Major players in the manufacture of active pharmaceutical ingredients have successfully included China in their sourcing strategies, and a number of other companies have emerged specifically to ease the transaction. They say that quality and reliability have improved significantly, and costs are still among the best in the world.
The most important factor in this growth has been the ongoing liberalization of China's economy -- long centrally planned, it is increasingly market driven. Low costs have been the hallmark of Chinese manufacturers, and amid the fierce competition, corners are sometimes cut, particularly in the area of health, safety, and environment. The States Food and Drug Administration has developed a GMP regime and mandated that all 5,083 API and finished drug manufacturers in China be certified to the standard or lose their license to produce. Partnerships with the Western companies can provide Chinese companies some of the best insights into the cGMP worldview.
Obscured by cultural, linguistic and geographic distances as well as the ambiguity that comes from too many choices, the Chinese fine chemicals market remains something of a mystery to many reluctant Western companies. But major players in the manufacture of active pharmaceutical ingredients have successfully included China in their sourcing strategies, and a number of trading companies have emerged specifically to ease the transaction. They say that quality and reliability have improved significantly, and costs are still among the best in the world. Moreover, they note, waiting to enter the Chinese market brings its own risks.
"What people have got to learn is to stop generalizing about 'the Chinese suppliers'-there are good and bad suppliers just like in America," says Guy Villax, Hovione's chief executive.
Hovione, which has sites in Portugal, New Jersey and Macau (a former Portuguese colony that reverted to Chinese control in 1999), has worked with Chinese manufacturers since 1979. "Originally we were buying products," he says. "Later we implemented technology transfer programs involving process, quality control and HSE [health, safety and environment], and turned many of the relationships into outsourcing programs. This was only possible by having established administrative bases in Hong Kong and Macau." Hovione now buys roughly 25 percent in value and 10 percent in volume of its raw materials from the Far East. "It has been very, very positive and constitutes today an integral part of our manufacturing strategy," Mr. Villax says.
The number of companies manufacturing active pharmaceutical ingredients in China is staggering: about 4,000, according to Susan Capie, president of PharmaVantage, a New York.-based consultancy specializing in the Chinese pharmaceutical market. They produce 1,350 different active pharmaceutical ingredients (APIs), 98 percent of which are generics, and 300 biological products. Among the best known companies are those that have received approval from the US Food and Drug Administration (FDA), says Ms. Capie.
Altogether, production of APIs and intermediates by the Chinese companies totals about 732,000 metric tons, generating sales of $17.5 billion and profits of $3.5 billion, according to Ms. Capie. Much of the revenue comes from overseas. API exports between January and September 2003 totaled $2.3 billion, an increase of almost 25 percent over the same period in 2002, which itself saw an increase of 7 percent over 2001.
The most important factor in this growth has been the ongoing liberalization of China's economy-long centrally planned, it is increasingly market driven. Whereas the state always set production quotas and subsidized businesses, factories now set their own priorities and receive little or no support. An entrepreneurial culture is emerging, notes Ms. Capie, where businesses either sink or swim. Increasing domestic competition is breeding broader product portfolios and alliances, she adds. The necessary consolidation is yielding stronger businesses and back integration, while participation in global markets has brought new knowledge, greater transparency and broadened awareness.
There have, however, been serious growing pains as opportunities outrun capability. Low costs have been the hallmark of Chinese manufacturers, and amid the fierce competition, corners are sometimes cut, particularly in the area of HSE. For example, last November, in a horrifying article entitled "Toxins Are Part of Cost of Boom in China's Exports," the New York Times reported that major violations of toxic waste regulations at a Zhejiang factory, had resulted in the death of employees and illness among the local population. More generally, toxic discharges and explosions are not uncommon.
"The recent accidents in China have attracted the attention of the State Council (the cabinet of the Chinese government), the most senior authority in the country," notes Hovione's Mr. Villax. During the first half of April 2004, 21 casualties resulted from seven separate chemical accidents in China, one of which was again in Zhejiang. "No doubt a crackdown, if not a review of HSE measures, is in order." He blames China's rising accident rate on the rapid growth in industrial manufacture. "It is one of the side effects of delocalization of manufacture," he remarks. "In Europe, the fine chemicals industry is plagued with overcapacity; we have empty plants and idle people; we have all the know-how; the systems and equipment are in place to treat every waste stream to the last ppm [part per million], every VOC [volatile organic compound] is dealt with-regulations make it tough to remain competitive. The competitive advantage of non-compliance becomes a critical question."
