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Volume 86 Issue 20 | pp. 15-20
Issue Date: May 19, 2008

Cover Story

Sourcing From China

Despite recent problems, Chinese suppliers remain an essential source of fine chemicals and pharmaceuticals
Department: Business
[+]Enlarge
Towering presence
Chinese pharmaceutical suppliers continue to play a dominant role in the global industry amidst increased scrutiny.
Credit: Jean-François Tremblay, C&EN
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Towering presence
Chinese pharmaceutical suppliers continue to play a dominant role in the global industry amidst increased scrutiny.
Credit: Jean-François Tremblay, C&EN

EVER SINCE the news began to emerge in February that contaminated heparin made in China was linked to the deaths of dozens of people in the U.S., Luis Gomes, vice president of generics for the Portuguese pharmaceutical ingredients producer Hovione, has been wondering what went wrong. His firm doesn't make heparin, but it has been sourcing raw materials from China for many years. And earlier this year, Hovione invested in a pharmaceutical plant in eastern China that will eventually supply some of the company's customers in Western countries and Japan.

As Gomes searches for answers to what happened to the heparin sold in the U.S. by Baxter International, one thing is clear to him: China will continue to play an essential role as a global supplier of fine chemicals and pharmaceutical ingredients. "Currently, many pharmaceutical ingredients are not manufactured anywhere else but China," he says. "This is especially true in fermentation, but capacity for many pharmaceutical ingredients is disappearing in Western countries."

The challenge for Gomes, and for many who buy Chinese pharmaceutical chemicals, is not to find alternatives to buying from China. The challenge is to implement the best methods for sourcing high-quality and reliable materials from that country.

China has quietly become a surprisingly important supplier to the global pharmaceutical industry, according to Darrell Abernethy. He is the chief scientific officer at U.S. Pharmacopeia (USP), a standards-setting authority for prescription and over-the-counter medicines, dietary supplements, and other health care products sold in the U.S. In terms of quantity, he says, about three-quarters of the pharmaceutical ingredients consumed in the U.S. are made in China. Other countries also supply the U.S., Abernethy says, but "the difference with China is volume."

Reacting to the heparin tragedy, many companies have been reviewing their exposure to Chinese suppliers. Speaking on condition of anonymity because he doesn't have the approval of his company, a China-based purchasing manager for a major pharmaceutical maker tells C&EN that since February, he has had to field a number of inquiries about his procedures from senior managers. "Our management actually had an emergency meeting about sourcing from China after the heparin issue broke out," he recalls.

The change in senior management's confidence in China's reliability as a supplier is both abrupt and absurd, the purchasing manager contends. He recalls that pre-heparin scare, his Shanghai-based team occasionally had to resist pressure from headquarters to purchase from questionable Chinese suppliers. The situation is now completely reversed. "For the purpose of diversifying our sources of materials, I wanted recently to add a Chinese company to our list of approved suppliers, and it came under intense questioning internally," he says. "We've never had this problem before."

China presents some unique sourcing challenges, this manager says, and to overcome them it's critical to have multiple buyers based permanently in the country. For example, China is a place where business information is not readily available. "You need a team in China to hear the rumors; you can't hear the stories about your suppliers from faraway," he says.

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Rising fortunes
Top Chinese manufacturers of pharmaceutical ingredients are enjoying growing sales as their customers start narrowing down their pool of suppliers. Pictured here is Asymchem's FDA-compliant facility in Tianjin, China.
Credit: Asymchem
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Rising fortunes
Top Chinese manufacturers of pharmaceutical ingredients are enjoying growing sales as their customers start narrowing down their pool of suppliers. Pictured here is Asymchem's FDA-compliant facility in Tianjin, China.
Credit: Asymchem

HAVING PEOPLE on the ground allows a company to visit suppliers frequently and identify potential problems, such as a manufacturer that risks a sudden supply interruption because it doesn't stock enough raw materials. Also, the supplier that makes the best initial impression may not be the most qualified, the purchasing manager says. He explains that staff in a modern and well-equipped plant may not understand the Food & Drug Administration's current Good Manufacturing Practices (cGMP) and, therefore, may not be able to follow them.

At Chemwerth, a leading U.S. importer of Chinese-made ingredients going into prescription drugs, the concern about sourcing from Chinese plants has not yet had much impact. On the contrary, the Connecticut-based firm is having a banner year. So far in 2008, Chemwerth's sales are up 18% compared with the same period last year, according to Vincent Asaro, the firm's senior vice president of operations and finance.

Company founder and Chief Executive Officer Peter Werth tells C&EN that Chemwerth's longtime customers have not expressed much concern recently about buying from China. The main reason, he contends, is that Chemwerth implements sophisticated systems to certify the quality of the products it sources from plants in China.

"We have a full-service audit program that mimics the Food & Drug Administration's six-system audit," he says. "So people who work with us, they know we're taking care of them, and they just keep on buying."

