Recently, among the A-share listed companies, six leading raw material pharmaceutical companies announced their performance for the first half of 2017, with revenue showing positive results. When it comes to the price increase of raw materials, many industry insiders first think of the "environmental protection" issue. In mid to late August, ten ministries including the Ministry of Environmental Protection, the National Development and Reform Commission, the Ministry of Industry and Information Technology, and the Ministry of Public Security, along with the governments of six provinces (cities) including Beijing, Hebei, and Shandong, jointly issued the "Action Plan for Comprehensive Management of Air Pollution in the Beijing-Tianjin-Hebei and Surrounding Areas for Autumn and Winter 2017-2018," which mentioned that "pharmaceutical companies involved in the production of raw materials and related to VOC emissions should suspend production during the heating season in principle. If there are special circumstances due to livelihood needs that require production, it should be approved by the provincial people's government." The government is taking a strong stance on environmental protection; how should companies actively respond in this situation? What actions have these six leading companies taken?
Recently, the Ministry of Industry and Information Technology announced the completion of major economic indicators for the pharmaceutical industry in the first half of 2017. In the first half of this year, enterprises above designated size in the pharmaceutical industry achieved main business income of 1,531.44 billion yuan, a year-on-year increase of 12.39%, with a growth rate 2.25 percentage points higher than the same period last year. Among them, the main business income of chemical raw material drug manufacturing reached 260.206 billion yuan, a year-on-year increase of 13.68%, with a growth rate 4.13 percentage points higher than the same period last year.
In the A-share market, the six leading raw material pharmaceutical companies all experienced varying degrees of revenue growth in the first half of 2017, with Hai Zheng Pharmaceutical, Northeast Pharmaceutical, Xinhua Pharmaceutical, and Huahai Pharmaceutical seeing increases of over 10%. In terms of net profit, Northeast Pharmaceutical's growth even reached 1162.03%.
Hai Zheng Pharmaceutical: All products entering the U.S. have been released from restrictions.
In 2016, Hai Zheng Pharmaceutical achieved revenue of 9.733 billion yuan, of which raw materials accounted for 1.288 billion yuan, accounting for 13%. Due to the FDA import warning in 2015 and the European Medicines Agency (EMA) warning in 2016, some of the company's raw material products could not enter the U.S. and European pharmaceutical markets. Additionally, due to rising raw material prices and cost reduction pressures, the company's overall revenue declined last year, with a net profit attributable to shareholders of listed companies of -94.43 million yuan, a year-on-year decrease of 796.03%.
In the first half of 2017, Hai Zheng Pharmaceutical achieved revenue of 5.505 billion yuan, a year-on-year increase of 16.40%; the net profit attributable to shareholders of listed companies was 13.504 million yuan, a year-on-year decrease of 33.61%.
According to the mid-term report, Hai Zheng's Taizhou base successfully passed the FDA inspection, and all products that were previously banned from entering the U.S. have been released from restrictions, leading to a recovery in product sales. In the first half of the year, trial production and verification work for four products including Capecitabine, 4-Aminosalicylic Acid, Posaconazole, and Fidaxomicin were completed. The Fuyang base completed the new process verification for Orlistat, significantly improving production levels, UK products were successfully sold in bulk, and Anifin completed the trial production phase, with process verification to be completed in the second half of the year. The Nantong base's production line for Praziquantel has passed FDA and WHO audits, and multiple varieties have significant production capacity.
Hai Zheng Pharmaceutical stated that there were no environmental pollution incidents in the first half of the year, and it did not receive any administrative penalties for environmental protection. Zhejiang Hai Zheng Pharmaceutical Co., Ltd. (Taizhou area) was listed as a national controlled pollution source for wastewater during the reporting period, and has now initiated a wastewater station upgrade project, with two wastewater treatment systems built.
North China Pharmaceutical: The price of Amoxicillin has increased.
In 2016, North China Pharmaceutical achieved revenue of 8.082 billion yuan, with chemical raw materials accounting for 21%. According to the mid-term report, in the first half of 2017, North China Pharmaceutical achieved revenue of 4.003 billion yuan, which was basically flat year-on-year.
Among them, the subsidiary North China Pharmaceutical Group Shentai Pharmaceutical Co., Ltd., which mainly produces synthetic antibiotic raw materials and intermediates, saw an increase in the price of its main product Amoxicillin in the first half of 2017, achieving annual revenue of 378.88 million yuan, a year-on-year increase of 0.37%.
In recent years, North China Pharmaceutical has actively carried out work on the treatment of volatile organic waste gas and odors. First, it supervises all fermentation enterprises to implement fermentation tail gas collection and treatment; second, it collects waste gas from all positions using organic solvents, including vacuum pump exhaust, storage tank exhaust, and distillation condensation exhaust, using measures such as adsorption and absorption to reduce VOC emissions; third, it actively promotes the optimization of antibiotic production processes, gradually replacing chemical production processes with enzyme methods to reduce the use of organic solvents from the source.
