study on the future opportunities and challenges of eu...

Study on the Future Opportunities and

Challenges of EU-China Trade and Investment

Relations

Study 4: Pharmaceuticals Study Expert: Dr. Klaus Griesar Senior Manager Business Development Business Development Chemicals / New Ventures Merck KGaA President elect of the German Association for Chemistry & Economics

A project implemented by:

“This report was commissioned and financed by the Commission of the European Communities. The views expressed herein are those of the Consultant, and do

not represent any official view of the Commission.”

EXECUTIVE SUMMARY With 20% of the world’s population but still accounting for only 1.5% of the global drug market, China’s rapid economic growth offers considerable potential as an export market as well as a production base. While the exact size of the market is difficult to measure – figures range from $8 bn to $20 bn- most estimates expect the market to grow by at least 10% per annum over the next five years. Chinese domestic production is dominated by generic products and Traditional Chinese Medicines (TCMs). The industry’s 3,500 domestic manufacturers are made up of mostly SOEs or joint ventures who engage in intense price competition over market share. This has led to an overcapacity in terms of production and has driven the sale of intermediates by Chinese companies to third markets. An overall lack of profitability combined with poor protection of intellectual property rights has meant that the R&D capacity of China’s domestic industry has historically been weak. Competitive Strengths and Market Opportunities

In contrast, the European pharmaceuticals industry represents one of Europe’s best performing high-tech industries and is characterised by significant investment in R&D. The EU pharmaceutical industry accounts for around a fifth of global pharmaceutical R&D expenditure. Increasingly, China has become a desirable low-cost location for R&D activities. Government policy (including legislation) is favourable towards foreign-invested R&D activities and China has become home to a number of world class biomedical facilities which are the recipients of considerable amounts of government resources geared towards biopharmaceutical research. This has meant that increasing opportunities exist for European companies to leverage cost advantages in China by investing in R&D. In terms of the Chinese domestic market, increasing self-medication trends in China will open up a growing line of direct customer service and delivery options. Taking into account trends in European markets, such as the emergence of pharmacies within retail chains, this may become a blue-print for similar innovative approaches in China, where European retailers are rapidly developing their networks and internet penetration is high. Rapid urbanisation and rural development trends as well as a growing proportion of

elderly within China’s demographic all bode well for the European industry. Obstacles to Trade and Investment

It is apparent that China will continue to promote and protect domestic industry. Often stricter standards for foreign companies are enforced, for example in import quotas and approval times for new drugs. Current legislation is not being fully implemented at the local level and there remains a lack of clarity with regard to systems for pricing and reimbursements. Distribution systems are also fragmented and underdeveloped, significantly increasing costs in the latter end of the supply chain. IP infringement remains a serious problem. Generic and counterfeit drugs play a major role in the market, and there is a lack of clarity with regard to data exclusivity, data protection and patent term restoration. Enforcement is perhaps the biggest obstacle to an effective IP regime. The quantification of market access obstacles undertaken by this study estimates that the European-based pharmaceuticals industry incurs up to $648 million in lost business opportunities due to market access obstacles of which $416 million can be attributed to non-tariff barriers to trade. Policy Recommendations

• IP protection should be strengthened by allowing in-house legal counsels to speak before China’s State Intellectual Property Office (SIPO), by providing training for administrative and judicial authorities, enforcing current legislation and by encouraging cooperation with other national and international patent offices.

• It should be ensured that pricing and reimbursement policies are based on transparent, predictable and indiscriminate criteria.

• Regulations should be changed to provide shorter clinical trial times and the elimination of discriminatory certification procedures.

• More forums should be established to ensure effective dialogue between all industry stakeholders.

• Despite difficulties, find ways of introducing more flexibility regarding Traditional Chinese Medicine (TCM) entering the EU market to increase leverage over the Chinese government concerning the opening up of the Chinese market to (‘western’) chemical pharmaceuticals.

EU-China Trade and Investment Relations – Study 4 of 12: Pharmaceuticals 2

Recommendations for Competitiveness

• European governments should invest more in R&D. This is in line with the implementation of the Lisbon agenda encouraging an innovation based economy.

• European companies should consider shifting more production and R&D activities to low-cost locations such as China, in order to make additional resources available to invest in R&D – a key success factor in maintaining competitiveness. However, it must be noted that the degree of such developments would be conditional to parallel developments in China's enforcement of IP.

• To avoid many of the difficulties currently experienced by distributing drugs through the overloaded and non-transparent systems currently in place, European pharmaceutical companies should initiate active dialogue with the retail sector on distribution of medicines in order to tap into increasing self-medication trends already emerging in advanced economies such as Europe.

• Where possible, European companies should explore the potential for collaboration on herbal medicines such as

Traditional Chinese Medicine (TCM) with domestic partners in order to build on an increasing interest from European consumers for these products. When exploring opportunities in this area, European companies must be aware of the difficulties that currently exist for herbal exports to China as well as for imports into the EU, making the development of regulatory obstacles a key strategic consideration.

• Closer relationships between businesses and academia should be formed and a pan-European research base established. This would facilitate consolidation in the industry and coordination of academic research.

• China based executives should build and maintain relationships with regulatory bodies. This will facilitate clarification of related issues and ensure that information provided in official notifications is not misinterpreted.

• The close and effective cooperation and coordination between businesses and the EU should be further developed to allow industry to speak with one voice to the Chinese government.


TABLE OF CONTENTS

Executive Summary ........................................................................................................................... 2

1.1 Structure of this Report ................................................................................................................7 1.2 Market Segments.........................................................................................................................8

2. The European and Chinese pharmaceutical markets ...................................................................... 8 2.1 Regional Pharmaceutical Market Breakdown ....................................................................................8 2.2 The European Pharmaceutical Industry ...........................................................................................9 2.3 The Chinese Pharmaceutical Industry ...........................................................................................10 2.4 Market Size and Growth..............................................................................................................10 2.5 International Trade ....................................................................................................................11 2.6 Special Aspects Regarding the Sub-Segment ‘Over-the-Counter Drugs’ ............................................12 2.7 Special Aspects Regarding the Sub-Segment ‘Traditional Chinese Medicine’.......................................12

3. Economic and regulatory environment ........................................................................................ 13 3.1 Economic Environment: Current Status and Future Trends ..............................................................13 3.2 Regulatory Environment: Current Status and Future Trends ............................................................16

4. Market access obstacles for EU and Other foreign companies...................................................... 21 4.1 Tariffs.......................................................................................................................................21 4.2 Regulatory Environment .............................................................................................................21 4.4 Registration (Drug Launch) .........................................................................................................22 4.5 Intellectual Property ...................................................................................................................23 4.6 Drug Distribution System............................................................................................................24 4.7 Quantitative Costs or Impacts Resulting from Market Obstacles .......................................................24

5. Competitive Overview.................................................................................................................. 26 5.1 EU Competitive Positioning vis-à-vis Chinese Companies.................................................................26 5.2 Local Chinese Competition ..........................................................................................................26 5.3 The Chinese Pharmaceuticals Market: European and Chinese Companies in Comparative Perspective ...28 5.4 Scenarios for the Development of the Chinese Pharmaceutical Market ..............................................32

6. Recommendations ....................................................................................................................... 34 6.1 General issues and concerns .......................................................................................................34 6.2 Recommendations for competitiveness ............................................................................................34 6.3 Recommendations for policy initiatives .........................................................................................36

Annex 1: Proposal for more detailed scenario ................................................................................. 37 Annex 2: Pharmaceuticals Government Structure............................................................................ 39 Annex 3: Table of Key Laws and Regulations pertaining to Pharmaceuticals sector ........................ 40 Annex 4: Factors Influencing Competitiveness in the Chinese Market ............................................. 41 Annex 5: Industry survey results..................................................................................................... 42


LIST OF FIGURES Figure 1: Structure of the report..............................................................................................................8 Figure 2: Pharmaceutical sales and growth rates by region/country (IMS data 2004) .....................................9 Figure 3: Development of healthcare spending in the PR China 1990-2005 .................................................14 Figure 4: Development of the economic environment 2005 to 2010 ...........................................................16 Figure 5: Development of regulatory environment 2005 to 2010 ...............................................................21 Figure 6: Major correlations between determining factors of the economic and regulatory environment of the Chinese pharmaceutical market.............................................................................................................37 Figure 7: Qualitative structure for a basic framework of scenarios regarding the economic and regulatory pharmaceutical environment in China.....................................................................................................38 Figure 8: Qualitative structure for basic framework of scenarios regarding the opportunities and risks of European pharmaceutical companies in the context “China” ......................................................................38 LIST OF TABLES Table 1: Key drivers in the economic and regulatory environment for the development of the pharmaceuticals industry................................................................................................................................................7 Table 2: Classification for medicines.........................................................................................................8 Table 3: Pharmaceutical sales and market growth rates on a regional/country basis ......................................9 Table 4: Key economic data for the European pharmaceutical industry .........................................................9 Table 5: Projected Chinese Pharmaceutical Market per capita and total, 2006-2011.....................................10 Table 6: Top 10 pharma markets 2002 till 2010 (in $ bn.) ........................................................................11 Table 7: Summary of Chinese pharmaceutical imports, 1999-2003 (US$000s) ............................................11 Table 8: Summary of Chinese pharmaceutical exports, 1999-2003 (US$000s) ............................................11 Table 9: Overview of Market Access Obstacles.........................................................................................21 Table 10: Quantification of Market Access Obstacles ................................................................................25 Table 11: Quantitative impact of market access obstacles – industry survey results .....................................25 Table 12: Leading Pharmaceutical Corporations by Sales in 2003...............................................................26 Table 13: Sales of leading therapeutic products in China, 2003 .................................................................27 Table 14: Chinese Medical/Pharmaceutical Production, 2002-03 ................................................................28 Table 15: China OTC Pharmaceuticals Market Share: % Share, by Value, 2004 ...........................................28 Table 16: Key success factors for “Ethicals” vs “Generics” and core competences of Chinese companies ...............29 Table 17: SWOT analysis of European and Chinese pharmaceutical companies ............................................30 Table 18: Key laws and regulations pertaining to pharmaceuticals sector....................................................40 LIST OF BOXES Box 1: Selected comments from industry on market growth .....................................................................13 Box 2: Selected comments from industry regarding the R&D environment in China......................................15 Box 3: Selected comments from industry regarding future developments in pricing and reimbursement .........17 Box 4: Selected industry comments regarding healthcare policy in China....................................................18 Box 5: Selected industry comments on the expected development of the IP situation in China:..................................19 Box 6: Selected comment on expectations of development of the distribution system in China ............................20 Box 7: Selected industry comments regarding market access obstacles......................................................22 Box 8: Selected industry comments regarding drug launch issues in China: ................................................23


ABBREVIATIONS AIDS Acquired Immune Deficiency Syndrome

APIS Active Pharmaceutical Ingredients

CAEFI Chinese Academy of Enterprises with Foreign Investment

CAGR Compound Annual Growth Rate

EDL Essential Drug List

EFPIA European Federation of Pharmaceutical Industries and Associations

FYP Five Year Programme

GDP Gross Domestic Product

GMP Good Manufacturing Practice

HIV Human Immunodeficiency Virus

IMS Institute of medicinal statistics

IP Intellectual Property

IPR Intellectual Property Rights

MoH Ministry of Health

MOLSS Ministry of Labour and Social Security

NDRC National Development and Reform Commission

NTB Non-tariff barrier (to trade)

OECD Organisation for Economic Cooperation and Development

OTC Over-the-counter

QBPC Quality Brand Protection Committee

RDL Reimbursement Drug List

R&D Research and Development

RMB Renminbi (China’s currency)

Rx Prescription drug

SATCM State Administration for Traditional Chinese Medicine

SDPC State Development and Planning Commission

SFDA State Food and Drug Administration

SIPO State Intellectual Property Office

TCM Traditional Chinese Medicine

TRIPS Trade-Related Aspects of Intellectual Property

UTC Under-the-counter

WHO World Health Organisation

WTO World Trade Organisation


1. INTRODUCTION The research-based pharmaceutical industry is one of the leading high-technology industries in Europe, accounting for about 3.5% of the total value added in EU manufacturing. At present, this sector employs over 612,000 people in Europe, of which 102,200 are involved in R&D activities. Furthermore, with a positive trade balance of over 32,200 million Euros in 2004, it is the leading high-tech sector in terms of trade surplus, representing 5.4% of total EU manufacturing exports in 2004 against 2.1% in 19901. As one of the largest pharmaceuticals markets in the world, accounting for around a quarter of world sales, the EU pharmaceutical industry accounts for around a fifth of global pharmaceutical R&D expenditure and 18% of all the R&D investments of European businesses. Compared to this, the profile of China within the pharmaceutical industry is still low: China accounts for 20% of the world’s population but only 1.5% of the global drug market. Although the market has been expanding by more than 15% annually over the last 10 years, China’s pharmaceutical companies are currently still unable to compete with European multinationals in global markets. Recently however, the research-based pharmaceutical industry in Europe has been slowing down with respect to its main competitors. Between 1990 and 2005 for example, R&D investment in the United States grew by 460% while in Europe it grew by only 280%. Emerging markets such as China are becoming increasingly important as locations for R&D related investment; providing EU companies with opportunities to enhance their current competitiveness through relocating work to these lower cost production bases. 1.1 Structure of this Report

Focusing on the future opportunities and challenges of EU - China trade and investment relations, the main objectives of this study are: • To evaluate the competitive position of

European and Chinese companies in

terms of their strengths, weaknesses, opportunities and threats.

