China has become an important supplier of pharmaceutical ingredients to both generic and innovative drug companies. While China was once mainly a source of low-cost ingredients, it is now moving into developing processes for newer drug molecules and supplying higher quality ingredients. The number of Chinese manufacturers capable of supplying regulated international markets has greatly increased in recent years. However, most Chinese manufacturers are still focused on the domestic market and issues around regulatory compliance, intellectual property protection, and cultural differences still present challenges to doing business in China.

1. manufacturing
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C
hina has integrated itself into the
global supply chain for both innovator
pharma and generics companies
and is no longer merely a low-cost threat.
For many years, it has been an important
supplier of intermediates and older off-patent
molecules. Increasingly, it is moving towards
supplying newer molecules and is slowly
becoming involved in the development
of non-infringing processes in support of
patent challenges. Doing business in China
is no longer just about the low cost – the
country is investing heavily in its people and
facilities, and can be a source of high-quality
ingredients in its own right. Nevertheless,
cost remains a significant part of the
equation when companies decide where to
build their factories or from whom to buy
their active ingredients.
According to figures developed by the
author’s team, the number of Chinese
manufacturers capable of supplying APIs
to regulated markets has steadily increased
over the past five years.The team assesses
the capabilities and experience of API
manufacturers according to a proprietary
scheme based on objective regulatory data
ranging from “established” (those that are well
versed in supplying highly regulated markets)
to “local” (those capable of supplying only
their domestic or less regulated markets).
Since 2004, the number of “established”
manufacturers, defined as having years of
experience supplying active ingredients
to regulated markets, has increased from
eight to 11 (seeTable 1). Examples include
Zhejiang Hisun and Zhejiang Huahai. Over
the same period, the number of “less
established” groups, a category including
Jiangsu Hansen and Zhejiang Medicine
Company, which have less of a track record
in supplying regulated markets in terms of
the length of their history or number of
products supplied, has increased from 11 to
30. Lastly, the number of groups designated
as “potential future” due to their interest
in supplying to regulated markets despite
limited or no known performance, has
jumped from 44 to 153.
Although more than 80% of the
manufacturers in China today are still locally
focused, e.g. neither interested nor capable of
supplying to regulated markets, the number
of less established and potential future
companies has more than doubled and
tripled, respectively, since 2004.This trend
indicates that Chinese API manufacturers
are investing large sums of money in facility
upgrades with an increased focus on meeting
international GMP guidelines and regulations.
evaluating the appeal of China
When evaluating the appeal of the Chinese
API sourcing market, the author’s team
considers four options:
• build or buy an API manufacturing base
in China;
• build or buy an API manufacturing base
in another market;
• source the API from China; or
• source the API from an alternative market.
In this context,“build or buy” is defined as
building an API facility from the ground up,
purchasing an existing API plant or becoming
involved in local manufacturing via a joint
venture.“Source” is defined as buying an API
from a third-party manufacturer in China
or entering a contract manufacturing and/
or technology transfer arrangement with a
Chinese facility.
At present there are 50 foreign
corporate groups with API manufacturing
sites in China, established using both build
and buy strategies. Since February 2008,
Portugal’s Hovione has had a joint venture
with Zhejiang Hisyn for the production of
iohexol, a contrast agent. Hisyn built a new
plant in 2005 and is considered to be one
of China’s largest iohexol manufacturers.
In 1995, Switzerland’s Lonza built a facility
in Guangzhou city to supply niacinamide
to the Chinese and global markets. Israel’s
Teva acquired Zhejiang Wanma in 2006.
The author understands thatTeva is
rebuilding this facility and will produce APIs
for less regulated markets and advanced
intermediates for its own consumption.
Companies in regulated markets have been
sourcing older, off-patent active ingredients,
especially fermentation products such as
lovastatin, vancomycin and vitamin C, from
China for many years. For example, Zhejiang
Hisun is supplying vancomycin to Alpharma
(King Pharmaceuticals) and Zhejiang Medicine
Company has entered into a long-term supply
agreement for vancomycin with Hospira, a
US company, through to 2017. Other off-
patent molecules historically sourced from
China include benzene-containing products
like acetaminophen and ibuprofen, steroids
and heparin. For instance, Perrigo of the US
has an agreement with Shandong Xinhua
for the supply of ibuprofen. Despite recent
negative press concerning heparin, companies
in regulated markets are still sourcing it from
China. For example, the author understands
that Shenzhen Hepalink supplies heparin to
APP (Fresenius AG).
