China: domestic growth to outpace exports, forecasts CPhI China 2015 report

Emerging cities, biopharmaceuticals and APIs to drive future expansion

Domestic growth is expected to outpace exports in the Chinese pharma market, finds Pharma Insights China 2015

The overall picture reveals an extremely positive outlook for growth in Chinese pharma, with the domestic market emerging as the driving force, finds a new report by CPhI.

Conducted after the recent CPhI China 2015 exhibition, Pharma Insights China 2015 provides an overview of opinion from a survey conducted among Chinese manufacturers and international companies operating in China.

China has 6,000 domestic pharmaceutical manufacturers, which account for 70% of the market, and around 14,000 domestic pharmaceutical distributors. In addition there are more than 5,000 research and development institutions in China, but only a handful of them are able to compete internationally.

The report forecasts that the world’s second-largest pharmaceutical economy will remain a rapidly expanding market, but unlike pharma manufacturing in the West, China’s growth is not dependent on exports and regulatory standards being met – the domestic economic case and cost advantages from large scale API batches are simply too strong to be resisted.

Unsurprisingly, these favourable economic factors have not gone unnoticed by international companies, including Western pharmaceutical manufacturers, who are now looking to alter their business strategies to capitalise on this positive outlook.

China’s growth is not dependent on exports and regulatory standards being met

On average, domestic companies predict a near doubling in their sales over the next five years, indicating growth in China remains strong for the immediate future – almost 70% of companies surveyed said they are focusing chiefly on investing in APIs and generics. In addition, IMS Health research showed that growth is not uniform across the market and ‘emerging cities’ have the highest growth potential, which is where domestic manufacturers are now looking to target their business efforts.

In the longer term, Pharma Insights China 2015 forecasts that the market may begin to develop higher margin, lower volume finished formulation drugs once a critical demand is reached from China’s increasingly aware middle-class population. However, there is little belief that such changes will be instrumented for at least 10-years, and it is thought that China’s growing API and generics domination could, in fact, be hindering the development of the region's evolution into exports and finished formulations.

This is particularly significant when looking at exporting to the West, where there is a more complex regulatory framework, particularly for clinical trial and commercial products. In contrast, the majority of manufacturing facilities currently operating in China are large scale and designed to produce high volumes of generic APIs. Thus, if the market’s focus does start to shift away from APIs, new pilot and scale-up plants will be required.

Of the surveyed international companies operating in the Chinese market, the report observed that all of them are looking for distribution partners throughout the country in order to increase sales across its diverse regions – distribution is a well-known problem for market entry. In fact, the chief difficulty for foreign companies working within China remains selecting the right Chinese companies to work alongside, the report found.

In fact, 'trust in Chinese partners’ continues to be a key issue for many Western companies operating in the region, with those surveyed reporting concerns about ‘supply chain and distribution integrity’, ‘patent protection’ and, perhaps more surprisingly, the ‘knowledge base within regional manufacturers’.

The US did not emerge as the main pharma economy target for Chinese businesses

But, in spite of these potential hurdles, 85% of the foreign companies surveyed predict an increase in turnover of 50–100% over the next five years, indicating that this market remains highly lucrative for companies able to navigate complex business relationships. When asked if they would invest further should they have access to increased market protection in the future, all of the foreign companies said yes.

However, in direct contrast to the majority of other large pharmaceutical export markets, the United States did not emerge as the main pharma economy target for Chinese businesses – less than 50% of those surveyed wanted to instigate or further business in this market. Instead, the majority of Chinese ingredients manufacturers are looking to deepen ties with Europe (62.8%) and India (74.4%). Again, this could be indicative of a lack of trust and/or FDA approved facilities within the Chinese market, and over the short term, manufacturers clearly feel there are quicker gains to be made selling to European and Indian manufacturers.

'The continued expansion of China’s domestic market makes it an incredibly exciting time for all manufacturers right now, both domestic and international. It is unusual for a major pharma economy’s future growth to be driven predominately by domestic sales, rather than from exports, and clearly international companies must now act to get a foothold in this region,' said Chris Kilbee, Group Director, UBM EMEA.

'The crucial factor for success is local partners and local knowledge, which is why attendance at CPhI China has proved so vital for successful companies in the region. We believe China will see increased contract manufacturing and a continued growth in biologics over the next five years. The view on the ground, is that, rather than move towards complex finished formulations we will first see China’s manufacturers diversify into biologics and new low cost, high growth regions like South America.'

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