Crisis Means Opportunity? Lessons From Chinese API Maker’s Rapid Downfall
Executive Summary
With its stock plunging 20% over three trading days, Chinese bulk producer Zhejiang Huahai has been hit hard by a spreading worldwide recall of its big-selling valsartan active ingredient, but the issue has also thrown into relief other underlying issues.
A July heatwave is hitting many parts of China, but bulk ingredients manufacturer Zhejiang Huahai Pharmaceuticals Co. Ltd. has found itself grilled by a different form of heat, stemming from a widening product recall as regulators globally grow concerned over the quality and safety of one of the company's main products.
Since July 5, when the European Union discovered an unexpected impurity in valsartan active pharmaceutical ingredient (API) manufactured by the Chinese firm, Huahai has been hit by a tsunami of bad news and its shares have been in a downward spiral.
Valsartan is an angiotensin II antagonist used to treat high blood pressure and heart failure, and the European recall was issued due to the detection of a probably carcinogenic impurity, N-nitrosodimethylamine (NDMA).
It is not unusual for companies to face heightened scrutiny after a major product recall, but the attention given to Huahai has been particularly intense, and many investors in China are also questioning the company’s way of handling the finding and how it has disclosed information.
Delayed Disclosure?
Shareholders first grew concerned over the seemingly long time lag before the disclosure of the incident after European regulators initially discovered the impurity and requested a recall (Also see "EU Regulators Recall Valsartan Products Produced In China" - Pink Sheet, 6 Jul, 2018.). Huahai first announced it in a July 7 filing to the Shanghai Stock Exchange, where the company is publicly traded.
But given the apparent delay between the EU announcement and the company’s public disclosure, and the fact that July 6 was a public trading day (Friday) while the market closed on July 7, investors questioned the company's reasoning for not releasing information on such a major event earlier.
“Please can you explain why the EU July 5 requested the product to be recalled, but you didn’t issue a public disclosure on July 6 before the market opening, nor requested a trading suspension, but decided to disclose one day later (7/7) with a statement saying an extremely small amount of toxic impurity was discovered in valsartan API?” questioned one investor on the Shanghai Stock Exchange’s social media platform for investors (http://sns.sseinfo.com/company.do?uid=521).
The investor further questioned whether that timescale allowed people who were already aware of the information time to sell if desired, given an unusually large volume of trading on the day. The shares fell 7.2% on July 6 after the European findings emerged, with a trading volume of roughly 270,200, compared to the previous day’s 96,741 and the previous week’s average volume of 62,818.
On the next trading day of July 9 however, Huahai shares hit the daily fall limit of 10% and trading was halted. The shares nosedived over the three-day period (July 5, 6 and 9), dropping roughly 20% overall. The company held an investor meeting on July 9 and in response to questions said it was taking measures to minimize the impact of the quality issues.
Leading Producer
Huahai has become the world’s major single producer of valsartan active ingredient, which it sells solely outside China to large markets such as the US, EU, India and Russia, among other countries, with total sales of CNY328.3m ($50.5m).
Huahai along with other Chinese API makers are now the world’s major suppliers of valsartan API, surpassing Indian producers. However, Huahai is not supplying its valsartan API to Novartis for use in the Swiss firm’s big-selling branded product Diovan, the Chinese firm said during its July 9 call with investors.
The impurity issue also seems to be limited just to valsartan API, stressed the company.
Meanwhile, Huahai has another matter to handle as one of its largest individual shareholders has been reducing its stake while the product recall unfolded. Zhou Minghua, a former company executive who held 201 million shares, or 19.36% of the total, has cut his holding by 1.218 million shares (0.11% of the total holding), announced the company in a July 6 statement.
Although the divestment was pre-planned, as part of an unloading of shares announced in late December, investors were nevertheless wondering about the timing. In response, Huahai said it had made a disclosure regarding the sale in compliance with the rules of the Shanghai Stock Exchange.
Recall Expansion
While Huahai remains under investor and regulatory scrutiny following the European move, other worldwide regulators including the US FDA and South Korea's Ministry of Food and Drug Safety (MFDS) have also started recalling valsartan made by the Chinese API maker.
The US market is the single largest worldwide for Huahai; since 2015 when the FDA cleared the product, sales have increased rapidly to reach $32.4m in 2017, accounting for around 64% of the company's worldwide valsartan sales.
On July 13, the FDA announced a recall of valsartan and valsartan/hydrochlorothiazide containing products from Major Pharmaceuticals, Solco, and Teva Pharmaceutical Industries, all of which have started recalling all lots of non-expired products that contain the active ingredient supplied to them by Huahai.
While supplies from other Chinese API makers are not affected, Huahai has now stopped distributing its valsartan API and the FDA is working with the affected companies to reduce or eliminate the valsartan API impurity from future products.
The FDA’s recall decision was seen as having a further negative impact on revenues, and Huahai investors unloaded more shares, driving the price down 7% on July 16, the first full trading day in China after the US regulator's announcement.
Meanwhile, South Korea‘s MFDS said that out of a total of 219 valsartan products on the market in the country, more than half (115 products from 54 companies) using the raw material from Huahai will remain under a manufacturing and sales suspension and will be recalled. The ministry asked patients who had been taking the affected drugs to visit hospitals to change their prescriptions.
The total market for valsartan in South Korea is reportedly estimated to be around KRW290bn ($257m).
GMP Questions Too?
Amid the global regulatory moves, Huahai said it had been manufacturing its API in compliance with GMP requirements, pointing out that its current GMP certification -renewed and issued by the local Zhejiang provincial Food and Drug Administration in December after factory inspections - is valid until the end of 2022.
More widely, the Chinese government is continuing to drum up support for the local manufacturing and supply of generics, in a bid to encourage the use of domestically made such drugs as a substitute for higher-priced generics from multinational, but on the condition that the local versions can show equal efficacy and safety, as demonstrated by bioequivalence testing.
Huahai was actually among the first batch of drug makers from Zhejiang province to clear such testing, for its generic paroxetine, risperidone, losartan and four other products. But the process raises questions over whether the impurity could and should have been detected as part of these clearances.
European regulators have said that the NMDA impurity may have been present in the Huahai API since 2012, when the company made changes to its manufacturing process.
Entering 2018, the company has also obtained a regulatory approval for its generic valsartan in China, but has so far declined to provide a launch date. In the meantime, others including Novartis and domestic firms continue to market their versions of the drug in the country.
However, the API impurity case, coupled with rising costs and environmental pressures, is likely to cloud the prospects for the Huahai product in China.
Next Moves In Sharp Focus
While examination of the exact cause of the valsartan API impurity is ongoing, the incident also highlights how leading Chinese manufacturers such as Huahai are prone to the complications of manufacturing, along with other operating pressures.
China is now the world’s largest producer of APIs, but such manufacturers are facing mounting pressures from the increasing cost of raw materials, and ever stricter environmental requirements. In part because of these factors, Huahai has already increased certain API prices in the US market by 10-20%.
This along with the other pressures from the recalls will further constrain Huahai’s ability to achieve its half-year revenue target, which will likely be hit hard by the valsartan affair.
“Crises are also opportunities” goes the old Chinese saying, but how the API recall is handled from now on will likely cast a far-reaching shadow to the wide generic drug manufacturing sector in China.
With contributions from Jung-Wong Shin in Seoul.
From the editors of PharmAsia News.