• To identify the main conditions necessary to ensure that European pharmaceutical companies maintain and develop their competitive position in the Chinese market in the next five years.

• To identify the main market access obstacles that are impeding European pharmaceutical companies in maximising their competitive advantage in trade and investment relations with China.

• The cost of these market obstacles will be quantified.

• To present recommendations on public policy actions in terms of EU trade policy and support to European pharmaceutical companies doing trade and investment in China.

The future path of the European pharmaceutical industry in China is heavily reliant on the related economic and regulatory environment. Consequently, the core of this study will be the in-depth analysis of the current framework and the major drivers and future trends impacting on these economic and regulatory aspects. The analysis of market size and growth (section 2.4) as well as the current and future economic (section 3.1) and regulatory paradigm (section 3.2) forms the basis for the description of key strengths and weaknesses of the Chinese pharmaceutical market in general as well as specifically for Chinese and European Companies (section 5.3). The future trends in the economic and regulatory situation will also provide a basis for the assessment of threats and opportunities (section 5.3). Moreover, current market access obstacles (section 4) for European companies are derived from the analysis of regulatory issues in section 3.2 and direct in-market experience of the European industry. In the two dimensions “economics” and “regulation”, the drivers listed have been identified, which are also determining factors for the scenarios developed in section 5.4 and the recommendations presented in section 6. Figure 1 displays schematically the structure of this report.

Table 1: Key drivers in the economic and regulatory environment for the development of the pharmaceuticals industry Economic environment Regulatory Environment Economic performance Socio-demographics Healthcare expenditure Domestic manufacturing Use of Generics R&D basis

Pricing & reimbursement Registration (drug launch) Health policies Intellectual property Drug distribution system


Figure 1: Structure of the report Table 2: Classification for medicines

Product Identification Generics Branded Product Description Non-patent Patent Over-the-counter A Ba D Bb Prescription C Da D Db

Key: A = Generic proprietaries, vitamins, etc. B = Branded proprietaries Ba = Non-patented branded proprietaries (multi-sourced branded products) Bb = Patented branded proprietaries C = Unbranded prescription medicines (ethicals)

D = Branded or true prescription medicines Da = Non-patented branded prescription medicines Db = Patented branded ethicals A + B = OTC products for self-medication C + D = Prescription medicines A + C = Generic medicines B + D = Branded medicines

Source: Griesar 2006

1.2 Market Segments

A possible segmentation of the pharmaceutical industry is based on a categorisation of medicines within two dimensions:

• ‘Generics’ versus ‘Branded’ and; • ‘Prescription’ versus ‘Over-the-Counter’

(OTC)

Medicines for human consumption can be consequently classified in a matrix shown in Table 2. In the context of this classification, the segments ‘Generics’ and ‘Ethicals’ can be defined as follows: Ethical pharmaceuticals (or ethicals) are pharmaceutical products that are supplied to patients through a doctor's or a dentist's prescription. Generic drugs are drugs sold under non-proprietary names. Generic drugs can generally be marketed

only on expiry of patent protection for the equivalent branded product. They may be freely manufactured and sold (normally unbranded) by any licensed manufacturer. 2. THE EUROPEAN AND CHINESE PHARMACEUTICAL MARKETS 2.1 Regional Pharmaceutical Market Breakdown

Spurred on by increased longevity of populations, rising wealth, innovative new products and new applications for existing products, global pharmaceutical sales passed another threshold to reach $602 bn in 2005.2 The pharmaceutical sales and market growth rates for 2005 are shown in Table 3 on a regional or country basis:

Economic Performance Sociodemographics

Healthcare Expenditure Domestic Manufacturing

Use of Generics R&D Basis

Pricing & Reimbursm . Registration

Health Policies IPR

Drug Distribution

European Chinese

S WO T

Companies

S WO T

Companies

Pricing & Reimburs ment e.RegistrationHealth PolicyIPRDrug Distribution

Market Access Obstacles for European Companies

2005 2010

2005 2010

2005 2010

2005 2010

2005 2010

2005 2010

2005 2010

2005 2010

2005 2010

2005 2010

2005 2010

Status Trend

Status Trend

SWOT Economic environment

Regulatory environment

Market Size & Growth Structure of the Report

2.4

3.1 5.3

3.2

General Aspects 4.1

4.2


Table 3: Pharmaceutical sales and market growth rates on a regional/country basis

World audited market 2005 Sales ($ bn) % Global sales (%) % Growth

(constant $) North America $ 265.7 47.0 5.2% Europe 169.5 30.0 7.1 Japan 60.3 10.7 6.8 Asia, Africa and Australia 46.4 8.2 11.0 Latin America 24.0 4.2 18.5 Total IMS audited $565.9bn 100 % 6.9 %

Source: IMS Health 2006

Figure 2: Pharmaceutical sales and growth rates by region/country (IMS data 2004)

Pharmaceutical Sales and Growth Rates by Region/ Country

Includes audited and un-audited markets

Source: Business Insights (2005)

Though the North American and European markets accounted for the greatest percentage of global sales, the highest growth rates in 2004 and 2005 occurred in smaller revenue markets such as China, Mexico, Russia and Turkey. As Figure 2 indicates, China recorded the highest growth rate of any single country or region, expanding by 28% from $ 7.4 bn in 2003 to $ 9.5 bn in 2004.3 China also experienced double digit growth (20.4%) in 2005 reaching $ 11.7 bn.4

2.2 The European Pharmaceutical Industry

Besides driving medical progress and improving health within Europe and worldwide, the research-based pharmaceutical industry is a key asset to the EU economy providing one of Europe’s best performing high-technology sectors. 5 Key economic data for this industry are summarised in Table 4.

Table 4: Key economic data for the European pharmaceutical industry European Industry (EFPIA) total (*) 1990 2000 2003 2004 2005 (e) Production 60,220 87,799 121,471 160,769 170,000 (e)Exports 23,180 44,188 90,935 165,003 178,000 (e)Imports 16,113 31,018 68,841 132,853 144,000 (e)Trade balance 7,067 13,170 22,094 32,150 34,000 (e)R&D expenditure 7,766 11,484 17,894 21,106 21,700 (e)Employment (units) 500,879 506,052 538,317 612,144 615,000 (e)R&D employment (units) 75,760 82,282 88,524 102,222 103,000 (e)Pharmaceutical market value at ex-factory prices 43,005 59,188 86,812 120,007 127,500 (e)

Pharmaceutical market value at retail prices 67,388 92,040 132,123 182,249 193,000 (e)Payment for pharmaceuticals by statutory health insurance systems (**) 42,627 57,603 74,741 97,709 104,000 (e)

Note: Values in € million unless otherwise stated (*) Data relate to EU-25, Norway and Switzerland since 2004 (**) Since 1998 data relate to ambulatory care only Source: EFPIA member associations (2006) - (e): EFPIA estimate


2.3 The Chinese Pharmaceutical Industry

2.3.1 Segmentation by Legal Status

A noteworthy aspect of the Chinese pharmaceutical market is that it is dominated by generic drugs. Estimates suggest that 97% of all domestically produced drugs are generics, including a large proportion thereof being counterfeits. 6 In 2005 alone, China’s State Food and Drug Administration (SFDA) approved at least 10,000 generic drugs (most of which were synthetic medicines). 7 The popularity of generics derives in large part from low per-capita spending on pharmaceuticals. Original and licensed brands on the other hand, are mainly imported and contribute to only one-fifth of the total Chinese pharmaceutical market. Another unique characteristic of the Chinese pharmaceutical market is the large under-the-counter (UTC) market, where consumers are able to purchase anything as long as they are able to afford it.8 2.3.2 Segmentation by Therapeutic Classes

Statistics from 2003 show that systemic anti-infectives are the largest therapeutic class of pharmaceutical products with approximately 34% market share in the Chinese market followed by cardiovascular (12%), alimentary tract and metabolism (12%) and anti-eoplastic agents and immunomodulations (9%).9 It should be noted that the Chinese government traditionally encouraged domestic manufacturers to produce anti-infectives though these figures are indicative of disease patterns that resemble that of a developing nation.10 Analysis of the fastest growing therapy classes in 2003 on the other hand, indicate that the disease profile in China is changing, with five of the ten fastest growing therapy classes consisting of treatments for cardiovascular and central nervous system illness, three of ten consisting of treatments for respiratory related illnesses and anti-inflammatory and anti-ulcer drugs and the remaining two being anti-infectives.11 This pattern is more indicative of a developed country largely a result of the increasing purchasing power of China’s emerging middle class. 2.3.3 Segmentation by Category

Chemical products account for the majority of China’s pharmaceutical market with roughly 69% of market sales. This is followed by Traditional Chinese Medicine (TCM) products

which account for 24% and biopharmaceuticals which account for 7%.12 2.4 Market Size and Growth

Estimates regarding the current market size of China’s pharmaceutical market vary. Market and business consulting companies and business intelligence agencies of high international reputation and expertise offering insights into the Chinese economy have recently published figures which exhibit significant differences. This is mainly due to the lack of transparency of the Chinese drug market and partially due to the fact that the different sources are relying on different market definitions. Factors contributing to this lack of transparency include inaccurate retail sales reporting (especially for OTC drugs as well as UTC and counterfeit drugs) and a complex and fragmented distribution system. The majority of Chinese pharmaceutical market estimates rely on IMS Health data for audited hospital markets for ethical drugs and fall in the range of about $8 bn - $10 bn. 13 Those estimates that consider a significant OTC, UTC and counterfeit sub-market fall in the range of $20 bn. It should be noted that the estimates that take sub-markets into consideration are in line with the assumption of a $16 per capita drug spending (see Table 5). Table 5: Projected Chinese Pharmaceutical Market per capita and total, 2006-2011

Year Market ($ bns) Per capita ($)

2006 20.8 16 2007 22.6 17 2008 24.5 18 2009 26.6 19 2010 28.9 22 2011 31.4 23

Source: Espicom Business Intelligence Despite these huge deviations regarding the current size of the total Chinese pharmaceutical market, market forecast for the future growth rate of this market do not vary significantly. Most estimates regarding the compound annual growth rate (CAGR) for the period 2005 – 2010 are approximately 10%. In line with these estimates, China can be expected to rank just outside the top five pharmaceutical markets in the world by the close of the decade (see Table 6).


Table 6: Top 10 pharma markets 2002 till 2010 (in $ bn.) 2002 Top 10 2005 Top 10 2010 Top 10

USA 196 USA 262 USA 466 Japan 53 Japan 65 Japan 81 Germany 20 Germany 24 Germany 37 France 19 France 21 France 28 U.K. 14 U.K. 16 China 24 Italy 13 Italy 15 U.K. 24 Spain 9 China 14 Italy 23 Canada 8 Brazil 10 Canada 17 Mexico 8 Canada 10 Spain 16 China 6 Spain 19 Brazil 15 Total 346 Total 447 Total 731

Source: Wang, A., v. Zedtwitz, M. 2005 Much is made of the potential demand for healthcare due to China’s large population, although per capita demand is not significant at present. GDP may be large in US dollar terms, and is still rising quickly; income disparity however is high, and for most people income per capita remains low; low income per capita translates to low pharmaceutical spending. Pharmaceutical drug-expenditure in China is only at around $16 per capita, much lower than countries like Japan that spend over $500 per capita.14

2.5 International Trade

Imports of pharmaceutical products in China have grown rapidly in recent years and are predicted to follow an upward trend. In 2003, imports stood at $1,680.2 million, 18.2% higher that in 2002, and nearly four times the amount recorded in 1998 (see Table 7). The bulk of imports consisted of retail medicaments accounting for 67% of the total, a rise of 27.5% from 2002. 15 EU countries were the largest supplier of pharmaceuticals (including raw materials) to China in 2003, accounting for 55.2% of total imports worth $928.1 million.

Of this, $675.3 million were retail medicaments. Germany was the largest individual supplier of pharmaceuticals to China with 13.2% of total imports valued at $221.1 million. Of EU countries, France ranked second accounting for 8.3% shares of total imports, worth $140.1 million.16Outside of the EU, Hong Kong was the second largest overall supplier, with 8.8% of imports valued at $148.3 million; Switzerland followed closely behind with 8.7% of imports, equal to $145.8 million.17 From 1999-2003 Chinese exports of pharmaceuticals doubled from $1,242 million to $2,572.5 million. More recently, export growth has continued steadily though pales in significance when compared with growth of imports. As Table 8 indicates, the vast majority of China’s pharmaceutical exports consist of raw materials (mainly antibiotics and vitamins), accounting for 86.7% of total exports in 2003. Exports of retail medicaments were considerably lower at 11.6%.

