In combination with the formulation transformation of Indian pharmaceutical company Ranbaxy, we elaborated on the significance of formulation exports to API companies, the way in which preparations are exported, the basis for the transformation of domestic pharmaceutical companies, and the main problems faced by the export of preparations.
Formulation transformation breaks the bottleneck of raw material growth. Due to the small demand for raw materials, the downward price, and the low added value, the raw material drug companies have bottlenecks that are difficult to leap. Through the transformation of the formulation, the API companies have opened up the industrial chain and improved the profitability of the enterprise. At the same time, the huge market and the stability of demand have solved the fluctuation of performance caused by the price fluctuation of the API. Through cost comparisons, we find that the profit margin of formulation exports can be as high as 80%, and the expanding generic drug market provides an opportunity for the transformation of pharmaceutical companies.
International experience shows that formulation transformation brings extraordinary growth to API companies. Indian pharmaceutical company Ranbaxy has been transformed into a formulation manufacturer in this way through the preparation of foundry, the acquisition of US pharmaceutical companies into the US market, and the export of generic drugs to the United States. Although the stock price during the transition has risen sharply by more than Rs. 80 to Rs. 600, the rapid growth in earnings has reduced PE from about 60 times that of the eve of the transition to about 25 times. This process clearly shows that the eve of the transition is a good investment period.
Chinese pharmaceutical companies already have the foundation for transformation. Developed countries in Europe and the United States have built high barriers in technology and market access. The basis for breaking through barriers is that 1) the government promotes the transformation of enterprises into preparations by increasing the difference between the export tax rebates for preparations and APIs and increasing environmental protection standards. 2) The comprehensive cost advantage of Chinese pharmaceutical companies has made industrial transfer a trend. 3) Raw material drug companies have improved in terms of technology level, certification capability and company scale.
International cooperation is the main mode of export. Constrained by the lack of market sales, domestic API companies have to cooperate with international pharmaceutical companies in the form of OEM, formulation, and cooperative development. Cooperative development based on enterprise R&D, because of enjoying the profit sharing of sales, the space for profit is far greater than the former two cooperation methods, and it is also the main way of future transformation.
A representative enterprise of domestic formulation transformation. Haizheng Pharmaceutical's multi-modal cooperation, rich product line and strong research and development capabilities make it a representative enterprise for formulation transformation. The export of statins this year and the joint venture with Fimama will start to grow in the next year. Huahai Pharmaceutical has made rapid progress in anti-Alzheimer's drugs. The gradually developed R&D system and flexible management mechanism will be the driving force for its future transformation.
The Chinese chemical and pharmaceutical industry represented by Haizheng and Huahai is in the stage of transition from a primary API manufacturing company to a downstream formulation manufacturer. In this report, we combine the case of India to what the transformation process can bring to the API companies. Under the current conditions, those pathways can realize the role change, the obstacles and risks of the role change, and what enterprises are there after Zui A preliminary explanation of the successful completion of the role transformation.
Since China's chemical raw material medicine enterprises are mainly export-oriented, the main way of future formulation transformation is to mainly export to the developed countries in Europe and America. Therefore, the formulation transformation in our report refers to the change in the business model of enterprises from the export of APIs to the export of preparations.
1. The export of preparations to raw material medicine companies is not only an increase in profit methods.
Formulation transformation promotes the transformation of the growth mode of API companies
The essence of API products is chemical products, so its market competition has its own characteristics compared with other companies in the pharmaceutical industry.
Growth bottleneck of API companies
The cyclicality of growth: Since the price of new products is much higher than that of mature old products, the basic mode of growth for API companies is to introduce new products to replace old products as soon as the old products are falling. However, the lack of support for downstream preparations has created considerable market risk for the development of new products. Even companies with strong R&D and rich products may still experience a decline due to the rapid decline in the price of new products.
Spatial limitations of growth: The variety of the API market, the small demand and the low added value determine that the long-term growth of API companies is far weaker than that of pharmaceutical manufacturers.
Industrial upgrading changes growth model
The raw material pharmaceutical enterprises formed an industrial chain after the formulation transformation, and increased the profit level by earning double profits of raw materials and preparations.
Formulation transformation is an important means for API companies to resist product cycles. Through the production of the preparation, the upstream API can avoid fierce market competition and reduce the fluctuation of corporate earnings caused by the price change of the API.
