March 1, 2007 (Vol. 27, No. 5)
Eliza Yibing Zhou
China is clearly one of the bright spots in the global pharmaceutical marketplace. With the world’s largest population and a rapidly growing economy, its pharmaceutical market is already ninth in the world. Its expanding middle class and a population of 1.3 billion make it an attractive opportunity. Many business observers are projecting it to become the fifth largest pharmaceutical market by 2010, based on its double-digit revenue growth trends over the past two and half decades.
“China’s pharmaceutical market value will reach $120 billion by 2020. The country will become the world’s second largest pharmaceutical market after the United States,” predicts Biao Chen, general manager of Sinopharma Group, a leading domestic pharmaceutical companies in China.
Based on the results of a recently released joint study by BioPlan Associates and the Society for Industrial Microbiology, “Advances in Biopharmaceutical Technology in China,” the multinational biotech and pharmaceutical companies that win in the Chinese market will likely also be those that have established long-term success strategies for future global market shifts.
An increasing number of western pharmaceutical companies have recognized the significant long-term business opportunities in this country’s healthcare sector. Many international pharmaceutical organizations have established or expanded their presence in China. To date, all the top-20 multinational big pharmas have set up wholly owned subsidiaries or joint-ventures in China. According to a February 2004 article in the WTO Tribune, 40 out of 50 of the best-selling drugs in China are foreign-made. In the Chinese drug market, 25% are Sino-foreign joint-venture products, 12% are imported products, and 63% are domestic drugs.
Many global biopharmaceutical companies see China as one of the most important emerging markets. AstraZeneca, for example, sees China as being a key to future success. James Ward-Lilley, president of AstraZeneca China, says, “Our Chinese business has been soaring at more than 30% for three consecutive years, the Chinese market will be AstraZeneca’s major focus from 2006.” AstraZeneca plans to increase its $40 million investment in manufacturing facilities in Wuxi between 2006 and 2010.
Pharmaceutical Industry and Growth
China’s pharmaceutical market has become a bright spot in both the Asia Pacific region and the world markets, with an impressive average annual growth of 19.4% between 2000 and 2005. As a top-ten world market, it is second only to Japan in the Asian region. This status is primarily attributed to the following factors:
• Expanding market demand based on large population, with an emerging middle class (now estimated at 70 million)
• Thriving economy with 9% annual growth rate
• Biotech and pharmaceutical sector highly prioritized by the government
• Increasingly high-quality pharmaceutical production capacity after nationwide GMP modification
• Increasing exports, especially in chemical crude drugs
• Enhancing intellectual property protection status
• Improving innovation ability
The Chinese currency, Renminbi (RMB), is most likely to remain undervalued, and any appreciation of RMB will play a role in China’s revenue growth. According to IMS Health, China’s pharmaceutical market size was $11.7 billion in 2005 and is anticipated to reach $15–16 billion in 2007.
Between 1978 and 2005 China’s pharmaceutical industry achieved an average growth rate of 16.1% in production value. In 2005, China’s pharmaceutical industry revenues grew by 25.78% to 437.28 billion RMB ($55.8 billion). Chemical synthetic medicines, traditional Chinese herbal medicines, biological products, and medical devices constitute 93% of the Chinese pharmaceutical market (Figure 1).
The industry achieved a total of RMB36.71 billion ($46.89 billion) profits in the same year (Figure 2), an 18.63% increase over 2004. Chemical synthetic drugs generated RMB17.57 ($2.24) billion profits, accounting for 47.86% of the total profits. However, 23% of Chinese companies experienced a total of RMB3.59 billion ($0.46 billion) loss in 2005, a 0.19 billion RMB ($24 million) increase over the previous year.
Notably, in 2005 China’s medical device market leaped into third place, following U.S. and Japan, with a 54.8 billion RMB (7.0 billion) domestic market. However, domestic products accounted for only 30% of the Chinese market, while imported medical devices dominated with 70%.
China’s pharmaceutical industry continued to expand in 2006. Recent Chinese government statistics showed the industry grew by 18.9% between January and August 2006. However, the profit growth of the industry during this period moderated to 7.9%, as an immediate result of significant drug price reductions.
