* 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
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