Following a visit to CPhI China earlier this year, Hilary Ayshford considers the opportunities and challenges presented by the Chinese pharmaceutical sector
China is the fastest growing pharmaceutical market in the world with sales growing four times faster than in the global rate. From its ninth position with sales of less than US$7bn in 2001, it is currently ranked number seven globally, and is expected to rise to fifth place by 2010 with sales of $24bn. And by 2020 it could surpass the US to become the world's largest pharma market.
At present the market is dominated by domestic manufacture of generics, which account for around 70% of the market. These are made using basic technology, unsophisticated machinery and simple production methods. But things are changing, with basic health insurance being extended to a larger proportion of the population, giving individuals greater access to products and services.
Furthermore, China is currently undergoing the world's greatest ever economic expansion with per capita GDP expected to growth 7-fold over 20 years, with no sign of this trend slowing down. Within the next decade there are expected to be 100 million Chinese 'luxury consumers' and this group will be the force behind the rise of new private hospitals with US-style premium services. This has already started with the introduction of US in vitro fertilisation clinics in China. These consumers will demand better healthcare and will have the means to pay for it.
At the same time, the overall Chinese disease profile is starting to look increasingly like that in the West. Cancer (liver, lung, gastric and colorectal) and cerebrovascular, cardiovascular and respiratory diseases accounted for 77% of deaths in 2000.
Internal challenges
There are, however, a number of internal challenges to overcome before China joins the mainstream global pharma manufacturing community - not least major concerns over quality standards and protection of intellectual property. Also the drug distribution system in China is inefficient, adding considerably to the retail costs of medicine, and counterfeiting is rife.
Chinese pharmaceutical producers are upgrading their facilities and are becoming more aggressive in marketing and selling globally. Quality standards have been tightened, and compliance with Chinese GMP standards is now required.
The number of pharmaceutical manufacturers in China has fallen from more than 7,000 in 1998 ito 5,300 in 2005. In that year 78% of those - 3.959 companies - had been GMP certified. This consolidation is likely to continue: quality requirements will push many more operators out of the market; environmental protection conditions will lead the government to shut down many operations; and economy of scale will lead to mergers to improve competitiveness.
Since it joined the World Trade Organisation (WTO), China has committed itself to cutting tariffs, liberalising its domestic distribution practices, and restructuring its regulatory environment. It is now starting to allow foreign enterprises to import products and engage in distribution services. Furthermore, China has also implemented new drug administration laws designed to streamline product registration and protect IP.
A number of laws have now been revised to address IP protection requirements in TRIPS. China has agreed to six years of 'data exclusivity' and has committed itself to implementing a patent linkage system. The State Drug Administration (SDA) has worked to crack down on counterfeiters but without greater resources and stricter legal consequences these actions alone will not be enough to curb this rampant problem.
Finding a partner
Almost half the companies exhibiting at CphI in Madrid in 2005 were from China; more than 750 Chinese manufacturing companies were at CphI China in Shanghai in 2006; more than 5000 Chinese companies have a GMP qualification from the Chinese government; there are thousands of raw material manufacturers. So how do you choose the right one when you are across the other side of the world?
For companies looking to enter the Chinese market, a careful assessment of the risks and the potential benefits is vital, as is the careful choice of joint venture or business partner and an understanding of the cultural differences. Fortunately, a number of specialist companies are on hand to offer guidance through the maze of pitfalls waiting to trap the unwary.
One such company is US-based Pacific Genuity, and its Chinese subsidiary eChinaChem. Pacific Genuity specialises in helping global companies to do business in China's pharma market.
Alongside its vast and rapidly growing market, one of China's main advantages is its low -cost manufacturing base. Prices in China are generally between 35% and 65% below those in the US/EU, according to Pacific Genuity ceo Minghua Lu, and the country is competitive in supplying around 60 types of APIs in the world market. It accounts for around 70% of world market supplies of penicillin and 35% of paracetamol, and has the capacity to manufacturing 50% of annual worldwide aspirin consumption.
But in order to capture new sales and cost saving opportunities, it is critical to have a clear and complete China strategy, warns Lu. He cites a number of reasons why companies fail to capitalise on Chinese opportunities. First, there is limited senior management leadership for a strategic and proactive China opportunity/threat analysis; this needs to be overcome by building a clear understanding and buy-in on the importance of proactively evaluating China opportunities and threats.
Second, there is limited understanding and awareness of concrete opportunities and threats. This can be solved by conducting methodical analysis to identify and quantify concrete areas of opportunities and threats. 'Data-driven analytical research is critical and must not be skipped,' he says.
In addition, China projects are often bottom-up, transactional and defensive responses, whereas what is needed is a strategy and execution plan with measurable milestones and execution timetables. Finally, there can be a failure to realise vast potential on products that require only limited resources for potentially large payoffs.