China’s pricing authorities have been taking ongoing steps to reduce drug prices to the benefit of Chinese citizens. The National Development and Reform Commission has launched 19 drug price reduction campaigns over the past decade. In August 2006, the retail prices of 99 types of antimicrobial drugs associated with 2,000 manufacturers in China were lowered by 30%. The result of this may be a savings of RMB 4.3 billion ($550 million) to Chinese consumers.
Imports and Exports
China’s pharmaceutical and healthcare product imports and exports have also shown a steady increase. According to China Customs data, total revenue on imports and exports reached $25.64 billion in 2005 (Exports: $13.80 billion, imports: $11.84 billion). This represented a 23.5% increase over the previous year. Chemical bulk drugs and intermediates remain the cornerstone of Chinese exports, accounting for 57.3% of total exports.
After China’s entry to the WTO in 2001, the government reduced the tariff rate for imported drugs dramatically, from 20% in 2001 to 5–8% in 2007. After 2007 the rate will go to 0%. Import tariffs for some much-needed drugs, such as anti-AIDS drugs, have already been completely eliminated. The tariff rate for imported medical devices has also been slashed from 11% (2001–2003) to 3.9% (2005).
Imported products are becoming more affordable for many Chinese consumers as tariffs decrease. Since the first imported drug, Insulin, was launched in the Chinese market in 1987, upward of 1,000 imported drugs from over 100 countries have entered the market. Official statistics also indicate that, so far, China’s State Food and Drug Administration (SFDA) has granted more than 2,000 certificates for imported drug registration and more than 9,000 certificates for imported medical device registration.
According to official data recently released by the SFDA, China has about 4,700 pharmaceutical manufacturers that have obtained Chinese GMP certification. Of these manufacturers, 90% are medium to small-sized. Only about 250 manufacturers in China have revenues in excess of RMB100 million ($12.77 million). The top-ten manufacturers now account for 13% of the industry’s total sales revenue, a much lower share compared with the top 10 pharmas in mature markets (40–50%). This may set the stage for Chinese manufacturers to experience more mergers and acquisitions in the near future.
Chemical drug manufacturing plays a key part in the Chinese pharmaceutical industry. More than 3,000 manufacturers are involved in chemical drug production, accounting for 50% of China’s pharmaceutical sales. China is perhaps the largest producer and exporter of chemical crude drugs. It is also the largest producer of drug preparations.
Traditional Chinese Medicine (TCM) is an important part of China’s pharmaceutical industry. The importance of TCM should not be underestimated, as the approach gains popularity worldwide. Today, there are more than 1,000 TCM manufacturers in China and their products account for about 25% of the country’s pharmaceutical sales.
China’s biopharmaceutical sector is the country’s fastest growing pharmaceutical industry segment and is currently a key investment area. Today, upward of 400 biopharmaceutical manufacturers have been established in China, including 114 genetically engineered drug manufacturers and 28 vaccine manufacturers.
The biopharmaceutical industry grew by 31.2% annually from 2001 to 2005. China has become the largest vaccine manufacturing country in the world, capable of producing 41 vaccines to prevent 26 viral diseases. Chinese-made vaccines are supplying the domestic market as well as international markets through activities at the WHO. China has also become the third country to succeed in large-scale production of genetically engineered insulin.
Chinese pharmaceutical manufacturers have been producing generic drugs for decades. At present, 95% of pharmaceuticals in the Chinese market are generics. Now that China has joined the WTO, these manufacturers are facing harsh competition in both domestic and international markets. The further reduction of import tariffs and drug prices, enforcement of intellectual property-right protection, and excess production capability, are posing serious challenges to Chinese pharmaceutical manufacturers.
China is now home to more than 1,700 foreign-invested (including Hong Kong, Taiwan, and Macao) pharmaceutical enterprises. These foreign companies and their products now make up over 21% of the Chinese market.
China’s pharmaceutical contract manufacturing industry began in the 1990s after the SFDA gradually lifted bans on contract manufacturing. Early on, Chinese CMOs were engaging in offshore API production. After 10+ years of development, Chinese CMOs are now capable of providing a wide range of contract manufacturing services such as API synthesis, peptide synthesis, and recombinant product production.
After January 1, 2006, all GMP-certificated Chinese manufacturers are legally permitted to conduct contract manufacturing for foreign companies provided that the products will not be sold inside China. However, vaccines, blood products, and Chinese herbal injections continue to be excluded from the list of drug products acceptable for contract manufacturing.
