Overview of the Chinese Pharmaceutical Sector
Official Statistics suggest that sales of drug products including Western medicines, biochemical drugs and TCMs rose from CNY 4.9 billion (US$ 0.6 billion) in 1980 to around CNY 220 billion (US$27.3 billion) in 2005.?According to SFDA Southern Medicine Economic Institute, the figure is forecasted to grow another 14% in 2006 to reach CNY 250 billion (US$31.1 billion).
Estimates of the domestic Chinese pharmaceutical market in 2005 range from US$13 billion by IMS to US$27 billion by official estimates, with projections of a number of other reputable sources in between.
WiCON estimates that the total Chinese market for drug products including Western medicines, biochemical drugs and traditional Chinese medicines is CNY 158.5 billion (US$20 billion) at hospital purchase prices, and CNY 149.5 billion (US$19 billion) at ex-manufacturer prices.
Despite variances in market size estimates among different sources, one thing everyone agrees on is the growth of the Chinese pharmaceutical market.?Most forecasts predict the market to grow at between 13% and 18% annually between 2006 and 2010.
These growth predictions are supported by an official estimate by the Development Research Center of China? State Council that based on current trends health spending in the country is set to rise to 7-8% of GDP by 2010 from 5.7% in 2004, thus spurring further pharmaceutical market growth.
Continuous double-digit growth in the past two decades has convinced even the most conservative industry analysts to offer optimistic views about the future of the Chinese pharmaceutical market. Flashy news titles such as China seen as fifth biggest drugs market by 2010 and China could overtake the United States as the top drug market by 2050 are frequently seen in well-known papers and journals in recent years.
Indeed, these daring predictions are not unfounded and are supported by various broad economic evidence. Nevertheless, when taking a closer look at today reality of the pharmaceutical industry in China, one may develop second thoughts about these predictions.?In fact, challenges facing the pharmaceutical industry in China are threatening to derail it from the development fast track depicted by many observers.
Challenges Clouding the Future
Despite all the positive forecasts and encouraging trends, the pharmaceutical industry in China, including both local firms and multinationals, are facing serious challenges that may potentially jeopardize the future prospects of the pharmaceutical market in the country.
* Contradictions in Government Policies - There is no doubt that the Chinese government? economic policies and systemic reform spurred the rise of the Chinese pharmaceutical industry and market.?However, many structural problems in China? healthcare system and pharmaceutical sector remained in the past 25 years in exchange for faster short-term growth.
On the one hand, the Chinese government wants the pharmaceutical industry to develop into an internationally competitive industry with strong new drug R&D capabilities, advanced technologies, and high quality standards; but on the other hand, it has cut back state investments in the pharmaceutical industry, repeatedly slashed prices of drug products and squeezed profit margins of the pharmaceutical industry through various cost containment measures.
The government has also cut its healthcare spending sharply, forcing the medical industry to rely on profits from drug sales, hence making the pharmaceutical industry a major source of healthcare financing, and creating many structural flaws in the healthcare system.
Evidently the share of government healthcare spending in the country total healthcare expenditures fell to 17.2% in 2003 from 36.2% in 1980.
* Changing Directions of Healthcare Reform - A survey carried out by China Youth Daily in August 2005 found over 90% of the people in China were dissatisfied with the reform to the country's healthcare system in the past 10 years.?A heated discussion about China's healthcare reform began in May 2005 following the publication of a report by the Development Research Center under the State Council that concludes China's healthcare reform in the past two decades was largely unsuccessful.
Consequently, the future direction of China? healthcare reform has now become a subject of heated public debate involving ordinary people, government officials, representatives of the National People's Congress and the media.
The changing direction of the healthcare reform will have overwhelming and comprehensive impacts on the pharmaceutical industry, and is likely to cause another round of restructuring of the industry.
