By James J. Shen

With the Chinese New Year in the middle followed by the important sessions of the National Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC), the first quarter of 2008 was packed with festivities and ceremonial events.

Meanwhile, the pharmaceutical industry reported impressive growth and leading players celebrated their success in 2007 with rising optimism for the future. As the quarter approached the end, senior officials reported progresses made on various fronts of the healthcare reform at the NPC and CPPCC, thus delivering to the public a clearer vision forward.   

Robust growth in 2007 reported with MNCs taking the lead

The Chinese government reported in February that the country’s GDP in 2007 jumped another 11.4%, the highest annual growth since 1994.

In line with the trend of the national GDP, total revenues of the Chinese pharmaceutical industry galloped 20% last year, according to official statistics. While the Chinese pharmaceutical formulation sector saw revenue growth of 17% last year, it lagged behind that of the API and biological product sectors (+22% and +21% respectively) but outpaced that of formulated TCMs (+14.3%).

The Chinese drug market is estimated by Pharma China to have already reached US$50 billion in 2007 when finished Western medicines, biological products, formulated TCMs and herbal preparations were all included, up from US$42 billion in the previous year.

On the other hand, Nicholas Hall, a leading global OTC drug market research firm, estimated that the Chinese OTC drug market grew 11.3% to reach US$7.4 billion in 2007.

Official statistics also suggest sharper import growth of Western medicines at 32.3% compared with export growth of 28.2% in 2007. Import of Western medicine formulations and biochemical drugs grew strongly at 45.6% and 33.0% respectively, while that of APIs rose only 26.9%. This trend is indicative of a more favorable market environment for imported drug formulations last year.

On the front of the pharmaceutical industry, leading local pharmaceutical companies saw moderate revenue growth last year, but their profits skyrocketed. The fast profit growth, however, was not a result of improving margins but rising stock market investment earnings.

By comparison, most leading pharma MNCs, led by Bayer Schering Pharma which saw 47% revenue growth, experienced sharp growth in China last year at rates above 20%. The sharp growth of multinational pharmaceutical companies in China was related to the stabilizing regulatory environment and favorable government policies in the country last year.

Optimistic outlook and rising importance

2007 was a good year in general for the pharmaceutical industry in China, and many positive developments last year are expected to benefit research-based multinationals and larger local companies continuously in 2008. The industry is likely to see double-digit growth again this year, but companies need to aware of many remaining structural problems in China’s healthcare sector and sustained uncertainties in healthcare reform.

Southern Medicine Economic Institute under the SFDA (SMEI) forecasts that the total output value of the Chinese pharmaceutical industry in 2008 will grow even faster by 19% to 20% to reach CNY 740 billion to CNY 760 billion (US$99 billion to US$101 billion), while IMS Health predicts that China will become the second largest pharmaceutical market in the world by 2020. IMS estimates, based on GDP growth projections, China’s drug consumption will reach US$110 billion by 2015. IMS also suggests that certain high growth segments, such as oncology and diabetes, are becoming the most important therapy areas driving China’s pharmaceutical market growth.

On the other hand, Nicholas Hall expects the Chinese OTC market to grow at around 15% rate in 2008, and predicts that it will overtake Japan as the world's second largest OTC market this year.

Fast business growth and improving prospects are boosting China’s strategic importance to MNCs which are brewing for another major expansion in the country targeting new market segments including lower tier cities and rural areas, the community healthcare market, the OTC market, off-patent/generic drugs and vaccines. Additionally, MNCs are seeking to boost R&D operations, manufacturing outsourcing and internal production capacity in the country.

Regulatory environment improves but remains challenging

Most of the regulatory corrections initiated in 2005/2006 winded down in 2007 thus creating a more stabilized market environment that allowed more growth in 2008. While no major regulatory introductions were introduced in the first quarter of 2008, a number of new rules and regulatory trends should be noted as follows.

To improve quality and safety of Chinese-made drug products, SFDA issued a number of new rules and initiated actions in the first quarter to step up regulation of injection drug manufacturing, drug donation, online drug sales and drug advertisements. The agency also launched the country’s first drug export control system that covers ten major drug products initially. Re-registration of 100,000 existing drug products approved between 2002 and 2003 was initiated and development of 2010 edition of the Chinese Pharmacopoeia, which will sharply raise national drug standards, began in the quarter. 

On another front, the Chinese government also issued in the first quarter a number of regulations and policies, such as the Supplemental Requirements for Registration of Traditional Chinese Medicines and policies that allow TCM doctors to be resident in retail pharmacies and to conduct home treatments, aiming to foster the long term growth and competitiveness of traditional Chinese medicine in the country’s healthcare arena. If successful, such policies may help boost future consumption of TCMs and thus may have long term ramifications on the future prospects of the Western-medicine-based pharmaceutical industry.

Following a similar but bigger move in the first half of 2007, the SFDA kicked off another major OTC switch in January 2008 in an attempt to increase OTC drug consumption and thereby reducing China’s healthcare costs. These moves are expected to bring China’s OTC portfolio more in line with Western and neighboring Asian countries.

Finally, the biggest regulatory event of the quarter was the announcement by the State Council to downgrade SFDA to the status as a subordinate agency of the Ministry of Health (MOH) in order to reduce bureaucracy, streamline government regulation and improve administrative efficiency. Although minimal restructure is anticipated at the central government level since the SFDA will remain an independent central government agency, this reorganization might trigger wider local government reshuffles. The MOH will also take away some of the most important responsibilities from the SFDA including the responsibilities for formulating policies and regulations, and the development of the national essential drug system.

For the Ministry of Health, taking over SFDA might just be the first step of building a super government agency that oversees all aspects of healthcare. It is believed that the MOH also hopes to take over the jurisdiction of national basic medical insurance programs from the Ministry of Labor and Social Security.

Vision for healthcare reform increasingly lucid

Despite continuous debates over certain aspects of China’s future healthcare reform, which has been holding up the finalization of an overall healthcare reform plan, apparent progress was witnessed in the first quarter on several fronts and it now seems certain that the healthcare reform will move forward in these areas ahead of the publication of an overall healthcare reform plan.

Firstly, reform was already initiated in community healthcare. Various reform schemes, including drug sales zero margin policy, separated control of hospital income and expenditure, government purchase and supply of essential drugs, and medical service integration between community healthcare facilities and public hospitals, will be pushed forward as the government significantly increases its funding for this sector in 2008.

Secondly, the State Council announced it will expand the trial of the urban resident basic medical insurance program to 229 Chinese cities this year, which consists of more than half of the Chinese cities in total.

Thirdly, the establishment of the national essential drug system, a core component of China’s healthcare reform, will be launched in June 2008 on full scale without any trials or experiments ahead of the conclusion of an overall healthcare reform plan.

Lastly, the reform of public hospitals will begin this year with decentralizing the administration of local level hospitals to local governments as the MOH increasingly taking the role of a regulatory agency over the medical industry.

Public image of MNCs needs to improve

A recent survey by Guangdong Provincial Public Survey and Research Center reveals that local consumers are strongly resentful of a number of MNC practices including unreasonable high pricing of non-exclusive products and withholding key information from the Chinese language version of package inserts. Also only 22.54% of respondents in the survey believe MNCs have fulfilled their social responsibility sufficiently in proportion to their profits from China, and 81.29% of the respondents believe that MNCs discriminate Chinese employees.

The merit of building strong bonds and caring relationships with the public goes without saying and it seems MNCs need to work harder on this front. This is not only important for companies, but also for the pharmaceutical industry in China as a whole, which has been a scapegoat and demonizing target for too long.