This post was originally published in February 2014 issue of our healthcare newsletter China Healthcare Deals+Strategies.
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Competitive impact of China’s new GMP rules
SSCO’s Carl-Johan Sköld talks to Zhao Qian, a GMP specialist who help Chinese pharmaceutical companies meet Chinese and foreign GMP requirements.
The deadline for injectable drug manufacturers to comply with the new GMP standards passed on December 31 2013. How many companies do you estimate comply with the new standards?
By mid-January just over 60% of manufacturers had passed the new standards, leaving over 500 companies non-compliant.
What types of companies are not meeting the requirements?
Companies that have strong finances or access to capital would already have updated their manufacturing processes. The companies not meeting the new regulations will be smaller companies, with limited access to finance.
What are the options for these companies?
For companies not wanting to make the relatively high investments required, the most attractive solution is to sell their business and product licenses.
Will this have a large impact on M&A activity in China?
Yes. We are likely to see a high level of domestic M&A activity in the coming two years. Especially as the new GMP standards will apply to all drugs from the end of 2015.
Why would a company that is not meeting the GMP standards be an attractive acquisition target for another pharmaceutical company?
It is all about products. Chinese companies with good facilities often operate at low capacity utilization, a result of having too few products. Given the back-log of applications with the CFDA it takes 3-5 years to get a generic drug approved. When acquiring a product it is enough to apply for a site transfer of the manufacturing to an approved facility. This process usually takes about a year.
What type of products can be obtained this way?
Non-compliant companies will have basic older generic products. Often there will be more than 20 companies with the same product approved in China. Acquisition will be useful tool to build a wider products portfolio, but not to gain strong products.
What competitive impact will the market consolidation have?
The consolidation will be very healthy for the Chinese market. In two years’ time we are likely to see fewer players resulting in less competition and better margins.
Are there any opportunities for foreign companies?
The opportunities to foreign companies are limited. The manufacturing facilities are too basic to be of interest to foreign companies. Producers of basic generics could find opportunities similar to those Chinese companies find, however the market is likely too competitive to be of interest to any foreign players.