Table 7: Summary of Chinese pharmaceutical imports, 1999-2003 (US$000s) Category 1999 2000 2001 2002 2003 Raw materials 251,514 233,014 331,635 459,698 472,303 Semi-finished medicaments 47,770 55,314 62,252 79,610 82,082

Retail medicaments 500,083 641,951 809,208 882,571 1,125,640

Total 799,367 930,279 1,203,095 1,421,879 1,680,225 Source: Espicom Business Intelligence, 2006 Table 8: Summary of Chinese pharmaceutical exports, 1999-2003 (US$000s)

Category 1999 2000 2001 2002 2003 Raw materials 1,242,421 1,332,376 1,473,658 1,791,899 2,231,262 Semi-finished medicaments 50,506 40,162 37,824 39,713 43,478

Retail medicaments 205,394 231,371 263,978 260,517 297,810

Total 1,498,321 1,603,909 1,775,460 2,092,129 2,572,550 Source: Espicom Business Intelligence, 2006


China’s pharmaceutical trade balance for retail medicaments began with a small surplus of $52.1 million in 1997; however, due to rapidly growing imports since then, the trade balance for retail medicaments showed a deficit of $827.8 in 2003. With the inclusion of pharmaceutical raw materials in the statistical data (surplus of $1759 million), China’s overall pharmaceutical balance of trade surplus stood at $892.5 million in 2003.18 The US was the leading individual destination for Chinese drug exports in 2003, with shipments valued at $488.7 million (19% of total Chinese exports); the bulk of these exports to the US (96.2%) were raw materials. The EU as a whole accounted for 30.2% ($776.7 million) of total Chinese pharmaceutical exports with Germany as a significant individual export destination responsible for $264.8 million, or 10.3% of the total. Several Asian destinations were also primary export destinations; chief among these were India (10.1%), Japan (5.9%) and Hong Kong (5.6%). Hong Kong received a substantial portion of retail medicament exports (22.2%), though it is likely that the large proportion is due to products being designated for re-export.19 2.6 Special Aspects Regarding the Sub-Segment ‘Over-the-Counter Drugs’

OTC drugs are a more recent phenomenon in the Chinese pharmaceutical market, but this segment has been growing rapidly. TCM is often included as part of the OTC market, as OTC drugs facilitate the purchasing process of TCM with the pharmacist rather than a physician serving as a link with the consumer. When split into categories, TCM account for over half (57.7%) of the total OTC market value. Further OTC categories include cough and cold preparations (8-10%), indigestion preparations (8%), and vitamin and minerals (8%).20 Though it is relatively easy to estimate the divisions within the OTC market, the actual size of the OTC market is more difficult to quantify. Consequently, estimates regarding the market size of the Chinese OTC market vary considerably. This is due to the complex distribution system that is compounded by inaccurate retail sales reporting.21 Conservative estimates offer a value for the Chinese OTC market (excluding TCM) at slightly over $2 billion for 2005, which would make China the fourth largest and fastest growing market in the world. 22 Less conservative estimates value the OTC market,

excluding TCM, at around $4.4 billion.23 It is believed by industry experts that the OTC sub-market may have the largest growth potential in China; the main drivers being the Chinese government’s aggressive encouragement of self-medication in response to the insufficient capacity of medical facilities. Self-medication is still underdeveloped and the capacity problems of medical facilities are not projected to improve in the medium- or long-term. 2.7 Special Aspects Regarding the Sub-Segment ‘Traditional Chinese Medicine’

With roots dating back to as far as 4,000 years, TCM represents one of the oldest therapeutic systems in the world. In China, TCM has been accepted and valued by generations, and today many Chinese still prefer Chinese remedies to Western remedies believing them to have fewer side-effects and a more natural recuperative effect on the body. TCM is mainly derived from natural resources, namely herbs, plants, or animals. It is estimated that as many as 5,000 – 8,000 different natural ingredients are routinely used in TCM. TCM is not based on any medical theories or practices which are scientifically recognised in the west, and are usually labelled in the international market as ‘alternative medicine’. Some elements of TCM however, have become commonplace in the west (such as acupuncture) though their efficacy is widely disputed. In China however, TCM dominates the sector in terms of volume. Chinese manufacturers will include Chinese medicine when referring to pharmaceuticals. Production of TCM can appear as advanced and high-tech as that of western medicine, and currently the TCM industry employs around 500,000 people. In addition to departments of TCM being set up in around 95% of all general hospitals in China, there are also roughly 2,444 TCM specialised hospitals throughout the country. Due to lack of verifiable retail sales reporting systems, it is difficult to estimate the value of the Chinese TCM market, and thus available estimates regarding the size of the TCM market vary greatly. On the lower end of the spectrum, it is estimated that TCM commands less than half of the OTC market share amounting to around $2 bn in sales.24 Higher estimates for the period of 2004-2005 place the TCM market at around $5 - $6

25bn.


3. ECONOMIC AND REGULATORY ENVIRONMENT 3.1 Economic Environment: Current Status and Future Trends

3.1.1 Economic Performance

China is one of the world’s larger economies with GDP in 2005 equal to $224 bn. Economic growth is progressing rapidly at around 10% per annum but due to the sheer size of the population, per capita wealth per annum remains low at around $1700 and there is a marked disparity between urban and rural populations. China remains set on a path of strong economic growth of around 7% to 8% for the next decade, driving growth in private consumption as well as demand for healthcare services. Box 1: Selected comments from industry on market growth “China pharmaceutical market has grown at a two digit pace in the past few years and this momentum is expected to continue given the rapid growth of the Chinese economy.” “Increases in the number and wealth of middle class means that the dynamic of the China market will shift and create new higher-end markets (private clinics, etc.).” In terms of the pharmaceuticals, the Chinese market is not a unique homogeneous market but rather a collection or relatively small markets, each based around a economics hubs and wealthy city such as Beijing, Shanghai, Guangzhou and Tianjin. Each province, region or even city has its own trade practices, purchasing policies and regulatory concerns meaning that successful methods of operation in one city or province have no guarantee of success in another. 3.1.2 Socio-Demographics

China has the largest population in the world, accounting for around 20% of the total, estimated at slightly over 1.3 bn in 2005. In 2004, 8.56% of the population was aged 65 years or older.26 Just a few decades ago the health of China’s population was characterised by high rates of infectious disease and early mortality (diseases of poverty) in a mainly peasant society. More recently infectious disease rates have decreased, and the rapid economic and social changes that have been occurring in China have given rise to new health problems, including chronic and degenerative diseases (diseases of affluence). This is not to say that China’s current disease profile resembles that of a developed country just yet, infectious diseases are still prevalent particularly in younger children in poorer regions of China.

Hepatitis B infection and tuberculosis are also prevalent communicable diseases across all age groups.27 With a lower birth rate, and higher life-expectancy, the share of the population aged 65 and older is beginning to increase, while the share of young adults is starting to decrease. The population age-shift is particularly evident in urban China, where the population aged 20 to 39 (who account for most consumer spending) is expected to fall from 34% in 2002 to 30% in 2012. 28 By 2035, it is predicted that one in four people living in China will be 60 or older. These demographic changes will have significant implications for the pharmaceutical market. As China’s population continues to grow and age, so too will the demand for pharmaceuticals. Increased longevity will boost consumption levels of drugs, particularly those for treating diseases relating to ageing (i.e. cardiovascular diseases). Geriatric medicine, along with related treatments of disease in the area of physical debilitation will also become important. In addition to aging of the population, China is experiencing dramatic transformation in many social and economic conditions that will continue to increase the incidence of major chronic diseases. Evidence of this shift is already apparent, and it is expected that as time passes, China’s disease profile will resemble that of a developed country. These epidemiological changes such as increases in chronic conditions such as diabetes, hypertension, and other cardiovascular diseases associated with western life-styles will also drive pharmaceutical consumption particularly for premium priced drugs. Certain drug categories perceived to have preventative qualities including certain OTC pharmaceuticals and nutraceuticals will also benefit. 3.1.3 Healthcare Expenditure

Average healthcare expenditure in China has increased dramatically over the years - faster than the country’s GDP with a CAGR of over 13% (see Figure 3). Between 1989 and 2005, healthcare expenditure per capita had increased eight-fold from $9 to $73. Despite this increase, total health expenditure in 2005 amounted to around 5.4% of GDP ($100 bn); lower than the OECD average of 8%. 29 Compared to countries like the US ($5000 per capita in 2003) or in Japan ($6000 per capita in 2003) China is still significantly lagging behind. In terms of drug expenditure, China’s annual per-capita drug expenditure of roughly $15 to $16 (25% of


total health spending) is also one of the lowest in the world - on par with that of India and Pakistan.30

41

46

50

54

62

73

1990

2000

2001

2002

2003

2005

Source: Accenture, Brückner et al, 2005

Health expenditureper capita US$

Development of Health Care Spending in China 1990-2005

Figure 3: Development of healthcare spending in the PR China 1990-2005 Examination of annual healthcare expenditure per capita does not reveal certain disparities that exist in China, and it should be noted that there is a significant imbalance in healthcare spending between the east (i.e. wealthier coastal provinces) and the west (undeveloped poorer provinces). An urban vs. rural discrepancy also exists, with China’s urban population accounting for approximately 80% of total healthcare spending. 31 The geographical and rural v.s urban concentration of healthcare spending is also found with respect to drug expenditure. Though the current healthcare expenditure situation in China is below average, the situation is expected to improve. The emergence of a more health conscious and affluent sector of the population will demand new products (i.e. state of the art medical equipment and western drugs) for which they are prepared to pay. In addition to China’s expected disease progression, a large portion of the country’s future market attractiveness will depend on how consumer spending develops. These trends will shape the investments and marketing approaches of European pharmaceuticals companies. 3.1.4 Domestic Manufacturing

China has around 3,500 domestically owned pharmaceutical manufacturers, almost all of which are state-owned or are joint ventures with a central/local government body. The

majority of these domestic companies are low-tech generic producers, and generally target the local market. Competition in the local market is high and to compensate, generic producers also act as bulk manufacturers exporting low-tech intermediates to unregulated markets. 32 Chinese companies now play a major role in the global bulk pharmaceutical and drug intermediary markets, contributing greatly to pharmaceutical exports in recent years.33 Despite having a positive impact on pharmaceutical exports, the domestic manufacturing sector is suffering from an overcapacity of basic, cheap generic products. Official figures released in 1999 indicated that total production output (including raw materials) were at $23.4 bn, while sales revenue amounted to $16 bn. (only 68.4% of the total). Additionally, a survey conducted by the state-run Market Daily covering 2,500 manufacturers during the same period found unsold drug stocks worth 17.8 bn RMB ($2.2 bn).34 If the domestic manufacturing sector’s overcapacity to produce basic, cheap generic products continues in the medium-long run, the situation has the potential to lead to falling prices as well as low or non-existent profits for many manufacturers. Improvements in R&D and the encouragement of mergers however, may reverse the current trends and serve to strengthen the domestic sector in the future. 3.1.5 Use of Generics

The majority of drugs (97%) produced by Chinese pharmaceutical companies are generics and a large proportion thereof are counterfeits.35 In recent years, the Chinese government has initiated price cuts which have generally favoured generic drugs rather than foreign patented products. One survey interviewee stated that currently ‘everyone in the branded product market is losing market share’, which was confirmed by another interviewee stating that ‘market share has increasingly gone to generic drugs from local industry’. Although major economic trends such as the increase in healthcare spending will bolster the demand for branded products, the unfavourable regulatory environment still favours commodity-type generics. Consequently, the dominance of generics in the Chinese market will most probably continue. It should be noted that the government has recently introduced programmes such as the revised reimbursement lists to tackle the problem of


price difference between off-patent original brands; 36 it remains to be seen however, whether such initiatives will increase the market share of patented original brands. The industry survey conducted in the frame of this study indicates that most of the companies interviewed –though they expect a significant increase in sales over the next 5 years- anticipate little change in the situation with generics dominating sales and believe that growth will benefit the generic drugs rather than the ethical branded ones. 3.1.6 R&D Basis

China’s current R&D status is low with overall Chinese R&D spending in 2004 reaching $24.2 bn, or only 1.2% of GDP for the year. Government spending represents an important component of R&D support; these bureaucratic allocation mechanisms however, fail to facilitate long-term basic research nor are they able to tap into China’s significant innovation potential. The situation seems likely to change as recognition of the importance of innovation in China’s public sector institutions continues to develop. It is expected that with increased recognition, governmental support for those institutions, especially in the areas of basic pharmaceuticals, biotechnology, and TCM research will intensify. China is home to a number of world class scientific biomedical research institutions and is already competing on an international footing in certain areas of biotechnology research including for example gene mapping, transgenic technology, stem cell research, gene research of some major diseases, etc. In addition to some 200 research institutes for biotechnology, more than 30 of the 150 key state laboratories are dedicated to biopharmaceutical-related issues.37 In terms of industry, there are around 500-1000 small and medium sized companies that are active in the biotech sector concentrated in more than 20 biotech parks throughout the country. The Shanghai-based Wuxi PharmaTech, a particularly successful local company, out-sources to 18 of the world's top 20 pharmaceutical companies and 8 of the top 10 biopharmaceutical companies. When compared to the west however, China still lags behind especially in terms of biotech companies. Furthermore, most of the biotech products currently manufactured by Chinese domestic companies are still in effect generics - copied biotech molecules produced

by molecular cloning and fermentation processes. The relative success of China’s biotech industry can be attributed to the major role the Chinese government plays in R&D activities. Several funds have been developed to finance biotech R&D including the National Natural Science Fund, the Torch Programme, the "863" High-Tech Program and the Five-Year Plans. 38 The liberal research environment is further facilitating research efforts in this area and has generated considerable interest from overseas companies particularly those facing restrictions on certain research activities (i.e. therapeutic cloning) in their home market. These factors all make China an attractive choice for biopharmaceutical R&D, and should contribute to China becoming one of the most important global locations for such activities in the long term.