* Cost-containment Measures - In its desperate attempts to control the rapidly rising healthcare expenditures, the Chinese government has introduced a matrix of cost-containment measures at national and local levels. These measures, including 17 rounds of price cuts on drug products by the central government, have seriously disturbed the normal operation and profit margin, causing sharp increases in administrative costs and resources, and substantially narrowing the profit margins of pharmaceutical companies, both local and foreign. In the first ten months of 2005, the manufacturing sector of the Chinese pharmaceutical industry had a pathetic profitability (before taxes) of 8.39%, down from 8.81% in 2004.
* Intensive Competition and Industry Consolidation - The Chinese pharmaceutical industry, which was once dominated by large state-owned enterprises, slowly disintegrated in the past 25 years into a large number of small enterprises with similar product portfolios.?There were only 1,377 pharmaceutical manufacturing companies in the country in 1985, but the number rose to nearly 4,000 in 2005 in spite of ongoing consolidation and compulsory GMP implementation.
This has led to intensive competition and the rise of unethical and illegal practices in pharmaceutical sales and marketing. Cut-throat competition among local generic drug manufacturers has also resulted in shortening product life spans for generic drug products. Most local pharmaceutical companies are trapped in a vicious circle of low R&D investment, poor innovativeness and product differentiation, price competition and low profitability. Compounded by the effect of government price control and cuts, many pharmaceutical companies are suffering from heavy losses, and most small companies are expected to be out of business in the near future.
The government's strategy to support the big, and let go of the small in recent years did not produce the desired result. Many large state-owned enterprises simply became bigger and fatter in size, rather than stronger, more competitive and more profitable.?Valuable capital and resources drawn from the government and the stock market have been largely under-utilized without delivering expected performance.
* Rising Conflicts between Local and Multinational Companies - In the 1980s and early 1990s, local Chinese and multinational pharmaceutical companies had focused on the collaborative parts of their mutual relationships.?The honeymoon period was over in the past decade, however, with both sides growing stronger in their own ways and beginning to concentrate more on the competitive parts of their relationships, leading to rising conflicts of interests between the two sides.
* Rampant Counterfeit Drugs - AmCham China estimated that between 10% to 15% of drugs sold through the retail channel in China are counterfeits. Not only do counterfeit and fake drugs pose serious public health problems for China, but also the country is now one of the biggest exporters of such products. In the past, drug counterfeiters in China developed poor quality fakes, but today they are producing high quality counterfeit drugs.
In conclusion, I would borrow a fairly recent Chinese proverb to describe the challenges and future outlook facing the pharmaceutical industry in China: ?hile the future is bright, the path to it is twisty with zigzags.
Source: China Pharmaceutical Guide 2006 co-published by WiCON and SCRIP
About WiCON? China Pharmaceutical Guide
In this Guide, readers will be taken through the some historical backgrounds, and the reform and development path that China? pharmaceutical sector has undergone in the past 25 years.?We will then discuss the varying estimates on the size of China? pharmaceutical markets (both ethical and OTC), and its different market segments, as well as drug consumption patterns in terms of therapeutic applications, regional differences, market shares between local and foreign companies, and more.?
Contemporary challenges facing the pharmaceutical industry and market in China are reviewed, and potential opportunities are explored in the Guide.?Understanding these challenges and opportunities will help foreign companies face the realities of China up close, be prepared for the turbulence ahead, and grasp the opportunities as they arise.
At present, 27 of the world's leading 30 multinational pharmaceutical companies have manufacturing and sales operations in China, and many of them have multiple operations.?The Guide will review the current state of foreign investment in the Chinese pharmaceutical industry, and discuss the contemporary challenges facing international pharmaceutical companies in China.
The Guide covers also the healthcare provision and financing structure of the Chinese healthcare system, and gives an overview of the Chinese pharmaceutical regulatory framework with briefings on each of the relevant important regulations and introductions on each relevant government agencies with administrative and regulatory duties over the pharmaceutical industry.
Finally, the Guide includes a chapter that focuses on exploring pros and cons of a number of strategic approaches for market entry into China? burgeoning pharmaceutical marketplace.?