US China Trade War: end in sight but pharma must remain vigilant
Pharma businesses can take some encouragement from the progress of US trade talks with China, but that doesn’t lessen the need for a hard look at their exposures.
Hope at last. This week brings news of a possible end to the yearlong trade war between US and China. Over recent days, there has been talk of a delay to planned increases for trade tariffs on Chinese goods, with US President Donald Trump announcing there has been “substantial progress” in trade talks between the two countries. He has added that, if more progress could be made, a summit with Chinese President Xi Jinping in Florida could cement a deal that would end the battle between the two countries.
This is a sign that those in the pharmaceuticals sector over the last year urging caution in responses to the trade wars with China may be proved right. As our own Catherine Geyman told the Pink Sheet “pharma intelligence” publication last year, waiting to see how the trade war evolved and if it would blow over might not be comfortable, but it seemed the most practical option. The expense and complexity of setting up US-based manufacturing facilities or even re-routing supply chains to avoid tariffs on Chinese imports made other options impractical in the short term.
But keeping a watchful eye on developments and waiting for clarity before acting is not the same as sticking your head in the sand. Pharma businesses still need to follow this debate closely, and have properly evaluated their options.
Pharma focus for US policymakers
Pharma is not the only industry involved in the trade dispute, of course, but it is a key one. The Trump administration’s ire is focussed on a wide range of non-tariff barriers to Chinese markets that includes industrial subsidies, regulations and product standards, among other practices that it argues prevent US goods from accessing China or competing there on a level playing field with domestic firms.
Given how highly regulated the pharma industry is in all countries, it’s perhaps not surprising there should be particular challenges here. But, as this piece explains, Chinese pharma is also one of the recipients of “Made in China 2025” subsidies the country offers to 10 strategic high-technology sectors it has identified as key industries. (Others include semiconductors, robotics, aerospace and electric vehicles.)
The US government has come out strongly against these subsidies.
All of which is to say that the pharma industry remains central to this dispute, and if anything changes, it could well be affected.
Furthermore, things do have a habit of changing. As the Pink Sheet’s timeline of the tariff battle outlines, drug products, active ingredients and excipients have appeared and disappeared on proposed lists of imports to be subject to tariffs (of either 10% or 25%) a number of times in the last year.
So, while it’s encouraging that progress in the talks seems to be yielding fruit, we’re a long way from being able to celebrate or relax.
Not just tariffs: inward investment challenges for pharma
It is also worth noting that the challenges for pharma and businesses in related sectors do not simply relate to the potential for tariffs. As reports last year pointed out, China has become a key source of finance for Western biotechs and medical-technology start ups. Research from Bain & Co. shows that Chinese venture capital and private equity firms poured a record $3.5 billion into foreign healthcare businesses in 2017. Other reports suggest that, of the $10 billion US biotech and drug developers raised from venture capital investors in that year, the same amount ($3.5 billion) was from Chinese investors.
That source of funding is also hostage to the on-going changes in US-China relations. Last October, the US Treasury Department Office of Investment Security increased scrutiny of foreign investments. The Office tracks and reviews foreign direct investments into the US and is tasked with enabling the investment the US needs, while protecting national security, particularly regarding its critical infrastructure. The reviews are undertaken by The Committee on Foreign Investment in the United States (CFIUS).
Much of the most high profile discussions on this sort of issue in both the US and UK have revolved around Chinese firm Huawei, and its role in national telecoms infrastructure. In October, however, a total of 27 strategic areas were identified as requiring increased scrutiny. While pharmaceuticals overall escaped, the list does include biotechnology, and the increased scrutiny is unlikely to encourage investment in this and other areas. While previously, CFIUS reviews focused only on mergers and acquisitions, the new rules include proposed minority investments as well as joint ventures. The body has the power to block such business deals if it has national security concerns or sees threats to US “technological superiority”.
Again there’s considerable uncertainty.
Significant value at risk
With so much uncertainty, however, it is worth firms concentrating on what they do know.
At a macro level, China remains the world’s largest supplier of raw materials for chemical compounds, and active pharmaceutical ingredients in particular. The US Food and Drugs Administration estimates that 80% of APIs used in the US originate from China or India. Tariffs on these and related products would significantly affect not only the Chinese producers, but also US firms relying on these ingredients for a wide range of drugs from insulin and antibiotics, to antidepressants and vaccines.
Whilst some stakeholders may believe that removing Chinese suppliers from their drug supply chain would be positive for quality reasons, (In a 2018 FDA online survey, consumers and patients were asked about their perception of pharma quality. 75% of respondents ‘either did not believe or were not sure that drugs manufactured outside the US and sold in the US adhere to strict manufacturing standards and regulations.’), the FDA are positively broadcasting the message that the quality requirements are the same whether a drug is made in the US or abroad. So the FDA patently do not forsee a future that excludes Chinese APIs.
In fact, as one commentator almost suggests, the depth and complexity of Chinese APIs’ influence in US supply chains is perhaps one thing that might be protecting the industry from tariffs: “US authorities would have to map out the entire supply chain of ingredients for generics and non-generics if they wanted to understand the full impact of imported Chinese pharmaceuticals and related products on the US market.”
But that is no guarantee of protection, and even if it were very unlikely, the potential impact of such tariffs means the possibility cannot be ignored. As a headline puts it starkly: “US-China trade war could wipe out US-based generics manufacturing.”
Time for supply chain transparency
So what’s the appropriate response for pharma businesses? Well, probably, still, to wait and see, particularly since we have some renewed caused for optimism. But to hope for the best does not mean we don’t prepare for the worst.
The task of tracking the impact of Chinese supplies on the entire US pharma market may well be beyond the US government. The task of evaluating its influence on particular companies is, however, a responsibility they all need to address. It is not an easy one, but it is necessary to ensure quality of supply. The Heparin scandal in 2008 revealed the lack of visibility and qualification of critical sources of raw materials in China, and despite many regulatory changes since then, the global pharmaceutical industries finds itself in a very similar predicament today. The current Valsartan & ARB contamination contagion that has been spreading across industry was uncovered in July 2018, but regulatory action against a key Chinese source only materialised in Dec 2018 with the FDA Warning Letter to Zhejiang Huahai Pharmaceutical Co. Ltd.
For products with tight margins, there may simply be no good answer: It might be that businesses have to concentrate on other products.
But, either way, businesses cannot make these evaluations and strategic decisions without clear visibility of their supply chains. However the China dispute resolves, effort put into gaining that insight is never going to be wasted. If it’s not called on for a solution this time, we can be sure there’ll always be another crisis down the road, sooner or later.