Drug costs set to rise as China tax increase kicks off
By Kirsty Barnes
By Kirsty Barnes
This news is provided by:
16/07/2007 - China's recent change in its export policy is expected to have a knock-on effect in the global pharma industry and lead to a rise in drug costs.
As of the beginning of this month, China's finance ministry has removed or reduced tax rebates on almost 3,000 export categories in order to try and cut its $216bn (€157bn) trade surplus. This effectively means that the cost of all included exported products will rise by between 8 and 15 per cent.
Bulk drugs, intermediates, active pharmaceutical ingredients (APIs) and other basic chemicals are affected in the policy change.
The pharmaceutical industry places a huge dependence on China in both the supply of raw materials and certain aspects of drug manufacturing and all those involved, from suppliers, to contract manufacturers, to pharmaceutical companies, will be left to battle it out as to who will ultimately pick up the price tag for these increases.
Those that source APIs from China, particularly generics firms, who rely heavily on cheap sourcing due to extremely tight margins will be hit the hardest, according to analysts.
In addition, many Indian manufacturers are particularly concerned, as they, like China, are heavily involved in the contract manufacturing of many drug products and rely on their low cost base to attract business, and in order to stay competitive, source a large amount of their raw drug materials from China due to the fact that is up to 15 per cent cheaper.
Indeed, China is the world's top API supplier, with sales of $4.4bn in 2005, with the next two biggest market players being, Italy with sales of $3.2bn and India with sales of $2bn.
Many large pharma firms have been jumping on the China bandwagon. At the beginning of this month, AstraZeneca said it is planning to gradually withdraw from making its own APIs and will use China as the pinnacle of its new outsourcing plans.
The firm plans to increase its API outsourcing, following "the general trend within the pharma sector," Marc Jones, vice president of Global External Sourcing, AstraZeneca, told Outsourcing-Pharma.com.
China is set to play a starring role in this strategy, as the company pushes forward its current "in China for China" strategy towards an "in China for global" strategy. As part of this it is planning to make its sourcing centre in China eventually account for 90 per cent of all its global purchases.
In addition to China, AstraZeneca also has a sourcing centre in Bangalore, India, although currently these two centres contribute to no more than 10 per cent of its global sourcing.
Furthermore, late last year Pfizer CentreSource announced its had decided to outsource the manufacture of some of its APIs to two Asian contract manufacturers, one of them being Shanghai Pharmaceutical Co. of China, in order to "enable more cost-efficient API production."
Meanwhile, several European suppliers who have been hard hit by fierce low-cost competition from cheap Asian competitors eating away at their profits, have been taking on the mantra 'if you can't beat them, join them,' and setting up operations in these countries.
Last year Lonza, whose Exclusive Synthesis business was being particularly affected, announced it would spend $200m over the next few years to expand in southern China.
The Swiss contract manufacturer already has a ten-year presence in the country, with manufacturing facilities in Guangzhou and Liyang, but "China's low operating costs and expertise in raw materials for the pharmaceutical industry are proving more and more attractive," Lonza said at the time.
"Numerous customers have shown strong interest in our new API facility in China, with start of production estimated to be the second half of 2008," the company said.
Furthermore, other aspects of the pharma industry, besides raw materials, are also set to increase, including certain types of machinery that have also often been bought from China at rock bottom prices, particularly from Indian firms.
China has a notoriously difficult business environment to operate in, compounded by niggling concerns over intellectual property and quality control concerns, and the country's price competetiveness has been the primary lure to those companies that have now decided to operate or source heavily from there. Although it will still remain cheap compared to the West, this month's price hikes may force companies to rethink the cost-benefit rational for choosing China over other low-cost destinations.
At the same time, European producers of APIs who have been watching their share of the global market fall, may now have their chance to try and claw some business back.
