China has never been a large formulations exporter, preferring to supply to the highly lucrative domestic market and exporting APIs. The situation is now changing and Indian exporters must take proactive steps to safeguard their interest, especially in Africa, highlights Suhayl Abidi, Research Advisor, GOG-AMA Centre of International Trade
The companies with the brightest prospects are those that know where to find pockets of growth, how to capture that growth now and in the future, and how to build a growth engine for sustainable success
– McKinsey & Co, 2019
According to Pharmexcil, roughly 20 per cent of India’s pharma exports of around $17 billion go to African countries. Indian pharma companies have long been present in Africa, especially South Africa and a significant number have steadily established themselves as partners of international healthcare NGOs and aid agencies over the past decades.
The African pharma market, which is $24 billion at present, is poised for big growth in the coming years. After decades of civil and tribal strifes, much of Africa is peaceful today and the GDP growth rate is rising again. Some countries such as Ethiopia, Ghana, Kenya, Uganda etc. are exhibiting consistent GDP growth rate of seven per cent and above. Five of the 12 fastest-growing economies in the world are in Africa. There are 720 million African mobile users, more than in Europe or North America and transaction in mobile money in Somalia exceeds $2.5 billion every month.
Rising industrialisation and urbanisation are leading to a rise in per capita income and a growing middle-class. Today, 26 of Africa’s 54 countries have achieved middle-income status. Increased penetration of health insurance is also taking place in many high-growth countries such as Kenya. During 2018, Kenya disbursed over $350 million. in health insurance. The governments in many countries are slowly exiting direct healthcare services in favour of promoting health insurance.
In June 2019, 52 out of 54 countries, with a total population of 1.2 billion, ratified the formation of a continent-wide Free Trade Bloc known as African Continental Free Trade Area on the lines of The European Union. This has paved the ways for border-less economic integration and will lead to a resurgence in large scale industrialisation. The effect of all these changes in the pharma market will be tremendous. McKinsey & Co. estimates that by 2025, the African pharma market will be worth $45 billion and 65 billion by 2030.
China understands that it cannot compete with India in exporting generic formulations to the regulated markets. Indian generic pharma industry is much larger than China’s with over 10,000 plants compared to less than 5000 in China. India also has the largest number of FDA approved plants as well as our product filing in the US (the major market for generic exports) is way beyond the Chinese capacity to catch up. In 2018 alone, India captured 290 of the total 813 ANDA approvals in the US compared to 38 from China.
However, the Chinese are slowly creeping up to reduce the gap with India. In the past years, more Chinese pharma companies have begun their march into the international market. This has not only positioned them to further expand their global territories but has also primed China to raise the quality of its industry as a whole. Receiving FDA recognition is vital to Chinese pharma’s internationalisation strategy, as of Dec 24, 2018, Chinese pharma companies had received 77 ANDAs – from the USFDA.
The number was 38 in 2017 and 22 in 2016. Before 2016, Chinese pharma companies had fewer than 15 ANDAs approved on average each year. Besides, established companies, a number of new Chinese names were seen in the 2018 ANDA list. Rising ANDA approvals has three goals for the Chinese industry.
1. Increase market share in the US, the world’s largest pharma market
2. With ANDA in hand, the process of registration in China (which is considerable) is shortened enabling the company to introduce new drugs in the $120 billion domestic market.
3. ANDA can be leveraged in other countries such as Latin America and Africa as a sign of quality manufacturing, where it can position itself as a competitor to India.
Knowing that they cannot catch up with India in regulated markets, China has developed a new strategy to outflank India through major thrust in local manufacturing with Africa as the laboratory. The emergence of AfCFTA will mean bigger markets enabling the emergence of large-scale industrialisation of Africa and large-scale indigenous production of pharma products is at the forefront of these developments in African nations. All these developments have not gone unnoticed in China.
China domestic market-implications in Africa
The events happening in China’s domestic market provides further clues to the likely expansion of Chinese companies in Africa. In just the last three years, China radically altered the regulatory landscape and the shift in fundamental policy direction, the speed of implementation, and impact on drug development—both in China and globally—has been dramatic.
