Developing World Healthcare Blog
When Public Health and the Healthcare Industry Collide
Air pollution is a serious problem in many Chinese cities, particularly in those with large industrial bases. Shijiazhuang City in Hebei Province (located 180 miles southwest of Beijing) has struggled with this issue for several years with limited effect:
According to a recent article in the Global Times, the city intends to cut its average concentration of PM 2.5 by 10% by year-end 2016 and keep its Air Quality Index (AQI) below 500 for the rest of the year. For perspective, the AQI tops out at 500 (similar to the US standard). Any reading above 500 means the air quality is “extremely bad”.
The city’s government decided to take drastic action recently. On 18 November the Shijiazhuang City Air and Water Pollution Prevention Command Office issued an order requiring all pharmaceutical companies in the city to suspend production. Companies must apply to the government and receive approval to resume production. The order also applies to companies in the cement, foundry, iron and steel, coal-electricity, coking and boiler industries.
Several publicly-traded pharmaceutical companies listed on the Hong Kong and Shanghai exchanges disclosed the production halts that resulted from the order within several days of its issuance. The HK-listed companies are CSPC Pharmaceuticals, SSY Group, and China Shineway Pharmaceuticals. The Shanghai-listed company is North China Pharmaceutical.
The stakes are potentially high with far-reaching impacts. One (unconfirmed) estimate claims that CSPC and North China Pharmaceutical supply more than half of the country’s antibiotics (which are wildly over-consumed). North China Pharmaceutical has estimated that the suspension would cut its profits by 50 million yuan (US$7.5 million) if it extends to the end of the year. The impacted companies have made differing statements so far:
CSPC -- The company stated in its HKEX filing that it “has been actively cooperating with the government on environmental protection work and is making an application to the Shijiazhuang municipal government for permission to continue its normal pharmaceutical production….” Management thinks that current inventories can meet short-term needs, and “no material adverse effect is expected on the Group’s business conditions in the near future.” There is a caveat: “The Company will make further announcement(s) to update the shareholders and investors on the above matter, if required and when appropriate.” Note that most of the company’s manufacturing operations are in Shijiazhuang City.
SSY Group – SSY disclosed that the impacted business is their IV solution and others segment “which contributed around 93% of total revenue of the Group for the six months ended 30 June 2016.” Further, the company reports that it “does not use any manufacturing process emitting harmful pollutants” and that they have requested the lifting of the suspension, and expect a favorable response with production resuming by the end of November. Like CSPC, they promise to provide further updates (which should be imminent).
China Shineway Pharmaceuticals – China Shineway’s disclosure is almost identical to CSPC’s (waiting a day can help!) The company’s headquarters are in Shijiazhuang City, so their exposure to a lengthy suspension likely is substantial.
North China Pharmaceutical – As mentioned earlier, management quantified the potential impact (50 million yuan reduction in profits) assuming the suspension continues to year-end. Management promises to provide updates too.
The shares of these companies haven’t reacted significantly to these developments, but the situation is dynamic. Pollution levels are a function of emission levels, weather, chemical transformations in the air, and transport of pollutants from other areas. Conditions could force the government to extend the production suspensions past year-end. Long-term solutions could involve requiring companies to move their manufacturing facilities or regulating the length of production runs. The government faces a delicate balancing act between protecting public health while preserving the local industrial base.
Is the Problem of Public Health and Healthcare Industry Limited to China?
A brief skim of this article will provide the answer……………………