- Stricter environmental regulations in China will weigh on manufacturers of active pharmaceutical ingredients.
- Chinese API manufacturers will be confronted with new environmental and regulatory restrictions due to their history of poor waste processing and disposal.
- The tougher pollution curbing measures will in turn pose risks to drugmakers that are major importers of Chinese APIs.
The Chinese government will step up its efforts to protect the environment over the coming years, which will weigh on the country's active pharmaceutical ingredients (APIs) manufacturing industry and in turn impact the drugmakers that source a wide range of APIs and intermediated products from China. The decision to implement the environmental protection tax on January 1 2018 will lead to higher costs for API manufacturers, which will weigh on their performance. According to the tax plan, factories will be taxed according to the air, water, and solid pollutant discharged. Companies could be charged CNY1,000 (USD158) per tonne for dangerous solid waste. Additionally, companies will be taxed for industrial noise on a monthly basis. Moreover, on December 27 2017, the State Council stated that the tax revenue will be collected by the corresponding local governments, which will provide strong incentive for the local authorities to enforce the law.
Environmental Tax Negative For Major API Manufacturing Plants
China is the world's largest producer and exporter of APIs. The country ranks first worldwide in the output of several bulk APIs including penicillin, statins and vitamins. A large number of APIs, or bulk drugs, that are used for the manufacturing of drugs, such as antibiotic penicillin and anti-diabetic metformin, are imported from China. For instance, according to the Central Drugs Standard Control Organization, India imports around 84% of the APIs from China with one of the main reasons for this being China's large-scale manufacturing facilities and the provision of incentives and subsidies by the government for promoting the production of essential pharmaceutical raw materials. In FY16, the country imported INR138.5bn (USD2.1bn) worth of APIs from China which included ingredients for essential antibiotics. China is also the major supplier of APIs to North America and the EU.
China Dominates The Manufacturing Of APIs
Location Of API Manufacturers (Number of API Manufacturing Facilities)
Source: Clarivate Analytics, BMI
However, pharmaceutical manufacturing, and especially API production, creates hazardous waste that must be processed and disposed off safely. The location of API production plants near urban areas in China has led to substantial environmental problems, including water contamination. While a short-term solution to a much bigger issue, the government has shut down API production in areas that may pose a risk, and is pressing API producers to move towards industrial zones where pollution can be dealt with through common facilities. In 2017, 145 API factories closed down due to tougher environmental protection measures.
The shakeup in Chinese factories in the light of environmental concerns will not only affect the API industry, but also the drugmakers that import the pharmaceutical ingredients from the Chinese API manufacturers. The Indian drugmaker industry, which has an overwhelming dependence on China for critical raw materials fears that there will be supply disruptions arising from the closure of manufacturing plants. In addition, inflationary pressures as a result of the tax will result in a significant increase in the prices of raw materials (as high as 120%). Costs have increased across therapies - including anti-diabetic, cardiovascular, central nervous system, vitamins and antibiotics - over those prevailing in June 2017. Some of the largest hikes have taken place in oncology where prices of key oncology APIs have witnessed a jump of around 60%.
Furthermore, the multinational drugmakers that import the pharmaceutical ingredients from the Chinese API manufacturers will also be negatively impacted. For instance, NCPC is Pfizer's sole supplier of sterile APIs for human use. Teva, likewise has links with at least three Chinese API producers, all of which have been in the media spotlight for various offences including improper waste management and the release of noxious chemicals. Inner Mongolia Changsheng Pharmaceuticals exports antibiotic APIs to various parts of the world and delivers antibiotic APIs to a wide range of multinational companies including GlaxoSmithKline, Bristol-Myers Squibb and Novartis.