Among the top 100 generic drugmakers, Chinese firms had a 74 per cent gross margin and an 18 per cent profit margin in the third quarter, compared with a global average of 55 per cent and 9.5 per cent, respectively, according to data compiled by Bloomberg. Chinese pharma companies are used to 50-80 per cent profits in the domestic market, partly due to fragmented procurement and the Chinese government’s policy of protecting the local industry.
However, this policy went a radical change in 2018. China’s plan to drive down generic drug prices through a centralised bulk procurement program is set to redraw the industry by forcing its thousands of small generic drug makers to streamline and consolidate after decades of enjoying outsized profit margins. The abovementioned pilot program bulk-buying program will be extended to other regions progressively.
In December 2018, the Chinese Joint Procurement Office (JPO) listed 31 generic drugs for procurement in a pilot program across all public hospitals in 11 cities, accounting for around a third of the Chinese drug market; foreign companies only won two of these contracts.
The centralised bulk-buying tender drove prices down by an average of 52 per cent and in one case by as much as 90 per cent. The Chinese Vice Premier has said that China would be expanding the programme to cover more cities and drugs, as medicine prices must fall for health care to be affordable for the people.
They will give at least 60 per cent to 70 per cent of orders for 31 specified, mostly generic, treatments to the lowest and the best-stocked bidder. With a rapidly ageing population and 4 million new cancer patients each year, China is playing tough. The state’s basic medical insurance program is burdened with ballooning expenses and is estimated to run into deficit as early as 2020 and thus a fierce price war has ensued. For example, Sino Biopharmaceutical slashed the price of its hepatitis treatment entecavir by more than 90 per cent to beat out Bristol-Myers Squibb Co. and two local competitors. The drug has accounted for 16 per cent of Sino’s sales in 2018. Acarbose price reduction was 78.5 per cent and Lipitor 75 per cent. At this rate, China’s drugmakers can say goodbye to most of their profits. At 3SBio Inc., for example, more than 60 per cent of its revenue comes from drugs that have at least five direct substitutes in the market, according to estimates by CLSA.
Indian pharma companies may get market access in China to spur competition. However, they should enter China with eyes open that although the Chinese market is huge and even a small share is large enough but the days of large profits are over.
The consequences are:
1. The stronger Chinese companies will spend more on R&D to bring out innovative drugs and delivery system. However, this will take years and the outcome uncertain.
2. The weaker companies will disappear
3. All companies will look elsewhere for markets where good profits are still possible
That market is Africa where the regulatory regime is weak and evolving, there is no price control and possibilities of manipulating government supplies.
China in Africa
Africa’s industrial landscape will change dramatically over the next decade and China is taking full advantage to enter various industrial sectors, especially where it is no longer economical to produce and export from China. For example -The first five ceramic tiles factories established in Sub-Sahara Africa are all from Chinese entrepreneurs. There is no doubt that this process will continue as many countries in Africa such as Nigeria have huge sources of raw material and a large regional market to make manufacturing possible. India is the second-largest manufacturer of ceramic tiles in the world and the fourth-largest exporter. However, this development has largely bypassed the attention of both the companies, their association, export promotion council as well as the government. In future, our exports will be impacted by local production including pharma products.
Many countries have drawn up large plans to indigenise pharma production from three per cent at present to 50 per cent. Kenya is building an HIV drugs plant at a cost of $100 million to produce a billion tablets & capsules which will be exported throughout Africa. Tanzania has announced plans for five plants and has invited foreign drug companies to take up production. Even Chad has announced its first pharmaceutical plant with Egyptian JV. Egypt has announced that from $1.7billion generic imports in 2019 to $700million in 2020 and nil imports in 2030. Local production is not entirely import-free. Plant, machinery, spare parts and manufacturing intermediates such as API will continue to be imported for a long time from a host country. Therefore, the composition of exports to Africa will gradually change from consumption products to manufacturing intermediates.