In addition, the company is also actively developing technology for the harmless disposal and utilization of antibiotic fermentation residues. The company's independently developed project "Integrated Technology for the Harmless and Resourceful Treatment of Antibiotic Fermentation Residues" passed the acceptance organized by the Hebei Provincial Science and Technology Department, and the project "Harmless and Resourceful Treatment of Cephalosporin C Fermentation Residues" passed provincial-level scientific achievement identification, reaching a leading level in the country; the "Treatment Method for Penicillin Fermentation Residues" has been granted a national invention patent; and the project "Detection Methods for Penicillin and Cephalosporin in Pharmaceutical Fermentation Residues" jointly applied with Hebei Academy of Environmental Sciences and Hebei University of Science and Technology has successfully been approved as a local standard in Hebei Province.
Northeast Pharmaceutical: Emphasizes the three major pollution issues of water, air, and solid waste.
In 2016, Northeast Pharmaceutical achieved revenue of 4.814 billion yuan, with raw material sales accounting for over 23%. According to the mid-term report, in the first half of 2017, Northeast Pharmaceutical achieved revenue of 2.766 billion yuan, a year-on-year increase of 15.02%. Among them, the raw material drug sector achieved revenue of 673 million yuan, a year-on-year increase of 13.12%.
With the intensification of smog and pollution, the environmental protection situation is becoming increasingly severe. Northeast Pharmaceutical stated that the company and its subsidiaries are key pollutant discharge units announced by the environmental protection department. In terms of water pollution prevention and control, all production plants of the company are equipped with comprehensive wastewater treatment facilities to handle production and domestic wastewater, with discharged wastewater meeting the "Liaoning Province Comprehensive Wastewater Discharge Standards." The wastewater discharge outlets are properly marked, and an online monitoring system is installed and connected to the municipal environmental protection bureau's monitoring center, allowing for real-time uploading of online water quality data; in terms of air pollution prevention and control, all production plants are equipped with two sets of desulfurization and dust removal facilities, using a double alkali method for desulfurization and a bag dust removal method for dust removal, ensuring that boiler flue gas meets discharge standards. Automatic online monitoring equipment is installed at discharge outlets and connected to the municipal environmental protection bureau; in terms of solid waste pollution prevention and control, hazardous waste incinerators are built by the company or disposed of by qualified units.
Xinhua Pharmaceutical: Raw material drug revenue exceeded 1 billion in the first half.
Xinhua Pharmaceutical achieved revenue of 4.015 billion yuan in 2016, with chemical raw materials accounting for 44%. According to the mid-term report, in the first half of 2017, Xinhua Pharmaceutical achieved revenue of 2.403 billion yuan, with the raw material drug sector achieving revenue of 1.05 billion yuan, an increase of 14.46%.
Xinhua Pharmaceutical stated that one of the key tasks for the second half of the year is to further expand the advantages of raw material drugs, continue to expand the market advantages of major varieties, actively seize market share, implement good sales incentive policies for new products, accelerate the market promotion of new raw material drug products, and strive to cultivate new economic growth points.
Regarding environmental protection issues, Xinhua Pharmaceutical stated that in the first half of 2017, it conducted comprehensive safety inspections in spring and summer, and important positions on multiple production lines completed safety measure project renovations, and in-depth VOC air treatment and comprehensive environmental remediation were carried out. The company did not experience any general or above-level accidents in the first half of the year.
In terms of the construction of pollution prevention and control facilities, Xinhua Pharmaceutical has built three sets of wastewater treatment facilities, which can fully meet the requirements for stable and standard discharge of wastewater. The company has installed standardized online monitoring facilities at its three main discharge outlets, entrusted qualified units to operate them, and the online monitoring data of wastewater discharge is uploaded in real-time to the Shandong Province Environmental Automatic Monitoring and Control System for release, with real-time management implemented by the Shandong Provincial Environmental Protection Department. For the treatment of exhaust gas, the company mainly adopts point source treatment methods, and has also built three incineration facilities to dispose of some hazardous waste by itself. In addition, some hazardous waste is entrusted to qualified units for disposal.
Huahai Pharmaceutical: Environmental protection investment has reached 600 million.
In 2016, Huahai Pharmaceutical achieved an operating income of 4.093 billion yuan, with the sales of raw materials and intermediates accounting for 46%. According to the mid-term report data, in the first half of 2017, Huahai Pharmaceutical achieved an operating income of 2.350 billion yuan, an increase of 18.53% compared to the same period last year.
In the first half of 2017, under the intense market competition, Huahai Pharmaceutical's raw material drug business maintained stable growth. The company closely focused on the strategic layout of global sales of raw material drugs, further segmented the market, and worked hard to achieve precise marketing. Through strategic negotiations and market operations, the company has gained the initiative in the pricing of multiple products, effectively maintaining product prices.
