Overview of China's API industry in 2023

Major listed companies in the industry: Plo Pharmaceutical (000739.SZ); Guobang Pharmaceutical (605507.SH); Xinhua Pharmaceutical (000756.SZ); Jiuzhou Pharmaceutical (603456.SH); Huahai Pharmaceutical (600521.SH); Hepalink (002399.SZ).

Keywords: production and marketing scale, competitive landscape, penetration rate.

Industry Overview

1. Definition

The ingredients are derived from chemical synthesis, plant ingredients or biotechnology, but cannot be taken directly by the patient.  Typically, ingredients are added and processed to make a directly usable drug.

Complete definition of an active substance in ICH Q7: Any substance or mixture used as an active ingredient in the manufacture of a pharmaceutical product. These substances are intended to have pharmacological or other direct effects in the prevention, diagnosis, management, mitigation or treatment of disease, or to affect the structure and function of the human body.

Depending on the source of the API, it can be divided into chemical synthesis API, biochemical API, and plant API.

2. Industry chain analysis: widely used downstream

From an industrial chain perspective, the upstream part of the API industrial chain mainly includes the supply of core raw materials and components such as batteries, motors and electronic controls. Midstream refers to the upstream part of the industrial chain of raw materials, which includes the basic chemical industry, plant culture and animal breeding. In the middle reaches are the processing and manufacturing of intermediates/API, which mainly include bulk, specialty and patented API. Downstream markets include applications in pharmaceuticals, health products, feed, food, cosmetics and other areas.

In terms of industrial chain ecology, upstream raw material enterprises include Yueyang Xingchang and Xinhecheng. Midstream companies include Plo Pharmaceutical, Guobang Pharmaceutical, Xinhua Pharmaceutical, Jiuzhou Pharmaceutical and additional enterprises; Upstream companies include Haida Group, Yunnan Baiyao and White Elephant Food.

Industry development history

From the perspective of the evolution of China's national economic planning, China's "ninth Five-Year Plan" proposes to further strengthen the management of the pharmaceutical market, vigorously develop new products, and continuously improve the quality of medicines. Subsequently, the "Tenth Five-Year" to "Twelfth Five-Year" plans emphasized the enhancement of independent development ability of API and the establishment of a perfect drug security system. In the 13th Five-Year Plan, we will gradually abolish the mark-up of drugs and promote the reform of the prices of medical services. The 14th Five-Year Plan specifically calls for fostering advanced manufacturing clusters and promoting the innovative development of the pharmaceutical and medical device industries.

Overall, the evolution of China's policy on API has been focused on enhancing research and development capabilities and improving medical security systems.

Industrial policies background

The policy planning of the Chinese API industry is closely related to the construction of medical and health systems, the standardization of healthcare and the development of the bio-medicine industry.

In November 2021, the National Development and Reform Commission of China and the Ministry of Industry and Information Technology of China established the implementation plan. The API industry will adhere to the innovation-driven approach, strengthen the system concept, strengthen the discursive points in technology and equipment, accelerate the green and low-carbon transformation, promote the optimization and adjustment of the layout, cultivate new advantages in international competition, so as to build a different development pattern and consolidate the foundation of medical supply guarantee. By 2025, we will develop a large number of high-value-added and high-growth varieties, make breakthroughs in a large number of green and low-carbon technologies and equipment, nurture a large number of internationally competitive leading enterprises, and establish a large number of industrial clusters and production bases with global influence. The API industry has significantly improved its innovative development and advanced manufacturing, its capacity for green and low-carbon development, and the resilience of its supply system, providing strong support for the development of the pharmaceutical industry and forging a distinctive plank for international competition and cooperation.

Industrial development status

1. Large-scale production and marketing of API

Chemical API is the basic raw material for drug production and directly affects the quality and productivity of drugs. Due to the low technological threshold of traditional bulk API, the number of traditional bulk API manufacturers in China has shown rapid growth in the early stage. According to the National Bureau of Statistics, China's chemical API industry has undergone a long-term and rapid development phase, with the output scale rising to more than 3.5 million tons at one point, leading to overcapacity in the country's traditional bulk API industry at the current stage. China's traditional bulk API production has started to decline since 2018, with total Chinese bulk API production in 2018 falling to 2,303,700 tonnes. Due to the impact of the 2020 and 2021 pandemics, China's API supply and output rebounded to 3.086 million tons in 2021, up 5.72 percent year-on-year.

China's API industry has been plagued by overcapacity in recent years, particularly in penicillin, vitamins, antipyretic and analgesic drugs and other traditional bulk API products. As a result, the market price of related products has been falling, manufacturers have been competing on low prices, and API manufacturers have moved into the prepared sector. China's demand for API in 2019 was just 2.523 million tonnes, down 7.21 percent. In 2020 and 2021, there will be strong international demand for some anti-epidemic agents due to the impact of the pandemic. As a result, demand for some API has rebounded, prompting Chinese companies to temporarily expand production. Combined with market demand, it is estimated that demand for chemical API will increase slightly by about 3% in 2020 and 2021. China's demand for chemical API will reach 2,676,700 tons in 2021.

