China’s State Administration for Market Regulation (SAMR) issued anti-monopoly guidelines for drug makers on 18 November, accentuating the world’s largest active pharmaceutical ingredients (API) exporter’s growing concerns over the increasingly prevalent monopolistic practices in its domestic market. The evil of monopoly has long been a bête noire of Beijing. Just three days before announcing the latest framework, China’s State Council appointed Gan Lin as the new head of the country’s anti-monopoly bureau under SAMR, bringing the state’s determination to eliminate monopoly to the fore.
The guideline is lucidly formulated in accordance with the country’s Anti-Monopoly Law to “prevent and curb monopolistic practices in the field of APIs, clarify market competition regulations, maintain the order of market competition, thus safeguarding the interests of consumers and the public on the whole”. Unreasonable trading operations, unfair pricing and forming monopoly agreements that could potentially lead to horizontal or vertical collusions, are some of the behaviors prohibited in the plan to prevent predatory mergers and acquisitions to form a monopoly.
According to a report by Chinese research institute ASKCI Consulting, there are 35 listed companies trading APIs as of November 2021 and their total revenue in the first half of 2021 reached RMB 51.117 billion. The top 10 companies as listed below have made a total revenue of RMB 40.174 billion in the same period, accounting for 78.5% of total market share:
- Zhejiang NHU (SHE: 002001)
- Guanfu Holding (SHE:002102)
- Zhejiang Hisun (SHA: 600267)
- Zhejiang Medicine (SHA: 600216)
- Apeloa Pharmaceutical (SHE: 000739)
- Shandong Xinhua Pharmaceutical Co Ltd (SHE: 000756)
- Shenzhen Hepalink Pharmaceutical (SHE: 002399)
- Guobang Pharma (SHA: 605507)
- Zhejiang Tianyu (SHE: 300702)
- Zhejiang Hisoar Pharmaceutical Co Ltd (SHE: 002099)
The report pointed out that the disproportionate distribution has resulted in tilting the playing field, “the structure of the country’s APIs market is unjustifiable. Due to the enterprises’ insufficient R&D and innovation capabilities, product homogeneity is widespread; Hence, supply of products often exceeds demand, resulting in low industrial concentration. Some products have fallen into a vicious circle of reducing supply to increase prices, and falling prices when supply is increased. This can easily lead to monopolies being formed.
The tussle between the Chinese antitrust watchdog and monopolies in the APIs market can be traced back to 2011, when Shandong Weifang’s Long Shunhe Medical Company was fined RMB 6.87 million by the National Development and Reform Commission (NDRC), for manipulating the price of promethazine hydrochloride. The state’s fight for fair trade in recent years is often punctuated with astronomical fines making the headlines thereafter.
Since the beginning of this year, SAMR has significantly enhanced its supervision: Nanjing’s Simcere Pharmaceutical was fined over RMB 100 million in January for exploiting the market of batroxobin concentrate liquid; Tianjin’s Tianyao Pharmaceuticals was fined for manipulating prices of fluocinolone acetonide in April; Last month, two companies were under investigation: Shangqiu New Pioneer Pharmaceutical was fined RMB 10 million for selling phenol at nine times the supposed market price and Nanjing’s Ningwei Medicines, a dominant pralidoxime chloride supplier, was fined RMB 6.6 million for selling the APIs at above the market price.
While individual API makers are heavily penalised for violating antitrust laws, interdependent oligopolistic actions are punished as well. SAMR fined three suppliers of injectable calcium gluconate, namely Shandong Kanghui, Weifang Puyunhu and Weifang Taiyangshen, a total of RMB 325.5 million last year for allegedly abusing their collective dominant position in the market by imposing unfair trading conditions. The three companies have a combined market share of more than 87%.
Topping the chart, SAMR fined Yangtze River Pharmaceutical Group, RMB 764 million for violating the anti-monopoly law. The fine, accounting for 3% of the company’s revenue in 2018, set a new record for antitrust fines in the pharmaceutical industry.
Innovation to Drive Profitability
It might seem improbable for Chinese pharmaceutical companies to maintain their profit margins with increased scrutiny. But often overlooked is the fact that innovation has gradually assumed a central role in driving profitability.
In its latest Five-Year Plan (2021-2025) the state placed particular emphasis on fostering an innovation-friendly policy environment to promote “innovation-driven developments”.
The grand blueprint is the country’s most visionary: the pharmaceutical industry, alongside forward-looking sectors such as quantum information, AI, micro/nano-photonics, are to strengthen, optimise and innovate with the support of national resources, to meet China’s strategic needs.
It was mentioned explicitly in the proposals that it would “promote integration of biotechnology and information technology, accelerating the development of biomedicine, biobreeding, biomaterials, bioenergy and other related fields, to expand and strengthen domestic bio-economy”.
At the industrial level, the National Medical Products Administration has in recent years launched a series of reforms to streamline the examination and approval process for new medicines, covering areas such as clinical trials, evaluation and pricing. All of which aims to support innovation, cut bureaucratic red tape and lower cost. From this, a new and more profitable business model is expected to emerge in the coming years.
Spotting a trend, top Chinese API manufacturers are increasing their expenditure on R&D to meet the newfound demand. Apeloa Pharmaceutical, one of the top ten listed APIs manufacturers, has established a specialized department, offering one-stop CDMO (contract development and manufacturing organization) services to global pharmaceutical companies. The enterprise, based in Zhejiang province, has also set up a research centre in the Hangzhou Biopharma Town, a new industrial cluster with a comprehensive biopharma ecosystem.
Salfaprodil, Apeloa’s ongoing research item, is a class 1.1 new drug under Phase II clinical trials that claims to be the world’s first molecular compound with dual brain neuroprotection mechanisms for the treatment of acute ischemic stroke. Likewise, its counterpart Zhejiang NHU has also invested in a R&D team of over 2000 experts, including specialists from the Netherlands, France and Germany.
The shifts of enterprises’ R&D priorities to focus on innovative products, new-generation therapies and digital healthcare systems will penetrate every link in China’s domestic pharmaceutical industrial chain, creating new competitive grounds for technological originality. The initiative is already showing results in fighting the pandemic. Last week, authorities approved Brii Biosciences’ (2137.HK) antibody COVID treatment, the first of its kind in the country.