A Glimpse of Influences of Tariff Slapping on the Chinese Pharmaceutical Industry at the Sensitive Time of Sino-U.S. Trade Friction

News about the trade war between the U.S. and China recently has been stirring the market nerves.

The Office of the United States Trade Representative (USTR) released a list of commodities worth USD 50 billion in total subject to additional tariffs on April 3 EST, proposing to slap 25% tariffs on the Chinese commodities listed therein, and the U.S. side said that they might slap tariffs again on Chinese commodities worth USD 100 billion. According to the official information, there would be a 60-day publicity period after the list was released, a hearing would be held for items proposed to be slapped tariffs, and the implementation time is expected to be June this year at the soonest. In other word, there is a buffer period of at least two months, and the final result is not clear.

Pharmaceutical plate is one of the field proposed to be slapped tariffs involved in the said list, with varieties including coenzyme Q10, quinone drugs, insulin, vaccines, blood products, MRI, defibrillators, syringes, artificial joints, and pacemakers, etc., which can be roughly classified into the following three categories: 33 pharmaceutical chemicals, 38 pharmaceutical or biological products, and 52 medical instruments and relevant products.

According to statistics, the main business income of Chinese pharmaceutical enterprises above a designated scale was RMB 2.98 trillion in 2017, with the amount of pharmaceutical export accumulatively of USD 15.084 billion, accounting for less than 3.5% of the overall operating income of the pharmaceutical manufacturing industry of China in the same period, showing that the export overall accounted for a small proportion, and the Chinese pharmaceutical industry was mainly driven by the Chinese market consumption.

The Chinese pharmaceutical products on the international market are mainly APIs, intermediates, and basic consumables, there are not many Chinese enterprises exporting preparations, and the U.S. is now the second largest country of export for China’s chemical APIs. According to the data statistics of the Ministry of Commerce and Customs of China, the scale of China’s export of APIs, pharmaceutical preparations, and medical devices to the U.S. separately reached USD 3.9 billion, 1.2 billion, and 5.8 billion in 2017. Overall, the exported products of the Chinese pharmaceutical industry are still at the downstream level of the industry chain.

Exported APIs

In this list of items proposed to be slapped tariffs, vitamins are a big category in the APIs. The U.S. is a big consumer of vitamins. China’s export of vitamins to the U.S. accounted for about 22% of its total vitamin export in 2017. If the list of the vitamin APIs imported from China proposed to be slapped tariffs is implemented after June, the Chinese vitamin manufacturers will be affected, especially enterprises whose performance relies heavily on export, like Guangji Pharmaceutical, Kingdomway, and Zhejiang Medicine.

However, limited by factors like environmental protection, European and American countries, etc. rely heavily on the import of API products; Chinese vitamin manufacturers are at the downstream position of the industry chain and complement European and American enterprises that are at the upstream position, therefore, the Chinese vitamin industry is estimated to be not much affected overall by this proposed tariff slapping.

Exported preparation products

The number of ANDAs approved by the U.S. FDA for the Chinese pharmaceutical enterprises totaled 38 application numbers in 2017, involving 33 active ingredients of 15 pharmaceutical enterprises, reaching a historic high. The top 5 pharmaceutical enterprises ranked by the number are separately Huahai Pharmaceutical (10), CSPC (6), Hengrui Medicine (5), Hisun Pharmaceutical (4) and Humanwell Healthcare (3).

With the frequent introduction of favorable Chinese policies for preparation internationalization and growing of Chinese pharmaceutical enterprises, the preparation internationalization of the Chinese pharmaceutical enterprises has significantly speeded up in recent years, however, the overall scale is still small, with China’s export of preparations to the U.S. totaling only about USD 1.2 billion in 2017.

On the whole, the increase of the tariffs will, to some extent, reduce the profit space of exported preparation varieties and increase operation costs of preparation export enterprises, however, down to the corresponding pharmaceutical enterprises, such influences will show big difference and imbalance, for example, in the event of the Chinese leading enterprises in preparations: Huahai Pharmaceutical and Hengrui Medicine:

Huahai Pharmaceutical is a pioneering enterprise in the pharmaceutical internationalization of China, with 48 preparation products under it having the U.S. ANDA numbers, being the Chinese enterprise possessing the largest number of ANDAs with the FDA. In 2017, the preparation plate income of the company was RMB 2.6 billion, the overseas preparation plate income was about RMB 1.2 billion. In terms of preparation internationalization, a characteristic of Huahai Pharmaceutical is that it develops the U.S. market by building own marketing team. In 2012, Huahai Pharmaceutical acquired the U.S. Solco Healthcare to obtain the drug sales and promotion channels in the U.S. Under such mode, Huahai Pharmaceutical needs to bear by itself the additional risk caused by tariff slapping.

The preparation internationalization of Hengrui Medicine started in 2007. In terms of the strategy for preparation internationalization, it builds a strategic alliance with partners through the mode of "costs and profits sharing", which belongs to deep collaboration. Its cyclophosphamide was marketed in the U.S. in November 2014, which is promoted and sold by Novartis’ subsidiary Sandoz. Similarly, competitive products under Hengrui like oxaliplatin have achieved export sales through the deep collaboration with companies like Teva and Sagent. Under such mode, the deep collaboration of both parties is expected to lead to win-win results, and the additional risk costs will be shared by both parties.

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