuang Siyao Group as an example, the company has increased its efforts to deploy the API market since 2016, and currently has two API-related subsidiaries. In response to the spin-off and listing, a person close to Shijiazhuang Siyao told the 21st Century Business Herald: “Splitting the API assets for separate packaging, because the high P/E value will promote corporate financing needs, it is also a kind of internal equity allocation. Incentives. At the same time, companies can pay more attention to innovative drugs, specialty APIs, high-end preparations and other high-value-added, market-forward products, optimize the product structure of the company, and make it more diversified ."


Business model reconstruction

Foreign epidemics are superimposed on domestic policies, and the business model of the domestic API industry is undergoing reconstruction.

In November 2017, the "Announcement on Adjusting the Review and Approval of APIs, Pharmaceutical Excipients and Packaging Materials" turned out to be the prelude to the reform of API companies. Since then, in December 2019, the "Drug Administration Law" was implemented, and a 4-year pilot drug marketing authorization holder system (hereinafter referred to as the "MAH system") was formally established. At this point, the marketing authorization and production authorization of drugs have been separated. For a time, domestic R&D institutions and small pharmaceutical companies have more choices for cooperative R&D and production.

The stimulus of this policy is also reflected in the data applied for review. In 2019, the number of APIs approved for use in marketed formulations has increased significantly. Among them, the newly-added affiliated review registrations are dominated by leading pharmaceutical companies. Forward integrated companies represented by Huahai Pharmaceutical and Xianju Pharmaceutical have seen significant increases in the filing of APIs in 2019. Leading APIs such as Puluo Pharmaceutical have increased significantly in 2019. The number of registrations for related review of APIs reached 35.

Minsheng Securities researcher Sun Jian analyzed that the core growth logic of leading API companies in the next 3-5 years stems from the continuous increase in return on net assets brought about by capacity expansion and product upgrades. Head intermediates and raw materials have been in the past 5-10 years. The advantages of quality management and cost control accumulated by pharmaceutical companies in the process of expanding and regulating the market will help related companies to enrich their product structure in the medium term, and achieve forward integration and business model expansion along the industry chain.

Under the joint urging of MAH and the joint review system, the cooperation between API companies and generic drug companies will become more flexible and targeted. For formulation companies, cost and quality control will be further improved. For pharmaceutical companies, product upgrades and business models will undergo more profound changes.

Take the cooperation between Hengrui Medicine and Stellite as an example. On May 13 this year, Stellite and Hengrui Medicine both announced the signing of a drug cooperation agreement. Stellite and its wholly-owned subsidiary Shanghai Stellite As a partner in the field of iodine contrast agents, Hengrui Medicine will cooperate on the production, supply and commercial operation of iohexol injection and iopamidol injection. According to the agreement, Hengrui shall pay Stellite RMB 5 million within 20 working days from the date of sale of each cooperative product. In other words, the raw material drug company shall give full play to its advantages in production process optimization and cost management. Create incremental income by leveraging the channel advantages of preparation companies.

On the other hand, the implementation of the MAH system has also stimulated the growth of domestic CDMO orders and promoted a more refined division of labor in the pharmaceutical industry. After 2019, during the registration of innovative drug-related APIs, unaffiliated original research companies and production companies registered at the same time. More and more category 1 innovative drug research and development select more mature CDMO companies to supply APIs and provide corresponding service.

Take the example of the specialty API company Minohua, which released its 2020 semi-annual report on the evening of July 30, showing that it achieved operating income of 651 million yuan from January to June this year, an increase of 16.01% over the same period of the previous year; Net profit was 107 million yuan, an increase of 24.57% over the same period last year. In the first half of this year, its core products valsartan, clopidogrel, rosuvastatin and other regions added sales in Latin America, Southeast Asia and other regions, and sales in South Korea, the Middle East and Europe continued to increase. In particular, the global supply of sartan products is in short supply. At the same time, downstream customers' demand for clopidogrel and other products has increased. The volume and price of blood pressure and antithrombotic products have risen, which has increased the overall gross profit margin of the sector. Manova's comprehensive gross profit margin in the first half of the year was 38.39%, a year-on-year increase of 2.01 percentage points.

Sun Jian predicts that under the shift of the pharmaceutical outsourcing industry chain and the dividends of the Chinese market, the demand side of innovative drug R&D will drive the growth of the innovative drug outsourcing market. At the same time, API companies with R&D capabilities, production and cost management capabilities are expected to play an increasingly important role in the innovative drug industry chain.