Box 2: Selected comments from industry regarding the R&D environment in China “China will increase its spending in the pharmaceutical and biotech sector; and Chinese companies will begin to invest in Europe.” “We are planning to maximise the opportunities brought about by the Chinese market through localisation and R&D.”

In addition to the aforementioned biopharmaceutical and biotech clusters that exist in China, as well as a liberal research environment, there are several other aspects that make China worth considering as a location for global pharmaceutical R&D efforts. Firstly there is the issue of cost. China counts on around 20,000 local research scientists whose salaries are a fraction (about 10%) of those in the west. Combined with the lower cost of conducting clinical trials, the aggregate cost for launching a new drug is believed to be as little as $6.5 million compared to the $800 million estimate quoted by many companies in the west. 39 Secondly, China provides access to a sizable testing ground with a large patient pool. The large number of untreated patients in China offers the optimum circumstance for clinical trials. 40 Additionally, China’s many ethnic populations and genetic diversity offers insight into both susceptibility to disease as well as the safety and efficacy of the medicaments used to treat it.


0

5Economic Performance

Sociodemographics

Healthcare Expenditure

Domestic Manufacturing

Use of Generics

R&D basis

2005 2010

Development of the Economic Environment 2005 to 2010


Note: Charts derived from section 3.1 Economic environment: current status and future trendsRating: Very strong = 5, Strong = 4, Fair = 3, Below average = 2, Poor = 1.

Figure 4: Development of the economic environment 2005 to 2010 3.1.7 Summary Figure of Current Status and Future Trends in China’s Economic Environment

Generally the economic environment in China is quite attractive and expected to improve further, particularly for R&D; only the situation regarding the use of generics will probably remain unchanged (see Figure 4).

3.2 Regulatory Environment: Current Status and Future Trends

3.2.1 Pricing and Reimbursement

Historically, the Chinese government has procured the most widely used drugs for it’s public health services, and thus has a vested interest in keeping drug prices down. China has several regulatory bodies that are responsible for pricing pharmaceuticals including the National Development and Reform Commission (NDRC) and SFDA (State Food and Drug Administration). Prices of drugs on the Essential Drugs List (EDL) are set by the government while for most other drugs prices are set upon negotiations between the manufacturers and the government. Since the mid-1990s the Chinese government has been faced with ever-increasing health expenditure and has actively attempted to curb drug spending. There have been several major price cuts since 1997: In 2000, the NDRC lowered the prices of 274 drugs by 30% as well as 120 locally produced generic drugs by 20-60%; in 2004, prices of over 400 medicines were reduced by an average of 30%; in 2005, the

maximum retail price of 22 kinds of medicines was lowered by an average of 44%.41 As an additional price control mechanism, drugs are also subject to a complex hospital bidding process as a part of the hospital procurement system. In their purchasing decision, hospitals carefully consider whether or not a patient can be reimbursed for the drug through the insurance system. Only drugs included in the reimbursement drug list (RDL) will be partly or fully reimbursed by China’s insurance system; other drugs have to be paid for by the patient themselves. The RDL is established at the provincial level, and generally follows the recommendations of the EDL list which is managed by the SFDA. After the product launch, only drugs that have been in the Chinese market for two years and have proven to be cost-effective will qualify for inclusion in the list.42 The drugs that are included in the reimbursement drug lists will then be subjected to price controls by the provincial or state governments. It should be noted that traditionally, OTC medicines in China have been classed along with prescription drugs and many still qualify for reimbursement. 43 In 2000, the SFDA implemented a system to classify and separate prescription and OTC preparations. Since then, a number of pilot projects involving major cities have been in operation. It is expected that the system will be functional this year, and will shift a greater proportion of drug costs (particularly for


minor ailments) from the state to the individual consumer.44 The Chinese government in taking strides to address the issue of increasing health care costs; this is evident in the Eleventh Five-Year Plan which calls for the creation of an effective healthcare system and a reduction in medical costs particularly for rural populations. Additionally, China's Minister for Health, Gao Qiang, has pledged to increase pressure on local health authorities to offer more affordable care for lower-income patients such as farmers and the unemployed.45 The task will be difficult due to the flaws identified during implementation of the cooperative medical network pilot scheme. In the context of these general governmental attempts to reduce health care costs, further drug price cuts are expected. The future situation could be different however, as governmental plans are now in place to establish a supplementary scheme covering occupational medical expenses. These expenses generally include more expensive drugs than those on the standard RDL and thus potentially benefit prescription drug manufacturers.46 Box 3: Selected comments from industry regarding future developments in pricing and reimbursement “The situation overall will improve except for the imposition of price controls and price cuts.” “The pricing system will worsen and put increasing pressure on prices. The RX area (required essential drug list) is another problem and a formula for corrupt practices. There will however be significant opportunities offered by the OTC (self-medication) market.” 3.2.2 Registration (Drug Launch)

China currently has arguably the world’s most complex requirements for the introduction of new drugs, second only, perhaps, to Japan. Product registration for small and medium-size companies in China spans roughly three to five years; the process for multinationals (two to four years), is not as lengthy due to access of the resources and skills needed to accelerate the process.47 Revisions of the notoriously awkward regulatory system are ongoing as China attempts to drum up more and more foreign investment by improving transparency for pharmaceutical registration. Reforms have focused on approval times and include replacement of the previous five categories of new drugs recognized by China’s drug

approval system with a type classification system for new drug applications, adjustment of the definition of ‘new drug’ to cover products which have never been marketed in China, and a commitment by the SFDA to keep data confidential which was submitted for drug registrations until 2007. 48 Despite ongoing reforms, market obstacles for foreign companies relating to registration procedures remain. These obstacles are laid out in section 4.2. If the government is to be successful in establishing a more streamlined and centralised registration system, it can be expected that the approval times and the time needed to review import standards for locally produced drugs can be reduced. 49 Imported drugs will also benefit from accelerating the clinical trial approval process and relaxation of the requirement for certificates of free sales. However, larger patient numbers and additional data requirements will increase the financial costs to manufacturers of conducting studies in China. It is therefore important that the registration system will be developed in line with the needs and requirements of the pharmaceutical companies. 3.2.3 Health Policies

As a result of political and economic transition from a planned to a free market economy, the Chinese government in the late 1990s decided to switch from a free health care system to a partial-provider pay system tied to employment and implemented as a deduction from a worker's salary. For pragmatic reasons, the Ministry of Labour and Social Security (MOLSS) delegated the responsibilities for implementing the insurance scheme to regional level administrations.50 Whilst the implementation of the insurance scheme falls on regional level administrations, the vast majority of medical benefits in China are provided through hospitals and other healthcare facilities (i.e. health centres and outpatient clinics). Currently other healthcare facilities in China are experiencing a decline in numbers, whereas hospitals are experiencing a significant growth. Most hospitals in China (88%) are non-profit institutions while private hospitals charge higher fees and cater primarily to expatriates.51 Regardless of private or public status, Chinese hospitals act as both prescribers and dispensers of pharmaceuticals and thus account for the majority of the Chinese pharmaceutical market.


Since the initiations of reforms, the share of individual contributions to healthcare expenses have increased significantly (36% in 1990 to 56% in 2002) while institutional and governmental contributions have declined. 52 By mid-2005, basic medical insurance coverage reached roughly 130.3 million people. 53 Only major cities (i.e. Shanghai) have been able to adopt a professional approach to the initiatives; in rural areas on the other hand, the Chinese government is still struggling to overhaul the healthcare system- up to now with only moderate success. Currently, the government is pursuing further reforms of both urban and rural healthcare system that are expected to be completed or fully operational by the year 2010. The co-operative medical service (rural healthcare reform plan) was developed to guarantee the provision of primary healthcare to China’s vast rural population.54 Plans for funding urban healthcare have been more advanced. China has a culture where patients will visit hospitals for minor treatments rather than grass roots facilities and a large percentage of both inpatient and outpatient visits at large hospitals in urban China have been deemed unnecessary. To remedy this, the Chinese government approved a project (in 1999) developed by the Ministry of Health (MoH) aimed at decreasing waiting times at hospitals and providing urban residents with access to treatment in the home and in local clinics.55 In addition to providing treatments outside the hospitals, the community based healthcare system will promote disease prevention and provide family planning services. A system for compilation of personal health records will also be introduced to facilitate earlier diagnoses and the initiation of preventive measures. The MoH is currently implementing experimental community schemes (in 70 cities) with the project expected to be completed by 2010.56 It is evident that China’s evolving health care system is making slow and steady progress, though there are a few hurdles to overcome in the next few years. The more rapidly the improvements in the healthcare system occur, the larger the future patient pool for reimbursed pharmaceutical products will be. Consequently, China’s ongoing medical reform could result in larger drug consumption patterns. With increasing consumer price consciousness, however, a certain part of this positive effect may be absorbed by demand flowing into generic

products instead of the branded products of European companies. Box 4: Selected industry comments regarding healthcare policy in China “An increasing share of the population will have access to healthcare services and drugs, which will result in a larger market.” “An increase in demand from the rural population is expected because of better access to healthcare, which offers huge market potential.” “China is now trying to scale up its medical insurance coverage and this will bring more opportunities for innovative products despite increasingly tight cost containment measures.” 3.2.4 Intellectual Property

Intellectual property (IP) is perhaps the most important issue for foreign R&D based drug makers in China. Whilst innovative medicines are difficult and costly to develop, they are generally easy to copy. Pharmaceutical R&D has therefore depended heavily on a strong and efficient system to protect IP. China’s patent law has been established since 1984 - though under this law domestic producers were able to ‘lawfully infringe’ upon foreign pharmaceutical patents (i.e. before patent expiry). At the behest of trade partners such as the EU and US, China’s IP laws were revised in 1992 and further amendments were made later in 2000; the State Intellectual Property Office (SIPO) is currently formulating the new draft revision which is expected to be in place by 2008. The EU places high priority in addressing IPR issues in China and has devoted both staff and resources to the issue (i.e. by engaging in constant dialogues, providing recommendations on draft legislations, highlighting difficulties for European companies, as well as other forms of capacity building such as organising training activities and workshops for relevant Chinese stakeholders). In 2001, China acceded to the WTO and consented to uphold the Trade-Related Aspects of Intellectual Property Rights (TRIPS) accord as well as strengthen its protection of intellectual property rights.57 Overseas companies have been expected to benefit significantly from WTO membership, but even after China’s entry, IPR still remains a major issue for companies wishing to supply pharmaceuticals to China. 58 On the surface, the system of IP protection appears in line with international norms with SIPO taking responsibility for patents as well as implementing the current administrative protection system accompanied by an


impressive array of legislation. However, in practice this is not the case. Part of the problem lies in enforcement which remains poor. Many provincial and local authorities are unwilling to crackdown on IP infringement because they want to protect local businesses. Additional problems include a lack of proper data exclusivity protection, absence of patent term restoration, counterfeiting, and inconsistent administrative protection. These will be discussed in more detail in section 4.2 on non trade market obstacles. Regarding possible future trends of IPR enforcement in China, it is currently possible to observe “mixed signals” from the market regulators. On the one hand, recent measures taken by the central government indicate its willingness to address the protection of IPR. Multinational pharmaceutical companies and China's leadership have aligned interests in this regard. The central government has begun to launch numerous crackdowns, in 2004 for example 691 factories were closed down on account of manufacturing counterfeit drugs. Beijing has also cooperated in trans-national efforts; for example in 2005, Chinese authorities seized $4.3 million worth of counterfeit drugs (including brand name products) that had been produced in China and shipped to the US.59 There has also been collaboration between industry specific organisations and the government; the Research-Based Pharmaceutical Association Committee (which is associated with the Chinese Association of Enterprises with Foreign Investment, CAEFI) is one such example. This organisation works with relevant government departments to strengthen IP protection, to develop industrial standards and to promote research. 60 Additionally, multinational drug manufacturers have been strengthening their cause by engaging lobby groups and the media in their efforts. The Quality Brand Protection Committee (QBPC) is a notable group established in 2000 that currently includes major pharmaceutical companies among its 120 members.61 However, the lax enforcement of IP law by provincial and local governments will continue to deter indigenous drug producers and foreign companies from launching new products in the domestic market and will remain another significant obstacle to stronger IP protection for brand owners. 62 Shortcomings exist in the legal system which hinder efforts towards a more effective IP protection system in China. The patent restoration system, for example, which is

international common practice, is non existent in China. The Chinese legal system lacks the necessary equipment to deal with complicated technical issues; judgements are often made on the basis of seniority or with political considerations in mind. Various multinationals have attempted to defend their patents in court without success. 63 If penalties are eventually issued, they tend to be low and difficult to enforce. Finally, regulatory capabilities and responsibilities in the field of IP protection are likely to remain patchy and will be allocated to a complex network of assorted agencies.64 While the recent measures taken by the central government reflect changing attitudes and a growing understanding of the importance of effective IP protection, local protectionism, poor IP awareness, and an absence of appropriate legal machinery will continue to have an impact on multinational drug producers in the China market. Consequently, in the mid-term, unless specific effective actions are taken, poor IPR enforcement will continue to be an issue in China. Improvements in IP enforcement in the long-term can be expected only as emerging indigenous brands begin to require and demand protection.65 Box 5: Selected industry comments on the expected development of the IP situation in China: “The problem of poor IP protection is likely to reach beyond the five year scope of this study.” “The situation will slightly improve particularly in terms of counterfeiting but we expect that a lot of critical issues will remain for some years.” 3.2.5 Drug Distribution System

