Foreign Pharmas Marching into Chinese Towns
While entry of multinational pharmaceutical companies into China has greatly improved the technologies, products and management of the country healthcare industry, it also causes significant impacts on Chinas own pharmaceutical industry. Foreign pharmaceutical companies are now gaining more and more market, equity and technology power in China, and furthermore, the new drugs market of China is now basically controlled by foreign players.
In recent years, multinational pharmaceutical companies have been increasing their investments in China. By the end of 2006, there were about 1500 foreign joint-venture (JV) or wholly-owned companies in China, accounting for 30% of the industry total number. In terms of market shares, sales value from foreign companies accounted for 27% of total sales value in the Chinese pharmaceutical market. Foreign and imported medicine had 60-65% market shares in large and medium cities of China, while 80% of the medical device market was dominated by foreign brands. Some specialty healthcare categories were even all controlled by foreign-related products.
Focusing on the hospital market
Products from foreign JVs had been gaining market shares in China\'s hospital market, up from 31.67% in 2002 to 40.16% in 2006. Products from domestic Chinese pharmaceutical companies had slipped from 47.91% in 2002 to 46.53% in 2006. But the most notable decline was in imported medicine products, down from 20.42% to 13.31% in the same period. This clearly showed that there had been an acceleration of domestic Chinese pharmaceutical companies forming JVs with foreigners. And foreign company operations are now changing from pure importing of medicines to establishing local manufacturing lines in China, resulting in a large increase of JV product sales.
In terms of JV partners, US pharmaceutical companies or JVs were the largest supplier of products to Chinese hospitals, with a stable 37.14% market share in 2006. While European-related companies had been on the rise with a 32.46% market share in that year, Japanese-related companies were seeing a downward trend in their market shares, capturing only 4.75% of total sales in 2006.
The hospital market in China had always been the major sales target for foreign JV companies. Between 2002 and 2006, foreign JV pharmaceuticals
had an impressive annual sales growth rate of 25%, higher that their domestic counterparts\'. The top ten foreign JV companies, in terms of hospital market shares in 2006, were Shanghai Roche (7.2%), Dalian Pfizer (5.2%), AstraZeneca (Wuxi) (5.1%), Beijing Bayer (5.0%), Sanofi-Synthelabo (4.7%), Hangzhou MSD (4.3%), Suzhou Lilly (3.7%), Beijing Novartis (3.5 %), Shanghai Bristol-Myers Squibb (3.4%) and Jiangsu Sino-Swed Pharmaceutical (2.7%).
New operation models
Similar to many domestic pharmaceutical companies, foreign JV companies also need to face impacts from the ever-changing healthcare regulations in China. Some of these policy changes may bring positive implications, while others may be constraining factors. Therefore how to cope with these factors, or how to avoid risks and grow, are inevitable courses that most foreign JV companies need to learn in their localisation efforts in China. Consequently, there are a few trends regarding activities of foreign JV companies in the Chinese pharmaceutical industry in recent years.
Tendency for wholly-owned
In China\'s pharmaceutical market, more and more foreign companies are now inclined to establish wholly-owned entities or take over equity stakes from existing Chinese JV partners to accommodate their investments. For example, Shanghai Johnson & Johnson, sanofi-aventis and Fresenius have all gone through the JV to wholly-owned process. According to a survey by the Ministry of Commerce of China, in drug manufacturing activities, 57% multinational companies would prefer wholly-owned operations in China.
Local R&D initiatives
At present, foreign investments in China\'s pharmaceutical industry are expanding from the previous \"simple packaging process\" to upstream and downstream industries. One is that in order to lower research and development costs, many multinational companies are now accelerating their steps of shifting R&D processes from developed countries to China. The other way is that foreign companies are now actively buying commercially-ready R&D projects in local China, by means of cooperation, acquisition and mergers. Leading pharmaceutical multinationals, such as Novo Nordisk, Roche, Pfizer, Novartis, GlaxoSmithKline and AstraZeneca, have all established their own R&D centres in China.
From prescription to OTC
As the Chinese government has introduced tighter regulations over prescription medicines in recent years, such as product categorisation, sales restriction and prescription-medicine advertising restriction, sales of many prescription medicines for common diseases like diabetes and blood pressure have now been restricted in pharmacies. As a result, multinational companies are adapting many medicines from prescription categories to OTC (over-the-counter) categories. Such initiatives can not only entrenched their hospital market shares, but also provide exposure to the fast-growing OTC market in China. Among JV companies, Xi\'an-Janssen (Johnson & Johnson largest subsidiary in China) has been an outstanding one, sales of whose OTC products have now exceeded hospital sales in certain categories.
Looking back at multinational pharmaceutical companies 20-year-plus history in China, we can see that their distribution models have gone through three stages, namely medicine importing, JV factory wholesaling and now repackaging for multi-channel distribution. Such development could not only facilitate product localisation, but also be able to re-export overseas. As China is building a better legal system for intellectual property protection, many multinational pharmaceutical companies are now gradually easing their biggest concerns on importing new formulas into China. So in the next few years we may see a boom in foreign drug manufacturing in China.
Opening up third-tier markets
When foreign companies first entered China many years ago, their focus was on importing and distributing prescription medicines to satisfy the demand from China\'s tier one (large cities) and tier two (medium cities) markets. But as the government is now improving its healthcare investments and regulations towards third tier markets, namely rural markets and urban communities, healthcare consumption power in these markets are now gradually being released. This has presented a new platform for pharmaceutical companies, domestic or foreign, to expand their sales reach, and leading multinational pharmaceutical companies, such as Xi\'an-Janssen and GlaxoSmithKline, have long been the first movers to capitalise these opportunities.
Produced by China Business Intelligence;