Complementary skill-sets are leading to alliances between Chinese and Indian pharmaceutical companies. In 1993 Ranbaxy Laboratories, India's second largest pharmaceutical giant, pioneered the trend by setting up the US$7m Ranbaxy Guangzhou China Limited (RGCL) in China, in collaboration with Guangdong Pharmaceutical Factory and Guangzhou Dongning Pharmaceutical Company. The first ever Sino-Indian joint venture, RGCL is a classic example of how Indian firms are combining their research and development expertise With the distribution. skills of their Chinese partners.
Luring international healthcare companies is the high-potential China pharmaceutical market, which has grown at a compounded rate of 18 per cent a year since 1978, under the Chinese governm.ent'.s. open door policy. Serving the healthcare needs of more than I.2bn people, the Chinese pharmaceutical industry is estimated. to be worth around Yn1O4bn (US$12.5bn) in terms of industrial output value; according to DBS Securities in I-long Kong. Yet China's per capita drug consumption is one of the lowest among major countries, showing the enormous growth potential. The market is expected to continue expanding at 15 per cent a year to. Yn200bn (USS24bn) through the year 2000 and to Yn800bn by 2010.
Barriers to entry
Of the world's top 20 pharmaceutical companies, 1.5 have already set up operations in. China. Strong domestic demand and steep profit margins led to more than Yn12bn (US$1.4bn) of foreign pharmaceutical investment flowing into China between _1991 and 1995. Currently, there are more than 1,500 forelgin joint ventures in China's pharmaceutical sector, according to Nomura Securities, making up for 13 per cent of industry sales. These include J&J, Eli Lilly, Du Pont, Hoechst Marion Roussel, Glaxo Wellcome, Merck and Novartis Ciba Geigy.
However, the government's policy of welcoming new investments, including repackaging and filling operations, is undergoing a significant shift, says Ms Pauline Du, research. analyst with Nomura Securities. This is being spurred. by the on-going restructuring of the industry, as the government attempts torationalise fragmented capacity and consol.idate inefficient local manufacturers and distributors, through price and profit margin caps. As a result, the red carpet treatment is now being restricted only to those foreign investors which are willing to transfer new technology and develop new products in China.
It is these entry barriers which present Indian pharmaceutical companies with an edge over their Western counterparts. To begin with, they possess a superior understanding of a huge but controlled, high volume/low value pharmaceuticals market like China.
Moreover, Indian players are able to match their Western competitors in terms of innovative technology, the creation of novel delivery system-based products (such as capsules with delay release mechanisms), R&D expertise and established patented drug brands that are promoted aggressively across the world. Ranbaxy, for example, is negotiating with China Innovation Centre for Life Sciences and Laboratories in Beijing and Shanghai to co-develop new products and formulations for both the .Indian and Chinese markets.
Establishing a presence
In contrast, Western companies are reluctant to invest in. formulation plants in China for products with no sales history. 1–Ience, international companies typically start with pharmaceutical packaging in China for the first few years, and then invest in manufacturing and drug development if the conditions are deemed favourable. Glaxo Wellcome, for example, primarily uses its Chongqing joint venture and four business units in China as an import base.
One of the top 10 importers in China, Glaxo has been selling antibiotics, Ventolin, cardiovascular and respiratory products in. the domestic market since 1391. Having established a -brand name and forged. strong government relation-ships, the company is now planning a new joint venture to produce antibiotics, according to a report by NOP Healthcare Asia — the pharmaceuticals and medical market research firm in Hong Kong.
Hoechst AG, which has pledged a US$600m investment for agricultura and pharmaceutical chemicals in. China, imports heavily from Hong Kong anti-tuberculosis brands such as 'rental 400and Rifater. It went on to form an US$80m joint venture with China National Biological Products Corp., National Vaccine and Serum Institute and. Xian Feng (SH No 3) Pharma Factory to manufacture plasma proteins and generics in 1993. Another 50:50 joint venture between Hoechst and North China Pharmaceutical Corporation started producing antibiotics and. cardiovascular drugs as late as August 1994.
Several Indian pharmaceutical firms with China ambitions are following in the footsteps of Ranbaxy and scouting for joint venture partners. Cipla Limited, the US$114m turnover Indian bulk, formulations and over-the-counter drugs maker, has entered into a strategic alliance with the Chinese firm Autokang. The joint venture manufactures pharmaceutical formulations and is viewed by the Indian company as a means to boost. exports and. tap the lucrative generic drugs market in China. With more than 40 hulk drugs and 200 formulations, Cipla is a market leader in. India for the antibiotics, anti-bacterial and anti-asthmatic segments. It plans to consolidate on this core competence in China.
Dr Reddy Laboratories (DRL), one of India's largest research-oriented and integrated pharmaceutical producers, is reportedly close to finalising a local partner in China for setting up a formulations plant and marketing centre. This is a logical step for a company which, until now, has been pushing its generic and branded products into China through a marketing co-ordination office located in Hong Kong.
Copran, India's largest manufacturer of Amoxvcillin (a penicillin-based antibiotic), has taken collaboration one step further; it has tied up with a Chinese pharmaceutical bulk producer to source Pencillin-G in bulk form at a rate cheaper than. the prevailing market price. I.n return, it has promised. to transfer formulation manufacturing technology for Amoxycillin to the Chinese partner.