In the past, drug manufacturers were prohibited from selling directly to hospitals or pharmacies, and were required to operate through state-owned wholesalers. Prior to entry into the World Trade Organisation, the central government’s three-level distribution system put additional constraints on the sector, and companies were obliged to utilise special state-owned import distributors. In late 2004, the retail pharmaceutical sector was finally opened, and foreign producers are now able to distribute directly thereby lowering distribution costs.66 Currently, the drug distribution system in China remains complicated and is characterised by regional and local differences. The traditional state-owned distribution system, which emphasised provincial and local networks with few links to other regional markets, has hampered the creation of a truly national distribution


system. China's vast geography has also impeded such efforts due to the difficulty in building and maintaining efficient transportation infrastructure and storage facilities. To date, China has no large-scale nationwide distribution systems and relies on thousands of (often regional) wholesalers, creating many unnecessary layers between manufacturers and patients. Despite inherent problems, changes in the Chinese pharmaceutical distribution are occurring, and it is expected that the liberalization will continue. Estimates regarding the number of pharmaceutical wholesalers active in China range from as high as 17,000 to as low as 4,000. 67 Regardless of the true figure, there is no doubt that China is currently undergoing accelerated consolidation of its wholesale sector with many companies exiting or going out of business due to non-compliance with GSP (Good Safety Practice).68 In this context the three leading distributors - CNPG, Shanghai Pharmaceutical Group and Guangzhou Pharmaceutical Group - are building regional networks and selling directly to hospitals and the retail sector. Box 6: Selected comment on expectations of development of the distribution system in China

“Our distribution partners are unreliable and we would like to take care of distribution ourselves. Thankfully this area is becoming more liberalised which will give us further options.” Though around 80-85% of drugs in China are dispensed in hospitals, three distinctive outlets are emerging in the retail sector with growing drug-sale rates. These are discount pharmacies (selling mainly low-cost generics), chain drugstores and designated pharmacies. 69 Since 2003, the central government has been encouraging the development of retail pharmacies, separating the functions of prescribing and dispensing in a bid to curtail over-prescription of drugs (notably antibiotics) and the often exorbitant price mark-ups on drugs sold by hospitals.70 These efforts have proved more effective in some markets than others for example in Shenzhen, up to 40% of all pharmaceutical sales are now thought to be dispensed via pharmacies - more than twice the national average. Designated retail pharmacies where reimbursement is provided under the new

urban employee insurance scheme are also being established. The higher patient responsibility for healthcare costs under the scheme will encourage self-medication at retail pharmacies as well as consumer cost awareness, and will gradually begin to drive sales in the retail pharmacy sector, at the expense of the hospital sector. Chinese pharmaceutical manufacturers are also acquiring interests in retail channels and have become a major driver of this trend with local companies starting to build chain store networks by acquiring existing outlets. Beijing Pharmaceutical Co, for instance, now has a network of nearly 900 outlets nation-wide, including over 270 in Beijing and at least 600 smaller stores in rural areas. 71 Foreign companies are also beginning to participate; Singapore-based Zuellig which established a joint venture with the China Xinxing Medicine Company in 2004 was the first foreign entrant into the distribution sector, circumventing the requirement to sell via wholesalers. 72 Though market access obstacles that arise from the current regulatory environment (covered in section 4.2) remain for the distribution sector, foreign pharmaceutical companies can expect to benefit from increased transparency and simplicity of the complex and diverse distribution system. 3.2.6 Summary Figure of Current Status and Future Trends in Regulatory Environment

The regulatory environment in China currently presents a lot of challenges with all five components registering at below average (see diagram overleaf). Some improvements are predicted– at least in the mid-term - mainly for health policies and drug distribution. However any improvements that occur are expected to be only marginal. Figure 5 provides a schematic summary of the current status and future trends of the regulatory environment of China’s pharmaceutical sector. European companies can take advantage of predicted improvements in these areas. In drug distribution systems for example, opportunities exist in tapping into the enhanced networks of the national leaders, CNPG, Shanghai Pharmaceutical Group, and Guangzhou Pharmaceutical Group.


0

5Pricing & Reimbursement

Registration (drug launch)

Health PoliciesIntellectual Property

Drug distribution

2005 2010

Development of Regulatory Environment 2005 to 2010

Note: Charts derived from section 3.2 Regulatory environment: current status and future trendsRating: Very strong = 5, Strong = 4, Fair = 3, Below average = 2, Poor = 1.

Source: Griesar 2006 Figure 5: Development of regulatory environment 2005 to 2010 4. MARKET ACCESS OBSTACLES FOR EU AND OTHER FOREIGN COMPANIES In addition to the genuine market driven competitive threats posed by Chinese operators in this sector, European companies also face competitive forces as a result of non-tariff or ‘behind the border’ barriers (NTBs). The following sections list market access obstacles and provide a brief qualitative description derived both from desk research, and the results of the industry survey. Annex 4 provides a visual summary of both the market driven competitive forces as well as those derived from NTBs. Table 9: Overview of Market Access Obstacles

Section Topic 4.1 Tariffs 4.2 Regulatory Environment 4.3 Pricing & Reimbursement 4.4 Registration (drug launch) 4.5 Intellectual Property 4.6 Drug Distribution System

4.1 Tariffs

As a consequence of China’s WTO membership, tariffs on imported pharmaceuticals were lowered in 2004. China reduced tariffs on imported pharmaceuticals in 2004 from roughly 10% to between 5% and 8%. 73 Currently, imported drugs are subject to import tariffs of 4.2% plus an additional 17% value added tax.

4.2 Regulatory Environment

In addition to lowering tariffs, China’s 2001 WTO membership has made a market that was notoriously difficult-to-penetrate a more attractive proposition for overseas companies; regulatory practice improvements, cutbacks on import tariffs and an increased transparency of legislation initiated by the government are some factors that have served to assist foreign companies operating in China.74 However, the Chinese government and its regulatory bodies attach great importance to the development of a world-class Chinese pharmaceutical industry. Consequently, several non-tariff barriers have been put in place to create obstacles for foreign competitors- including tough reimbursement practices, longer time-to-market for foreign firms an increased financial promotion of the TCM industry.75 As a result, these non-tariff barriers have brought about a sharp drop in the market share of drug importers that has been as low as 10% in recent years.76 An additional problem that is often cited is the discrepancy between what is happening at the central government level and what occurs at the provincial level. It seems that while central government institutions are more accommodating to foreign investments, provincial governments tend to favour domestic companies. The Chinese regulatory bodies have attempted to address the situation but reform in this area tends to be incremental.77


4.3 Pricing & Reimbursement

In the past, foreign pharmaceutical companies operating in China had experienced many difficulties due to the uncertainty and lack of transparency inherent in the Chinese pricing and reimbursement systems. The promulgation of the “Guidelines for Drug Price Administration Reform” by the State Development and Planning Commission (SDPC) in July 2000 was a significant step forward towards remedying the situation. However, problems arise for foreign companies with the perpetual changes in pricing policy as several years of stability and transparency are needed to plan for a product’s registration, manufacturing approval, and product launch.78 Generally, direct protectionism by Chinese authorities has been reduced but non-trade barriers have increased, primarily in the form of drug price controls; directly via price cuts or indirectly using the mechanism of reimbursement list or hospital bidding. The primary purpose of the existing system seems to be the creation of a highly complex price-control mechanism resulting in market entry barriers. The European Federation of Pharmaceutical Industries and Associations (EFPIA) has expressed concern over the frequent mandatory price cuts and the lack of transparency around the decision-making process leading to these cuts.79 Additionally, innovative foreign drugs are facing serious obstacles in order to qualify for the national and provincial reimbursement drug lists. The recent price control mechanism applied by the Chinese government and authorities have left manufacturers with little room to manoeuvre. Either they leave their prices unchanged and are removed from the drug list, or make damaging price cuts in order to be included. In some cases companies do not have a choice and are forced to withdraw their product from the market entirely. Some improvements have been made with the decision to update national reimbursement lists at the end of 2004, but the concerns still exist with regards to the long and cumbersome listing process and the intermittent updating of these lists. Another obstacle is the drug procurement system. It is assumed to be a fair-bidding process, yet in practice, both hospitals and provincial governments still favour local producers. 80 Furthermore, imported off-patent drugs have a different price structure from local Chinese generic drugs. The multinational pharmaceutical industry is attempting to convince the Chinese

government to grant special consideration to original off-patent products by placing them in separate innovative categories. 81 Corruption within the hospital bidding process is also an obstacle for multinationals wishing to operate in China and is of serious concern – so much so that in a State Council meeting (Feb 2006) Premier Wen Jiabao specifically cited the pharmaceuticals sector when stating that anti-corruption steps are required to build a clean government.82 Box 7: Selected industry comments regarding market access obstacles “Pricing (price-regulated market): Recently there has been another wave of price-cuts. On June 1st 2006 prices were cut by 23%. These cuts will hurt all pharmaceutical operators in China, including the hospitals that sell drugs.” “Obtaining a hospital listing is difficult but necessary in order to make our products available through hospital channels, which are the main drug distributors in China. Kick-back marketing [providing financial ‘incentives’] is often the only way in.” 4.4 Registration (Drug Launch)

The SFDA has taken great strides to improve the pharmaceutical regulatory framework in China. However, significant problems remain that make it very difficult for European companies to operate in the Chinese market or to include China in global clinical development programmes. The regulatory procedure is unnecessarily long and complicated compared with European procedures with the time lag resulting in delays in drug introductions, favouritism to domestic drug companies, and IPR challenges. 83 Registration procedures change frequently and unexpectedly. There is usually limited dialogue with the regulators, and announced changes are often unclear and sometimes not even implemented. For example, in a recent draft issued by the SFDA on excipient regulations, legal requirements exceed those issued by any other regulatory authority and in many cases will be impossible to comply with. China now has a monitoring period providing 5 years exclusivity for drugs that are produced locally. This could prevent access of the originator’s drugs into the Chinese market. 84 Domestic Chinese companies are still able to gain multinationals’ product registration data first. So when it comes to time-to-market of new products, local manufacturers are often much faster than their foreign competition. Even when drugs intended for the China market have already undergone clinical trials in other countries, they are required to go through additional trials-completing phase I and III


trials- before they can even be considered for the Chinese market. The ‘biological equivalence test’ is not accepted by Chinese authorities, so generics also require additional clinical trials prior to certification by the national EDL.85 Box 8: Selected industry comments regarding drug launch issues in China: “To launch a product requires a very long regulatory time-scale. Drugs can only be approved after local trials have taken place, even if these were done previously in areas with ethnically similar populations such as HK. Registration of drugs takes time and money.” “Pre-market entry requirements take too long and are too expensive. For example, the registration of products is difficult as previous foreign trials are not accepted (even if they have been on the market for 20 years in other countries). This means we have to engage in lengthy and expensive Chinese trials.” 4.4.1Active Pharmaceutical Ingredients

More recently the industry has expressed concern about restrictions on imports of Active Pharmaceutical Ingredients (APIS) for local productions, where stricter standards are applied for importers than to local producers. Imported active pharmaceutical ingredients (API’s) in China are subject to a routinely multi-sampling and testing practice that unnecessarily increases industry’s cost up to 20-100% of the API market value. The origin of the multi-sampling and testing practices of imported active pharmaceutical ingredients (APIs) lies in Article 38 of the Implementing Regulation of the Drug Administration Law and Article 45 of the SDFA Administrative Measures for the Import of Drugs, describing the sampling methods applicable to imported APIs to be carried out by the Port Drug Inspection. In these articles a homogeneous batch of e.g. 1500 kg can be subject to as many as 6-7 samples - all providing, as could be expected, the same outcome. This practice is unnecessary as APIs are under Article 100 of the Drug Registration Regulation subject to the GMP (General Manufacturing Practice) standards all guaranteeing the "identical nature" and "consistent quality" of batches on which basis the Import Drug License (IDL) is provided. Moreover, it is difficult to understand how the multi-sampling/testing practise relates to Article 7 of the Chinese Provision of Drug Quality Supervision and Selective Inspection that proclaims the efficient and selective inspections, proper testing ratios of batches, which are moreover free of charge according to Article 12. Also the high officially listed

testing fees represent an unnecessary obstacle to international trade while, according to foreign industry practitioners, domestic products are not subject to the same testing requirements. 4.5 Intellectual Property

Being bound by WTO regulations, China has made some progress in the area of IP protection adopting legal provisions that protect and promote innovation, including provisions on data protection and to some extent patent linkage. IP issues constituted those most frequently cited (75%) by those interviewed in the industry survey as preventing their operations from expanding further into the Chinese market. Currently, numerous overseas companies operating in China face significant challenges with regard to intellectual property rights, including a lack of proper data exclusivity protection, absence of patent term restoration, counterfeiting, inconsistent administrative protection, and enforcement. Firstly, under article 35 of the Chinese Implementing Rule of Drug Administration Law, data submitted to the SFDA for the approval of a drug containing a new chemical entity is protected against improper commercial use for six years from the date of marketing approval. Though in place, the functioning of this ‘data exclusivity’ mechanism is not completely clear leaving many foreign companies still unsure of which registration approvals drugs are eligible for, and which have been granted data exclusivity. Secondly, China’s absence of a patent term restoration has proved a major obstacle for foreign companies operating in China. Patent restoration is not applied in order to allow its local industry (mostly based on the production of generics) to start producing as early as possible. However, long drug development time and lengthy drug registration procedure in China means that by the time a new drug is launched it may have only 7-8 years remaining out of its 20 year patent life. The lack of a scheme for supplementary protection seriously hinders both foreign and domestic innovation.