Such practices are unsustainable, and the most ambitious companies are upgrading their operations to compare with Western and Japanese counterparts. "For those companies who just look into China and have no past dealing with China, I assume they would be very surprised by what they see there," says Wynn Hui, CEO of Welex Chemicals, a Hong Kong based sales and marketing organization working with manufacturers in Europe and Japan. Mr. Hui, whose relations with the Chinese chemical industry go back 25 years, took over the management of Welex Chemicals 7 years ago. The standards among Chinese manufacturers vary widely, he says. "But for those better ones, if you only look into their 'hardware' (the size of the plant, equipment etc.), they are very close to some of the Western companies, especially for those newer plants built in recent years. They will be also surprised how many plants are available in China and how quickly they are improving. The chemistry they are handling becomes more sophisticated each year." Many Chinese companies are also working to align their business practices with those taken for granted in developed nations, and turning to both consultants and foreign partners for help.
Establishing true cGMP operations would be a dramatic demonstration of capability and trustworthiness for any Chinese company. The State Food and Drug Administration [SFDA], China's version of the FDA, has developed a GMP regime and mandated that all 5,082 API and finished drug manufacturers in China be certified to the standard by July 1 or lose their license to produce. By the end of April, more than 3,000 authentication certificates had been granted to 2,721 of these companies. "It is estimated that about 1,000 pharma [companies] will fail to reach the GMP standard and finally be required to halt production, the majority of which have fallen into business difficulties for quite a long time," notes Ipsos' Mr. Pang. Even without compulsory certification, he observes, they would very likely have become insolvent given the extreme competition. "According to SFDA policy, for some special categories that only host one or a few producers, if these producers fail to reach the GMP standard, the drug administration will push them to join hands with the GMP-certified players for transferring production in order to guarantee stable supply in the marketplace."
"Most companies view a company with a Chinese GMP as a company that has adopted a stronger view on quality and compliance and has the requisite controls in place, thereby providing a Western company a higher level of confidence," Mr. Hui notes. "Those companies usually can provide quality material with appropriate analytical support and necessary documentation. The HSE standards are also generally higher than companies without GMP."
"There are wide disparities in how the GMP is implemented," says Jim Havlin, sales and marketing chief at ChemPacific, USA. "As time goes by, those companies not in full compliance will not survive." Some observers in the West expect the new requirements to eliminate the cost advantage enjoyed by Chinese manufacturers, he says. "I don't believe that. The cost advantage comes from low-cost labor, equipment and overheads. This cost advantage is sustainable in the companies currently practicing good GMP methods. In short, I think people are mistaken if they feel that by strictly enforcing GMP, the Chinese and Indian competitors will disappear."
Patent issues are the greatest weakness of Chinese producers, says Ms. Capie. "When the Chinese are developing an API they do try to do patent searches, but that is not complete," she notes. "No factory yet has patent attorneys on staff, but I think for the larger pharma groups who are seeking partnerships with large Western firms, this may come soon."
Partnerships with Western companies can provide Chinese companies some of the best insights into the cGMP worldview. Every one of the global top 20 drug makers have joint ventures or wholly foreign-owned enterprises in China, and the scale of these activities is growing, according to Mr. Hui. "The fast growth of China's domestic pharmaceutical market has already lured many Western companies to localize their production, even R&D, here," he says, noting that China is expected to become the largest pharmaceutical producer and consumer in the world. Some of these global innovators have turned to Chinese manufacturers for intermediates and API, says Mr. Hui. "For example, Japanese Daiichi is the inventor of ofloxacin, but it now sources ofloxacin bulk drug from Chinese manufacturer. Merck & Co. is the world's largest manufacturer of ivermectin, and it also uses Chinesemade ivermectin and lovastatin API." Eli Lilly has reportedly transferred capreomycin production to several companies in China.
However, pharma innovators still use Chinese manufacturers mainly for intermediates, says ChemPacific's Mr. Havlin. "There has been a large change in the past 10 years in this direction and those pharma innovators that have resisted sourcing intermediates from China now find that they must now do this to remain competitive. The next trend will be to move towards lower-tech, lower-profile older APIs. This should happen in the next 10 to 15 years. Finally, newer APIs will eventually be outsourced; however this is many (25 or more) years away."
Many Western companies still avoid sourcing from China altogether, daunted not only by stories that have circulated over the years, but also by the difficulty of distinguishing among 4,000 manufacturers on the other side of the world, not to mention the great linguistic and cultural divide. Others have sovled those difficulties by using Hong Kong trading companies.
"A good consultant familiar with China is best to assist in evaluations of potential suppliers," asserts Ms. Capie, who has over 20 years of experience in China. "Internet research is misleading, as often the best Web sites belong to the worst companies. You need to have someone in the business designated to be the main conduit with the Chinese supplier to ensure smooth, complete communication is maintained, otherwise various departments are receiving communications and not copying each other resulting in misunderstandings and delays. [You] also need to designate someone from the Chinese side to perform the same function-a main channel for all aspects of a sourcing project," she says.
