Upscale Market Beckons

No longer is China just the world’s source of competitively priced pharmaceutical ingredients. As the country gets richer, its citizens are demanding high-quality medicines made by foreign companies. As a result, more and more drugmakers and their suppliers are constructing manufacturing plants in China to supply the growing local market. The trend is creating opportunities in the drug supply chain, but it may be slowed by the limited availability of suitable industrial sites.

Earlier this month, Novartis officially opened a $250 million active pharmaceutical ingredient (API) manufacturing facility and process development center in Changshu, Jiangsu province. Next door, ScinoPharm, a Taiwanese producer of custom pharmaceutical ingredients, started construction of a new facility that will produce intermediates and APIs, as well as conduct process development research. An affluent industrial city, Changshu is an hour-and-a-half drive from Shanghai.

These two projects are the latest additions to a growing list of top-notch facilities producing APIs in China. Lonza has been operating an API and intermediates plant in Guangzhou, Guangdong province, for the past two years. Evonik Industries took over the Chinese API producer Lynchem in Dalian, Liaoning province, in 2006. And Hovione operates an export-geared API facility in Taizhou, Zhejiang province.

Western makers of generic drugs have been buying Chinese-made pharmaceutical chemicals for some time, but the biggest branded-drug companies have had fewer such dealings with China. Until recently, most of them eschewed the generics business and concentrated on patented pharmaceuticals, which they made themselves or contracted out to established Western chemical firms.

A combination of growing wealth in China and tougher times in patented drugs has led big pharma firms to rethink generics. Many firms are refocusing on the segment with “branded generics” that carry names that appeal to newly affluent consumers but without the high price tags of the patented drugs marketed primarily to the developed world.

At the same time, branded-drug companies have not found many Chinese API manufacturers that they feel comfortable buying from, says Jo Shen, president and chief executive officer of ScinoPharm. Companies already supplying medicines to Europe and North America based on ScinoPharm ingredients will also buy from the company to serve China, she predicts. ScinoPharm’s new plant will also produce custom intermediates for the company’s main API manufacturing plant in Taiwan.

“The multinational drug companies have been trying to build their whole supply chain in China,” says Hardy W. Chan, ScinoPharm’s executive vice president and cofounder. “The foreign subsidiaries of major drug companies have to buy from legitimate sources, just like the parent company.” Shen and Chan set up ScinoPharm 12 years ago with other former colleagues from the California-based drug firm Syntex after it was bought by Roche.

It makes perfect sense for ScinoPharm to expand its business of providing APIs for branded generic drugs, says Guy Villax, CEO of Hovione, a Portuguese API manufacturer. Big drug companies, he says, are adding branded generics to their portfolios of patented products, not just in China but on a global basis. “They will pay more for more reliable people, whether it’s ScinoPharm or Hovione,” he says. Villax expects that major drug firms will eventually source APIs from China for all their branded generics businesses, not just the Chinese ones.

The standards for supplying a top drugmaker such as Novartis are exacting, says David Xu, head of chemical and analytical development for Novartis in China. “When an operation or a material meets Novartis’ quality-control standards, it also meets the requirements of any regulatory authority across the world,” he says.

Although Novartis has built its own production and process development capabilities in China, it will seek to collaborate with outside companies. “Our internal capacities have limits,” Xu says. “Projects come and go, and we want neither that our people sit on their hands nor that they take on more work than they can handle.”

Novartis recently announced that it will invest $1 billion over five years in China to further boost its R&D and manufacturing capabilities there (C&EN, Nov. 9, page 13). Market growth in China warrants such moves, Xu says. “The Chinese market has become too big a pie to ignore in the global scheme,” he says. “Our ultimate goal in Changshu is to provide quality medication to the populations there.”

In the not-too-distant future, Xu says, Novartis will have in China a fully integrated set of capabilities to conduct drug discovery, development, and manufacturing domestically. Xu’s team in Changshu will soon be able to produce APIs for clinical trials of drugs invented and developed in Shanghai or at other Novartis R&D centers. And when drugs are ready for commercialization, the Changshu manufacturing site will be able to produce them on a large scale.

That international players like Novartis are boosting their R&D work in China presents another opportunity for custom manufacturers such as ScinoPharm, Shen says. Besides bulk APIs, ScinoPharm can support the R&D operations of its customers in China with process development services. “As more and more major drug firms do R&D in China, they will outsource the process development locally,” she says. “There’s a need for companies that can supply clinical studies materials manufactured under current Good Manufacturing Practices.”

But it’s a challenge to find industrial parks near major cities that are suitable for pharmaceutical chemical manufacturing. And companies that decide to build in more isolated locations may find that high-quality employees are few and far between.

The Changshu facility will be the second that ScinoPharm owns in China. For eight years now, ScinoPharm has operated an R&D and production facility for drug intermediates in Kunshan, a city halfway between Shanghai and Changshu. But Kunshan no longer welcomes the chemical industry, Shen says. The ScinoPharm plant there has become surrounded by commercial buildings.

ScinoPharm chose Changshu largely because it is close enough to Kunshan that the company could take advantage of the people it has trained over the past eight years, Shen says. “They can do process development; they have analytical capabilities; they can test for impurities, can conduct process transfer, and know about good manufacturing practices.”

Another consideration in Changshu’s favor is that few places in the Shanghai region are both friendly to the pharmaceutical industry and have the resources to support it, Shen says. Novartis’ Xu concurs. “Changshu enjoys close proximity to Shanghai, and infrastructure here is fabulous,” he says.

Each city and region in China has its own development plans, explains Li Jun, a vice director of the Changshu Economic Development Zone. Changshu has set out to attract drug-manufacturing companies by providing water and solid-waste treatment facilities, industrial gases, and a stable electricity supply. “If the power is suddenly cut, they might lose all the materials they’re working on,” he says. “It’s an industry with comparatively high requirements.”

Companies face a trade-off depending on whether they operate near a major city or far way, Hovione’s Villax notes. Costs may be lower in remote locations, but qualified employees are harder to recruit. Hovione operates an X-ray contrast media plant in Taizhou, Zhejiang province. The city, a four-hour drive from Shanghai, welcomes drug companies, Villax notes. Officials there have helped Hovione avoid power outages that afflict other parts of the city from time to time.

Even in Jiangsu province, where the chemical industry is highly developed, only four cities—Nanjing, Changshu, Lianyungang, and Taizhou—offer industrial infrastructure suitable for pharmaceutical manufacturing, Li says. Changshu, having earned a reputation as one of China’s most hospitable investment destinations, can now choose whom it wants to welcome. “We prefer famous foreign companies,” he says. “They bring us prestige and they tend to have higher environmental and safety standards.”

As the Chinese market for high-quality pharmaceuticals matures, the locations that can support manufacturing of such products are already becoming scarce. The number of drug companies breaking ground on new sites is likely to surge in the next few years as they snap up space from the best remaining sites.