The great medicines migration How China took control of key global pharmaceutical supplies

April 5, 2022

Key illustration

By the pandemic year of 2020, China accounted for the bulk of exports of certain pharmaceutical raw materials. The country now plays an indispensable role in the supply chain for antibiotics and vitamins.

China’s share of global exports of key pharmaceutical ingredients in 2020, by volume

Tetracycline/Doxycycline

0 %

Vitamin B1

0 %

Aspirin

0 %

Data may contain chemical compounds for other uses
Source: Trade Map

In spring 2020, Ryotaro Katsura, president of Katsura Chemical in Japan, was fretting over a delayed shipment of a pharmaceutical raw material from India. “No worries, no worries,” the Indian supplier kept insisting. Over numerous phone calls and emails, Katsura kept pressing, and finally discovered the source of the problem.

A chemical used to produce the material was made by only one supplier, located in China, which was gripped by the early pandemic and lockdowns.

COVID-19 has brought to light just how much the global pharmaceutical supply chain depends on China, even for the most basic chemical building blocks.

This is the final part of a Nikkei Asia series on Beijing’s ambitions to become the center of the global drug industry. This entry focuses on China’s command of the market for active pharmaceutical ingredients (APIs) -- a dominance some Western countries are attempting to overturn as the pandemic and geopolitical tensions expose this supply chain vulnerability.

Sea change

China has become a major pharmaceutical player in recent decades as production has moved from West to East. This has included its emergence as the top producer of APIs.

How a finished drug is produced
How a finished drug is produced

Put simply, an API is a component of a drug that impacts health -- for example, suppressing a disease or its symptoms. Broken down further, APIs are the result of integrating substances known as key starting materials, or KSMs, and intermediates. Few pharmaceutical companies handle the whole process, from KSM to finished drug. Most import at least some materials, especially generic drug makers. And most roads lead to China.

“If you follow the supply chain, you will bump into China sooner or later,” said Ichiro Fujikawa, chairperson of the Japan Pharmaceutical Traders’ Association.

Until the mid-1990s, the West and Japan reportedly produced 90% of the world’s APIs. But the U.K.’s Medicines and Healthcare Products Regulatory Agency estimated in 2017 that China alone was producing about 40% of all APIs.

Its actual influence may reach even farther.

This reporter experienced the Chinese medicine connection firsthand after suffering from a severe stomachache. A doctor diagnosed a case of bacterial gastroenteritis and issued prescriptions, including a generic antibiotic called levofloxacin. The drug’s API came from three possible sources, one from China and two from Japan. However, it turned out both Japanese producers imported the pre-purified API from China.

China has an advantage in “the low-cost and off-patent APIs” like antibiotics or vitamins, according to Deloitte. This is because production costs are lower there than in Western nations. The country’s large share of APIs looks even greater if one follows the trail upstream to KSMs, which are often simple yet versatile chemical substances produced in bulk.

Even India, another pharmaceutical giant often considered to be an alternative to China, depends heavily on Chinese supplies. According to the European Commission, India accounts for about 20% of global generic drug demand by volume, but it imports about 70% of the APIs from China. For some drugs, such as the painkilling and anti-inflammatory ibuprofen, India procures the vast majority of the APIs from China, according to the Pharmaceuticals Export Promotion Council of India (Pharmexcil). Moreover, while India is one of the biggest API exporters, many KSMs and intermediates of those APIs come from China.

Race to the cheapest

China leads new API filings

New registrations under Japan’s Master File system

New registrations under Japan’s Master File system
Source: Japanese Pharmaceuticals and Medical Devices Agency (PMDA)

For Western pharmaceutical companies that used to produce their own APIs, sourcing from China and India made sense -- dollars and cents, to be precise. The emerging countries could make the ingredients for less, under looser environmental standards.

API registration data illustrate the shift. In 2021, China topped new submissions under the Drug Master File system, a registry of detailed information on APIs managed by Japan’s Pharmaceuticals and Medical Devices Agency. API makers submit their data for future marketing in Japan. Until the early 2010s, Japan and Europe accounted for the majority of submissions, but both China and India have since increased their presence.