Chemwerth's labs in Shanghai, Werth adds, are able to identify and correct problems that are common among Chinese suppliers. Werth says Chinese manufacturers are relatively weak at developing methods for identifying impurities or at controlling particle size. Materials may also contain residual organic solvents, he adds.

Before they become Chemwerth customers, executives at some Western companies occasionally express concern about buying from Chinese plants, Werth says. They change their minds after they discover that buying from non-Chinese plants would cost a lot more. "When they find out that it costs 40% more to source from another country, then they come to China," he says.

At Asymchem, a research service provider and custom manufacturer of pharmaceutical ingredients that operates facilities in northeast China, Elut Hsu, vice president of business development, says customers have been asking more questions about her firm's manufacturing and raw materials sourcing procedures in recent months. "The people we deal with tell us clearly that they're responding to upper management concerns," she says.

The concern is understandable, Hsu says, and her firm may eventually benefit from it. She points to the trend among pharmaceutical companies to reduce the number of suppliers they use in China and to retain only the best ones. "A lot of work is moving our way as the number of companies being sourced from is going down to a select few in China," she says. Hsu adds that she has no idea whether any of this increased business is the result of heparin-related concerns.

Asymchem established its reputation among buyers over a period of time. "Our customers, even though they've been with us for years, do perform due diligence," she says. "They come frequently and know our quality controls, our people, and our facilities."

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Business-friendly
Portuguese custom pharmaceutical producer Hovione has acquired a controlling stake in Zhejiang-based Hisyn, shown here.
Credit: Hovione
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Business-friendly
Portuguese custom pharmaceutical producer Hovione has acquired a controlling stake in Zhejiang-based Hisyn, shown here.
Credit: Hovione

Hsu notes that her customers are increasingly asking questions about Asymchem's own suppliers. She says the firm does its best, through site visits and meetings, to select reliable suppliers "who believe in what they are doing." But at the same time, there are limits to how far her company's oversight of suppliers can go. "Unless we have someone sitting there full time, we can't know everything." She adds that Asymchem operates its own pharmaceutical intermediates facility partly to reduce its reliance on third-party suppliers.

At Porton, a supplier of chiral intermediates that is based in southwest China, President Oliver Ju says he has also noticed this supplier rationalization taking place among his customers.

"Customers are removing from their suppliers' list companies that are interested in a quick buck and don't care about environment, health, and safety or compliance with quality standards," Ju says. "Customers come to us for partnering with a reliable, low-cost supplier, and they come again because of the growing trust they have in us." Ju, who used to be a manager at AkzoNobel, operates a large-scale intermediates facility in the Changshou Industrial Park on the outskirts of Chongqing (C&EN, Nov. 27, 2006, page 18).

Chemwerth's Werth says Chinese companies are capable of producing high-quality pharmaceutical materials when they are paid enough to do so. Werth, who has been sourcing from China for 25 years, says foreign buyers who experience quality problems with Chinese suppliers usually pay too little for their products. "When you start paying below the real value of what you're buying, the suppliers have to cut on quality controls. They won't use the right, or more expensive, ingredients, and you're just asking for trouble."

Chemwerth's approach to getting good quality is "to basically pay the factories to be cGMP-compliant—and that's reflected in our pricing." Werth says he employs a team of 20 people in Shanghai who audit the plants Chemwerth buys from and organize training programs for manufacturers that do not yet comply with FDA standards.

quality check
Stamps of approval can help companies in China. Pictured here is a worker at Apeloa, an FDA-approved supplier of pharmaceutical ingredients based in the province of Zhejiang.
Credit: Jean-François Tremblay/C&EN
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quality check
Stamps of approval can help companies in China. Pictured here is a worker at Apeloa, an FDA-approved supplier of pharmaceutical ingredients based in the province of Zhejiang.
Credit: Jean-François Tremblay/C&EN

IN ADDITION TO FDA compliance, Chemwerth sends all of its pharmaceutical ingredients to the U.S. in compliance with the U.S. Customs-Trade Partnership Against Terrorism (C-TPAT) program, which tracks the origin, down to the manufacturing-plant level, of goods shipped into the country. Adhering to the C-TPAT program is not a legal requirement, Werth notes, adding that it was initially put in place to root out terrorist activities. All these compliance activities by Chemwerth, he says, add between 15 and 25% to the Chinese manufacturer's initial prices.

Despite all of its experience in China, Chemwerth suffered a blow last year when FDA, after a plant inspection, sent one of its dreaded warning letters to Kunshan Chemicals & Pharmaceutical Factory, a Chinese manufacturer that Chemwerth represents in the U.S.