A systematic approach should be used to indentify and quantify Chinese market potential:
- Market - determine market size; research historical growth rates and project future growth; summarise market attractiveness.
- Customers - identify and profile key customer segments; understand customer requirements on products; study unmet customer needs.
- Competitors - identify and profile key competitors; evaluate industry dynamics and concentration; evaluate their strength and weakness against clients
- Channels - evaluate marketing and sales channels to reach target clients; identify and profile key channel players; be aware that channels in China may be very different from global markets.
But opportunities in China lie not just in low-cost manufacturing of finished products. Bridge Pharmaceuticals subsidiary BridgeNet, a manufacturing solutions provider with a network of facilities in China and Taiwan, has identified significant preclinical opportunities.
Bridge is collaborating with Pacific Genuity to form Bridge Genuity, aims to become the primary point of contact and provide manufacturing and development solutions for nces and custom intermediates for emerging companies in the US/EU and Canada. It will provide a US-based single point of contact for client manufacturing in China and a network of more than 2500 registered suppliers.
By 2008 China will be the number one destination of outsourced development for small biopharmaceutical companies, claims director Paul Joyce, and will surpass India as the development region of choice.
Areas in which China has much to offer include:
- basic chemistry, biology, clinical and surgery
- labour- and professional skill-intensive tasks
- small-scale, exploratory or iterative projects not suited to automation
- special resources - primates, lab animals, natural products, patients/specimens
- projects with high regulatory/environmental hurdle or costs
- projects that need large land/building (local government willing to provide)
- substantial opportunities for privatisation
- IP-sensitive discovery
- Technology- or automation-driven projects
- High non-labour costs, such as reagents
- Fast turnover and innovative tasks
- Heavy regulatory compliance requirements
For small to medium-sized pharma companies, timing and quality are the most important factors in determining a manufacturer and thus leaves them with very few choices and no pricing leverage. China has a definite pricing advantage, but needs to develop the reputation for on-time delivery and cGMP quality.
It is a chicken and egg situation, he says.
'Many Chinese manufacturers have the potential to make the leap to Western cGMP standards but are unwilling to commit the resources and capital required without a previous commitment to a long-term project.
'But Western clients are unwilling to commit to a cGMP project unless the Chinese company has previous cGMP credentials. Chinese manufacturers need to develop a reputation for quality and on-time delivery with smaller non-GMP projects and reputable third party validation of cGMP capabilities. A solution is needed to assure quality, timelines and real-time project management and support.'
Pacific Genuity - Case study 1
The client was a US market leader for a segment of speciality chemical products and wanted to develop a China market entry strategy. It was offered a profitable plant in China by a top European company, but needed an opinion and recommendation before making an investment of millions of dollars.
Pacific Genuity conducted a China competitive analysis and evaluated major segments of client's competitors in China. It found the market was fragmented with only one global supplier, a dozen large Chinese suppliers and hundreds of small workshops. The market was also chaotic and distorted, with many local producers substituting and blending cheaper materials and using kickbacks to get sales. Average net profit margins were only 1.5-3%, whereas the high end foreign player currently enjoyed 20-50% margins.
A survey of the requirements and expectations of the end-customers found that the client's current formulations did not fit well with China market requirements as they did not take into account Chinese equipment shortcomings, such as lack of automatic moisture and temperature control. Chinese customers were also used to and demanded high level and immediate technical service.
A due diligence and analysis on the European company's plant and its sell offer revealed that the offer price was based on multiples of current profits and priced at the peak level; the plant had only a few foreign customers who might easily switch to lower cost Chinese suppliers; and the client would inherit a 20% technology licence royalty the plant was paying to its Europe division.
The result was that the client decided not to enter China. It rejected the European company offer and saved millions of dollars in investment. The client concluded it was not ready to invest significant resources to adapt its technology to China customer requirements nor to build up a China sales and technical support organisation because of a forthcoming major corporate reorganisation in its parent organisation.
Pacific Genuity - Case study 2
The client's key product manufacturing plant in the US became obsolete and required tens of millions of dollars to modernise and upgrade it. The client wanted to outsource manufacturing to China and needed to identify and qualify the best Chinese supplier to meet its scale/quality/cost requirements and negotiate best possible long-term contracts.
Pacific Genuity identified an exhaustive list of 78 Chinese producers; interviewed 44 producers by phone and fax questionnaire; Pacific Genuity sourcing specialists visited 16 plants, of which it recommended three, and then accompanied the client's US team to conduct in-depth factory audit; it then selected the final best supplier, and supported the client in negotiating a multi-year supply contract.
As a result, the client signed a $12m annual supply contract with the Chinese supplier and products are currently being shipped to the US and Canadian markets.