China’s share of API production is growing rapidly
  • China
  • India
  • Europe
  • U.S.
  • Other

New applications of Certificates of Suitability (CEP) submitted by country (in percent)

New applications of Certificates of Suitability (CEP) submitted by country (in percent)
Source: European Directorate for the Quality of Medicines & HealthCare (EDQM)

The same trend can be observed in Europe. The European Directorate for the Quality of Medicines & HealthCare issues quality certificates for APIs called Certificate of Suitability (CEP). China’s share rapidly increasing -- it now accounts for more than 20% of new applications. In addition, data show that some chemical substances, such as the high-cholesterol medication simvastatin, do not have European certificate holders behind them. Although the CEP does not contain information about the location of production, this suggests that even if these APIs were produced in Europe before, this is no longer the case.

“There was high pressure for manufacturers to offer a low price,” said Andreas Meiser, Partner at life science consultancy MundiCare. The strategy for achieving this was “mainly to outsource the API production to Asia, especially China and India.”

Rise of the generics

Generic drugs -- typically much cheaper versions of branded treatments -- have emerged as a crucial means for countries to reduce national health care expenditures. As a result, they have spread rapidly.

According to IQVIA, an American health-care consulting company, generics account for about 90% of all prescribed drugs in the U.S., up from 50% in 2005.

Producers are under especially high pressure to limit costs. The only thing that makes a generic drug competitive is price. According to German generic industry group Pro Generika, the average cost of a daily dose of such drugs is only six euro cents in Germany – as cheap as a piece of bubblegum.

China enjoys an API production cost advantage

API production total cost breakdown; India = 100 (in percent)

API production total cost breakdown; India = 100 (in percent)
Source: KPMG, CII

When it comes to API prices, China has a significant edge. According to KPMG India’s research, a drug generally can be produced for 20% less in China than in India. This is largely thanks to cheaper raw materials, which can be up to two-thirds of the total production cost.

India relies on China for many API raw materials

China’s share of imports, 2020-21 (in percent)

China’s share of imports, 2020-21 (in percent)
Source: DGCI&S

For example, lamivudine, an antiretroviral medication for HIV, costs $120 per kilogram if produced by a Chinese manufacturer, compared with $137 if made in India.

Raw reality

One reason India is struggling to produce cheaper APIs is that fewer Indian manufacturers produce raw materials such as KSMs and intermediates. Cytosine, the KSM for lamivudine, is rarely produced in the country. Many Indian API manufacturers therefore import the materials, mainly from China.

China’s production-scale advantage

Average manufacturing capacity comparison between China and India (in tonnes)

Average manufacturing capacity comparison between China and India (in tonnes)
Source: KPMG, CII

China has a huge production scale advantage as well. For some APIs, Chinese companies have more than twice the capacity of their Indian counterparts. The average Chinese production capacity of amoxicillin, an antibiotic for bacterial infections, is 14,000 tonnes. In India it is just 5,000, according to research by KPMG India and the Confederation of Indian Industry (CII).

The Chinese government itself has clearly understood the value of the API industry. Since the 2000s -- the same time as the eastward migration of API factories -- the government has implemented numerous laws and regulations that have encouraged API production. These include the Administrative Measures for Drug Registration in 2005, which enabled quicker approvals. APIs are “the long-term advantage of China's pharmaceutical industry to participate in international competition,” China’s National Development and Reform Commission said in November 2021.

Western pharmaceutical companies appear to have contributed to the growth of the Chinese industry. Some gave China the specifications “for making their generic drugs including antibiotics, and the reason they did that, in return, [was that] they would be given access to China’s market for lucrative branded products,” said Rosemary Gibson, a senior adviser with the Hastings Center, the U.S. based bioethics research institute, and author of “China Rx: Exposing the Risks of America’s Dependence on China for Medicine.”

There is another reason Western players were willing to offload this aspect of drug-making: APIs can be a rather dirty business.

Because API production involves chemical reactions, their environmental impact came under increased scrutiny in Western countries. in the 2000s. Processes like fluorination and chlorination raised concerns over “the accumulation of dangerous material in the reactor and the safety risk for the operators and the environment in case of containment failure,” according to the European Fine Chemicals Group (EFCG), a chemical industry group in Europe. Research by PwC in France found that every manufacturing step to produce an API relied on potentially polluting technology that could leave chemical waste in the air, water or soil. Handling the dangerous waste left by such processes and ensuring safety can be costly for companies.

“For the chemical side of the industry, these [APIs] are sometimes toxic chemicals that are being manufactured, so to produce in Europe, you need to have either highly sophisticated production techniques or anti-pollution technologies, or you will never be able to manufacture them here,” said Adrian van den Hoven, director general at Medicines for Europe, a generic lobby group.

