BusinessForum China 4|05 1 Published By German Industry & Commerce China | Shanghai www.bfchina.cn
BusinessForum China
4|05
July/August 2005
B I - M O N T H L Y I N F O R M A T I O N - S T R A I G H T F R O M T H E S O U R C E
BusinessForum China4|05
Main Topic
From Acupunture to Antibiotics The Healthcare and Medical Sector
Law
‘False’ Subcontractors in Bidding Partnerships Branding
The Unloyal, Brand Conscious Consumer
BusinessForum China 4|05
14
Drugs for the Masses
The Chinese Pharmaceutical Sector
Industry Overview
The pharmaceutical sector in China is an attrac- tive prospect. According to China’s National Bu- reau of Statistics, the number of individuals par- ticipating in a basic medical care system in- creased from slightly below 18 million people in 1997, to more than 94 million in 2002. Yet a large potential customer base alone does not guarantee an attractive market. Four main fac- tors make the pharmaceutical market in China attractive to foreign firms. In combination, these factors have helped to transform the Chi- nese pharmaceutical market into one that is led by multinational companies.
1. Income - A Market Opportunity
Potential customers in China are becoming more affluent and more willing to spend money for medical care every year. Thus, in combination with an increasing number of in- dividuals seeking medical care, the per capita expenditures for drugs and medical care grew from RMB 180 in 1997 to RMB 430 in 2002.
However a mere look at the average expendi- ture per capita can be misleading. China is a country full of regional differences, a factor particularly relevant for the pharmaceutical industry. The per capita expenditure for medi- cine and medical care in select major urban and rural regions is illustrated in Figure 1.
According to an interview we conducted with the manager of a leading pharmaceutical company, it is the demand in these zones that represents the main growth driver in the Chinese pharmaceutical industry. “This is the center of the opening blossom,” he told us. According to market intelligence of a Swiss pharmaceutical
company, the spending power of consumers in the top three Chinese cities is only slightly be- low that of other more developed Asian coun- tries (see Figure 2). “And this gap will continue to narrow every year”, says the CFO of a leading Swiss pharmaceutical company in China.
2. Enjoying the Benefits of Urbanisation
Generally speaking, companies providing medi- cation and health care solutions for diseases of industrialised civilization will be in a healthy position to operate successfully in China. An in- creasing number of Chinese citizens are mov- ing to urban areas (see Figure 3). This develop- ment is typically accompanied by other side ef- fects of industrialisation, i.e. drastic changes in life-style and nutrition. These in turn, have strong effects on disease patterns and common causes of death. Consequently, the range of medication needed and demanded by patients changes. Attractive opportunities will arise for companies able to offer health solutions to newly appearing mass diseases such as cancer or diabetes. According to an industry expert, the extent of change can be demonstrated with the following example: out of 100,000 inhabitants, 147 patients died from cancer in 2000 (30% more than in rural areas). Inhabitants of urban areas also increasingly suffer from cardiovascular diseases. In 2000, 107 cases of heart failure per 100,000 inhabitants were reported in urban ar- eas (about 43% higher than in rural areas).
3. An ageing population spending more on health While China’s one child-policy helped the gov- ernment to avoid a population explosion (see Figure 4). This demographic shift will have a positive effect on the pharmaceutical industry.
“Older people, being more prone to sickness, will drive up expenditures for medication in a way similar to Western countries”, as one gen- eral manager of a Swiss pharmaceutical com- pany in China explained to us.
4. International Companies Competitive Edge Western firms acquired quality management and marketing & sales capabilities when their home- markets in Europe and the USA underwent a transformation from being product-driven to demand-driven. Most local Chinese competitors
Univ.-Prof. Dr. Lutz Kaufmann Herbert-Quandt- Stiftungslehrstuhl WHU Guest Lecturer:
CEIBS Shanghai
Dirk Panhans Consultant McKinsey & Co Frankfurt
Boney Poovan Consultant McKinsey & Co Munich
Benedikt Sobotka Boston Consulting Group, Munich
Main Topic | Medicine & Healthcare | Business Opportunities
BusinessForum China 4|05 15
are still adjusting to a business environment that is undergoing a process similar to that seen in the West. “Professional marketing and sales as a means to enhance sales and profitability is still new to many local firms”, explained the CEO of a leading German generics manufacturer in China: “Combined with quality standards that local firms often cannot obtain, international players have a clear competitive edge.”
Fragmented Market Dominated by Foreigners A striking characteristic of the Chinese pharma- ceutical market is the degree of fragmentation.
According to the general manager of a major Ger- man pharmaceutical company in China, the market, with its estimated 5,000 local pharmaceu- tical companies plus an additional 1,700 Chinese- foreign invested joint ventures, is probably one of the most fragmented markets worldwide.