Werth does not mind talking about the incident. He tells C&EN that Kunshan operates two plants in China: a new facility that produces materials for Chemwerth and an older one that does not supply Chemwerth. "The older plant has not produced anything in two years that needs to be cGMP-compliant, so it failed the inspection miserably," Werth says. FDA also inspected the newer plant, and it passed, he adds. Werth says his company erred by not objecting more strenuously to the agency's inspection of the older facility. "We did not do anything wrong; the inspectors went to the wrong facility—one that does not produce any products represented or supplied by Chemwerth," he says.

For buyers of pharmaceutical ingredients, FDA's approval of a manufacturing facility is the ultimate guarantee of quality. But FDA does not inspect all plants that produce materials going into pharmaceuticals. For instance, the agency rarely visits producers of ingredients for nonprescription drugs or plants making the nonactive drug components known as excipients.

An alternative to FDA's seal of approval is the Pharmaceutical Ingredients Verification Program that USP launched in late 2006. Products approved under the program bear a "USP Verified" mark.It's used by companies that produce excipients, ingredients for over-the-counter products, or that are looking for an additional way to convince potential pharmaceutical chemical buyers of the quality of their products.

Abernethy, USP's chief scientific officer, says his organization's verification program "mimics the rigorous requirements of the U.S. Food & Drug Administration for approval of a generic drug for marketing: inspection, documentation review, and testing." The cost is around $50,000 per ingredient for three years of verification, and the price comes down when a facility is tested for several ingredients. "Because of the rigorous requirements that an ingredient must meet in order to be USP Verified, a drug manufacturer can have peace of mind that the ingredient is of high quality and suitable for use in its finished drug product," he says.

IN THE PAST six months, Abernethy says, demand for USP Verified certification has increased noticeably, particularly from companies based in China and India. But the list of companies participating in the program remains short. "Awareness of the program has been a challenge, given that we don't market or promote it beyond our own website," he says.

At Hovione, Gomes says his company's employees routinely visit China-based suppliers instead of relying on third-party inspections. In that regard, he says Hovione is aided by its ownership of a manufacturing facility in Macau, a Chinese special administrative zone near Hong Kong. "It gives us a tremendous advantage because our local staff is able to visit suppliers often, providing us with great insights into the Chinese supply chain, and moreover, we never need to use interpreters," he says. Some buyers of materials in China, he notes, rely on interpretater services provided by their suppliers.

Gomes, who managed the Macau facility for seven years and has himself visited many suppliers in China, says Chinese companies are anything but homogeneous. "China has very good companies and companies that are no good, and you need to distinguish by going there and knowing the facilities, the systems, and the management," he says. Whereas buyers and sellers in Western countries deal with each other mostly on a transactional basis, Gomes points out, it's important in China to form a personal bond with a supplier.

When Hovione decided to invest in a Chinese manufacturer earlier this year, it selected a company that it knew was well managed, Gomes says. Hisyn Pharmaceutical, based in Taizhou in Zhejiang province, was already an established Hovione supplier.

He explains that Chinese companies are often managed by an autocratic boss who micromanages operations. In contrast, he says, "below Hisyn's top management, there is a nice layer of middle management that is empowered to make decisions on its own." After the acquisition, Gomes says, Hovione did not replace Hisyn managers with its own people.

Hovione staffers based in Macau largely are executing the integration of the new Chinese facility into the rest of the company, and two of them are now based in Taizhou. One of the priorities in Zhejiang, Gomes says, is to expand production of contrast media products, now made mostly in Portugal. Injected into patients just before an X-ray, these materials change the opacity of soft tissue and enable radiologists to get more information.

One particularity of contrast media products is that they are injected in large amounts—as much as 200 g per dose—Gomes says. "It's a product that is not toxic but, because it's injected into patients in large amounts, needs to be extremely low in impurities and microbiological-related contaminants." Hovione sells its contrast media products to generics formulators that are constantly seeking lower prices for their ingredients. As a result, Gomes says these customers have been receptive to the idea of being supplied by a lower cost plant in China.

Looking more broadly at the pharmaceutical ingredients industry, Gomes believes that prices for Chinese products have hit bottom after being in constant decline for the past three decades. Going forward, he expects prices will either stabilize or start rising as Chinese authorities clamp down on companies that have poor environmental, health, and safety practices.

Chinese producers face other cost pressures, he says. The Chinese currency, up nearly 14% in the past two years against the dollar, is on an appreciating trend; moreover, Chinese manufacturers no longer get tax rebates on their exports. "There used to be a belief that prices can only go down, but now, it will reverse," Gomes predicts.

If prices in China begin to rise, foreign buyers may start searching for suppliers in other countries. "There's always another place, like Malaysia, South Africa, or Ethiopia," Werth says. "But China has the infrastructure, and it's hard to reverse a trend."

Even though prices may be rising in China, Gomes doesn't expect a revival in the fine chemicals industry in North America or Europe. "The regulatory climate for chemistry in Europe is very hostile," he says, "but China is very friendly to business and industry, and you don't see that elsewhere."

 
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