The transformation of the preparation of APIs is a direct way to break through the bottleneck. The market size of the preparation and the added value of the product are much higher than the raw material medicine, and the transformation of the preparation of the raw material enterprise is the main way for the enterprise to achieve value growth.
Large profitable space for preparation exports
Developed countries in Europe and the United States have built up high market barriers through perfect intellectual property protection, good market mechanisms and strict access conditions, which we usually call the normative market. Due to the high competition barriers, the price of drugs in the regulated market is much higher than the non-standard market represented by China.
Taking simvastatin as an example, the domestic price of the drug substance is only between 2,700 and 2,900 yuan/kg, but the product is more than 500 times more valuable after being sold in the United States.
In order to roughly estimate the profit margin from the bulk drug to the formulation export process, we compared the cost of simvastatin from API to domestic formulation production and the wholesale price of international practices. According to the process of drug distribution in the European pharmaceutical market, the price of the preparation export is usually 25% to 30% of the terminal sales price, and the wholesale price of the drug from the pharmaceutical company to the pharmacy circulation is 50% of the terminal price.
Based on this, the sales share from raw materials to zui will be calculated. The gross profit margin of domestic pharmaceutical companies will be over 80%. Since the sales of the preparations are undertaken by the partners, the sales expense ratio will be far lower than the domestic pharmaceutical companies by about 30%, and the net profit margin of Zui will not be less than 20%, and may exceed 30%. Of course, the gross profit generated by different forms of export and different cooperation conditions will be greatly deviated.
The market for preparation exports is amazing
The value of the pharmaceutical market represented by developed countries in Europe and America has exceeded 600 billion US dollars, accounting for more than 80% of the world pharmaceutical market share. In contrast, the sales revenue of the domestic chemical industry in 2006 was only 138.25 billion yuan, or about 19.2 billion US dollars, less than 1/30 of the value of the pharmaceutical market in developed countries.
In recent years, driven by rising labor costs and increased environmental pressures, the trend of European and American pharmaceutical companies to transfer production of pharmaceutical products has become more apparent. International pharmaceutical giants such as Pfizer, GSK, and Roche have begun to find partners in the country for formulation production.
The expansion of the generic drug market provides an opportunity for the export of preparations
Since 2002, a batch of blockbuster-grade patented drugs has gradually ended its protection period, and the market for patented drugs has expanded rapidly. As of 2006, the market value of generic drugs has reached 240 billion, far higher than the $30 billion of APIs.
On the other hand, due to rising medical expenses, the plans of developed countries in Europe and the United States to promote generic drugs instead of original drugs have also promoted the growth of the generic drug market. IMS expects the market for generic drugs to maintain a 15% growth rate in the future, greatly exceeding the growth rate. The world pharmaceutical market grew by 7% to 8%.
Second, the analysis of the transformation of international API companies
The manufacturers of APIs are currently concentrated in southern European countries represented by China, India and Italy. Both China and India are large developing countries with weak pharmaceutical industry bases. They are the typical representatives of the increasing market share in the international API market with the advantage of labor cost and environmental cost. However, India's API companies began the process of transitioning from APIs to formulation production more than a decade ago. At present, there are already world-competitive generic companies such as Ranbaxy, Dr Reddy's Lab, and Sun Pharmaceuticals. High growth brings lucrative returns to investors. Therefore, it is of great significance to explore the growth process of Indian API companies for the formulation transformation of China's API companies.
Ranbaxy, ten times ten times Ten-bagger
Ranbaxy is a successful pharmaceutical company in India's transformation. It has grown from a small Indian drug company that was unknown 15 years ago to a pharmaceutical company in the top five global generic drugs. 2007 (Is it in 2007 or 2006? Is India's annual report and Our annual division is different? It should be noted that the annual operating income has reached 664 billion rupees, or about 1.37 billion US dollars, and the net profit is as high as 7.9 billion rupees, or about 162 million US dollars.
2.1 Formulation OEM is a step of transformation
Figure 2 shows the development of Ranbaxy; the preparations for Lilly's OEM sales in India - the establishment of a US drug application platform, the opening of the US market - the development of pharmaceutical products for sale in the United States - the early development of patent-avoiding drugs, the patent expires After obtaining 180 days of exclusive sales rights - the entry of proprietary patented drugs into the US sales and the stock market performance corresponds to the stage of formulation transformation, and Ranbaxy's revenue growth rate is far more than other stages.