Chinese pharmaceutical industry observers are finding that Chinese manufacturers are entering a peak time of offshore contract manufacturing. In 2006, Pfizer signed its first contract manufacturing agreement with Shanghai Pharmaceutical Group and is expected to sign a second agreement with Harbin Pharmaceutical Group. More global big pharmas are considering China as a potential outsourcing partner as they attempt to reduce costs and increase efficiency.
Pharmaceutical Distributors in China
Pharmaceutical distributors play an irreplaceable role in the drug supply chain by controlling drug flow and maintaining drug supply. The evolution of Chinese pharmaceutical distributors went through three stages: 1) Planned economy stage (1949–1979); 2) Reform and open stage (1980–1989); and 3) Market-oriented stage (1990–present).
Today, there are 16,500 pharmaceutical wholesalers and 140,000 retailers in China. A survey conducted by the China Pharmaceutical Distributor Association showed that 56 distributors have exceeded 1 billion RMB ($128 million) in revenue, 13 exceeded 3 billion RMB ($382 million), and 8 have exceeded 5 billion RMB ($637 million), in sales.
The total market share held by the top-three largest Chinese distributors (China National Pharmaceutical Group, Shanghai Pharmaceutical, and China Jointown Group) with over 10 billion RMB ($1.3 billion) sales in 2005 was only 17%. This is a small figure compared with that of the three leading distributors in U.S., which account for 90% of the U.S. domestic market.
Currently, the majority (80%) of Chinese drug distributors can be described as small-sized, over-represented, and disorganized. Although a nationwide certification program completed in 2004 eliminated many mini-sized and unqualified wholesale and retail distributors, the current number of distributors is still huge. The average gross profit rate for China’s drug-distributing companies has continued to drop, currently to 8%, with net profits at just 0.5%. This trend is likely to continue, and net profits may reach zero. More pharmaceutical distributors will likely become product agents, which make profits by earning commission and discounts from the manufacturers.
On April 26, 2005, five large Chinese distributors, Shanghai Pharmaceutical, Guangzhou Pharmaceutical, Chongqing Medicine, Beijing Pharmaceutical, and Tianjin Taiping Group, officially formed the China Pharmaceutical Commercial Economic Alliance.
Meanwhile, Sinopharm Medicine Holding was planning a merger with the Tianjin Taiping Group to expand its business network and compete with the Alliance. All these activities have sent a strong message that the Chinese distributing system is expecting more major restructuring or large-scale merger and acquisition.
Foreign-invested Distributors in China
Through compliance with the agreement between China and the WTO, China’s drug-distribution business has achieved a rapid transformation. In 2003, the industry was partially opened to foreign companies, and by 2005, it had been completely opened up. As a result, several foreign-owned or joint-venture drug distributors were established in China in 2003. Other notable events include:
• In December 2003, the first Sino-foreign joint-venture pharmaceutical distributor, China Zuellig Xinxing Pharmaceutical, was established by the Zuellig Pharma headquartered in Swiss and China Xinxing Group with a total investment of 120 million RMB ($15.3 million).
• In September 2005, the China Ministry of Commerce and Trade gave approval to a U.S. corporation, Beijing Med-Pharm(BMP), to acquire a Chinese drug distributor, Wanwei, based in Beijing. BMP thereby became the first wholly foreign-owned pharmaceutical distributor in China. The company also provides drug registration and market research service.
• In October 2005, a wholly Japanese-owned drug wholesale company completed its registration in Guangzhou, China. The company started operation in January 2006.
China’s pharmaceutical industry will most likely develop in the following directions:
• Industry will maintain sustained growth in production, sales, and profits
• Outsourcing industry will continue to expand
• Drug prices in China will continue to decline, so as to become more affordable to consumers
• Stricter classification and management between prescription drugs and OTC drugs can be expected
• OTC drugs will start a new fast-expansion stage
• Expect more mergers, acquisitions, or reorganizations among Chinese manufacturers and distributors
• Modern pharmaceutical logistics will make further headway into China
• Market competitions will tend to become more severe as the industry shifts to a market orientation
• Potential markets in the vast rural areas will be developed
Eliza Yibing Zhou is project director for research programs in China and India fo BioPlan Associates. She is an editor for Advances in Biopharmaceutical Technology in China, published by BioPlan Associates and the Society for Industrial Microbiology. Web: www.bioplanassocates.com Phone: (301) 921-9074 [email protected]