Elisabeth Stampa, CEO at Spanish API manufacturing company Medichem, explained the difficulty of clearing such hurdles in Europe.

Stainless steel and glass lined reactors suitable for multi-product manufacturing in the Celrà Plant in Girona. European environmental regulations have raised the bar for producing pharmaceutical ingredients on the continent, in some cases pushing the industry eastward. (Courtesy of Medichem)
Stainless steel and glass lined reactors suitable for multi-product manufacturing in the Celrà Plant in Girona. European environmental regulations have raised the bar for producing pharmaceutical ingredients on the continent, in some cases pushing the industry eastward. (Courtesy of Medichem)

“We have changed the processes [of production] for environmental reasons. Each change is associated with significant R&D, regulatory and industrial work because you have to test, you have to validate, you have to see the final API is exactly the same as it was in the other process, and our customers have to accept the change and update the regulatory filings,” she said. She conceded that “in some cases, we have to stop producing products for price reasons eventually.”

Stampa called for incentives to make it more economically sustainable for companies to address environmental and climate objectives.

In her view, cost-containment measures in Europe have generated a number of undesirable effects, such as reduced competition, price erosion and supply constraints. Stampa told Nikkei Asia that her company has changed its processes for an antidepressant called amoxapine and an antipsychotic called loxapine to adjust to new environmental standards. However, some APIs are simply no longer economically viable -- Medichem has dropped production of several, such as metoprolol for high blood pressure.

The solution becomes the problem

Katsura Chemical, the Japanese company that suffered delivery delays in early 2020, is hardly the only one exposed to the consequences of the supply chain shift.

Soon after the pandemic began, German contract development and manufacturing company Corden Pharma was unable to import KSMs from China for a short period. This “eventually affected both generic and innovative APIs,” said CEO Michael Quirmbach.

Spooked by COVID-19, the Indian government in April 2020 slapped export restrictions on APIs for drugs like paracetamol, a painkiller, and clindamycin, an antibiotic. Although local demand was high at the time, the APIs in these drugs are also among those that depend on Chinese ingredients.

Bork Bretthauer, managing director at Pro Generika, noted that “the cost of KSM production is often quantity-dependent, so the more a company produces, the cheaper it is to produce per unit volume. In order to get the cheapest offer the market consolidates over the years.”

As Katsura Chemical discovered, there are often very few manufacturers in China that can make certain materials for a drug, even if the materials are relatively simple to produce. Sometimes, there may even be only one.

Katsura added that some Chinese producers “probably do not know that they are the only ones to produce certain KSMs, since many companies gradually exited the market due to low profitability.”

Supply chain worries did not emerge suddenly with COVID-19. "The geographic concentration of the supply chain was a primary concern for our company way before the COVID pandemic started," said Andrew Gradozzi, who leads the generic API business at Italy-based API company Dipharma.

Sometimes, Dipharma could not find a reliable second supplier of intermediates or KSMs. For this reason, Gradozzi told Nikkei, the company has sought to geographically diversify its sources and started "in-housing production of selected raw materials" to minimize exposure to shortages.

API manufacturers are geographically concentrated within China
  • The U.S.
  • Japan

Manufacturers registered with Japanese PMDA or U.S. FDA as of January 2022

Manufacturers registered with Japanese PMDA or U.S. FDA as of January 2022
Source: Japanese Pharmaceuticals and Medical Devices Agency (PMDA), U.S. FDA

Even within China, API manufacturing is geographically concentrated. Out of all Chinese API manufacturers, more than 40% of those registered with the U.S. and Japan respectively are in Shanghai, Zhejiang and Jiangsu. With China sticking to its zero-tolerance approach to fighting the coronavirus, there are nagging worries in the industry about the potential impact of sudden lockdowns. In fact, the lockdown happened around Shanghai in March 2022 caused shipping delays and freight increase, according to Fujikawa.

This is no longer just an economic or business problem..

A supply chain review released by the White House in June 2021 highlighted the risk of pharmaceutical dependency, saying “the supply of drugs and the health of American citizens dependent upon these drugs are vulnerable to the geopolitical strategies of foreign governments.”

“There is definitely a national security risk,” said Reji K. Joseph, associate professor at the Institute for Studies in Industrial Development in India. Joseph pointed to penicillin, a widely used antibiotic, saying, “What would happen if supplies [of raw materials] from China stopped? We do not have a manufacturing facility here [in India], and it is not easy to find another supply source because everyone is dependent on China.”

