China may usurp India’s pharma edge before long

Country has already demonstrated its strength in bulk drugs and may do the same in formulations

The Beijing Olympics left many memories for sports enthusiasts the world over. It also sent out a scary message for the global drug industry: if the Chinese cut off raw material supplies, the industry’s cost calculations can go haywire.

While Chinese companies are not expected to stop supplies, as they too need to be in the business, there is a subtle indication that the balance has tilted heavily in favour of Chinese pharmaceutical suppliers. It may have happened without any design or plan but Chinese companies now know that they have more bargaining power on pricing of intermediates and bulk drugs.

A large number of Chinese plants had to be shut down in the run-up to the Olympics as the government clamped down on polluting chemical companies and the movement of hazardous chemicals. That sent panic signals across the globe. Though supplies from large European companies did plug the holes to some extent, costs were running very high. In fact, some formulators in India say the API crunch in the last six months erased almost all the gains of the last two years.

Why did that happen? A decade or so ago, when the Chinese started building giant-sized drug manufacturing plants, the world thought there would be a glut-like situation and the Chinese will play the volumes game. Critics said there would be no pricing power left with them. Now we know how wrong they were.

The Chinese worked on thin margins but ensured that long-term contracts from big markets gravitated to them, particularly from big European companies. The quality of raw material was suspect initially, but many of the Chinese companies complied with the US Food and Drug Administration norms and kept scaling up. Recently, a large
German company went to the extent of working on complex chemistry with a Chinese firm so that it can ensure supplies do not get disturbed and the proprietary hold over technology is retained. Notably, a few big Chinese firms are getting increasingly aggressive on contract manufacturing and more and more US firms are gaining confidence in Chinese firms.

A friend from a leading foreign brokerage travelled to see a cephalosporin plant in Guang Zhou some time ago. The plant was under construction, so my friend asked the owner how big the manufacturing unit would be. The owner pointed his index finger and told my friend it could go as far as his eyes did.

A story that was ridiculed by detractors has now become a nightmare.

Many senior industry stalwarts now feel the Chinese will next attempt to build their formulation capabilities. A generic player with a presence in the US says costs would be redefined if they start filing their abbreviated new drug applications. And with most European and African nations calling for tenders for government supplies, Chinese will easily score over Indian companies.

For years, India has been ahead in the formulations game. But the cost advantage is genuinely fading for many companies. Young chemists who were willing to work at salaries below Rs 15,000 per month are now charging double of that amount and there is no guarantee about the time the professional will stick with one company.

Wages have risen in China, too, but it’s been more reasonable and with businesses growing, wages are still not so high. Remember, infrastructure in China is leagues ahead of India. There is no shortage of cheap power, there is no shortage of water and there are no clamours over setting up big plants. Singurs do not happen in China.

Pillman is an executive closely linked to the global pharma industry.