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The Chinese Pharma Challenge
 
10/13/2008 2:10:54 PM

By Mina Choi
China International Business

Soon after Deng Xiaoping announced his open-door policy in 1978, multinational pharmaceutical companies started trickling into China.

Back then, the only option available in this very tightly regulated industry was to set up a joint venture with state-owned pharmaceutical companies. Japanese firm Otsuka was the first foreign entrant into the sector, setting up a joint venture in Shanghai with an initial investment of RMB 71 million (USD 10.4 million) in 1980. Bristol-Myers Squibb followed shortly after, with an investment of USD 11.6 million in 1982, while Janssen, now the market leader in China, arrived in 1985, investing RMB 150 million (USD 21.9 million) in a joint venture manufacturing plant in Xi’an.

Almost 30 years on, every major multinational pharmaceutical company  from GlaxoSmithKline to Pfizer has established a presence in China as they seek to gain a foothold in one of the world’s fastest growing markets.

According to James Shen, publisher of healthcare journal Pharma China, China’s pharmaceutical sector has shown double-digit annual growth for the past two decades, with 2007 growth coming in at nearly 20%. Omair Azam, marketing forecasting manager at Synovate Healthcare in Beijing, projects that the Chinese market will continue to show a growth rate of 12-15% per annum for the next five years; by contrast, growth in Europe and the US is expected to hover around the 2-5% mark.

However, despite this spectacular growth, China’s pharmaceutical industry has recently been beset by a series of scandals, while concerns persist over long waiting times to get new drugs approved. In addition, the resurgence of traditional Chinese medicine also poses a unique challenge to overseas drug companies. But with multinationals increasingly moving research and development, as well as manufacturing operations to China, the market looks set to be the major pharmaceutical battleground of the 21st century.

TIGHTER STANDARDS

In July 2007, Zheng Xiaoyu, the head of the State Food and Drug Administration (SFDA), was executed for corruption and dereliction of duty.

As head of the SFDA, Zheng was empowered to approve or reject licenses for new drugs. He was found guilty of accepting bribes worth RMB 6.5 million (USD 950,000) from eight companies in return for approving their products, one of which, an antibiotic, was blamed for at least 10 deaths.

This swift and severe move by the central government was interpreted by many as signaling a renewed pledge to improve product safety and fight corruption within the industry – Zheng was the highest-ranking government official to be executed since 2000. His execution was followed by a subsequent tightening of regulations and a crackdown on malpractice within the industry.

However, last month, both the food and the pharmaceutical industries were rocked by news that traces of melamine, a harmful chemical, had been found in infant formula powder produced by a number of leading Chinese firms. This has led the government and the SFDA to reiterate their vow to enforce more rigid quality control and safety standards across all industries.

MIXED BLESSING

For multinational drug firms operating in China, tighter regulatory control is both a blessing and a curse.

Clearly, improving safety standards and quality control is of vital importance, and beneficial to multinationals which had watched on helplessly as local competitors cut corners in a bid to drive down the cost of their products.

But the heavily regulated nature of the pharmaceutical sector also has an impact on the activities of foreign entrants into China. Following a restructuring of the SFDA, and the revision of many health and safety laws governing the sector in 2005, most multinational drug firms saw a drop in China revenues in 2006, though revenues and profit levels have since recovered.

Many multinationals are also sometimes hampered by the slow nature of the approval process in China. Most have had to wait a minimum of two years for their drugs to be approved and then listed in the hospitals – the only distribution channel for most of the prescription drugs in China. In addition, with a number of multinationals moving R&D operations to China, many also cite the long approval process for clinical trials as another drawback.

R&D IN THE PRC

Despite this, multinationals are increasingly basing both manufacturing, and research and development facilities in China. GlaxoSmithKline alone has invested more than RMB 1 billion (USD 146 million) into R&D facilities and projects in China, and doubled its staff in this division within the last few years. Wyeth recently announced a USD 300 million plant in Suzhou to be opened in 2010, while it also moved its Asia-Pacific R&D headquarters from Australia to Shanghai in 2005.

