North China Pharmaceutical: Changes Along with the New Medical Reform     

North China Pharmaceutical Co., Ltd. (SH: 600812) is located in Shijiazhuang, the capital of Hebei province, and was founded in 1992. Its main productions include antibiotics, preparations, VB12, pharmaceutical glassware, organic solvents, starch, sugar and so on. Its largest shareholder is North China Pharmaceutical Group Co., Ltd. (NCPC) which holds a 27.88% share.
    On April 6th, 2009 China's new medical reform program was unveiled. From the second half of 2009, China will reform its health care system. In the procurement of basic medicines, it will drop the old method that designated manufactures and adopt "public bidding." Since North China Pharmaceutical Co., Ltd. was designated and authorized by the government to manufacture its main products - penicillin and cefazolin sodium for injection - before this round of reform, it will have to face new challenges and cope with bidding competition in the future.
    However, after four years of negotiations, North China Pharmaceutical and another bulk drug giant DSM finally joined hands officially on March 20th. North China Pharmaceutical hopes to seek technical and financial support from DSM to complete this change of business procedures. (CCR2009 No.10)
    Before that, North China Pharmaceutical Co., Ltd. was preparing to acquire a 77.84% stake in NCPC New Drug R&D Co. Ltd. from its parent NCPC.   
   There is every indication that this firm, one of the largest national pharmaceutical companies, is striving to change from a bulk drug head to a biopharmaceutical pioneer, and also to attract foreign strategic investors.

Focus will be shifted to preparations     

Among the two main products of North China Pharmaceutical, the once popular penicillin has now entered a recession with overcapacity in the industry and growing competition. At the same time VC, another main product, is significantly affected by the economic fluctuations and will see little price growth later given its high price in 2008.  
   In recent years, among the medicine sales in North China Pharmaceutical, VC and penicillin bulk drugs have continuously accounted for around 25% of the total, still a relatively high proportion. However, the company is now trying to shift its product mix from focusing on bulk drugs to emphasizing preparations. The reason is that the management is not sure about the price trend of VC and penicillin products.
   Since the beginning of the fourth quarter of 2008, the price of penicillin has fallen sharply. Sighs of industry fatigue are becoming evident, too. Analysts believe that it was competition in the industry that led to the continuous decline in the overall cost of penicillin. For example: Shijiazhuang Pharmaceutical Group, another major penicillin producer in China which is located in the same city with North China Pharmaceutical, recently set up a new factory in Inner Mongolia and won the low-cost advantage.
   Since penicillin cannot contribute much profit, the company's over-reliance on VC business in performance has begun to show quickly. In 2007, North China Pharmaceutical made RMB74 million of net profit due to a large increase in the price of VC. Aside from VC and penicillin, the profit contribution of the company's other products like cephalosporin, chemical medicine preparations and new drugs are still quite limited.
   A manager of the company discloses that the current product portfolio which focuses on bulk drugs will be shifted to one that focuses on preparations. In the future, the company will be committed to the development of bio-pharmaceuticals, anti-cancer drugs, immunosuppressant and other product areas. Some product-development projects will be carried out after relocating the factories from urban areas to suburban areas.

Invest in recombinant albumin project    

North China Pharmaceutical is now moving its factories in the urban areas of Shijiazhuang City to the development zone in rural areas. Along with the relocation, the company will phase out backward production capacity. For example, the penicillin powder injection business will be gradually abandoned while cephalosporin products will become the key products. In addition, the company has determined to invest and construct a recombinant albumin project in the development zone.
   At present, other companies in China also do not have the large-scale production technology for recombinant albumin project that are fairly common around the globe; only three manufacturers have mastered the technology.
    It is reported that North China Pharmaceutical's purification technique for manufacturing albumin products has reached the most advanced international level and the company is planning to build a production line which can produce 15 tons of media-grade albumin per year.
    The recombinant albumin project is based on a patented technology bought by North China Pharmaceutical in 2007 from NCPC New Drug R&D Co., Ltd.
    At present, NCPC New Drug R&D Co., Ltd. has sold only the media-grade albumin technology to North China Pharmaceutical while it has, in fact, mastered a higher level of production technology. The prospect of this technology is quite seductive for any pharmaceutical company intending to enter the new drug area. North China Pharmaceutical lured by this asset of NCPC New Drug R&D Co. Ltd, has long been brewing to acquire the latter.

After a successful transition, the strength of North China Pharmaceutical will be greatly enhanced. However, it is not difficult to imagine that during the period of shifting the product mix, the company's normal earnings will be affected to a certain degree and it may have to go through a lean season with less profit in the near future.