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Opening the Door to the Chinese Pharmaceutical Market

Paul Lee

May 1, 2008

17 Min Read

Virtually all aspects of the Chinese economy are booming, not the least of which is its pharmaceutical sector. Growing at 20% over the past five years, the $15 billion Chinese pharmaceutical market is predicted to become the world’s fifth largest by 2010 (1), making China an attractive place to do business for multinational pharmaceutical companies (MPCs). Rising living standards and improvements in China’s regulatory and technology infrastructure are the key drivers for this continued growth.

Although all segments of the Chinese pharmaceutical market are growing, the production of biogenerics and vaccines offers the greatest opportunities for Chinese manufacturers. This is the result of China’s strong generics manufacturing capabilities, significant cost advantage over Western manufacturers, and the fact that 17 million babies are born annually in China, each requiring vaccination. China’s vaccine market alone is worth $388 million, and it is growing at 15% per year (2). Looking at the broader biologics market, Chinese biogeneric manufacturers are already marketing some 361 recombinant biogenerics and 25 biotech drugs (3). At the same time, China boasts one of the largest API markets, making its pharmaceutical industry as diverse as it is large.

MPCs seeking to buy and sell within the Chinese market or establish subsidiaries in the country will be met with both opportunities and challenges. Labor costs are still significantly lower than in the United States and Europe, and China’s intellectual property (IP) landscape continues to move toward international standards.

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Doing business in China is not so forbidding. Here, two Chinese businessmen glance back at the Forbidden City as they pass by. ()


China’s pharmaceutical market is slated for success because of

  • the country’s entry into the World Trade Organization in December 2001.

  • the development of a regulatory system like the US Food and Drug Administration, called the State Food and Drug Administration (SFDA), which is involved in regulating drug production in China

  • the Chinese government’s promise to expand IP protection

  • the government emphasis placed on fostering biotech applications and innovative drug discovery, as outlined in the National Development and Reform Commission’s (NDRC) eleventh annual “Five-Year Plan for National Economic and Social Development of the People’s Republic of China.”

As part of the Chinese government’s efforts to aggressively implement common drug manufacturing parameters existing in the United States and Europe, SFDA mandated that all pharmaceutical manufacturers implement good manufacturing practices (GMPs) beginning 1 July 2004. Although this requirement eliminated a number of small-sized manufacturers, the overall production capacity of Chinese pharmaceuticals increased dramatically (4). The GMP adoption effort has significantly affected the performance of pharmaceutical manufacturing in China, making it consistent with world-class standards.

China’s wealth of well-trained scientists, engineers, mathematicians, and other technical experts provide another reason to do business in China. Scholars educated abroad over the past decade make up more than half of the top scientific researchers now working on key projects and receiving priority funding, significantly improving China’s pace of innovation.

As China’s economic reforms continue and older researchers retire, there will be more opportunities for China’s younger, Western-educated science and technology researchers and engineers. As a result, high-tech companies in the United States and the Chinese government are competing for the services of these talented individuals.

Gaining Fast Access to the Chinese Pharmaceutical Market

Not surprisingly, China’s ongoing economic boom and rapidly growing pharmaceutical market are attracting an increasing number of MPCs to establish and/or expand their presence in the country. Participating in a Chinese pharmaceutical trade show is one of the most effective means for direct market entry. Trade shows offer great networking opportunities and a chance to sample the latest market intelligence and industry culture before becoming immersed in it.

It is important to note that not all Chinese pharmaceutical trade shows are equal in terms of cost and business opportunities. A key advantage of some is that they offer multilingual facilities and signage, helping to break down the language barriers that exist in traditional business situations with China. From a buyers’ perspective, the cost of purchasing products at Chinese trade shows with a strong manufacturer presence are relatively low compared with shows that attract primarily distributors as exhibitors.

By establishing a direct connection between buyers and suppliers, typical “middleman” costs associated with doing business with distributors can be eliminated. Aside from the obvious cost and efficiency benefits of closing business deals without middlemen, manufacturer-oriented trade shows allow international buyers and suppliers to establish direct relationships with China’s strong base of original equipment manufacturers (OEMs). Conversely, these shows enable international pharmaceutical companies to gain direct access to a vast universe of Chinese pharmaceutical decision makers who often shape and set the trends of the market. Because companies from the West are major trading partners for Chinese pharmaceutical suppliers, MPCs also enjoy a degree of preferential treatment from suppliers.

