China has two key attractions: a huge population that is gradually becoming more affluent as economic regeneration and urbanization reshape the region; and a strong biopharmaceutical sector. However any foreign pharmaceutical company investing there faces considerable risks. The Chinese government has been slow to enforce the international rules on intellectual property rights; some of its healthcare reforms could end up depressing drug prices; and the drug distribution system is controlled by middlemen. Even so, the potential rewards are substantial for those companies that treat China as an integral part of their global business strategies.
China has a population of 1.3 billion which is ageing at a projected rate of 3% a year. During the last national census in 2000 there were 88.1 million people aged 65 years or over - more than in any other country in the world.
The Chinese economy has grown by about 8% per annum for the past five years and despite the SARS epidemic the momentum continues.
Real GDP growth is expected to be 9% in 2005. Inflation is low - less than 1% per annum. Interest rates are tied to US rates and likewise low. In short the country is emerging as a major engine of growth.
China's pharmaceutical market is growing at an annual rate of 15 %. Annual revenues are expected to reach $14 billion in 2005 and $24 billion by 2010, making China the fifth largest pharmaceutical market after US, Japan, Germany and France.
The pharmaceutical industry is one of China's fastest - growing sectors. The sector last year realized 387.65 billion yuan (US$46.8 billion) in production value. That was up 19.86% over 2002. The added value of the industry last year reached 113.32 billion yuan (US$13.69 billion), up 17.11% over the previous year, indicate figures from the National Bureau of Statistics. This huge market has plenty of scope for growth; per capita expenditure on pharmaceuticals is currently about 190 Renminbi ($22.95) which is less than half of the global average. Medicines produced by domestic firms held 69% of China's market last year; imported drugs, 17%; and drugs produced by joint venture firms, 14%. In 2002, these percentages were 66%, 18 % and 16 %, respectively.
Among China's 6,000 pharmaceutical firms in China, about 1,800 are foreign invested. Imported drugs and medicine produced by Sino-foreign joint ventures are mainly used in major Chinese cities, where the market has become relatively saturated in recent years. Domestic firms have a competitive advantage in rural China, as it will cost foreign-invested pharmaceutical companies too much time and money to market their high-priced drugs in rural communities.
Regulatory scenario
China's entry into the WTO in December 2001 promises to bring the country's regulations and distribution networks in line with the world- class standards over the next five years. Among its most important changes in the pharmaceutical industry arena, the WTO agreement specifies that China will do the following:
" Enhance its protection of intellectual property rights (IPRs).
" Reduce import tariffs on pharmaceuticals from an average of 9.6% today to 4.2%.
" Increase foreign participation in the drug distribution industry.
" Comply fully with global regulatory standards.
Significant changes will sweep China in the wake of its entry into the WTO, thereby providing foreign players with new opportunities in healthcare.
Generics-driven market
In China today the pharmaceutical industry is awash with 'me-too' drugs with almost 6000 manufacturers in China focusing primarily on producing generic drugs and competing almost entirely on price. Three factors drive this glut of undifferentiated drugs:
" The Chinese government has concentrated initially on basic medical needs, such as anti-infective products.
" In doing so, it has focused the state owned local industry on generics and has not been particularly effective in preventing local manufacturers from infringing on foreign drug patents.
" At least historically new drugs in China have been quickly copied and their price points eroded by the resulting generics. Thus MNCs in China have found it difficult to justify the investment required to bring new, innovative drugs to market.
In this environment as many as 40 knockoffs may compete illegally with a patent protected drug. Enforcing the provisions of TRIPS will naturally take time.
Nonetheless we expect that within the next 5 years significantly enhanced intellectual property protection and reduced tariffs will give MNCs a greater incentive to introduce breakthrough drugs that address illnesses that otherwise would go untreated or are treated inadequately by existing or generic drugs.
The shift to breakthrough drugs will be further fueled by the enormity of opportunity, the unmet need for sophisticated drugs is vast in China and the potential payoff is significant. China is after all a nation where 100 - 150 million people carry the hepatitis B virus and where head and neck cancers are more prevalent than in any other part of the world. China also has its share of patients with chronic conditions routinely treated in the West like high blood pressure, high cholesterol, diabetes, depression, osteoporosis and arthritis. In addition AIDS has just begun to be acknowledged in China and demand is on the rise to treat the disease and its related complications.
Cardio-vascular, CNS drugs top
Five of the ten fastest growing therapy classes in 2003 were treatments for the illnesses of the cardio-vascular and central nervous system. Another three were respiratory, anti-inflammatory and anti ulcer drugs. Only two were anti-infectives -which the Chinese government traditionally encouraged domestic manufacturers to produce.
China's pharma market profile is changing accordingly. In the year 2003, ethical generics accounted for 62% of the market, OTC products accounted for another 15%, branded generics account for 14% and patented innovative drugs for a mere 9%. The International Federation of Pharmaceutical Manufacturers (IFPMA) predicts that by 2010 patented innovative drugs will account for 21% of the market, OTC products for 23% and branded generics for 19%, while ethical generics will account for just 37%. The main beneficiaries of this trend will be companies with good treatments for chronic diseases in their repertoire rather than those that are locked into producing anti-infectives.
Recently, the Chinese government announced a series of preferential policies to expedite the pace of TCM modernization and to promote pharmaceutical industry upgrade. This initiative has already yielded some positive results. Sophisticated technology platforms, relative to scientific validation, mechanism of action elucidation, quality standard determination, and novel product development, have been set up that will greatly improve the image, efficacy, and market share of herbal based therapeutics. Newly formed international collaboration network on TCM modernization involves a dozen well-recognized research institutions in life sciences across the world, thereby providing a strong technical support to China's endeavor in promoting TCM both domestically and internationally.
In summary, with sustained economic progress and continued elevation of the standard of living, healthcare and quality of life have become a central topic for China's social development in the new millennium. An increasingly aging population and expansion of the rural medical market provide an unprecedented growth space for Chinese pharmaceutical industry. Through years of unremitting efforts, China's own drug innovation system has borne its first fruits. Aiming at strengthening international competitiveness, China's pharmaceutical industry is undergoing its historical transformation from imitation to innovation.
(The author is Industry Analyst-Healthcare Practice, Frost & Sullivan. He can be contacted through sdedhia@frost.com)