2.2 The eve of the transition is the investment period of Zui Jia
During the transformation of Ranbaxy's formulation, the share price has risen from less than 20 rupees in 1990 to more than 600 rupees in zui, an increase of more than 30 times. However, the rapid increase in profits from the transformation of the formulation has rapidly reduced PE from 60 times to about 25 times.
The eve of the transition is the low point of the stock price, which is also the high point of the valuation, reflecting the market's transformation of the formulation of Ranbaxy and the expectation of the growth of the company. With the surge in export business and the rapid listing of Cefalor in the United States, the stock price has risen rapidly, but the price-earnings ratio has rapidly declined, fully reflecting the rapid growth of the formulation transformation to reduce the pressure on valuation.
Third, China's API companies have already had the basis for transformation
3.1 Characteristics of preparation exports
High technical barriers
For the production of preparations, the intellectual property protection of medicines in developed countries in Europe and America includes three parts; the patent protection of the raw material medicine production process, the patent protection of the preparation production, and the patent protection of clinical application. The patent expiration of the original drug in the usual sense refers to the expiration of exclusive patent protection for clinical applications, and the generic drug with the same composition is eligible for marketing. However, the patents for the API manufacturing industry and the preparation process are generally longer than the clinical application protection patents. Therefore, when developing generic drugs, it is still necessary to avoid infringement of the production patents of the APIs and preparations. This is what we usually call the patent avoidance process, which has high requirements for the research and development and technical strength of generic drugs.
High market access conditions
The developed legal and administrative systems in developed countries in Europe and America have detailed regulations on the safety of medicines. The market access includes not only the certification of the preparation line but also various software and hardware such as APIs and environmental protection.
3.2 China's API companies have the basis for formulation transformation
The successful transformation of the Indian pharmaceutical industry is based on its low cost and high level of internationalization. Although Indian companies have an advantage in terms of internationalization level, language, technical strength and talent pool, China's API companies are catching up with continuous investment, and gradually occupy an advantage in infrastructure, cost and technology investment. Therefore, when Chinese API companies gradually strengthen the level of internationalization on the basis of low cost, it is possible to replicate the Indian model and even surpass the Indian model. The wave of production transfer and the continuous expansion of the generic drug market provide an opportunity for the transformation of Chinese API companies.
Policy encouragement: The impact of national policies on the industrial upgrading of API companies is mainly achieved through two aspects. On the one hand, the export tax rebate for most chemical raw materials is reduced from 13% to 5%. In the future, the possibility of further reduction is not ruled out. On the other hand, the national environmental protection standards for chemical pharmaceutical companies are becoming more stringent, and the raw materials are improved. Cost of production.
Cost-driven production transfer: Compared with developed countries in Europe and America, China's production cost advantage is comprehensive. According to Tomson's survey report, the labor cost of Chinese pharmaceutical companies is less than 10% in developed countries, the cost of newly established factories is 1/4, the management costs are less than 1/3, and the environmental protection costs are less than 1/10. The comprehensive production cost advantage makes it possible to transfer the production links of international pharmaceutical companies to China.
Improvement of the enterprise foundation: After years of development, the API companies have also achieved great development in terms of technology level, certification capability and enterprise scale. The knocking on the export of APIs to developed countries in Europe and the United States - the number of DMF files has increased dramatically from scratch in the past decade. According to incomplete statistics, the number of effective DMF documents of China's API companies in Europe and the United States reached 121 and 345 respectively.
3.3 The main way of the initial transformation of the preparation
In the international pharmaceutical industry chain, China relies on low cost to take advantage of the manufacturing of APIs, but the market for end-users is almost blank. Therefore, domestic API companies inevitably need to find international partners to explore the market in the process of transformation to the formulation.
OEM: Exports the formulation to the regulated market in the form of formulation processing. Since the preparation of the OEM form is mainly the transfer of the production process of the preparation process by the international pharmaceutical factory, the form of the export is similar to the processing of the material, and the basis of its survival is low labor cost.
Formulation OEM: This form of preparation is exported through cooperation with international pharmaceutical giants in research and production, and the international pharmaceutical giants transfer the production of its high value-added original research drugs. This form of formulation export is limited by the technical barriers of the product, so competition is relatively less intense.