Mr Giridhar Aivengar, assistant vice president, equity research at HG Asia in Mumbai_, expects to see co-operation gathering momentum. "While Chinese pharma companies tend to be more cost-effective, they lack the expertise or technology to make high quality and value-added bulk drugs. Also, the formulations manufacturing capability is virtually non-existent in China," he explains. "'Hence, a tie-up with Indian pharmaceutical players provides there with new drugs formulation technology."
in return, Indian partners gain an opportunity through these joint ventures to tap latent demand in the vast China healthcare market. Local partners bring to the table established distribution networks, export channels and strong professional relationships with physicians, provincial governments and the linistry of Health.
Industry observers believe that Indian pharmaceutical firms can help steer the China healthcare market towards being an integrated pharmaceutical supplier. Specifically it can achieve this through pre-formulation studies, product innovation and. development for both branded and generic categories, Most shelf-life and stability studies of products, and bio-equivalence studies (comparing one chemical. with another).
An excellent example here is DRL. With an expertise in research of new molecule entities and basic research through its research arm Dr. Redd..''s Research Foundation, the company's joint venture is expected to give a big boost to the overall R&D capability of China's pharmaceutical industry. With new drug patent laws being implemented, the company is looking to compete in generic drugs which have immense export potential. Moreover, DRL is considered a pioneer in' developing and discovering high value-added finished dosage forms and drugs such as anti-ulcerants, anti-hypertensives and anti-histamines.
An integrated supplier
Yet another factor spurring Sino-Indian pharmaceutical collaboration is the movement of the Indian. healthcare companies up the value chain when exporting. "While Indian companies started off with exports of bulk drugs and chemicals, then are clearly shifting towards finished. dosage .format, which is either branded or generic," says Mr Tarun Jeitley, a Mumbai-based analyst with HSBC James Capel. At present, most of these finished dosage products are exported in. the generic segment in the likes of :DRL, Cipla, Glaxo and Lupin Laboratories. However, most Indian pharmaceutical firms are polishing strategies; to move into the high-value, high-operating margin branded category. China, with its unsatiated demand. for branded finished dosage products, is one of the most lucrative targets.
"For low-cost branded producers of antibiotics and anti-bacterials such as the Indian companies, China presents an excellent opportunity" says Jeitley.
The Ranbaxv joint venture delineates this growing trend. RGCL began manufacturing and marketing branded pharmaceutical formulations in mid-1995, aimed, at the domestic Chinese market. Since then, aggressive brand promotion has led. to the emergence of Cifran, the company's flagship brand, as one of the top pharmaceutical brands in China. In 1996 the company launched two new products, Oframax and Trexyl, which also enjoy significant recognition in China's branded segnient. In addition, the joint venture produces tablets, injections, dry syrups, capsules and related pharmaceutical bulk drugs and intermediaries. Astute financial management and brand acceptance have helped the venture break even in only its second year of operation.
The company aims to strengthen its position as a research-oriented international producer of branded finished dosage formats in China. It is expanding the sales force significantly to cover additional. markets, provinces and hospitals within China. Moreover, the operations and processes of the Guangzhou plant are being 'upgraded in terms of quality and productivity.
In May 1995 RGCL underwent a capital and ownership restructuring. While additional investment of US$17.5nm v ?"as pumped into the venture, a Ilong Kong-based partner, New Chemic, was brought in to boost international distribution skills. A global marketer of bulk and branded pharmaceutical products, New Chemic hopes to open nevv 'export markets for the joint venture. The reshuffle also resulted in raising Ranbaxy's stake in RGCL to 79 per cent from. 70 per cent. New Chemic has ended up replacing one of the earlier partners in the joint venture, Guangzhou. Dongning Pharmaceuticals.
The Indian pharmaceutical industry also has its attractions despite price controls, with annual growth averaging more than 17 per cent. Escalating domestic demand. and export orientation have turned the industry into a I. S$2. bn. business. However, rising entry barriers iii the branded segment, such as stronger patent protection and more stringent health standards, are deterring Chinese from the Indian market.
Despite improving co-operation, India and China remain intense competitors in the international bulk pharmaceutical arena. "Both countries are strong bulk drugs producers and are increasing their clout as low-cost exporters of hulk actives, chemicals and intermediaries," says Dr David Lubega, Director of NOP Healthcare Asia.
Targeting the same markets
As much as 67 per cent of the China pharmaceutical industry's production value is accounted for by chemical pharmaceuticals, comprising bulk drugs and preparations. Almost 40 per cent of the 3,257 pharmaceutical enterprises in China are specialised chemical drug factories, dedicated to hulk actives and commodity intermediaries. A similar situation exists in. India, where even value-added pharmaceutical majors such as Cipla and Ranbaxv earn 51 per cent and 37 per cent respectively of their revenues from basic bulk drugs.
However, economies of scale and a price advantage give Chinese firms an edge over India. "Yet to face the WTC) restrictions, Chinese players often under-cut prices in the export market," says an industry observer. In fact, their alleged dumping into the Indian market has resulted in immense pressure on local Indian bulk drugs manufacturers. Many finished dosage makers in India now prefer to source cheaper hulks and intermediaries from China, resulting in the closure last year of several small-scale drug producers in the southern Indian city of Hyderabad.
Moreover, dogged by a low-quality perception, the two competitors have traditionally been forced to target the same unregulated export markets ?Asia, Russia and. the CIS, the Middle East and Africa. This has built in a severe volatility in bulk drugs prices as well as the earnings of Indian and China pharrna.