Marked by some recent successes and government efforts to tidy up and consolidate the industry, China's pharmaceutical sector is now beginning to export to world markets after years of being hardly more than a source of cheap, often poisonous imitation drugs.
Product innovation is starting to feature in business plans. And while multinationals like GlaxoSmithKline, Roche, Pfizer and others stand to make gains on the backs of China's rising middle class, the combination of an expanding market and the shift to higher standards is giving investors cause to take a fresh look at some of the better local players.
"China's pharmaceutical industry is undergoing tremendous positive transformations, spurred both by the government's economic and political policies and the increasing investment/involvement by foreign pharma firms in China," notes the Journal of Generic Medicines. "These changes will contribute to China's emergence in the next decade as a major force in the international pharmaceutical arena." But how fast it advances is contingent on improving intellectual property enforcement, the regulatory and manufacturing practice," the journal adds.
China's shift to market economics, plus challenging demographic trends, have put conventional health care beyond the reach of more and more Chinese, forcing them increasingly to consider pharmaceutical potions ferociously promoted on street billboards, TV and other media. Collapsing state companies, which provided fully subsidized medicare and housing to employees, ended free hospital access to millions-but even the civil service has felt the pinch too. When new rules went into effect in January 2002, medicare services were withdrawn from nearly 1m civil servants in Beijing alone, forcing employees to switch over to fixed-subsidy insurance schemes.
"The (pharma) market will continue to grow due to prevailing socio-economic factors, such as an aging population, increased life expectancy and growing affluence among the population," said Quam Financial Services Senior Research Analyst Damon Wong.
United Nations population projection data back him up. The UN predicts that by 2020, 16% of the China's population will be over 65, compared with 7% now. But the really juicy projection concerns the over-50 set-all potential participants in China's coming aches and pains blow-out. Their number will creak nicely up to 42.5% of the population, from around 20% now.
Wong says the regulator's clampdown on the sale of antibiotics without prescription, and new penalties for false product claims "not to mention new rules forcing discounts on antibiotics "have all helped shake out China's overpopulated drug sector.
Pharma sales in 2004 jumped 28%, to US$9.5bn, the highest increase anywhere in the world, according to industry consultants IMS Health. Global sales were US$550bn in 2004 so China's contribution is still only a drop in the global bucket-in pill-popping North America, sales were US$248bn, 45% of the world total.
Headline domestic performers may be small but they are growing fast. Case in point: Sinovac Biotech, which reported 2004 revenues of US$6.45m, up 127% on 2003-largely due to blistering sales of Healive, an inactivated hepatitis A vaccine. Sinovac CEO Yin Weidong, announcing plans to develop a US$4m flu vaccine, conceded China's US$145m government-funded disease prevention helped make 2004 sparkle for the company. He said an avian flu vaccine that Sinovac is working on could help lift 2005 sales.
China is currently best known as an exporter of pharma component products. Indeed, due for completion this year, Shanghai Shiye Group and Chifeng Pharmacy Group have joined forces to build world-class R&D and manufacturing facilities for what is billed as the world's largest ephedrine program, a key component of bronchial medications.
Meanwhile Beijing has committed to building a RMB7bn "Medical Valley" in Haikou, provincial capital of Hainan Island to house five bio-med R&D centers to attract domestic players and multinationals alike to drive exports, notes Germany's Achema Worldwide. Outsiders, including big Indian pharmas, are starting to take notice. Chennai-based exporter Orchid Chemicals and Pharmaceuticals last year signed a 50-50 joint venture with industry kingpin North China Pharmaceutical Corp (NCPC), and Orchid Managing Director K Raghavendra Rao called the deal the beginning of a new globally oriented business.
Shanghai Pharmaceutical Group (SPG), China's biggest drugmaker, invested US$6m in its Central Research Institute last year. That is a pittance by the R&D spending standards of US or European pharmas, but the fact that SPG trumpeted the news is an indication of the kind of rethinking Chinese players are doing.
China blotted its IPR copybook over Viagra, Pfizer's patent, which was voided in July 2004, letting Chinese manufacturers duplicate its antidote to penile dotage. Despite that, Hubert Chan, director of China.hk Intellectual Property Services, takes the view that IP protection has improved in China since its entry into the WTO and that "quantum improvement" is coming in the war against counterfeiting. He says that his mainland clients, stress mainland clients, are "Continually embarrassed by the counterfeit goods industry" complaining that China continues to lose face because of IP frauds they see going on in their industry.
The World Health Organization says that more than 1,300 illicit pharmaceutical factories have been shut down since China joined the WTO, resulting in the seizure of US$57m worth of counterfeit drugs. But that says only two things: 1) there is a vast population of tiny pirate operators out there; and 2) US$57m is peanuts. "The problem of counterfeiting is a generational one, which despite the government's increasing efforts, continues to grow,? said Jeffrey Blount of international law firm Fulbright and Jaworski.
Scandals in the past year over deaths from locally-made infant milk powders and drugs, and rising concern about Chinese imitations flooding the international market, have also encouraged Beijing and companies to work together to sort things out.
Inevitably though, a clean-up will be achieved piecemeal, led by cities interested in putting up IP defenses rigorous enough to attract investors. In May last year, for example, the Shanghai Municipal Food and Drug Administration joined forces with Pfizer in a bid to uncover imitation drugs makers in Shanghai.
Despite continuing IP fears, Glaxo-SmithKline, Roche and Novo Nordisk have established R&D facilities in China, giving increasing cause to regulators to come down harder on the rule-breakers.
In the end, Chinese pharmas now targeting export markets will have the most to lose. If they cannot earn a decent crust at home, they will never generate the R&D budgets to develop the kind of products that will sell abroad. The difference between today and yesterday is that they know that now.