China’s growing biologics capabilities have given rise to a new breed of event, uniting the country’s traditional advanced pharmaceutical ingredient (API) expertise with that of biopharmaceutical manufacturing to create a one-stop-shop for pharmaceutical manufacturers and suppliers. In addition, Chinese pharmaceutical events typically have ties to local and regional government organizations. This allows MPCs to familiarize themselves with those key agencies, which can assist them in building their business in China.

Partnering with a Chinese Company

There are many different types of partnerships that MPCs can pursue with their Chinese counterparts. Some of the most common types are “entry level” partnerships. These alliances can be lucrative if companies understand the varied levels of risks associated with the specifics of each type of collaboration model

  • Partnerships with Chinese manufacturers, Chinese suppliers or wholesalers, or Chinese distributors or agents

  • Joint ventures with Chinese companies based on percentage sharing and strategic alliances

  • Technology exchange with Chinese research and development institutions to find products with relevance to the Chinese market or low–production-cost products for redistribution back to the source country.

Besides assessing the financial and commercial terms of all potential partnerships, it is important to consider the personality match of the management teams and the operational level of either party’s staff. Whereas all partnership models are bound by contracts, the
efficiency and success of the partnership depends on the commercial and social chemistry of the parties involved. Because each partnership carries a different collaboration and financial model, measurement of benefits and return-on-investment (ROI) are complex and subjective, varying from company to company. Multinational pharmaceutical companies must ultimately consider the results (tangible and/or intangible) of their partnerships to determine ultimate success.

Partnerships with Chinese Manufacturers give MPCs access to a diverse and cost-effective manufacturing base that is on the path to rapidly meeting worldwide industry and regulatory standards. According to official data recently released by the SFDA, China has about 4,700 pharmaceutical manufacturers that have obtained Chinese GMP certification (5). Of those manufacturers, 90% are small to medium-sized. Only about 250 have revenues in excess of RMB100 million (US$12.77 million) (5). The top 10 manufacturers now account for 13% of the industry’s total sales revenue, much lower than the 40–50% shared by the top 10 companies in mature markets overseas (5).

These factors set up strong competition among Chinese manufacturers, and the market is ripe for partnerships, mergers, and acquisitions thanks to China’s advantages including enormous market size, skilled labor base, and entry into the World Trade Organization (WTO). At the same time, MPCs are attracted to Chinese manufacturers for the quality and depth of expertise they offer in the local production of APIs and generic drugs.

Partnerships with Chinese Suppliers or Wholesalers: China has emerged in the past two decades as a major player in the international API market. With abundant low-cost labor supply and lower environmental pollution control costs, Chinese manufacturers are often willing to supply both APIs and the less profitable advanced intermediates for APIs. By partnering with Chinese API suppliers, MPCs can realize significant cost savings in the redistribution of pharmaceuticals to their own countries while maintaining better control of their API sources.

In addition, the growth of international generic companies that traditionally rely on outsourcing for their raw materials further elevates the importance of China as a low cost and long term API supply source. Among the top countries that import APIs from China are Israel, Colombia, Nigeria, and United Arab Emirates.

Partnering with Chinese Distributors or Agents is one of the easiest ways to break into the Chinese market. China’s distributors are achieving economies of scale required for economic performance; narrowing their focus to specific geographic, market, or healthcare areas; and enhancing logistics management (1). However, it is important to note that the Chinese pharmaceutical distribution sector is very fragmented with about 17,000 state-owned pharmaceutical wholesalers (6). Direct marketing to doctors (the basic marketing activity in developed countries), complemented by advertising, is not yet the key to increasing sales in China. Chinese hospitals generate 60% of their revenues from the sale of prescription drugs (6). Hospital pharmacies are still the main retail outlets for pharmaceuticals, accounting for 80% of total drug sales (6). This situation is changing because the government is encouraging the establishment of retail pharmacies that are not associated with hospitals. More importantly, the Chinese government has a policy of providing affordable healthcare by controlling physicians’ prescription activities to reduce unnecessary prescriptions for drugs.

Traditional Chinese distributors typically adopt a three-tiered system to distribute drugs within their country. At the top of the ladder are national level-1 stations in Beijing, Shanghai, Shenyang, Guangzhou, and Tianjin. They allocate products to provincial level-2 distributors, who in turn sell to county and city level-3 wholesaler-drug stores. At the bottom of the distribution chain are China’s vast numbers of small retail stores that are difficult to reach individually (6). Without the help of a Chinese distributor partner, most MPCs would not be able to navigate the complex Chinese drug distribution system. Therefore, partnerships between MPCs and Chinese distributors continue to flourish.