API manufacturing
There are several benefits associated with
establishing an API manufacturing base in
China.These include gaining access to China’s
talented pool of scientists and engineers,
good public infrastructure (especially in
comparison to India) and a lower cost base
relative to established markets like the US and
Europe. China also serves as a strategic base
for selling APIs in other emerging markets.
Intellectual property (IP) protection
is improving. China is strengthening its
commitment to upholding and enforcing
IP rights and its laws and regulations are
converging with international standards.
Judicial enforcement of IP rights in China has
seen the following improvements:
• the establishment of specialised IP panels
within the civil court system;
• the qualifications of judges presiding over
cases involving IP have improved;
• damage awards for IP violations have
been occurring more frequently; and
• a few cases have resulted in the award of
high damages, by Chinese standards, and
this phenomenon is increasing.
Of course, when building or buying an API
manufacturing base in China the buyer needs
to be cautious. For example, companies need
to be aware of China’s environmental issues
and its rapidly changing regulations.
In preparation for the 2008 Olympic
Games, the Chinese government shut
down a large number of factories in and
around Beijing to improve air quality.With
the implementation of more stringent
environmental health and safety regulations,
many of these closures will be permanent
because facilities cannot conform to
new waste water treatment standards.
Prices of goods are increasing as Chinese
manufacturers attempt to comply with
environmental standards. Additionally, China
is struggling internally with the rising cost of
labour, inflation, fluctuation of the exchange
Can China retain its API sourcing appeal?
China has a burgeoning API manufacturing base, albeit one focused largely on achieving quick profits in
the domestic sector. Robert Kennedy’s analysis reveals a striking number of Chinese companies that
are gearing up to supply pharmaceutical ingredients to the regulated markets of the west

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3. manufacturing
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rate and spending on coal, electricity, oil and
water, further contributing to higher prices.
In China there is a need for “hand holding”
and close monitoring of manufacturing
activities. US FDA approval of a facility does
not necessarily mean consistent quality
of its output. Employees must be given
ongoing training to ensure adherence to
standard operating procedures and GMP
regulations.Additionally, there is a high
turnover of qualified and experienced quality
assurance/quality control (QA/QC) staff,
further increasing the need for and cost of
compliance training and monitoring.
Although China has taken steps towards
improving its IP protection, enforcement
measures continue to be insufficient and the
country is still a haven for counterfeiters and
pirates. Fines and penalties for IP violations
do not always provide adequate deterrence
to infringers.
Lastly, doing business in China can be
difficult due to the language barrier and
cultural differences. Despite the fact that
many Chinese are returning to China after
spending years working abroad, it is difficult
to find people who speak fluent English in all
departments of a manufacturing site.
sourcing APIs from China
There are several factors working in favour of
China’s API sourcing market. In comparison
to India, where fermentation and steroid
manufacturing have never become widespread,
China has limited gaps in API manufacturing
technology and easy access to a wide variety
of intermediates and chemicals. As mentioned,
China also has a talented workforce, a lower
cost base in comparison to its western
counterparts and improving IP protection.
Additionally, many Chinese companies are
investing heavily in both regulatory compliance
and RD. Non-compliant plants are closing
and many newer facilities are preparing for
inspections, for example by hiring external
consultants. Chinese manufacturers are
also receiving feedback from their overseas
customers. Concerning RD, research centres
are springing up all over China.There are many
research collaborations with universities and
much greater openness to RD collaborations
with foreign firms.
Some of the less desirable aspects that
need to be considered when making the
decision to source APIs from China have
already been mentioned: more stringent
environmental compliance regulations,
increasing prices, language problems and the
need for close monitoring of manufacturing
activities.Additionally, contract manufacturing
arrangements which are not planned carefully
can lead to the theft of technology.
Other challenges include limited strategic
planning on behalf of Chinese companies
and a corporate culture which focuses on
short-term results.The majority of Chinese
companies focus on achieving quick targets
rather than long-term opportunities and
sustainable profits.
The lack of a distinct corporate culture
and an overall corporate QA programme
is an issue for many Chinese companies.
Individual manufacturing sites have their own
QA and QC units, but all sites collectively do
not work under the umbrella of a corporate
quality management system.
For example, the Shanghai Pharmaceutical
Group is composed of more than 15 API
and finished-dose facilities and was artificially
formed by the Shanghai government.The
individual factories comprising the new group
resented being unified and ultimately chose
to operate independently of one another.
Not surprisingly, problems soon followed.
One of the member companies, Shanghai
Hualian, was implicated in the manufacture
of a contaminated leukaemia drug that
left nearly 200 Chinese patients paralysed
or otherwise harmed.The incident was
never publicly addressed by the Shanghai
Pharmaceutical Group.