2. The export scale of the API continues to grow.

Chinese API not only occupies an essential place in China, but also plays a key role in the global pharmaceutical industry chain. China is a large exporter of API products. According to the data of China Chamber of Commerce for Import and Export of Pharmaceutical and Health Products (hereinafter referred to as the Chamber of Commerce), except for a slight decline of 1%-2% in 2015 and 2016, the export scale of China's chemical API has continued to grow over the years, from 15.98 billion USD in 2010 to 35.7 billion USD in 2020. That's more than double in a decade.

According to the preliminary statistics of the Medical Insurance Chamber of Commerce, in the first half of 2021, China's export volume of API reached 19.5 billion US dollars, a year-on-year growth of 14%, but mainly driven by an 18% increase in the average export price, in terms of volume, exports decreased by 4% year-on-year. This is mainly due to the unilateral increase in global bulk raw material prices and cross-border logistics costs since the second half of 2020, which is an increase in revenue rather than profit, which also partly reflects the decline in global demand for API.

3.  The market size of API exceeds 460 billion yuan.

Revenues of companies above a designated size in China's chemical API industry reached 38.37 billion yuan in 2019, up 5.0 percent year-on-year. About 1,300 API enterprises above the designated size were included in the 2020 Chinese statistics, with a total output of more than 2 million tons and an operating revenue of approximately 400 billion yuan, accounting for about 16 percent of the total pharmaceutical manufacturing industry. As of November 2021, almost 2,000 types of chemical API (excluding pharmaceutical intermediates) have been approved by Chinese API companies, and most of the API of pharmaceutical products can be produced in China. In 2021, the size of the API industry in China exceeded 460 billion yuan, representing a year-on-year growth of 17.8 percent.Industry competition pattern

Industrial competition pattern

1. Regional competition pattern

According to the query data, the registered enterprises of China API are mainly located in Jiangsu Province. It was followed by Guangdong and Zhejiang provinces and cities; Sichuan, Hebei and Hubei provinces also have a large number of API enterprises.

In terms of the regional distribution of listed companies in the API industry, Zhejiang has the largest number of listed companies, including leading enterprises such as Propharma (000739.SZ), Guobang Pharmaceutical (605507.SH), Jiuzhou Pharmaceutical (603456.SH), Huahai Pharmaceutical (600521.SH), etc. Hubei and Jiangsu provinces also have a large number of listed companies in the API industry. The former includes Gongye Pharmaceutical (300966.SZ), Guangji Pharmaceutical (000952.SZ), Hengdi Pharmaceutical (301211.SZ) and other listed enterprises. The latter includes listed companies such as Jianyou Shares (603707.SH), Bo Rui Pharmaceutical (688166.SH) and Fujilai (301258.SZ).

2. Enterprise competition pattern

In 2021, Pulo Pharmaceutical (000739.SZ) had the highest market share in China's API industry, 0.52 percentage points behind Guobang Pharmaceutical (605507.SH).

Prospects and trends in the industry

1. Improved policies and entering an era of high-quality development.

2. The future market size of the API industry will exceed 600 billion yuan.

Undeniably, China's API industry still suffers from large-scale overcapacity, small-scale monopolistic pricing and disorganized competition. In recent years, the state has vigorously promoted supply-side structural reform, gradually phased out backward production capacity mainly by means of supervision and guidance, encouraged the transformation and upgrading of API enterprises, and intensified efforts to standardizeUndeniably, China's API industry still suffers from large-scale overcapacity, small-scale monopolistic pricing and disorganized competition. In recent years, the state has vigorously promoted supply-side structural reform, gradually phased out backward production capacity mainly by means of supervision and guidance, encouraged the transformation and upgrading of API enterprises, and intensified efforts to standardize the API market to crack down on illegal price increases and maliciously controlled sales. On the one hand, leading enterprises should be guided to improve their technology and enhance their competitiveness through reasonable improvement of environmental protection standards, and companies with high pollution and non-compliance should be forced to withdraw from the market to reduce low-price competitors in the API market. On the other hand, guidelines were issued on the pricing behavior of short supply and active substance operators to punish those who maliciously manipulate the price of active substances. Integrating capacity, improving technology and maintaining reasonable profits will lay a more solid foundation for the sustainable and healthy development of the Chinese API industry in the future. By 2027, the market size of companies above a specified size in China's chemical API industry is expected to exceed 600 billion yuan, with an annual compound growth rate of 4.2 percent. API markets to combat illegal price increases and maliciously controlled sales. On the one hand, leading enterprises should be guided to improve their technology and enhance their competitiveness through reasonable improvement of environmental protection standards, and companies with high pollution and non-compliance should be forced to withdraw from the market to reduce low-price competitors in the API market. On the other hand, guidelines were issued on the pricing practices of short supply and active substance operators to penalize those who maliciously manipulate the prices of active substances. Integrating capacity, improving technology and maintaining reasonable profits will lay a more solid foundation for the sustainable and healthy development of the Chinese API industry in the future. By 2027, the market size of companies above a specified size in China's chemical API industry is expected to exceed 600 billion yuan, with an annual compound growth rate of 4.2 percent.