CULTURAL ETIQUETTE AT A GLANCE

  • When giving out business cards or brochures, start with the most senior person before moving down the line, and ensure that you use both hands to hold the card. Always orient the card you are giving out in a manner such that the receiving party receives it facing him or her correctly.

  • Make a show of examining a received business card carefully before putting it away.

  • Chinese business people prefer to establish a strong relationship before closing a deal.

  • Be careful not to speak lightly of sensitive hot topics about China that may offend patriotic business people.

  • Drinking a toast often can be understood as a gesture of business commitment so it should be done with much sincerity.

Joint Ventures: Because it can be difficult to build traditional relationships with Chinese companies — often due to business, cultural, and language differences — joint ventures or joint business models often provide the ideal solution. The joint venture model is generally recognized as a great method for businesses to join forces without actually merging. In a joint venture, two or more “parent” companies agree to share capital, technology, human resources, risks and rewards in the formation of a new entity under shared control. Typically, the foreign partner provides the capital, knowledge, access to international markets and jobs. The Chinese partner provides access to cost-effective labor, local regulatory knowledge, and access to a burgeoning domestic pharmaceutical market.

The business synergy between two entities plays a critical role in the success of a joint venture. It is also important that the foreign company evaluate the honesty, integrity, and entrepreneurial ambition of the Chinese company. The Chinese partner must be committed to the protection of the joint venture company’s intellectual property (IP) rights, have proven market access, and local contacts.

Technology Exchange: A technology exchange is one of the most synergistic types of partnerships foreign and Chinese companies can engage in because it capitalizes on the inherent strengths both parties bring to the table. While Chinese companies are looking to strengthen their R&D capabilities, MPCs are seeking to beat foreign and domestic competitors to the China market.

An increasingly frequent type of technology exchange or commercial offset is with a training or R&D center, institute, or laboratory, typically within one of China’s premier universities or research institutes located in Beijing or Shanghai (7). In this type of situation, the transfer of advanced foreign technology is exchanged for access to the Chinese market.

Also driving foreign investment and technology transfer are tax concessions and other incentives from the Chinese government, such as establishment of special economic zones (SEZs) in Shenzhen, Zhuhai, Xiamen, Shantou, and Hainan. Additionally attractive is the availability of reduced tax rates for qualified export-oriented and technologically advanced enterprises and foreign companies investing in the special industry sectors. As a result of these actions and the concerted investments in China by MPCs, China’s R&D expenditure boasts a compounded annual growth rate of 24% during the four-year period from 1999 through 2003 — more than double that of India (8). During that same four-year period, pharmaceutical patent applicati
ons from local Chinese companies rose from 283 a year to 1,696 a year (8). Today, about 30 innovative drugs are in preclinical development or actual clinical trials in China (8).

Keeping Pace with the Dynamic IP Landscape in China

Intellectual property protection has long been a concern of MPCs doing business in China, but that perception is quickly changing thanks to growing confidence in the Chinese IP rights systems. As evidence of this, many foreign companies are filing patents in China and setting up R&D facilities in Shanghai and Beijing, including Novo Nordisk, Roche, Eli Lilly, and Pfizer.

The number of patent applications filed with the Chinese patent office by domestic and foreign applicants has risen dramatically in recent years. It took 15 years for China to reach its one millionth filed patent application. However, it took only four years for China to reach its second millionth filed patent application. The number of patent applications has increased at an annual rate of 20% from 1997 to 2005 (9).

The following facts evidence China’s improving IP environment:

  • At least 90% of foreign companies litigating their patents in China win their cases compared to 30-40% of foreign companies litigating their patents in the United States (9).

  • Chinese universities now file as many patents in their own country as do universities in the United States, and six times those of universities in the United Kingdom.

  • Underscoring the important role the leadership in China feels IP plays, prime minister Wen Jiabao has said on many occasions that, “Competition in the future is competition in IP.”

On the flip side, China has only one-third of the patent examiners it needs for the pharmaceutical product market (10). Newly trained examiners lack experience as do the majority of judges hearing IP cases. It could take 5–10 years to remedy this training and experience deficit. However, China’s central government is aware of the need to improve IP protection and is taking steps towards this goal as evidenced by amendments to Chinese patent law that will be finalized in 2008. The changes indicate that China is continuing to strengthen and harmonize its legal system for IP rights protection.