Cooperative production: It is mainly based on the patent avoidance process of raw material medicines and preparations produced by domestic raw material pharmaceutical companies, and cooperates with international pharmaceutical companies to develop and protect the failed preparations. R&D and production are done in China, and sales are carried out by international pharmaceutical companies. Due to the high technical barriers and the high market value of the products, this form of export is a good way for the growth of API companies.
Cooperative development: Domestic pharmaceutical companies cooperate with international pharmaceutical giants to develop new patented drugs. The two parties to the cooperation are equal, and the sales revenue after successful research and development is divided into profit according to the agreement of both parties. Since the difficulty in the development of new drugs is much higher than the research and development of APIs, there are very few domestic pharmaceutical companies that can carry out cooperative development.
The OEM is simply a processing fee, which can be a bulk drug processing or a processing of a formulation. In the process of preparation of the preparation, the enterprise obtains the full profit from the raw material medicine to the preparation of the preparation, and the price of the end product is not sensitive, so the profit obtained by the enterprise is higher than that of the OEM.
In the process of cooperative development, the company not only obtained the full profit of the production but also participated in the market sales, so the profitability is much higher than the OEM and preparation foundry.
4. China's raw material drug companies on the eve of the transition
From the analysis above, it can be seen that the key to the transformation of the formulation is 1) strong research and development capability: in the process of raw material production and preparation production, the patent protection of the original pharmaceutical factory can be broken, and the generic drugs are introduced in the market before other pharmaceutical companies; 2)
High internationalization: Standardizing the market for the production of APIs, excipients and preparations is much higher than the non-standard market, so certification and international cooperation capabilities are one of the keys to the transformation of the formulation; 3) continuous R&D investment to form a complete product Line: The high profit of the generic drug in the early stage is the key to the growth of the company. Only by continuously developing and forming a product group can it maintain the continuous growth of the company.
The rapid growth of Indian pharmaceutical companies in the transformation process has brought rich returns to investors. Further analysis shows that the eve of the transformation is the investment period of Zuijia. At present, the rapid growth of domestic API companies in policy, technology, research and development links has made it possible to transform the formulation. As the forerunner of domestic formulation transformation, Hisun Pharmaceutical and Huahai Pharmaceutical have achieved breakthroughs in R&D, production and products, reflecting the potential for rapid growth.
Hisun Pharmaceutical
As a leading company in domestic chemical raw materials, Hai is seized the opportunity of simvastatin patent expiration from 2003 to 2004, and the company's profitability and scale have achieved significant growth. However, as competition intensified, the price of simvastatin continued to fall, causing large fluctuations in the company's performance.
However, with the change of the company's business model, the company's performance also showed a rapid rebound. From January to September 2007, the main revenue and net profit reached 2.11 billion yuan and 96 million yuan, respectively, an increase of 21.3% and 92%.
Hai's outstanding advantages in international cooperation, product development and rich product lines have made the company a benchmark for the formulation of domestic chemical raw material pharmaceutical companies.
The multi-modal collaboration has made the formulation breakthrough gradually: the company's OEM and cooperative development of the formulation has made breakthrough progress. In 2008, vervastatin will be the first to export to Europe.
Strong R&D strength provides a continuous stream of new products for Haizheng's future: Haizheng's annual R&D expenditure exceeds 100 million. The continuous high-intensity investment has enabled Haizheng to form genetic drugs, raw material drug development and process development, and formulation research and development. Four major platforms for innovative drug development.
Strong certification capabilities enable Hisun to have market access advantages. As the first pharmaceutical company in China to achieve the market certification of APIs, Haizheng has established a complete certification system, and currently has 13 and 10 FDA and EU COS certifications respectively.
The rapid growth of the domestic preparation market provides a high margin of safety: the company increased its holding of 85% of its subsidiary, Zhejiang Pharmaceutical Industry Co., in 2006, and replaced its management in mid-2007. With the continuous development of the market and continuous investment of new products, domestic agent sales in the next three years are expected to achieve a compound growth rate of 35%.
The rapid growth of domestic preparations will reduce the performance fluctuations caused by Haizheng's price changes in raw materials, and the increase in the sales volume of preparations will also drive the growth of Haizheng's API business. Therefore, the rapid growth of domestic preparations provides Haizhen with a sufficient margin of safety.