A report by the European Commission and the WHO in 2017 found that China Government authorities and stakeholders have already started to engage in the development of the pharma sector in the African region. The Chinese Development Bank is undertaking studies and projects, and some Chinese companies have initiated operations, albeit of a limited nature.
In August 2019 more than 300 representatives from China, Africa and various international organisations held a two-day meeting on China-Africa health cooperation and an investment roadshow was organised by the International Trade Centre (ITC) and the China Chamber of Commerce for Import & Export of Medicines & Health Products (CCCMHPIE) in June 2019 where Amakobe Sande, UNAIDS Country Director and Representative in China said, “The needs on the continent are very high, including for HIV/AIDS medicines. Yet China is not making a mark.”
Taking advantage of African countries’ need and desire for indigenous pharma industry, China took the first step and constructed an exclusive pharma industrial park in Kilintoro in Ethiopia on 240 hectares. Ethiopia is way ahead of other African nation in spelling out its pharma ambitions. It aims to become the “Pharma Hub of Africa.’ It was to the first country in Africa to bring out a pharma manufacturing policy and roadmap. Among other incentives, it provides 25 per cent price preference and 15 per cent advance to local companies.
China has taken advantage of the new indigenisation policies by constructing two large generic plants in Ethiopia to cover markets in Ethiopia, Sudan, South Sudan and Eritrea, to start with, at an estimated cost of $200 million. The Sansheng plant has a capacity for 5 billion solid preparations, 300 million ampoules and 10 million large volume parenterals. This is only the first step and we will soon see more Chinese manufacturing both on East and West Coast as well as North Africa.
This was made clear in a recently commissioned study (October 2018) by Chinese Pharmaceutical Association, China Chamber of Commerce for Import and Export of Medicines and Health Products (CCCMHPIE) titled 21 Country Profiles which has identified 21 countries in Africa with pharma manufacturing potential and highlights vast opportunities for Chinese pharma companies to expand and relocate their manufacturing to African countries.
The indigenisation of manufacturing in Africa will ultimately reduce the import of generics in due course. We only have to see the growth of the pharma industry in Bangladesh to visualise the trajectory of manufacturing in Africa. Bangladesh today has 97 per cent indigenous production and from $118 million in exports in 2018, it plans to export drugs worth $ one billion in 2020.
As a first step, some African countries where manufacturing has reached an advanced stage may ban or put restrictions on the import of generics like Bangladesh did, followed by some North African countries. For example, Kenya has identified and may ban or restrict the import of eight drugs in 2020. Chinese manufacturing will certainly accelerate this process.
This Chinese strategy has grave implications for the Indian pharma industry. China, with its vast economic and financial strengths coupled with industry-government joint strategy, has a history of decimating competition wherever it has gone abroad. In India, Chinese mobile companies have reduced the once large Indian mobile companies such as Micromax, Lava, Karbonn etc. to the margins of the market. The market for Chinese mobile makers increased from 60 per cent in 2018 to 72 per cent in 2019. China is making vast investments for the future. Xiaomi invested Rs 3500 crores in 2018 and TCL Rs 2500 crores. Oppo has committed an investment of Rs 7500 crores. Which Indian company can match this investment? Next may be automotive. MG is the only automaker in India which is not affected by the auto recession. In the 2020 Delhi Auto Show, Chinese companies had booked 20 per cent of the total space, though they did not attend due to coronavirus. One can be sure that they will come back next year with renewed force.
In the railway rolling stock industry, Chinese company CRRC (world’s largest railway rolling stock company) has decimated competition from once formidable Alstom, Siemens and Bombardier. Bombardier, which has supplied most of India’s metro carriages has since exited the railway carriage business. Chinese industry finished off Australia’s railway industry within a decade. Four US Companies have asked the Congress and the Senate to withhold Government funds to those municipalities asking for CRRC carriages as CRRC will use subsidies to grow and eventually threaten freight wagon industry which is their next target.
We should be under no illusion that in Africa, China will not use the same strategy to decimate competition over the long run. We must have a rival strategy of our own, not only to successfully face Chinese competition but also to eventually rule the global generic market. We will discuss some options in the next and final article in this series.