China has strengthened its commitment to IP by agreeing to adhere to the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement as part of its entry into the World Trade Organization (10). Also, the Chinese government has escalated its antipiracy efforts resulting in the closure of 691 factories producing counterfeit medicine in 2004 (11).

Collaborating with a Trade Association

Partnering with trade associations can help multinational pharmaceutical companies better navigate the Chinese business environment. Partnerships with associations in China vary greatly based on the profile and nature of the interested parties. Signing a memorandum of understanding with associations — be it commercial, educational, governmental, or technical — creates a clear understanding of each party’s commitments and purpose. It also gives international players an extra edge in getting more exposure in the Chinese market, provided they have a strong marketing strategy and postpartnership implementation plan to promote the collaboration to the market.

Although other factors play into the success of a trade organization partnership, effective positioning to the market will most significantly affect ROI for MPCs. Trade shows can help bring international players together with associations in China by playing the role of relationship broker. Some trade-show organizers will go further to match MPCs with trade associations by assessing the respective profile and expectations to yield a creative and constructive partnership.

Some associations for MPCs to consider partnering with include

Understanding Cultural Differences for Success in China

Even though the cultural gap between China and the West is narrowing, there are still significant differences in the way business is conducted in these disparate geographic regions. Understanding these differences is crucial to the success of any business relationship between MPCs and Chinese companies.

In general, Western business people are often deadline-driven and unwilling to slow down to the Chinese pace when discussing business. But in China the pace can be simultaneously fast and slow. Those involved in negotiations know how long they can drag on when the Chinese side is consulting internally or has other reasons for delay. But Chinese negotiators can move with lightning speed on other occasions. Nevertheless, Chinese negotiators use time more consciously than do their Western counterparts (12).

Chinese cultural differences also come across in the way trade shows are planned, executed, presented, and delivered. For example, emphasis is placed on the presentation of the show, such as extravagant opening ceremonies. A trade show is often a foreigner’s first business experience in China, so these events provide an important lesson in the way business is conducted in China.

Trade Shows Can Be Your Bridge to China

Increasing globalization, greater cultural understanding and alignment with the West, and a strong ambition to realize predictions to become the fifth-largest pharmaceutical market in the world by 2010 are making China an increasingly attractive place to do business. Although language still presents a barrier for MPCs seeking to conduct business in China, the proliferation of internationally oriented pharmaceutical trade shows provide a bridge to larger business opportunities.

With Chinese drug manufacturers poised to achieve regulatory compliance for export to US and EU drug markets, rapid changes are on the horizon for the global pharmaceutical industry. More than solidifying China’s position as a key player on the world pharmaceutical stage, China’s Western export status will help Chinese companies win favor with MPCs as trusted business partners, and will provide an important source of manufacturing capacity.

Note to Readers: This article is based on the author’s personal experience and knowledge, which may differ from that of its readers. The author should therefore not be held responsible for any acts or interpretations made by the article’s readers.

REFERENCES

1.) Zhou, EY. 2007. China Today: Pharmaceutical Distribution in China. BioPharm Intl..

2.) Liu, JY, and N. Wang. 2006.Vaccines in ChinaAdvances in Biopharmaceutical Technology in China, BioPlan Associates, Inc. and Society for Industrial Microbiology:22.

3.) Rosen, M. 2006.Chinese Pharma-Biotech Dragon Rears its Head, Wisconsin Technology Network.

4.) Zhou, EY. 2006. Biopharma CMOs In China. Contract Pharma.

5.) Zhou, EY. 2007. China Pharma Basking In Its Spotlight. GEN 27:58-62.

6.) 2005.Digital Vector Report Summary, Chinese Pharmaceutical Industry: Strategi
es, Trends and Opportunities.

7.) 1999.Bureau of Export Administration, Office of Strategic Industries and Economic Security US Commercial Technology Transfers to the People’s Republic of China.

8.) The Boston Consulting Group 2006. Press Release: Pharma Companies Look to R&D Operations in China to Secure a Future in the Chinese Health Care Market.

9.) Langer, E. 2007. China Today: Intellectual Property Protection in China — Does it Warrant Worry?. Biopharm Intl..

10.) World Trade Organization Annex 1C: Agreement on Trade-Related Aspects of Intellectual Property Rights.

11.) SharedXpertise.com 2005. Survey: Pharmaceutical Companies Cautious of Investments in Emerging China and India Markets.

12.) Los Angeles Chinese Learning Center Chinese Business Culture Golden Hints for Doing Business in China from the British Embassy in Beijing.