Core view

The Indian epidemic could create a large supply gap in the global specialty API segment. Currently, China and India already represent a significant portion of global API supply, together accounting for about 21% of the global regulated market. If we consider the non-regulated market and price factors, the scale of supply should be even larger. At present, the Indian epidemic is not optimistic, and India has begun to ban the foreign export of some APIs. If the Indian epidemic spreads further, it may have a greater impact on the global supply of APIs. From the structural point of view, about 70% of Indian APIs are chemical pharmaceuticals, and mostly concentrated in the field of specialty APIs. From the production side, India's regulated market has a relatively high concentration of exports, mainly a few large pharmaceutical companies, such as Sun Pharma, Aurobindo Pharma, Lupin and so on. If the outbreak of the epidemic causes Indian pharmaceutical companies to stop production, it may cause a huge impact on the global supply of specialty APIs.

China is the region most capable of taking over Indian API capacity. If the Indian epidemic causes a gap in the global supply of APIs, we believe that China is the region most capable of taking over the relevant production capacity. On the one hand, the Indian API market itself has a greater dependence on China, with about 70% of upstream raw materials imported from China, and from the perspective of product structure, China's API product structure is very similar to India's, which can make up for the demand gap in anti-infective and cardiovascular fields. On the other hand, China has sufficient API production capacity. 2018, China's API exports have reached $30 billion, and China still has a large portion of APIs for its own use, so Chinese API companies have the ability to undertake India's API production capacity.

Under the influence of the epidemic, China's APIs may have a more far-reaching impact, mainly in two aspects, we believe; 1, is expected to accelerate the speed of exports to high-end markets; 2, accelerate the transformation to the CDMO field, so as to extend to a more international, higher value chain direction.

Domestic policies have also accelerated the upgrade and transformation of Chinese APIs. With the implementation of consistency evaluation and quantity-based procurement in China, the added value of the drug sales chain is greatly reduced. The future competition in the generic drug industry depends more on the cost situation of enterprises and the number of varieties. The API companies themselves have an inherent advantage in terms of cost and variety of reserves. At present, there are already a number of enterprises in China, on the way to the transformation of the preparation field.

1. Global epidemic: expected to accelerate the extension of Chinese API companies to a higher value chain

1.1 China and India both occupy an important position in the global API industry chain

API (Active Pharmaceutical Ingredient) refers to one of the substances or a mixture of substances used in the manufacture of a pharmaceutical product. It is an active ingredient in a pharmaceutical preparation. It cannot be taken directly by patients and is mainly prepared by chemical synthesis, plant extracts or biotechnology.

In terms of industry development, the global API industry has maintained stable growth in recent years. On the one hand, the global aging trend is obvious, especially in developed countries such as Europe, America and Japan. This makes the demand for drugs greatly increased, the continued expansion of the drug market scale directly drive the global API market size rose year by year. On the other hand, in recent years, a large number of global heavyweight original drug patents have expired, the relevant generic drugs have been listed. This also further boosts the growth of related APIs. The growth rate of API market size will be higher than the growth rate of global drug market size.

China and India are already prominent in the global industry chain with a high share.

In addition to the United States, India and China are the two largest markets for the global supply of APIs. Together, they account for about 21% of the global chain. When non-regulated markets are considered, the market share of the two is expected to be even higher. This shows that China and India, in the global API industry chain in a very critical position.

1.2 The Indian epidemic may cause a large shortage of global supply of specialty APIs

India is already an important player in the global supply of APIs, and the proportion of Indian APIs for own use is not low, about 50%. So if Indian API companies stop production because of the epidemic, their exports will be directly affected. In fact, due to the impact of the new coronary epidemic, India has begun to consider restricting the export of some domestic API products. The impact will be more in the area of specialty APIs, which account for a greater proportion of raw materials in the Indian market.

Most of the production of APIs in India is concentrated within big pharmaceutical companies. This relatively high concentration also poses a certain risk to exports. Once the major pharmaceutical companies are affected by the epidemic to stop production, it is likely to also exacerbate the overall capacity constraints of Indian APIs.

1.3 China is the country most capable of undertaking India's API production capacity

China's product structure is similar to India

At present, the United States API market size is the largest, accounting for about 36%. The highest market size of APIs in the United States, in addition to the United States is the world's largest pharmaceutical market, but also more with the United States in the global API production of the last link related.

On the other hand, from the product structure, China's product structure is also very similar to India. Indian API categories are mainly anti-infective, cardiovascular, central nervous system, respiratory field. Among them, anti-infectives and cardiovascular account for a relatively high, the two together account for about 55% of the overall Indian API. China has a strong accumulation in the anti-infective and cardiovascular field.

China's API production capacity is also relatively adequate.

In 2019, the market size of India's exports is about $15 billion. And in 2018, China's API exports have reached $30 billion. Therefore, China is actually not weaker than India in terms of production capacity, and China still has a large portion of APIs for its own use. Therefore, Chinese API companies have the ability to take over the capacity of Indian APIs.

1.4 Longer-term impact -- to the direction of higher value

At present, the epidemic has spread globally, while the epidemic in China has been controlled. Relevant API companies have also achieved a full range of resumption of production. From the current progress of the epidemic, it is expected that it will take some time for the epidemic to be truly under control. The epidemic will also have a far-reaching impact on the global API industry and even on China's API industry.

It’s relatively difficult for China to seize the high-end API market in Europe and the United States. The epidemic has brought certain opportunities to Chinese API companies. With the shortage of raw material production capacity caused by the epidemic, Europe and the United States and other developed countries have to increase the procurement of Chinese APIs. At present, the epidemic in China has been controlled. The certification situation of overseas API companies is expected to accelerate, prompting the transformation of China's API industry to a higher industrial chain.

2. A number of domestic policies to accelerate the transformation and upgrading of API enterprises

2.1 Medical reform policies to accelerate the redistribution of interests in China's pharmaceutical industry

In recent years, the emergence of quantity-based procurement makes China's generic drug industry competition pattern and even the interests of the industry pattern redistribute. With the implementation of consistent evaluation and volume procurement in China, this situation is changing.From the specific situation, collective procurement has achieved obvious results in reducing drug prices.

2.2 API enterprises have inherent advantages in the process of transformation to formulations

In the transition to formulations, raw material pharmaceutical enterprises have obvious advantages. In the cost side, API enterprises after years of large-scale development, the cost advantage has been undoubted.On the other hand, the quality of API companies have also had a high level. The transition to the preparation is logical. At present, there are already a number of enterprises on the way to the transformation of the preparation field.