China is deeply embedded in production of medical supplies used to treat COVID-19 as well, experts say.

“Sedatives, antibiotics, anti-inflammatories [and] medicines to treat life-threatening low blood pressure are among the generic medicines used to care for people with severe coronavirus. China produces 90% of the chemical ingredients for these essential medicines,” the Hastings Center’s Gibson told the U.S. Senate in March 2020.

According to analytics company Clarivate, out of 52 COVID-related treatments, three-fourths did not have API manufacturing sites within the U.S. at all.

Beijing is aware of the importance of having local API production, which is “not only about lowering the development and manufacturing cost” but also securing supplies from upstream, said Jens Ewert, who oversees China life sciences and health care at Deloitte.

Ewert said this applies to COVID-19 vaccines as well. “One of the key elements for the speedy development of the COVID-19 vaccine in China is that local pharma companies have very direct access to APIs while many other countries have to wait for the imports.”

Shanghai-based biotech company StemiRNA is developing its own mRNA vaccine whose ingredients are mostly locally supplied.
Shanghai-based biotech company StemiRNA is developing its own mRNA vaccine whose ingredients are mostly locally supplied.
Source: AP/FeatureChina

While China initially focused on conventional vaccines, it is moving toward mRNA options like the ones provided by Pfizer and Moderna. Chinese biotech company StemiRNA Therapeutics says that 90% of the raw materials in its mRNA vaccine are supplied locally. The company is currently conducting global clinical trials, and says it is ready to produce 400 million doses annually.

When it comes to the new drugs for COVID-19, “it would surprise me if they were mass manufactured for global markets without any raw materials from China,” said Rory Horner, a senior lecturer at the University of Manchester.

A sharp political turn

From the U.S. and European Union to India and Japan, governments are increasingly seeking ways to secure greater supply chain independence.

India is pushing particularly hard. In March 2020, the government revealed a plan to encourage domestic production of bulk pharmaceutical products such as APIs and KSMs, including a Production Linked Incentive (PLI) scheme worth 69.4 billion rupees ($900 million). The PLI program guarantees money for approved manufacturers of 53 important API, KSM and intermediate products for which India has a high dependency on China.

“This scheme is a very important initiative to reduce import dependence for critical APIs and will also help kick-start the API ecosystem,” said Sumit Goel, managing partner at India-based consulting firm Praxis Global Alliance.

India has become more dependent on China for APIs

China’s share of API imports by volume (in percent)

China’s share of API imports by volume (in percent)
Note: No data for 2017
Source: UN Comtrade

The idea is to incentivize production in India enough to lower prices and become more competitive with imported APIs. Goel added that “while India, too, has strong API capabilities in certain segments, Chinese players had developed an advantage due to scale and favorable regulatory policies.”

China, meanwhile, is looking to improve its own industry. In some ways, it is undergoing a similar evolution to that seen in the West, paying more attention to environmental concerns. But while some companies are being squeezed out of the market, observers see the reforms leading not to a hollowing-out of the Chinese API sector, but to even greater strength.

China’s API industry undergoes shakeouts

Number of API producers and drugmakers

Number of API producers and drugmakers
Source: National Medical Products Administration

Since around 2015, the government has emphasized quality control and cleaner production methods. This appears to have triggered a shakeout: The number of API manufacturers and drugmakers decreased from 5,065 in 2015 to 4,176 in 2016.

China’s 2015 Action Plan for Prevention and Control of Water Pollution specified API production as one of 10 key industries in need of “a clean transformation.” The environmental law imposed the same year, billed as the strictest so far, and a 2016 environmental protection tax on producers of polluting substances, impacted the industry as well.

The ripples have been felt outside China.

When Anhui Bayi Chemical -- which produced nitrochlorobenzene, a key ingredient for the painkiller paracetamol -- was forced to shut down its facility due to environmental concerns in late 2020, it caused a sharp increase in the price of the paracetamol API. It was yet another example of the world’s high dependency on China for raw materials.

Over the years, China has been criticized for substandard APIs, such as contaminated heparin, a blood-thinning drug linked to at least 81 deaths in the U.S. in 2008, according to Reuters. But Beijing is apparently trying to raise the bar.

An evaluation system implemented in 2015 checks generic drugs’ consistency with branded versions. Drugmakers must pass this test to apply to a centralized purchasing policy, called the Volume Based Procurement (VBP). In the VBP, the government opens bids for the centralized procurement of drugs, mainly generic ones.