Mr. Havlin points to some of the hurdles a Western company will face. "One mistake made by Western companies is not knowing who actually will manufacture their material in China," he says. "Will it be the company they are dealing with, or will another factory produce the material? Another one is understanding the true capabilities of the company they are working with. Does the Chinese company totally control the manufacturing process, or will it in turn be further outsourced in China? Finally another mistake is understanding how problems and mistakes will be handled," he warns. "During any buyer-seller relationship, there will be problems. How these will be resolved needs to be understood up front. For example, does the Chinese supplier have the technical and developmental resources to solve production and quality problems?
Local knowledge is essential, points out Welex Chemicals' Mr. Hui. "In order for Western companies to successfully outsource from China," he advises, "they need to have the right mediator in place with good knowledge, years of experience and a well-established network, so they can choose the right partner for the right projects." For twenty-nine years, he notes, Welex Chemicals has been performing these services, providing a "bridge" for Western companies by managing risk, identifying the right manufacturing partners, and providing logistics services. "Every company has to go through a learning curve when dealing with China, and one safe way to do it is to select a partner who truly knows China and who conducts business by Western standards and business practices."
Western API manufacturers sourcing materials from China are generally satisfied with the experience. "We do source intermediates from China," says Stu Needleman, general manager, development services at Rhodia Pharma Solution, which has its own sourcing team based there to help in finding and qualifying suppliers. The most important consideration is what clients want and expect, he notes, observing that some have more familiarity with China than others. "We continue to monitor who delivers and who does not and what companies are capable of doing, so we build up our network. Our customers expect us to source from China, India etc., so it will continue." Quality is fine, he states, and will only get better. "I think what China lacks is larger-scale manufacturing/engineering design." Rhodia and Rhodia Pharma Solutions together have 17 plants of their own in China, he adds, a factor that "gives us local knowledge to stay ahead of the game."
Ralf Pfirmann, global director of market management at Clariant Pharmaceuticals, says the company has been sourcing raw materials and building blocks for regulated intermediates and APIs from both India and China for several years. "We do this as a matter of course to reduce our costs for our customers." In India, Clariant produces raw materials and intermediates at its own facility. In China, the company turns to suppliers with whom it has longstanding relationships. "This activity is a part of using the full purchasing power of a global organization like Clariant to develop selective advantages to support our customers," he says. "It is anticipated that as the capability of Chinese manufacturers develops even further, companies in this region will become an increasingly important option for Clariant in maintaining our global network of manufacturing in the service of our pharmaceutical customers."
Mr. Pfirmann considers the basic issues around sourcing from China to be essentially the same as sourcing from anywhere else. "Quality, logistics and a strong working relationship are key elements that have been addressed as our work with producers in this market has grown. At Clariant, it is our job to manage the various issues that present themselves to create advantages for our customers. Where we can address the important issues of quality and consistency and take advantage of lower costs inherent in Chinese production, we do so."
Cambrex also obtains raw materials and some basic intermediates from China. The selection there is broad, of good quality and getting better, and reasonably priced, states a representative of the Cambrex Purchasing Council. Another driver is the availability of certain raw materials that are no longer available in Europe. "We cannot source items that cannot be planned well in advance of demand: The long lead times prevent them being a viable source in this situation," she says. "We will also not use suppliers in China for certain classes of materials that require particular attention to storage conditions, packaging, and transport regulations." Supplier selection is critical. "We have learned that extensive use of pre-shipment samples, detailed packaging specifications, and anticipating import document details can prevent problems. There are also benefits to using a reputable agent
Time may be short for companies that have stood aloof. The partnering environment, though clearer, is becoming less favorable with time, observes Welex Chemicals' Mr. Hui. "They may find their competitive edge diminished because their competition may already be taking advantage sooner," he notes. "The ability to set up joint ventures may not be as attractive since many of the well-established companies are already strong enough, so they are less interested in foreign partners. Their only interest is if you are a customer who will buy products from them. Additionally, most of the well-established companies do not have cash difficulty, since some are already publicly traded."
Leonard Schwarz, chairman and CEO of Aceto Corp., a pharmaceutical and specialty chemicals distributor that sources a large proportion of its products from China, agrees that Western companies cannot afford to put off engaging with the Chinese market. "They should have substantial worries," he says, "as the Chinese arc the most competitive chemical producers in the world, particularly for fine and specialty chemicals and pharmaceuticals." At the same time, however, he advises companies to look before they leap. "They need to fully understand the culture and how to do business in China. It is very different than in the West and even in Japan. They need to make a great investment in time and energy to understand the Chinese way."
Mr. Villax agrees that Westerners will have a difficult time if they are not sensitive to the Chinese mind-set and culture. "Relationships take many, many years to build, they then become relations of trust and friendship between individuals that respect each other," he explains. Hovione has provided suppliers with process technology and quality control (QC) know-how, contributed to product development strategy and provided market expertise, he says. Moreover, the company is perceived in China as an end-user with a long-established plant in South China that pays fair prices. "We have therefore always received great service-a situation probably different from those that media have reported. On the other hand Hovione is very careful at selecting the best suppliers, and in China this is like finding a needle in a haystack."
(Reprint version)