Nevertheless, foreign-owned companies domi- nate the market, holding leading positions among China’s top-ten companies (see Figure 5 and 6).
Latecomers entering the Chinese market receive pressure from both sides: from international play- ers who have already established a sizable pres- ence and from local players with an increasingly competitive edge. Once the market picks up, es- tablished international players will be ready to scale up with a strong sales force and well-estab- lished relationships. In contrast to the internationals, local companies have a lower cost structure, which may be due to cost calculation methods, but are mainly to a lower overhead base.
Furthermore, they are more flexible when it comes to decision-making. As the general manager of one international pharmaceutical company told us:
“We always need to get approval from the top management. If the market opportunity is to be grasped quickly, chances are that a Chinese com- petitor may have been faster than us.”
Far from Being Big
Pharmaceutical firms in China were not success- ful in developing a market that is comparable in size to Western markets. China’s best-selling drug, Zuo Ke, ‘only’ generated sales of RMB 270m in one year (see Figure 6). This is also due to the high level of fragmentation in the market.
A look at the aggregate level provides a more accurate picture, illustrating the top-ten thera- peutic classes with respect to size and growth (see Figure 7). The largest pharmaceutical field, systemic anti-infectives, generated revenues of slightly more than RMB 8bn. The second larg- est segment, pharmaceutical products in the cardiovascular system field, is only half as large as the first one.
Main Topic | Medicine & Healthcare | Business Opportunities
BusinessForum China 4|05
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Paralysed by Red Tape
Operations and business strategies of even the most experienced firms in China are hindered by manifold restrictions, rules, and regulations, especially when it comes to drug registration and approval. One top manager of a pharma- ceutical company we spoke to said that it would take at least one out of every 20 employ- ees to handle product approval alone. Another CFO of a leading pharmaceutical company ex- plained to us that his company had been sell- ing a cancer product virtually everywhere in the world with global revenues exceeding USD 1bn, a blockbuster drug by industry standard.
In China however, the product never received approval by the Chinese State Food and Drug Administration (SFDA). Other products never even made it to the reimbursement list, thus effectively hindering companies from tapping the large pool of customers covered by public healthcare. Sometimes regulations even affect companies’ ‘proprietary’ decisions, including areas such as pricing. Foreign pharmaceutical companies are often not used to the bidding
processes that are - despite government efforts - still not as transparent as in most Western countries. In this environment, many foreign firms still find it difficult to find and employ the adequate instruments to promote products to a government-run, hospital-based healthcare system. Even if effective promotion mechanisms can be found, some practices may not go over well with headquarters, even if a flexible bidding strategy is key to winning.
Pharmaceuticals are Mostly Export Oriented Most pharmaceutical companies still follow the strategy of ‘export orientation’ in China. For the most part, German pharmaceutical com- panies have only opened marketing and sales offices in China and, in select cases, small pro- duction facilities mainly for formulation and repackaging. R&D is still almost exclusively conducted in Germany and three quarters of sourcing and two thirds of production are still being done in Germany (see Figure 8). The majority of active agents, representing a large share of the total value of inputs, are still be- ing imported from centralised research depart- ments and facilities in Europe or the USA.
Few Changes Expected
In the coming years, the pharmaceutical indus- try does not expect major changes. Because of transfer barriers, especially the risk of losing in- tellectual property, many companies will prob- ably continue to follow the ‘export orientation’
strategy. They continue to import major shares of their active agent inputs. Thus, with trade bar- riers remaining low and transfer barriers high, the export orientation strategy will remain viable.
However, general managers seem to view the local market as a very relevant outlet market. This has two effects: on the one hand some compa- nies follow the 'business transfer’ strategy, de- spite all concerns surrounding transfer barriers, in order to avoid hidden trade barriers in the form of discrimination against foreign producers for large government orders and to be able to better exploit market opportunities. On the other hand, it is unlikely that exports from China will soon become an important factor. A slight increase in global sourcing is the only exception worth
mentioning.
Main Topic | Medicine & Healthcare| Business Opportunities
P R O F I L E
China Champions - A Management Handbook What other methods did the Champions use and which programs did they initiate?
In our book, China Champions, we present a number of examples of companies that have "done things right", developing and adopting effective practices for operating in China. For more information on China Champions - How German companies can successfully integrate China into their global strategies, please refer to www.china.ahk.de/gic/publications.
C O N T A C T
If you would like to order a copy of this is book, please contact: Emma Schumacher-Voelker | Publication Service | German Industry
& Commerce Shanghai (GIC) | Tel: +86-21-5081 2266*1676 | Fax: +86-21-5081 2009 | Email: schumacher.emma@sh.china.ahk.de