Regarding environmental protection issues, Huahai Pharmaceutical and its subsidiaries had zero environmental accidents in the first half of 2017. Huahai Pharmaceutical stated that each subsidiary is carrying out clean production work in accordance with relevant documents from the Zhejiang Provincial Environmental Protection Department, and has started the third round of clean production work at the end of 2016. Currently, a third-party qualified company is preparing the clean production report. Each subsidiary's environmental protection facilities are also carrying out various tasks according to the environmental protection "three simultaneous" management system. The project is designed by Zhejiang Meiyang International Engineering Co., Ltd., and the environmental impact report is prepared by the Zhejiang Provincial Environmental Science Research Institute and Zhejiang Taicheng Environmental Technology Co., Ltd., followed by environmental trial production, environmental acceptance monitoring, and on-site acceptance. After obtaining approval documents from the Environmental Protection Department, they will be put into formal production operation. Each subsidiary has prepared an "Emergency Plan for Sudden Environmental Accidents," which has passed expert review.
Huahai Pharmaceutical attaches great importance to the introduction of advanced environmental protection technologies and equipment upgrades. So far, the company's total investment in environmental protection has exceeded 600 million yuan.
Yifan Pharmaceutical: The proportion of raw materials in the first half of the year increased to 41%.
In 2016, Yifan Pharmaceutical achieved an operating income of 3.505 billion yuan, with the raw materials business accounting for over 32%. According to the mid-term report data, in the first half of 2017, Yifan Pharmaceutical achieved an operating income of 1.857 billion yuan, a year-on-year increase of 7.23%, with raw material drug business revenue of 770 million yuan, and the proportion increased to 41%.
Yifan Pharmaceutical stated that the market for its products, such as Vitamin B5 and raw B5, is relatively good, and product prices have increased compared to the same period last year. The company adheres to the marketing strategy of "following the market and determining production based on sales," consolidating its existing market share while seizing market opportunities, timely adjusting production and operation strategies, ensuring zero accidents in production, maintaining high environmental protection standards, and actively expanding new customers, achieving sales that are basically on par with the same period last year, resulting in good operating performance in the raw material drug sector during the reporting period.
Some raw materials used in the production of the company's raw material drug products, such as Vitamin B5 and raw B5, are flammable, explosive, and toxic gases or liquids, and will generate a certain amount of wastewater, exhaust gas, and waste residue. With the implementation of the new environmental protection law, the state has implemented supply-side reforms, and the environmental protection requirements for production enterprises, especially raw material drug production enterprises, are becoming increasingly stringent, and the challenges of safe production will become greater. Therefore, the company will further increase investment, implement a responsibility system, conduct safety training and education in a timely manner, and continuously reduce the company's environmental protection and safety risks through strict management and technological improvements. Subsidiaries such as Hangzhou Xinfuyuan, Anqing Xinfuyuan, and Chongqing Xinfuyuan have all started related pollution prevention facility construction, and the current operation situation is stable.
The high pressure of environmental protection will continue in the second half of the year.
As an industry with relatively high pollution, the pharmaceutical industry is facing increasingly severe environmental protection pressures. At the turn of 2016 and 2017, due to pollution control and other factors, many enterprises were notified to suspend production, involving 26 pharmaceutical enterprises in Beijing and the five provinces and cities surrounding Beijing (Hebei, Tianjin, Shanxi, Shandong, Liaoning). The suspension of production undoubtedly affects the supply and demand relationship of raw material drugs.
According to the Ministry of Environmental Protection's report, as of the end of June this year, the number of "scattered, disordered, and polluting" enterprises discovered in the Beijing-Tianjin-Hebei environmental supervision reached 176,000. The Ministry of Environmental Protection requires that enterprises unable to upgrade and meet discharge standards be closed by the end of September this year. Currently, the national-level requirements for environmental protection are being enforced with unprecedented determination.

The issue of "environmental protection" may be a double-edged sword. Yu Mingde, president of the China Pharmaceutical Enterprise Management Association, once stated that environmental protection forces enterprises to eliminate backward production capacity or relocate on a large scale, which incurs huge costs and long construction periods, while this process may create opportunities for some enterprises to turn around. Pan Guangcheng, executive president of the China Chemical Pharmaceutical Industry Association, also mentioned that environmental protection requirements have raised the technical barriers in the raw material drug industry, forcing enterprises to shape their core competitiveness through environmental protection technologies and processes. The raw material drug industry is gradually getting rid of disorderly and low-price competition, and in this process, the prices of raw material drugs are experiencing a surge. Once enterprises can cross the environmental protection threshold, they will also usher in a new round of development opportunities different from transformation.
This will be another major reshuffle in the industry. Leading enterprises with strong capital will face the challenge of successfully crossing the environmental protection hurdle to welcome a new round of development opportunities, and we will wait and see.