Another issue of particular concern is the current rise in counterfeiting. The World Health Organisation estimates that 25 – 50% of drugs consumed in developing countries are counterfeits (many of which originate in China) and account for more than 10% of the global medicines market.86 Multinationals are especially threatened since the most successful foreign firms will be those with innovative, high-priced drugs, which


unfortunately are those most attractive for counterfeiting. It is estimated that counterfeiting costs multinationals around 10% to 25% of annual sales.87 Multinationals most affected by counterfeiting have begun to look into innovative technology, such as radio frequency identification to support investigations, however it is up to the Chinese government to take a stricter and more proactive stance in the fight against pharmaceutical product counterfeits.

Finally, there are also concerns with regard to the implementation of data protection measures in China as the current regulatory framework provides for different authorisation categories.88 Depending on the marketing authorisation category, the type and extent of information to be submitted varies according to a company’s origin. This is to the detriment of foreign companies and contrary to international regulatory data protection standards. The lack of IP enforcement in China has serious consequences. It affects not only European industry competitiveness in China but worldwide, and undermines the huge investments made in order to find new and better medicines.89 Although the quantitative impact of IPR infringement is difficult to quantify, the World Health Organisation provides estimates that counterfeit drugs (many of which originate in China) cost the global pharmaceutical industry around $32 bn a year, with conditions remaining unchanged, this figure is expected to reach $75 bn in 2010. It is estimated that counterfeiting costs multinationals around 10% to 25% of annual sales. 4.6 Drug Distribution System

Though distribution markets have been opened up in China and it is technically possible for foreign pharmaceutical manufacturers to distribute their products directly across the country, the requirements needed to obtain a distribution license are difficult to meet. These include the ability to demonstrate strong business credibility and a minimum of three years selling experience overseas in addition to the Ministry of Commerce requirements (i.e. having minimum of $9.9 million of registered capital). 9 The 0 Chinese government has begun to improve the distribution sector, but widespread progress in this area will take years to accomplish. With the full opening of the retail sector to foreign investors, more companies are expected to enter the market and create national networks, competing head on with the three leading domestic distributors

(CNPG, Shanghai Pharmaceutical Group and Guangzhou Pharmaceutical Group).

In order to sell in hospitals, manufacturers are often obliged to offer a significant margin to middlemen or distribution companies. Moreover, they may need to offer some form of incentive for hospital officials and doctors to prescribe their drugs (some companies do this by using a bonus system loosely linked to sales). 91 When offering margins or incentives, foreign pharmaceutical companies should also be aware of anti-corruption laws in China and in their own country, which duly apply. In May of 2005, Diagnostic Products Corp’s Chinese subsidiary was charged with paying local hospital officials to buy its laboratory testing kits and had to pay fines and damages of $4.8 million to the US. As one interviewee for this study commented: “If we were to compete like Chinese competitors (i.e. through corrupt practices such as “kick-back marketing”), this would double our business but this is too risky for a foreign multinational like ourselves.”

4.7 Quantitative Costs or Impacts Resulting from Market Obstacles

To establish the quantitative impact of market access obstacles on EU-China trade, a partial equilibrium (PE) model was applied by the study’s quantitative analysis experts (for further details please refer to the Technical Appendix). Inputs for the model were based on assumptions derived from the qualitative analysis discussed above, with estimates for the impact of non-tariff barriers to trade (NTBs) and regulatory restrictions calculated in consultation with trade experts and industry representatives, and compared to existing datasets on ad valorem NTBs from the World Bank. The PE model was then used to make several sets of calculations, each assuming a different outlook scenario. Finally, the quantitative impact of these market obstacles was then derived by comparing the current situation with the liberalised trade scenario.92

The key quantification results from the model for the pharmaceutical sector are outlined in Table 10. The model compared current conditions with a scenario where tariffs and NTBs are eliminated. Under the liberal trading regime overall economic welfare increased by 2.63% whereas local production would almost not be affected, only decreasing by 0.35%. In addition, the European-based pharmaceutical industry exports to China increased by $648 million. The cost in lost business opportunities resulting from NTBs alone amounted to $416 million.


Table 10: Quantification of Market Access Obstacles Pharmaceutical Products (HS 30)

China Imports from EU-25 (1) $918 million Current Conditions Domestic Production Output (1) $41 billion Welfare Improvements(3) 2.63% increase Conditions Under a Liberalised

Trading Regime (2) Change in Domestic Output 0.35% decrease Estimated Total Cost $648 million Cost of Lost Business

Opportunities of EU Companies Exporting to China. Cost of NTBs Alone $416 million

Notes: (1) China imports from the EU-25 and production data uses 2004 figures (2) A “liberalised” regime here denotes a 100% cut in tariffs and non-tariff barriers across sectors covered in

the partial equilibrium model and which is applied equally to all major trading partners. (3) Economic welfare is measured by changes in absorption (total consumption) by sector Source: UN Comtrade; World Bank; China Industry Annual (Various Years); Author’s own calculations

As part of the industry survey conducted for this study, questionnaires were sent to representatives of European pharmaceutical companies operating in China and Europe. The following table, Table 11 provides a

selection of responses from industry representatives with regards to market access obstacles and their quantification. A full and detailed overview of the industry survey results are provided in Annex 5.

Table 11: Quantitative impact of market access obstacles – industry survey results

Where respondents made specific calculations: Sub-sector Comment

Ethicals Generics

Licensing requirements for new products

“Should pre-market requirements be more lenient this would reduce our cost of entering the market with a new product by 30-40%”

●

Staffing Regulations “Due to limitations in employing staff by regulation of local authorities (e.g. the need to obtain a Shanghai residence permission) we experience 10-20% higher costs for staff and we have difficulties on fostering a high level innovative R&D environment”

● ●

Business registration “Just to register our operations and employ 18 staff employees we had to invest over 1 million EUR over for the last 3 years”

● ●

Where respondents made estimates: Sub-sector Comment

Ethicals Generics

“20% of sales revenue in China” - IV solutions; prenatal nutrition; anaesthetics drugs ● “Around 10% of turnover” - Anti-infective drugs Hard to estimate, ● “Our development is stymied by 100%” – Cardiovascular; respiratory drugs ● “More than 20% loss in revenue” – Hepatitis, antibiotic; respiratory; CNS; metabolic drugs ● ● “Preventing growth by a factor of 1.5 to 2” - Cardiology ; Gastroenterological drugs ● “[A]bout 20% of our sales” – Respiratory drugs ● “10-20% of local revenues are lost” – Prescription Drugs ● Where respondents found it difficult to quantify market access obstacles:

Sub-sector Comment Ethicals Generics

“Most costs are passed down to the consumer. Other than that, we are not really able to put a figure on our financial losses resulting from market access obstacles.”

● ●

“Difficult to say and depends on further price cuts and whether our drugs will be put on hospital lists or not. If we were to compete like Chinese competitors (i.e. through corruption and kick-backs) this would double our business but this is too risky for a foreign MNC.”

●


5. COMPETITIVE OVERVIEW 5.1 EU Competitive Positioning vis-à-vis Chinese Companies

5.1.1 EU and other Foreign Companies in China

Since the mid 1980s, multinational pharmaceutical companies have passed through several stages in their process to build business in China. The first stage - market entry - began in the mid-1980. At that time multinationals were mainly focused on exporting to China, though also some establishment of manufacturing, sales and marketing branches as well as forming joint ventures or (e.g. Xian-Janssen) or wholly-owned subsidiaries (e.g. Roche). In the second ‘protectionist phase’ which began in the 1990s, Chinese authorities began to reduce extensive spending on imported drugs and made great efforts in establishing its own national champions in the pharmaceutical sector. Share of drug imports during that period decreased from around 40% during the 1980s to around 10% in the 1990s.93 Since the opening up of China’s economy, the share of sales of foreign companies has risen to around 35%, though domestic firms still hold approximately 65% of total sales.94 In terms of volume, locally produced drugs represent 85% of unit sales, while joint venture and imported products account for 9% and 6% percent, respectively. 95 Currently, most of the world's pharmaceutical giants have set up R&D centres in China. They include: AstraZeneca, Novo Nordisk China (2002); Eli Lilly, GlaxoSmithKline (2003); and Johnson & Johnson, MSD, Organon, Pfizer, Roche China, Sanofi-Aventis (2004) Recently, none of the leading multinational companies have achieved above-market sales growth. However, as

Jiangsu-based Yangzijiang and Harbin Paharmaceuticals have outperformed the market.

T

The European pharmaceutical industry in particular has been very active in the Chinese market during the past years bringing innovative medicines to China as well as developing China’s pharmaceutical industry. Currently there are approximately 30 research-based European pharmaceutical companies with operations in China, of which 20 have established manufacturing facilities.96 Some companies have established multiple factories, producing not only for China, but exporting within the region and in some cases globally. These factories are notable as some of the first to obtain GMP recognition in China, providing an example of best practice to other companies operating in the pharmaceutical sector. The EU is also one of China’s main investors, with total investment by European pharmaceutical companies in China amounting to around 1 bn Euros. 97 Further activities of European companies operating in China include R&D collaborations and drug developments. 5.2 Local Chinese Competition

China has around 3,500 domestically-owned pharmaceutical manufacturers, the majority of which are State-owned or are joint ventures with a central/local government body. 98 Most Chinese provinces have plans for the development of their local pharmaceutical industries; those on the Eastern coast, such as Guangdong, Zhejiang, Shanghai, Shandong, Jiangsu and Beijing tend to be among the most active in promoting their own industry and tend to record the highest output.

able 12 illustrates local companies such as

Table 12: Le armaceutical Corporations b 3

ading Ph y Sales in 200

200 s $ 3 Salemio.

Mark are et sh(%) Corporation Change (%)

JS Yangzijiang Fty 147 2.5 +46

Pfizer 113 2.0 +11

GlaxoSmithKline 105 1.8 -1

Roche 105 1.8 +5

Fresenius 89 1.5 +12

AstraZeneca 86 1.5 +12

Novartis 83 1.4 +15

HLJ Harbin Pharm 74 1.3 +26

Merck & Co 72 1.2 +6

Johnson & Johnson 72 1.2 -1


Source: Brückner et al 2005 Excluding multinational joint ventures, Chinese manu

99facturers broadly fall into three

tegories:

price

M products to the European

ly recognised

argest producer Roche (see able 13).

solidation was the conversion f state-owned enterprises into share-holding

Table 13: Sales of leading therapeutic products i

ca 1. Manufacturers of western medicines:

For these manufacturers, production is usually concentrated on raw materials and cheap generic products. The majority of these manufacturers are small and ill-equipped and thus profits are generally low. However, due to the preferential nature of the Chinese regulatory system, these manufacturers are able to compete in the domestic market in terms of price, if not quality. China is a major producer and exporter of pharmaceutical raw materials and finished goods such as antibiotics and medicines. Exports however, have fallen in recent years mainly due to lack of market awareness, inadequate product certification andcompetitiveness on world markets.

2. Manufacturers of TCMs: There are a large number of TCM manufacturers in China, all regulated by the State Administration of Traditional Chinese Medicines (SATCM). Some TCM manufacturers employ high-tech methods of production, so much so that there are attempts underway to employ TCM techniques and ideas in the production of ‘western’ medicines. A strong opportunity for European companies exists in collaborating with these manufacturers to bring TCmarket.