Shanghai No. 1 Biochemical, a subsidiary
of the Shanghai Pharmaceutical Group,
received a long warning letter from
the US FDA in April 2009.The agency
discovered that Shanghai No. 1 was not
even manufacturing the heparin that it was
supplying to Amphastar, a US firm which
filed an abbreviated new drug application
(ANDA) with paragraph IV certification for
enoxaparin sodium. Enoxaparin is derived
from an injectable grade of heparin.
So far, China has had limited experience
in the support of patent challenges, which
may discourage many aggressive generic
companies from sourcing from that market.
Only a handful of Chinese manufacturers can
develop non-infringing processes and perfect
technical packages several years before
patent expiry. Among them is Jiangsu Hansen.
The author speculates that Sicor (Teva)
referenced Jiangsu Hansen’s US drug master
file (DMF) for gemcitabine in its ANDA filing
with paragraph IV certification;Teva did not
file its own DMF for the product until some
time after it had submitted the ANDA with
patent challenge.
cost comparison
The cost of labour in China is rising due to new
laws which require increased welfare benefits
for employees. Even though remuneration is
higher in Europe and the US, salaries in China
and India are increasing much faster. Additionally,
high staff turnover in China and India
contributes to labour costs in these markets.
As discussed, environmental compliance
is a major expense in China with the advent
of stricter environmental health and safety
regulations for waste water treatment
standards. Factories that cannot invest in
sufficient upgrades are closing. By contrast,
India has not been subject to massive
factory closures due to environmental non-
compliance. Factories located in Europe and
the US have been operating under stringent
environmental regulations for many years so
the cost of ongoing compliance is much less
in these markets compared with China.
China’s energy costs are rising quickly due
to the nation’s heavy dependence on coal
and oil. Meanwhile, India suffers from an
inconsistent electrical supply driving up its
energy costs. In comparison to these markets,
energy usage in Europe and the US is more
efficient and less expensive.
The cost of protecting IP across all
markets is relatively similar, although money
is spent on different things. Staff mobility and
technology theft in China and India means
that costs are incurred via actions taken to
protect IP. Conversely, in Europe and the US,
costs are often assumed from challenging and
litigating patents.
GMP monitoring in China is a major
expense and companies need to have people
on the ground to continuously supervise
manufacturing activities.This is less costly
in India because a larger number of the
country’s factories have a long history of
supplying to regulated markets. Companies
in Europe and the US have been operating
within a well defined regulatory system for
many years, so the cost of compliance in
these mature markets is considerably less.
So, China is not the low-cost option in
every category.When making sourcing
and investment decisions regarding China,
companies have to look at the overall
package that the country offers.
Figure 1 illustrates the breakdown of
companies across several countries according
Table 1: Number of Chinese groups pursuing regulated API markets
2004 2009
established 8 11
less established 11 30
potential future 44 153
Source: Thomson Reuters Newport Premium

4. manufacturing
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to their manufacturing capabilities.Although
China has fewer established companies than
other markets, it has roughly the same number
of less established companies as India.What
is striking is the large number of potential
future companies located in China.The pool
of companies that are interested in entering
regulated markets is almost double that of
India.There is no doubt that over the coming
years, with help from overseas partners,
additional Chinese companies will advance
from the potential future category to the less
established and then the established categories.
Most companies in China are locally-
focused and reluctant to spend money
to improve their processes, invest in
equipment or facility upgrades and adhere
to international GMP regulations when they
can make a profit within the large domestic
market.The author predicts that many
Chinese companies will find that the local
market continues to be more profitable,
especially in light of pricing pressures in the
US and European generic sectors. However,
those Chinese manufacturers that want to
ascend the supply chain must gain the trust
of major global players; this will require a
high level of business sophistication, excellent
communication skills and a well developed,
well managed organisation.
Costs remain a significant consideration
when doing business in China. If China’s cost
differential decreases or disappears altogether,
it will likely make sense for companies in
regulated markets to manufacture some
products closer to home. China’s response
to rising salaries and energy costs and its
adherence to environmental regulations,
international GMP requirements and IP rights
are factors that will determine how long its API
sourcing market retains its appeal.
0
50
100
150
US
India
China
Italy
Japan
Rest of the world
Established Less established Potential future
Numberofgroups
25
75
125
175
Source: Thomson Reuters Newport Premium
Figure 1: China versus the world
Robert Kennedy is manager of
industry research for Thomson
Reuters API Intelligence.
Email: robert.kennedy@
thomsonreuters.com.
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