According to James Shen, China is well on its way to becoming the pharmaceutical hub not just for Asia-Pacific, but for all global markets.

“There has been a huge global shift in the pharmaceutical industry in the 21st century,” he said. “In the 20th century, most pharmaceutical manufacturing and R&D was done in the West, now much of it is moving to China and India because of the tremendous pressure to reduce cost. Companies have to look for cost reduction, and both India and China offer a great foundation for the pharmaceutical industry, namely a very large chemistry talent-pool.”

IN RUDE HEALTH

Right now, the outlook is good for multinational pharmaceutical firms. With the introduction of more stringent safety regulations, multinationals are poised to benefit, as smaller, lower-profit margin local enterprises are unable to compete. Already, a rash of small local, pharmaceutical firms have collapsed, as they found that pricing regulations on their generic, cheaper line of drugs made them economically unviable – the government sets pricing for all drugs and medicines in China.

In addition, multinational companies tend to be granted a higher retail price on their drugs than local firms, which makes them attractive to hospitals – many hospitals in China are increasingly reliant on pharmaceutical sales to prop up their otherwise unprofitable operations. 

These favorable conditions mean that international pharmaceutical firms are increasingly confident in their China ventures. After two decades in the Chinese market, multinationals are now comfortable, and have enough knowledge bases, to do without their local partners. A number of wholly-owned foreign enterprise have been set up and many multinationals such as Janssen, Baxter, and Schering-Plough are buying out their partners in a bid to take total control of their operations.

Overall, the long-term government outlook on the industry should benefit the multinationals, according to Shen. “There’s strengthened intellectual protection, cleaning up of the market environment, and focus on innovation. It’s a good marriage.”

CHINA CHALLENGES

However, with the ailing state healthcare sector about to undergo major reform —  at the 17th Party Congress last October it was announced that China would build a comprehensive basic healthcare system covering all Chinese citizens by 2020  — and with the healthcare picture in the country changing dramatically, pharmaceutical firms looking to succeed in China need to be on their toes.

For Synovate’s Azam, the firms that are most likely to succeed are the ones which are most in tune with changes in China’s disease patterns. “China is now the second biggest market for type 2 diabetes [in the world],” he said. “Obesity, cardiovascular issues, and oncology are going to be huge in China.” Changing lifestyle patterns mean higher food consumption and less active lifestyles. If you combine this with the impact of environmental pollution, it is clear that healthcare firms are likely to be kept very busy in the coming years. According to Shen, all chronic diseases are on the rise in China. Anticipating exactly where the greatest demand will lie in the future will be key.

The other huge factor for drug firms operating in China is the continued influence of traditional Chinese medicine. While some commentators in the 80s and 90s predicted that as Western medicines penetrated the Chinese market, the TCM market would decline, this has been far from the case. Most modern Chinese consumers are now very comfortable using both Western pharmaceutical, and TCM, products. TCM now accounts for 40% of the Chinese healthcare market, with most market analysts in agreement that its influence, if anything, is on the rise.

Some multinationals, such as GlaxoSmithKline, are researching the active ingredients in TCM products and packaging them into familiar Western pharmaceutical products. But what will really have ripple effects on the overall pharmaceutical industry is the government’s renewed pledge to develop and cultivate TCM. There will be new policies on the horizon, according to Shen, and that means more money will enter the sector.

How the multinational big boys deal with this TCM renaissance, as well as how well they read the key future trends remains to be seen. But with almost all major pharmaceutical firms investing billions of dollars into both manufacturing and product development, getting it right in China will, to a large extent, determine these companies’ overall success or failure. And with the credit crunch decimating economies in Europe and the US, expect still more pharma dollars to pour into the Chinese market in the next few years.

 
 
 
 
 
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