3. High-tech research companies: The majority of these high-tech research companies are often closely tied to State universities or other government research bodies and may have links with overseas research organisations. Research activities have tended to revolve around copying existing drugs, but there is now a drive to expand China’s capacity for original research. This is part of an effort to develop a manufacturing sector on par with that of leading global sectors, though such aims are a long way off (i.e. China is yet to produce an internationalnew chemical entity, NCE)

In 2003, local products generally posted stronger growth than those of multinationals. For example sales of a JS Yangzijiang anti-infective grew by more than 60% as a result of the SARS outbreak. 100 Sales of this product were more than double those of a similar product (Rocephin) which is produced by the second lT

Only two years ago China had around 5,000 pharmaceutical companies. However, China’s pharmaceutical sector has started to consolidate and this figure is now down from over 5,000 to around 3,500. Two factors have contributed to rapid consolidation in China. The greatest single factor in restructuring of the pharmaceutical industry has been the implementation of SFDA’s GMP policy in July of 2004. This policy forced around 1,300 non-compliant companies to immediately suspend product sales and initiate rapid market consolidation as local players sought to acquire scale and capital required to meet the GMP.101 Another factor for industry conocompanies.102

n China, 2003

Product (manufacturer) Sales

[$ millio

]1. Zuo Ke (JS Yangzijiang Fty) 73 2. Rocephin (Roche) 35 3. Da Li Xin (Shenzhen) 34

4. Heptodin (GSK) 31 5. Sulbactam/ Cefoperazone

(HLJ Harbin) 29

6. Tienam (MSD) 27 7. Glucobay (Bayer) 26 8. Sandostatin (Novartis) 26 9. Lu Nan Xin Kang (Shandong

Lunan) 26

10. Kai Shi (Beijing Taide) 23 Source: Accenture, 2005 Despite consolidation efforts, the pharmaceutical sector in China remains quite fragmented. The fragmentation has not prevented the country’s top ten pharmaceutical companies from reaping the rewards of increased scale and sales volume. The average revenue of these companround $560 million in 2004, account

ies was ing for

y or affiliated with state-owned hospitals, universities, or manufacturing companies).104

aroughly 19% of the total market.103 True private sector activity in the Chinese pharmaceutical sector is virtually non-existent. A large number of Chinese pharmaceutical companies are state-owned, those that are not, still have close ties with the government at some level (i.e companies that have no state connection but are owned b


Tab hinese Med harmaceutical Production, 2002le 14: C ical/P -03

2002 2003 Sector Number Sales

[yuan 10Number Sales

[yuan 100 million] 0 million]State-owned enterprises

1,341 913.54 1,180 965.83

Foreign-funded enterprises

568 453.25 604 524.84

Total* 3,488 2,040.86 3,314 2,378.67 Total includes all State, Collective and JV enterprises ‘above a designated size’. ource: China Statistical Yearbook 2003 and Espicom, 2006

04 was $20.7 illion, doubled that of 2003.105

als Market Share: % alue, 2004

S 5.2.1 Competition in the Chinese OTC Market

In the field of OTC, YunNan Baiyao Medicine Ltd, which has its headquarters in Kunming, is the leading company in the Chinese OTC pharmaceuticals market. The company is involved in the manufacture and distribution of a variety of medicines and pharmaceutical preparations, though it primarily produces TCM as well as medicinal chemicals and botanical products. In 2004, YunNan Baiyao held a total market share of 6.3% and generated revenues of $220.3 million, a 36.2% increase over the previous year. Net income in 20m Table 15: China OTC Pharmaceutic

Share, by V Company M e arket shar

20 ] 04 [%YunNanBaiyao Medicine Ltd. 6,3 Beijing TonRenTang Medicine Ltd.

6,1

SanJin Medicine Factory 3,5 Other 84,1

Source: China Statistical Yearbook, 2005

et are in the OTC market of 3.5 % in 2004.

101 branded ‘natural’ products. It has

9.7% higher than the revious year.107

’ Competitive

ke the Japanese company Toa Seiyaku.108

innovation has only cently restarted.109

Companies in

ve area both for today and in the future.

Sanjin Pharmaceutical based in Guilin Guangxi, China was established in 1954 and is one of China's leading botanical medicine producers. The company primarily distributed under its SanJin brand and commands a total marksh YunNan Baiyao Medicine Ltd. is closely followed by Beijing TongRenTang Medicine Ltd., which holds a 6.1% market share. Beijing TongRenTang - mainly producing pharmaceutical preparations and TCM - has a 300 year history and a distinguished household name. Currently, TongRenTang boasts 500 retail outlets in China as well as

recently listed in Hong Kong, and invested $75 million in new production facilities for packaged products. 106 In the financial year 2004, the company generated revenues of $293 million, an increase of 13.1% over the fiscal year 2003. Net income in 2004 totalled $34.6 million, 1p 5.2.2 Chinese OrganisationsStrategy in Foreign Countries

The Chinese pharmaceutical industry is keen to compete in foreign markets, and looks to western companies as a source of expertise in management techniques and as a model of quality standard best-practices. Among the most progressive is the Sanjui Enterprise group which acquired a majority of the stain In contrast to India however, China’s domestic firms are generally not ready to capture a significant market share overseas, nor are they ready to invest significantly in overseas acquisitions. This can be mainly attributed to the absence of national champions as well as the fact that encouragement of re 5.3 The Chinese Pharmaceuticals Market: European and Chinese Comparative Perspective

The pharmaceuticals market can be distinguished in two broad sub-categories: ethicals and generics. Table 16 on the next page offers an assessment of the related core competences of Chinese companies in the respecti


Table 16: Key success factors for “Ethicals” vs “Generics” and core competences of Chinese companies

Ethicals Generics Key success factors

- R&D - Patents - Global marketing

- Favourable cost position

Competitive position of Chinese companies

Chinese companies still have a large gap to close - Only a few Chinese domestic companies have the scale and capacity to run effective R&D programs. Local firms currently invest only a small percentage (around 2%) of sales income in R&D110 - The industrialisation of biotechnology still lags behind the western world. Relatively few biotech companies exist and public biotech research institutions used to be completely isolated from the market. Most of the biotech products currently manufactured by Chinese domestic companies are bio-generics111

Chinese companies dominate the domestic market - Some domestic players’ retail prices are lower than multinationals’ raw material costs and some companies can sell at 50% of the multinationals’ price and still realise better margins112 - Often better raw materials cost position (overall procurement costs generally run at 20-40% below the costs of comparable goods in established markets - Enormous pool of workers, with a low hourly pay of approximately $ 0.50113

Status today The pharmaceutical industry culture in China is strong in meeting the requirements for copying, rather than being oriented towards a dedicated and systematic search for new molecules114 The Chinese pharmaceutical industry currently lacks the critical mass to be competitive in the “Big pharma” business: By comparative example, in 2005 AstraZeneca’s revenue was 5 times bigger than the total of Chinas top ten pharmaceutical companies put together ($ 23.9 bn). Astra Zeneca spent almost as much on R&D alone ($ 3.4 bn) as the top ten Chinese firms collect in revenue.

Future Trend Since R&D is increasingly being encouraged by the Chinese government at both national and provincial levels, a future basis for world-class pharmaceutical research might emerge. In the longer term, at least some of the larger current domestic generics producers such as the 999 Company, Hua Bei and Dong Bei are expected to gear towards truly innovative R&D and innovation focused on small molecules.115



Chinese and European pharmaceutical companies are characterised by specific core competences, leading to a differentiated

assessment regarding their strengths, weaknesses, opportunities and threats. Table 17 looks at these in detail.

Table 17: SWOT analysis of European and Chinese pharmaceutical companies

Europe China

Strengths - EU companies are major innovators in the industry,

investing heavily in R&D. - Large EU MNCs have global market access.

Strengths - Chinese drug makers do not share the

development costs, liability costs and quality assurance costs of global players; moreover, they are able to offer drugs produced on a completely different and intensely competitive cost base.

- Domestic firms benefit from an enormous pool of cheap workers and flexible working conditions.

- Raw and processed materials are often cheaper in China and frequently match global quality standards; overall procurement costs generally run at 20 to 40% below the costs of comparable goods in established markets.

Weaknesses - There is still too little market-based competition in the

end-consumer markets in some of the EU countries. This has contributed to the nurturing of inefficient positions within the industry.

- The competitiveness of the EU pharmaceutical industry is still centred on domestic and fragmented markets and research systems.

Weaknesses - Chinese health and life sciences companies have

inherent state ownership-related inefficiencies and cannot continue to finance the health care system’s notoriously long cash cycles.

- Suffering from domestic overcapacity, Chinese companies have currently little spare cash to invest in new technologies or R&D. They are rarely able to compete with products from multinationals (manufactured in China or imported) and rely on discriminatory government pricing and reimbursement policies in order to remain viable.

- Only a few Chinese domestic companies have the critical mass to run effective R&D programs. Domestic companies currently invest only a small percentage (2%) of sales income in R&D

- Most of the biotech products currently manufactured by Chinese domestic companies are generics. Moreover, public research institutes are relatively isolated from the market resulting in poor market orientation and a lack of experience in the commercialisation of research.

- R&D spending is commonly only 2% of sales.

….Cont.


….Table 17 (Cont.): SWOT analysis of European and Chinese pharmaceutical companies

Opportunities - It is expected that as the Chinese society continues to

become better educated and people’s tastes more sophisticated, their demands for Western goods will grow correspondingly.

- A possible improvement regarding intellectual property (IP) protection might increase incentives for both multinational and local pharmaceutical companies to introduce innovative drugs and new brands into the Chinese market.

- Liberalisation of the Chinese pharmaceutical distribution system will continue. Foreign pharmaceutical companies will benefit from increased transparency and simplicity of the complex and diverse distribution system. More foreign-backed, specialist and third-party logistics providers (3PLs) and distributors will emerge. This will provide multinationals with additional opportunities to develop a vertically integrated industry.

- TCM is an opportunity for multinationals (especially for those already established) to invest in the field of complex homeopathic and phyto-pharmaceutical products

- Using low-cost manufacturing capabilities in China, many multinationals, with spare capacities, can export their products to other Asian and international markets.

- Establishing R&D facilities in China is attractive for multinationals due to a variety of advantages: Lower costs, biopharmaceutical and biotech clusters, a liberal research environment. a large patient pool, the opportunity to use innovative approaches, treatment flexibility and the opportunity to access a huge testing ground.

Opportunities - Chinese companies will also benefit from

improvements in the economic environment. - Chinese health and life sciences companies are

likely to be active participants in the aggressive consolidation of the Chinese pharmaceutical manufacturing base.

- Chinese pharmaceutical manufacturers are acquiring interests in retail channels and have become a major factor in the consolidation trend.

- Exporting out of China is a strategy that Chinese domestic companies are pursuing. The exporting activities of domestic companies with products at earlier stages of the pharmaceutical value chain will remain strong.

- Domestic Chinese TCM products, actively supported by the Chinese government, have significant export potential. Today, Hong Kong and Taiwan hospitals already include forms of TCM in their therapy and treatment programs.

Threats - In the short and medium term, the unfavourable

regulatory environment will not improve significantly. The “sector branded & patent protected drugs” (where European companies have significant competitive advantages in comparison with Chinese competitors) is particularly negatively affected by the regulatory climate. This will clearly limit the growth potential of European chemical companies in the Chinese market.

- The market for imported commodity generic drugs may disappear, as multinational ethical businesses and domestic commodity generic players will squeeze out this segment

- The Chinese government will remain firm in its resolve to promote and protect its domestic pharmaceutical industry. Non-trade barriers are likely to remain strong to avoid further market entry by multinationals and reduce their ability to make a lasting footprint in China.

- The trend towards exporting out of China may also represent a threat to multinationals, since Chinese competitors might gain market share in international markets

- Trademark and patent infringements are responsible for an estimated annual loss in sales of $ 800 million. Of particular concern is the increase in counterfeiting, which costs multinationals approximately 10 to 25% of their annual sales.

Threats - The Chinese domestic industry will continue to see

a rapid consolidation as smaller domestic players exit the market or are taken over by larger firms.

- Domestic overcapacity to produce basic, cheap generic products will force local producers to export their products to obtain better returns for their products and to survive.


5.4 Scenarios for the Development of the Chinese Pharmaceutical Market116 These scenarios, both baseline and optimistic, assume that economic performance and socio-demographic trends will continue as expected. These are that the Chinese economy remains on a strong growth path above 7% per annum of GDP. In addition, it is presumed that socio-demographic trends with regards to a low birth rate and higher life expectancy will result in an increasing share of the population over 65 compared to the overall population. Longevity and the ageing of the population will fuel the demand for drug categories that have preventative qualities (e.g. OTC pharma and nutraceuticals). Geriatric medicine and related treatments of disease in the area of physical debilitation will also become important. Epidemiological changes such as increases in chronic conditions (e.g. diabetes, heart disease) will drive drug consumption particularly for premium priced quality drugs. The emergence of intensified new diseases such as HIV/AIDS and avian influenza will also be observed.

5.4.1 Baseline Scenario

Assumptions and Impacts

Health Policies: China’s healthcare reform initiatives for rural areas will not achieve its goals due to an over ambitious agenda. Disadvantaged healthcare will remain for rural populations undermined by a continued high income disparity between rural and urban areas.

Healthcare Expenditure: Disparities on health care expenditure remain between more affluent coastal regions and the relatively poorer inland. With unchanging income disparities the growth of health care expenditure will level; in costal regions at a constant 13% or at best increase only slightly. Consumer spending patterns continue to show demand in favour of cheaper generics and locally produced products over high-end ethicals. The demand for foreign products will not increase and the market beyond coastal regions will remain untapped.

Domestic manufacturers will continue to produce an oversupply of basic and cheap generic drugs in the medium to long term. Due to continued overcapacity, Chinese pharmaceutical exports will remain significant, but as a result of local competition Chinese producers will still suffer losses. Prices of pharmaceutical products will continue to decline.

Use of generics: The unfavourable economic environment for ethicals remains, due to

continued low health care spending and government initiated price cuts in favour of generics. With stagnating health care expenditure, the dominance of generics in the Chinese market will continue and branded products from multinational companies will continue to lose market share. Current profitability levels will be maintained as the new middle class gains in numbers.

R&D Base: Undeveloped and bureaucratic fund allocation mechanisms continue to hinder long-term basic research. The culture of copying and counterfeiting will not change and progress in the protection of IP will be slow. The obstacles to long-term basic research will hold back China’s innovative potential in the pharmaceuticals sector. China’s domestic producers will continue to produce cheap generics and will fail to develop high value added ethicals.

