Since 2020, there has been an outbreak of the New Crown epidemic. After more than 3 months of strict prevention and control in China, the outbreak is now largely under control. The majority of enterprises have resumed production and the logistics system has resumed operation. On the other hand, the epidemic is raging worldwide. Italy, Germany, Spain, Japan and other major European API producers are in a critical period of the development of the epidemic. Many countries have taken isolation measures such as shutting down production, blocking traffic and limiting travel. It is expected that the supply of APIs will face great difficulties in the short term. India, known as the "pharmacy of the world", issued an export restriction order on March 3, 2020 to officially restrict the export of 13 APIs and corresponding preparations to meet its domestic demand as a priority, due to the unpromising forecast of the development of the epidemic in the country.
In the short term, the supply side of APIs will be more affected by the epidemic. Foreign API producers may not be able to produce or restrict exports. Because of the epidemic, the demand for related APIs increases. Chinese API companies have the opportunity to seize the market share and increase the price of related drugs. However, in the long run, this new crown epidemic brings domestic API enterprises opportunities at the same time, Chinese API enterprises are also facing internal and external problems.
1. China's API enterprises face the "internal problems"
1.1 Product structure risk and homogeneous competition risk
China's API low-end overcapacity, high-end production capacity is insufficient, homogeneous competition is intense. The overall profitability of the industry is lower than the average level of the pharmaceutical industry.
At present, there are about 2,000 kinds of APIs produced in the world, of which more than 3/4 kinds can be produced in China. There is no doubt that China has become a source of raw materials for the world's pharmaceutical companies.However, behind the advantage of scale, China's API industry has great problems in product structure, industry competition, profitability and other aspects.
APIs are generally divided into three categories: bulk APIs, specialty APIs and patent APIs. Compared with the three types of APIs, showing a decreasing downstream demand and increasing technology content. Our APIs are mainly concentrated in vitamins, antipyretics and analgesics, antibiotics and hormones, and other bulk APIs. Industry competition, the number of API exporters has been growing for six consecutive years, resulting in excess capacity and homogeneous competition.
Subsequent government to encourage API exports may also introduce relevant policy preferences. Excess profits from higher product prices may attract new entrants to the industry, and may prompt existing players to expand their production capacity. In particular, the capacity of bulk APIs with lower barriers to entry may further increase. Once the subsequent epidemic is controlled and foreign API producers resume production, current domestic companies will lose their international competitiveness, further intensifying homogeneous competition among domestic companies.
1.2 the risk of weakening the production cost advantage caused by the decline of the demographic dividend and the tightening of environmental protection policies
All along, one of the decisive advantages of Chinese APIs to occupy a pivotal position in the world API supply is the cost advantage. The source of this advantage is mainly dependent on the domestic more complete upstream chemical industry chain, as well as low labor and production costs. However, in recent years, with the gradual decline of the demographic dividend, domestic environmental protection supervision tightened, the cost advantage of domestic API enterprises is significantly weakened.
1.3 "Volume purchasing" and other medical reform policies, API companies face the risk of compressed profit space and increased dependence on large customers
As a result of "volume purchasing", the focus of competition of downstream formulation enterprises has changed from marketing ability to "cost performance" of drugs. The related cost pressure will certainly be transferred to the upstream API enterprises. At the same time, the dependence of API companies and downstream formulation companies will also increase significantly. In this process, specialty API companies have the opportunity to achieve an integrated model from raw materials to preparations, to obtain higher profits.
2. China's API enterprises face "external problems"
2.1 "new crown" after the epidemic, the global API supply chain reshaping may lead to the risk of increased domestic API overcapacity
The "new crown" epidemic directly prompted the pharmaceutical countries and pharmaceutical giants to re-examine and re-evaluate the risk resistance of their respective pharmaceutical industry chains, and take measures to reduce the dependence on Chinese APIs and accelerate the process of their APIs "to China". China's API global supply position may be weakened. Since the global spread of the New Guinea epidemic, many countries have become aware of the fragility of their domestic drug production chains and their high dependence on Chinese APIs.
2.2 The risk of trade, investment and technology "sniping" by major countries for Chinese APIs after the New Crown epidemic
Before the new epidemic, the major exporting countries of Chinese APIs have taken trade measures against Chinese drugs for many times. After the new epidemic, out of fear of China's high dependence on APIs, as well as the purpose of accelerating the return of domestic API manufacturing, the major countries may intensify their trade, investment and technology barriers against Chinese drugs. May lead to some of China can be replaced by other countries API API varieties face increased export costs, export prices are significantly depressed, and even export blocked and other adverse situations.
2.3 domestic preparation enterprises to enhance the quality of drug requirements, coupled with policy dividends, resulting in imported APIs to squeeze out the domestic market share of domestic APIs risk
National generic drug consistency evaluation policy will enhance the demand for high-quality APIs, and taking into account the national policy dividend for imported APIs, it is expected that the scale of imported APIs will maintain a faster growth rate in the future, crowding out the market share of domestic API enterprises.
3. Credit risk outlook for China's API industry
The new crown epidemic will lead to changes in the domestic API industry dynamics. The impact on each sub-component industry is different, as follows.
For the bulk API industry, competition is focused on cost control and continuous supply capability. At present, China's lower production costs compared to other countries, as well as the advantages of scale and climate conditions, so that the relevant products in the short term "to China" is less likely. However, we need to pay attention to the problem of overcapacity of bulk APIs. In the future, the field of bulk APIs in the cost and scale of the absolute advantage of the competitiveness of enterprises, including new and Cheng, North China Pharmaceuticals, Northeast Pharmaceuticals, including the head of the enterprise. With the increase of industry concentration, their bargaining power will also be improved. A large number of small and medium-sized bulk API manufacturing enterprises with greater credit risk. It is worth noting that the bulk APIs that rely heavily on Chinese crops will also be difficult to "de-Chinese".
For the specialty API industry, its downstream use is concentrated in the field of "three high", anti-tumor, psycho-neurological, digestive system and other chronic disease drugs. As the drugs in these areas are generally of high technical content, the competition for specialty APIs focuses on the certification of supply qualification, speed to market, and the ability to update technology. It is worth noting that specialty API companies are the most likely to extend their industry chain to downstream formulations, thus gaining a competitive advantage in integrated production from raw materials to formulations.
For the patent API industry, downstream applications are mainly for the original drug, the API research and development capabilities, technical content and quality control requirements are extremely high. The concentration of downstream customers of patent API manufacturers is often very high, and excessive reliance on a single customer may have a negative impact on their operations.