Nicolas Zhu, head of the life sciences and health care sector group at law firm CMS China, said that “due to the VBP, it would be hard for the pharmaceutical manufacturers to change the API suppliers, and [they] will pay more attention to the quality of the APIs.”

The government is also encouraging the production of patented APIs. China’s current market share of patented APIs is only 9%, while the U.S. accounts for 36%, according to Deloitte.

“Along with the government incentives in encouraging Chinese API manufacturers to shift from developing traditional APIs to high-end and patented APIs, we believe that the API types that China has an advantage with is expanding,” Deloitte’s Ewert said. “The presence of China in the global API supply chain will have a further boost in the upcoming years.”

The University of Manchester’s Horner said that China already has the “the ability and capability to work with innovative APIs, because once a drug maker spends billions of dollars and invents a new drug, it is actually very simple afterward to replicate.”

“The challenge for China,” he added, “is how to invent new APIs and bring them to the market.”

Achieving that would allow it to contribute more to global health -- and continue to expand its power over the supply chain.

No turning back

The result is that some countries are making promises about supply chain reshoring that they may find hard to keep.

French Prime Minister Jean Castex visits a chemical factory in Roussillon, in southeastern France, in September 2021.
French Prime Minister Jean Castex visits a chemical factory in Roussillon, in southeastern France, in September 2021.
Source: SEQENS

France’s much-heralded reopening of a shuttered paracetamol plant exemplifies a move that is less substantial than it seems.

The government announced in June 2020 that France would bring back domestic paracetamol API production, which had stopped in 2008. But paracetamol is a cheap drug, with a packet of 8 tablets typically sold in French pharmacies for about $3. Pro Generika’s Bretthauer warned: “Reshoring can be sustainable, but only if the selling prices paid for these products are maintainable on that higher level. Only then can producers of medicines afford to buy the more expensive European production instead of buying on the world market for lower prices.”

In India, several APIs are not covered by the production incentive scheme. Joseph at the Institute for Studies in Industrial Development suggested this is because they are simply “not profitable” for companies, since it can cost more to produce those APIs in India than to import from China.

“Any policy aimed at self-sufficient APIs and decreasing imports from China should focus on being able to produce in a price-competitive way,” he argued.

Flora Zhu, director of corporate research at Fitch Ratings, suggested that despite the talk of reshoring, the tide is not turning against China.

“We believe the scale of the production reshoring is limited at this stage and global pharmaceutical companies still procure a large portion of APIs from China, given China’s significant cost advantages,” she said.

How, then, can the world diversify the pharmaceutical supply chain and ensure drugs do not become a geopolitical bargaining chip?

Many experts are concerned that there is too much price pressure on drugmakers.

“You would not go to the grocery store and just say, ‘I always buy the cheapest no matter what the quality is,’” said Steffen Denzinger, president at the European Fine Chemicals Group (EFCG). “Is it fresh? Does it look like it was laying around for 20 days?”

The current system, Denzinger argued, can reward substandard products. “Additional criteria such as the security of supply or the respect of minimum social or environmental standards must be taken into consideration for public procurement.”

Investment in technology will be vital if others are to compete with China as well as conform to costly environmental rules. Efficient production can also lower the price of drug raw materials.

“In order to build competitiveness, it is crucial to invest consistently in technology and build on the scale. Efficiency comes from either scale or efficient process,” said Sudarshan Jain, secretary general of the Indian Pharmaceutical Alliance, an industry body.

Jain added that India’s "National Institutes of Pharmaceuticals Education and Research (NIPER), scientific institutions and companies are working on improved processes to provide cost-efficient options.”

Gibson suggested there may be another way to trim costs – reconsidering the role of “middlemen,” such as distributors or purchasing organizations. She said they can account for a substantial portion of a generic drug’s price. This, she said, shows that the cost of manufacturing is often not the problem.

“With advanced technology, there are many drugs that can be produced faster, cheaper and with a smaller environmental footprint,” she said.

The pandemic has made countries acutely aware of the pharmaceutical supply chain’s fragility, and of how they have unconsciously handed China a major competitive advantage. The shift of basic drug production to China looks largely irreversible. The question is how to adjust and guarantee supplies of vital medicines, including in the next pandemic many health experts fear.

Medicines for Europe’s van den Hoven stressed that there should be a way to build a more balanced supply chain with the right policies and incentives on pricing and investment.

“With good policies, Europe can be competitive -- we can compete with India and China,” he said. “We are not asking to go to the moon.”