China with the advantages such as large patient pool, skilled professionals and government support towards pharmaceutical research is drawing the attention of pharmaceutical companies in the Western world. Of the globally outsourced research activities in the pharmaceutical sector in 2005, near about 33% was outsourced to China.
In 2005, the global drug development outsourcing market was valued at USD16.46 billion and has grown by 99% in the last five years between 2000-2005. This is due to the rising drug development cost and difficulty in finding the patients for clinical trials in the Western world. The cost of developing a drug is near about USD800 million in the Western world. Such high cost involved in drug development has driven the outsourcing of those activities to emerging countries like China and India, where the cost involved in drug development is comparatively less than that of the Western world.
Double-digit growth rate
In 2005, the drug development outsourcing market in China grew by 16% to USD5.19 billion compared with that of the previous year. The drug development market comprises of two segments namely pre-clinical (mostly in-vitro) and clinical (in-vivo). In China, clinical drug development outsourcing market accounts for 58% of the total drug development outsourcing market, the remaining being accounted by pre-clinical drug development outsourcing market. The average cost of pre-clinical drug development in China is just one-fifth of that in the US.
Currently, there are about 100 local contract research organizations in China. Some of the major players in this category include, WuXi PharmaTech, ChemExplorer Co. Ltd, Shanghai Genomics, Zhongguancun Life Science Park, China Clinical Trials Center (CCTC), Excel PharmaStudies Inc., and Gleneagles CRC (China) Pte Ltd. Eli Lilly saves about 40% of the cost of doing the basic research activities in drug development by outsourcing those activities to China rather than doing it in the US. This is one of the best examples for the benefits derived by outsourcing research activities to China.
Outlook
The Chinese drug development outsourcing market size is expected to grow at a compounded annual growth rate of 15.8% during the period 2006-2010 to reach the figure USD10.8 billion by 2010. The need for new drug development will grow due to increasing number of patent expiries of the blockbuster drugs during the next five years. As the cost involved in drug research is high in the Western world and the results are also uncertain, losses due to drug research failures can be brought down by minimizing the drug development cost, for which outsourcing those research activities to low cost destinations such as China is one of the best strategies. Few pharmaceutical companies in the Western world follow this strategy today and the number of companies to follow this strategy will increase incredibly in the future years.
Booming industry
Pharmaceutical sales in China have been increasing by over 20% in the last three (2003-05) years and it is one of the fastest growing markets globally. It is estimated that the market would be the world's seventh largest by 2009, fifth largest by 2010 and the largest market by 2050. Factors like healthy economic growth (and thus increasing percaptia income), rise in diagnosis and the increasing treatment rates, growth in chronic ailments with changing lifestyles due to the economic growth are driving the growth in the pharmaceutical market and is turning to be an attractive destination for the multinational pharmaceutical companies from the market demand perspective.
What is holding the dragon?
But why the market with second largest GDP globally and largest population base is nowhere in the top rankings. The reason lies in the lower GDP per capita of the country, the focus of the market towards the traditional Chinese medicines, lack of intellectual property protection (which encouraged generic drugs), healthcare being majorly managed by the government as part of the socialist policy and other reasons. However, looking at the potential the market has and the factors that would influence the market growth and the areas the policy makers and the industry should concentrate to fuel the growth further have been discussed below.
Drug distribution: Needs overhaul
Nearly 80% of the drugs in the country are distributed through hospitals while 15% are sold through the retail outlets and the rest is through convenience stores which mostly sell over the counter drugs.
The issue here is the distribution of the drugs to the consumer. As the majority of the drugs are distributed through the hospitals, the growth of over the counter medicines segment and the establishment of the retail pharmacies in the country has impeded. Globally, more than 40-50% of the drugs are dispensed through retail pharmacies.
Added to this the majority of the hospitals are depending on the drug sales for more than 80% of their revenues and the drug procurement is normally a fair bidding process. But in reality the hospitals do favor the locally produced generics. In this process, drug manufacturers are offering significant margins to middlemen and the distribution companies in order to sell their products to the hospitals. This system is complicating the distribution process for a new entrant. Moreover, traditional state based distribution system in the vast geography of the country emphasized on the provincial and local networks with few links to the regional markets (due to inefficient transportation system), which also didn't help in developing a national distribution system. Currently, every new entrant has to go through the 6000 - 8000 established national and provincial wholesalers to sell their drugs in the market or have to establish their own distribution network which is difficult. However, the government is taking steps in shifting towards personalized healthcare rather than depending on the government or social system.
Intellectual property protection holds key
Globally, a significant proportion of the counterfeit drugs of worth US$35bn in the market, are of Chinese origin. Added to this, WHO estimates that the counterfeit drug market globally would reach US$75bn by 2005 and the probability of the drugs of Chinese origin are comparatively high. Though China has agreed to uphold the intellectual property rights as part of the accession to WTO in 2001, implementation at the regional or local levels are comparatively poor as their interest is to protect the local businesses. This lax of enforcement is de-motivating the research based pharmaceutical companies in the country but the shear size of the Chinese market and the inherent potential is making the companies to continue to associate themselves with the market. Another aspect of this is the unclear legal infrastructure wherein many of the research based pharmaceuticals have failed in defending the patent of the products which were approved globally. Some of the examples are GSK and Pfizer.
Globally, the pharmaceutical industry has grown and was established in the countries were there was high intellectual property rights protection. The US and UK markets are examples. Looking at the importance of this, the government has taken steps to enforce the IPR in a major way and has plans to increase the research and development spending to 2% of the nation's GDP by 2010.
Non-tariff barriers: A hurdle for new entrants
Though the Chinese government with its accession to the WTO has eased out the restrictions for the multinational pharmaceutical companies in the country by lowering the average import tariff on pharmaceutical goods to 4.2% and permitted them for manufacturing in the country, there still exists various types of non-tariff barriers for the multinational or foreign companies at the provincial and local levels. The elimination of these factors plays a major role in the healthy growth of the industry since the global pharmaceutical industry is highly consolidated with top 10 players garnering a share of 47% of the total market. The operations based on the economies of scale are the major critical success factor for the players to operate in this industry whether it is a research based pharmaceutical company or a generic company.
Drug pricing issues
Globally, the markets with the least government intervention in the prices of drugs have grown faster and the pharmaceutical industry in that market has been well established. Typical example of this scenario is that of the US, where the government intervention into the prices of the drugs is very minimal when compared to that of its European counterparts. In China, the market is predominantly generic, hence the government has cut down the prices by about 17 times since 1997. In the recent past, the highest reduction was in June 2004, wherein the drug prices of about 400 drugs were reduced by about 30% and the prices of about 24 antibiotics were reduced by 56%. This in turn is causing some of the foreign companies to remove their drugs from the list of reimbursement forcing the industry to look into the operational costs reduction due to the squeeze in the margins. Moreover the continuous decrease in margins of the firms drives lower interest to spend in research and development, especially the domestic firms. Moreover, the R&D spending of the Chinese pharmaceutical companies are comparatively less with the availability of the talent pool in the country.
Outlook
The policy makers and the industry associations in the country should put in more emphasis to the above factors or issues to convert the inherent potential of the market (to make the market to continue to grow at levels of more than 20%) into a stronger established pharmaceutical market supported by the infrastructure like the well structured legal frame work, environment emphasizing research and development for long term success of the industry and the industry should be driven by the market rather than that by the government. The government should only concentrate on supporting the industry in terms of infrastructure creation for the industry.
(Compiled by Cygnus Business Consulting & Research,Hyderabad www.cygnusindia.com)