Huahai Pharmaceutical
The company is one of the representative enterprises of chemical raw materials. Although the company's products are relatively single and fiercely competitive, it has achieved rapid development relying on the advantages of management, technology and scale. The company's main income comes from cardiovascular drug substances, of which the proportion of sales revenue and profit contribution of Puli products accounted for 57% and 80% respectively.
Huahai Pharmaceutical's international level, rich preparation product line and gradually perfect R&D system are the basis for the transformation of the formulation.
High internationalization; the company's international level is at the forefront of the country. In June 2007, the company's anti-AIDS drug nevirapine's formulation production workshop took the lead in passing the US FDA certification, reflecting the company's strong market access. In 2007, the preparation workshop has also passed the EU cGMP certification, opening the door for products to be exported to Europe.
A rich product line of preparations; the company has formed a breakthrough in the production of raw materials and preparations against Alzheimer's disease.
In the second half of this year, the company's products will be officially exported to Europe. In 2009, the patents for antidepressants and sartans will gradually expire, and the company has also formed a complete product reserve in related products.
The construction of the R&D system has gradually taken shape; the company has continuously increased its investment in research and development in recent years. In 2007, R&D investment accounted for more than 7% of sales revenue. At present, the company has established the research and development of raw material medicine process, the development of preparation production process and the research and development system of innovative drugs. More than 20 varieties have been researched.
Flexible management and management system; Huahai Pharmaceutical has clear property rights and flexible operating mechanism. The main profit source price of Puli products has been declining year by year, but the company has maintained a high product gross margin by adjusting product structure and technological progress. The recent implementation of equity incentives reflects the confidence of the company's management in the future.
V. Main problems faced by the transformation of preparations
Market Development
As mentioned above, the form of preparation exports is mainly based on OEM, formulation foundry and cooperative development. China's pharmaceutical companies are only responsible for the research and production stage, and cannot participate in the terminal market sales, and are relatively weak in cooperation. For the development of the market, it depends entirely on the partners. We believe that this is a big risk for the transformation of domestic pharmaceutical companies.
Competition in the international market
Due to the extremely similar development of the pharmaceutical industry in India and China, Indian pharmaceutical companies are strong competitors for domestic pharmaceutical companies in the international market. After more than 20 years of development, Indian pharmaceutical companies have completed industrial upgrading. After accumulating a large amount of market resources and continuous R&D investment, Indian pharmaceutical companies have taken the lead in the international market. In the process of transformation, domestic pharmaceutical companies are bound to face the competition of Indian pharmaceutical companies with similar cost advantages. We believe that the generic drug market is a growing big cake, and the concentration of this market is not high, there are plenty of opportunities for domestic pharmaceutical companies.
Competition and cooperation
In the transition from raw material pharmaceutical companies to preparations, it is necessary to compete positively with the original pharmaceutical factory and other generic pharmaceutical factories, so it will inevitably have a certain impact on the sales of raw materials.
We believe that this impact is limited. First, the trend of cost-pressure international pharmaceutical companies shifting production to China and India will be irreversible. Second, the cooperation between Chinese API companies and international pharmaceutical companies is greater than competition.
In the international pharmaceutical industry division of labor, China's API companies are still in a lower position, and there is no direct threat to international pharmaceutical companies. After zui, the main competition for formulation transformation is the international generic drug company. At present, international generic drug companies are basically carried out by means of the industrial chain of raw materials to downstream preparations. Therefore, the formulation transformation has little effect on the sales of bulk drugs.
Variety selection
The characteristic of generic drugs is that prices are initially barrierd by technology and capital, and prices can be maintained at a high level. But as competitors' joining prices continue to fall, until a relatively stable level. On the other hand, due to the substitution of new products, not only the price is decreasing, but also the market value of the products is continuously lost.
Therefore, these characteristics determine the selection of the right variety, and it is possible to obtain higher returns when the patent protection expires quickly. Secondly, only companies with a complete industrial chain will have a cost advantage in the later stage, thus achieving stable returns. However, the production of APIs requires considerable investment and technical accumulation, so it is possible to recover the investment and obtain higher returns only if the right variety is selected.
Both Haizheng and Huahai's varieties are based on their own APIs, thus avoiding investment in the construction of APIs and reducing the risk of initial cost inputs.
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