Under the background of centralized procurement, pay attention to the opportunities of the API industry

The so-called bulk drug refers to the active ingredients in the drug. Generally, the bulk drug needs to be added with excipients and processed before it can be made into a drug that can be used directly. The quality of the bulk drug will directly affect all aspects of the drug's properties.

01

Basic situation of the industry

From the perspective of the industrial chain, the upstream of the API industry is petrochemical products and agricultural products, and the downstream is mainly in the fields of chemical pharmaceutical preparations and health products. The following mainly discusses the API products used in the field of chemical drugs and pharmaceuticals.

According to different patent stages, APIs can be roughly divided into three categories: 1) Bulk APIs: generally include anti-infectives, vitamins, Amino Acids, Antipyretic Analgesics, non-steroidal anti-inflammatory drugs, hormones, Alkaloids, and organic acids, etc. Traditional APIs, such APIs generally do not involve patent issues; 2) Featured APIs: generally refer to products whose patents are about to expire or will expire in the near future, mainly including series of products for lowering blood pressure, lowering blood lipids, and lowering blood sugar; 3) Patented raw materials: generally refers to innovative drug products that cooperate in the CDMO model.

02

Correction of existing concepts: APIs are not a simple cycle sector

High barriers to characteristic and patented APIs

Bulk APIs have the characteristics of low added value, large scale of production and mature technology, and generally do not involve patent issues. Overall, the gross profit margin of bulk APIs is relatively low.

After years of development, the global bulk API industry has entered a mature period, and downstream demand is a slow natural growth. The current production capacity is mainly concentrated in China. The leading factors in the price of bulk raw materials mainly come from changes on the supply side caused by emergencies in the industry, such as sudden natural disasters, environmental protection and safety incidents, and so on.

In terms of specialty APIs, there is still room for improvement in the penetration rate of downstream formulations. Taking valsartan as an example, its sales in sample hospitals increased significantly during 2012-2015, which is expected to increase the growth of upstream valsartan APIs. In terms of gross profit margin, specialty APIs are relatively high. For example, Minova, whose main products are specialty APIs, has a gross profit margin of about 37% in its API business in recent years. The driving factors of the specialty API industry are generally mainly due to the enrichment of product pipelines, the development of more core customers downstream, the expansion of the standardized market, and the transformation to CDMO and downstream preparations.

The characteristic and patented APIs have high barriers, which are mainly reflected in four aspects:

First: high technical barriers

In terms of R&D, in recent years, with the increase in R&D investment and the acceleration of review and approval, the frequency of downstream drug innovation iterations has accelerated, which has promoted the acceleration of the innovation of API varieties, and put forward higher requirements for the innovative R&D capabilities of API companies.

Second: strong customer stickiness

When downstream preparation customers choose API suppliers, the inspection cycle is relatively long, and the quality requirements for APIs are usually high. Generally, they will not easily change after choosing a supplier.

Third: asset-heavy industries, with large investment

The API industry has high investment in new product development, a long cycle, and a large number of special equipment for pharmaceutical production. Important instruments and equipment are dependent on imports, which are expensive and require a lot of investment in fixed assets.

03

Industry Opportunities: Transfer of production capacity to Asia-Pacific + centralized procurement to increase concentration

Production capacity is gradually shifting to Asia Pacific

Before the 1990s, Europe and the United States were the main API production areas in the world. After the 1990s, due to environmental protection and labor costs, the production capacity of Europe and the United States gradually shifted outwards, and emerging markets represented by China and India rapidly Rise, and gradually become a major producer and exporter of APIs.

In general, the transfer of global bulk API production capacity has been basically completed, and the country is in a mature stage; the transfer of specialty APIs and patented APIs is accelerating, and the country is in a stage of rapid development. Some varieties such as valsartan and carbamazepine are in the global market. Achieved a relatively advantageous position; in terms of downstream preparation capacity transfer, the country is still at an early stage.

Centralized procurement is relatively good for the API industry

In recent years, the domestic medical insurance fee control trend has been obvious, and the purchase of generic drugs has gradually become the norm. Under the volume purchase policy, the policy of API companies has relatively benefited.

First of all, mass procurement is not lethal to export-oriented API companies. At present, a large number of A-share API companies have major customers from overseas, and they are the main force in China's API export.

Second, volume purchases have led to a decline in the price of preparations and increased drug penetration rates, which has led to an increase in the demand for APIs. Volume purchases have not changed the basic clinical drug demand. Most drugs have increased penetration rates due to volume purchases, and sales are expected Continuous growth has spawned more demand for APIs.

Third, the consistency evaluation improves the quality standards of the drug, and the stability, impurities, crystal form, particle size, solubility and other parameters of the API will affect the formulation behavior. This has made preparation companies more demanding for high-quality APIs, and orders continue to be concentrated on leading API companies with high-quality standards and stable production capacity, and the status of API companies in the industry chain has been improved. Therefore, the bargaining power of API companies has been continuously strengthened, and prices are expected to be maintained.

Fourth, mass procurement weakens the role of sales in the industrial chain, and the production and cost advantages of API companies are enlarged. At present, the proportion of preparation revenue of API companies is generally low, and the revenue of companies such as Borui Pharmaceutical, Stellite, Tianyu, Aoxiang Pharmaceutical, and Jiuzhou Pharmaceutical is almost zero in 2019. In the context of mass procurement, the production and cost advantages of API companies have begun to magnify.

In December 2017, CFDA issued the "Management Measures for the Joint Review and Approval of APIs, Pharmaceutical Excipients, Pharmaceutical Packaging Materials and Pharmaceutical Preparations (Draft for Comment)", requiring food and drug administrations at all levels to no longer individually accept APIs and pharmaceuticals The registration application for excipients and pharmaceutical packaging materials was changed to a registration system, and the registration number was obtained after registration, and the related drug preparations were reviewed together after the registration application was filed. Association review enables API and preparation companies to select each other in advance, thereby establishing a stronger and long-term cooperative relationship. For preparation companies, the cost and difficulty of replacing API suppliers are significantly increased, and the binding with upstream suppliers is deeper. .

04

API companies are facing three major development trends

1. For API suppliers, continuously enriching their product pipelines through research and development can improve market competitiveness to a certain extent. Take Minohua, for example, the company focuses on lowering blood pressure, lowering blood sugar, anti-infection and other fields, continuously enriching its product pipeline, forming a combination in the field of chronic diseases, and significantly improving its market competitiveness.

2. Under the general environment of domestic medical insurance control fees, the price of domestic generic drugs is under pressure, and the integration of API + preparations can greatly reduce costs. It is currently the key layout direction of API and generic pharmaceutical companies, such as Huahai Pharmaceutical, Stellite, etc. API companies have extended to downstream formulations with the advantage of APIs, and seized market share by virtue of their cost advantages.

3. From the perspective of the industrial chain, the upstream of CMO/CDMO is the fine chemical industry, and the downstream customers are pharmaceutical companies, which are very similar to the industry chain of the specialty API industry. The expansion of specialty API companies to CMO/CDMO has certain natural advantages. CDMO is in a stage of rapid development, and we believe that the growth space of API companies capable of expanding to CMO/CDMO will be further opened up.

Main risks: 1) The risk of increased competition in the API market; 2) The risk of being subject to supervision and environmental penalties; 3) The risk of oversupply due to excessive expansion of production capacity.