Pricing and Reimbursement: With ongoing price cuts, little reform of the complex hospital bidding process, the government’s rigid price control regulation will not provide any incentives and will not be able to deliver an environment in which multinational companies can achieve adequate returns in relation to value offered to consumers. Innovative foreign drugs will still face difficulties in qualifying for national and provincial reimbursement drug lists. Perpetual changes in the pricing policy and several years of stability and transparency are needed to plan for a product’s registration, manufacturing approval and the product’s launch. For these reasons multinationals will rely on market pull and remain reluctant to supply the Chinese market with innovative drugs or to support public research efforts.

Registration: The drug registration procedure will continue to be complex and lengthy. Larger patient numbers and additional data requirements add to manufacturers’ financial costs of conducting studies in China. A long registration time combined with a lack of patent term restoration in China allows for only a few years of patent protection. The inefficient registration system will lead to delays in drug introductions, favouritism to domestic drug companies and challenges to IPR. This will lead to a drop in the share of imported drugs.

IP Protection: The protection of intellectual property will remain insufficient. Patchy regulatory capabilities and responsibilities contribute to the absence of appropriate legal enforcement of IP. The absence of an adequate IP protection system will make indigenous and foreign drug producers hesitant to launch new and innovative


products in China. The potential growth of European companies operating in China therefore will not be fulfilled and foreign companies will be hesitant to invest in R&D in China.

The Drug Distribution System will remain complicated and characterised by regional and local differences. China fails to establish a large-scale nationwide distribution system and layers remain between manufacturers and patients. Foreign companies continue to face difficulties in obtaining a distribution license, making China less attractive for business.

Market Potential: With healthcare expenditure remaining low at 5.4% of GDP, the current rate of $16 per capita and the total pharmaceuticals market size will remain at $20.8bn. Thus, with the current share of foreign funded companies remaining at 29%117 this will result in, at best, a market of $6bn for foreign companies. The continued lack of IPR protection will affect any growth or profitability of companies, including Chinese companies under this baseline scenario.

5.4.2 Optimistic Scenario

Assumptions and Impacts

Health Policies: Government policies in the healthcare sector under the 11th Five Year plan for rural areas will be fully implemented. The gap in income disparity between rural and urban areas will diminish. The Chinese disease profile in high-income urban areas evolves to one increasingly similar to western societies characterised by more chronic and debilitative ‘diseases of affluence’. Further reform of the market system takes place and current price-controls ease.

Healthcare expenditure: With the emergence of a more health conscious and affluent sector of the population, total health care expenditure continues to grow at least by 13% p.a. In the long-term, healthcare expenditure will get closer to the OECD average of 8% of GDP. Drug expenditure will increase to over 25% of total healthcare expenditure.

An increase in health care expenditure would lead to a shift away from the current cost-conscious attitude set by the regulatory environment towards a value-oriented culture. A successful medical reform could also result in larger drug consumption patterns translating into increased profitability for drug suppliers. This would mean an increased demand for state of the art medical equipment and western drugs (for which consumers are prepared to pay).

Domestic Manufacturing: Local companies will be freer to invest more in R&D. This trend will be encouraged by the government and through consolidation of the industry as a result of mergers and acquisitions. The domestic sector will grow stronger. Increased profitability will provide an incentive and the means to produce innovative drugs rather than copying existing ones only.

Use of Generics: Major economic trends and increased healthcare expenditure will bolster demand for branded products and government initiated programmes (such as the revised reimbursement lists). This will help to reduce problems related to the big price differences between off-patent and original brands. The market share of patented original brands will increase to the detriment of low quality and counterfeited generics.

R&D Base: The importance of innovation will be recognised by China’s public sector institutions. Government support for research institutes and leading local companies in the area of basic pharmaceuticals, biotech and TCM research will be increased further. In the long-term, large domestic manufacturers currently producing generics will migrate towards truly innovative R&D and will begin to demand greater IP protection for the ethicals they develop. China will become a world class pharmaceutical research base.

Pricing and reimbursement: Government initiated plans that will benefit Rx drug manufacturers (such as a supplementary scheme to cover occupational medical expenses) and ease the current downward pressure on prices. Price control mechanisms become more transparent and effective measures are taken against corruption. Prices will not decrease further making it easier for companies to recover their costs and to charge a premium for the introduction of new and innovative drugs.

Registration system: The Chinese government develops a more streamlined and transparent registration system. An improved system will reduce approval times and as a result will review standards of imports in line with locally produced drugs. Imported drugs will benefit from an accelerated clinical trial approval process and more relaxed requirements for certificates of free sales.

IP protection: The local R&D basis is strong enough to generate Chinese innovative players capable to compete in the “Big Pharma” business. Emerging indigenous brands begin to demand and require protection and the central government begins to take a proactive and effective stance on IP


protection. Multinationals will continue to invest in R&D in China, to launch innovative products and to set up manufacturing branches. While they will gain ground in innovative products, imported commodity generics will be squeezed out of the market.

Drug distribution system: Liberalisation of the distribution system will be successful and the system will become more transparent. This will facilitate and encourage the overdue consolidation of the wholesale sector. With greater liberalisation, more foreign-backed distributors (such as the trial joint venture ‘Zuellig Xinxing Pharmaceuticals’) will emerge. These multinationals will provide additional opportunities to develop a vertically integrated industry. With greater transparency in the distribution system, it is likely that specialist distributors and 3rd-party operators (3PLs) will emerge. These (local/international) 3PLs will be able to help multinational drug makers streamline supply-chains in China and thereby address inefficiencies in the distribution chain. The consolidation of the wholesale sector will further facilitate the formation of domestic champions that have the ability to build regional networks and to sell directly to hospitals and the retail sector. The retail sector will develop into three distinctive outlets: discount pharmacies, reimbursement pharmacies, and chain drug stores. In combination with the encouragement of self-medication and consumer cost awareness retail pharmacy sales will increase significantly.

Market Potential: With the new reforms and increased transparency and efficiency across the sector, strong growth rates will continue at almost double GDP growth rate. A successful rural strategy will increase per capita healthcare expenditure, achieving $22 per capita and a total amount of $28.9bn. Applying current market share figures of foreign funded companies in China, 118 this would allow $8.4bn of market share for foreign pharmaceutical companies by 2010. Moreover, Chinese companies, with more incentive to invest in R&D and innovation, will be better equipped to enter 3rd country markets. 6. RECOMMENDATIONS 6.1 General issues and concerns

Recent developments in China’s regulatory environment have been positive for both EU and Chinese industry competitiveness and have been marked by an increase in bilateral trade and an enhanced research based on international exchange of know-how. China’s recent accession to the WTO and intensified

dialogue between Chinese authorities and international institutions and industry, have been key in this regard. There remains however a number of important issues regarding both the implementation of new rules, as well as the adoption of non-discriminatory and international standards, particularly in the regulatory field. Furthermore, more reforms are still needed in areas which are still of concern. This includes the enforcement of a strong IP system which creates incentives for innovation. Greater IP protection leading to increased transfer of modern hi-tech and R&D, as well as fostering an environment where universities and enterprises work together in drug development. A more streamlined regulatory system would in addition provide for enhanced safety and quality control of drugs while striking the balance with the need to ensure that new pharmaceutical products reach shelves and patients in a timely manner. 6.2 Recommendations for competitiveness

Building an innovative economy in Europe Basic research constitutes the backbone of the pharmaceutical industry. The development of pioneering technologies would not be possible without a highly integrated and well-funded research environment at the basic level. To this effect, institutional as well as financial changes are highly relevant. Therefore, structural changes in Europe are called for in line with the Lisbon Agenda to promote an innovation-based economy. For instance, the establishment of a pan-European research base would help to pool resources and allow researchers to benefit from economies of scale. The European pharmaceutical industry is currently relatively fragmented and consolidation should be encouraged. More importantly, closer cooperation between business and academia could be strengthened at a fundamental level. While recent actions by some European countries have moved in this direction, the actions have not achieved their potential effects. Measures taken so far have included the establishment of investment funds and research campuses, which are designed to create links for information dissemination and capital allocation. However, linkages are


required at a much more fundamental level to integrate scientific education with technological markets. Education and research can and should take place, as in the US, in order to serve future markets. A wider range of funding and co-funding tools and development of complementary industries such as healthcare insurance are indispensable in ensuring equity in unison with competition. Various means are required to counter ‘protectionist’ elements of the Chinese system that otherwise may remain unchanged. One of these is the absolute necessity to build and maintain healthy relationships with the various agencies and officials involved in the regulatory process. As in most emerging markets, the state employs considerable influence on market access and business rights to shape the involvement of foreign companies; subsequently, a strong government relations programme remains an important factor for success in China.119 Another general obstacle worth mentioning is the notification system of upcoming regulatory changes. Though multinational companies receive advance notification on such changes, the information provided is often incomplete and sometimes even inaccurate. It is recommended that executives follow up on finalised formal announcements to ensure the information is factual120. Further improving the cooperation between European authorities and business is key in order to address these issues and should continue to take place on a regular basis. The EU-China IPR working group is a very helpful approach in seeking concrete actions and remedies to specific issues and companies operating in China are encouraged to repeat these kind of initiatives in other areas like regulatory issues. It was noted that there are problems surrounding the confidentiality of some data and trade secret policies, but there may be remedies in agreement. Recommendations for Industry

In order for European pharmaceutical companies to regain some of their lost competitiveness over the last decade (especially vis-à-vis US competitors), a number of creative approaches for taking advantage of the opportunities brought about by China’s integration in the world trading system are suggested here. Despite severe difficulties in setting up R&D activities in China, not least of which is a lack in the protection of IP, European companies

should increase their activities in this area due to the large cost differentials between developing new drugs in China and advanced economies. In addition, further outsourcing of non-core / back office activities could also be facilitated. Of course, if China’s IP environment continues to deteriorate, companies should increasingly consider alternative investment destinations to lower R&D cost – the pharmaceutical industry in India for example has made some recent notable advances. Increased pressure on China’s current distribution system as well as increasing self-medication trends and distribution of medicines through supermarket chains which are already emerging in some European markets will mean that new opportunities for European producers exist to distribute their products - with the added value that they by-pass the current networks which are a formula for corruption and graft. European companies should be the first mover should these changes in China emerge and therefore an active dialogue with the retail sector is encouraged. In addition, European pharmaceutical companies should look for opportunities to offer value added services in the Chinese market, starting with providing free information for Chinese consumers and medical practitioners. Annual sales volume of Traditional Chinese Medicine in the international market has already reached over USD 16 billion. European phytopharmaceutical companies in particular should be able to build on their strength in the international market for plant medicine (in which Europe already accounts for 30 percent of global sales121) to bring an increasing global demand for TCM to the consumer. When exploring opportunities in this area, European companies must be aware of the difficulties that currently exist for herbal exports to China as well as for imports into the EU, making the development of regulatory obstacles a key strategic consideration. When raising issues with the Chinese authorities, European industry should speak with a single voice. This can be across industry, for example related to issues on IP, which affect most industries, or this can involve the pharmaceutical industry singularly for other issues affecting it (e.g. mandatory pricing of drugs).


6.3 Recommendations for policy initiatives

1. Strengthen IPR protection

For European research-based pharmaceutical companies to continue to invest in new medicines and be able to operate in key markets like China, it is important to strengthen the implementation of (announced or agreed) provisions while adopting other provisions in line with international standards. European authorities are encouraged to adopt a firm position in this respect. Below are a number of possible measures which, if adopted by Chinese authorities could enhance IP protection for pharmaceutical products in China: - Allow companies’ in-house legal counsels

to speak before SIPO relax restrictions on the ability of foreign lawyers to practice in China and encourage the cooperation of SIPO with other national and international patent offices.

- Adopt Patent Term Restoration or Supplementary Protection certification practices which will compensate firms for the time lost between patent application and release.

- Adopt tougher sanctions on counterfeiters.

- Strengthen data protection provisions and increase transparency of data protection procedures.

- Train IP administrative and judicial authorities on legal aspects of IP enforcement.

- Establish more forums such as the EU-China IPR Working Group to serve as a platform for European and Chinese authorities and business to conduct technical exchange and explore concrete actions.

2. Pricing and reimbursement

Pricing and reimbursement policies should be based on transparent, predictable and non-discriminatory criteria. Likewise, more transparency is also needed in the hospital bidding system, with better recognition of innovation and clear criteria applicable in the same way across the country. Currently, the onus is on China to cap pharmaceutical prices in order to increase access of drugs to consumers. However, in some cases, uncertainty over price restrictions has dampened R&D activity as companies face significant risks in obtaining returns on investment. A clear-cut legal framework which outlines conditions under which pricing obligations are imposed should be established. Furthermore, procurement practices are problematic in Chinese hospitals with non-transparent bidding processes which have the effect of discouraging competition. 3. Regulatory environment

Further regulatory reforms and deregulation are needed in order to achieve a level-playing field and an internationally competitive pharmaceutical industry. Some additional improvements which could be made in the Chinese regulatory regime include:

- Shorten clinical trial approval time - Eliminate discriminatory certification

procedures for imported active ingredients.

- Switch from a manufacturing license to a marketing license system for the granting of business licenses.

In order to promote further reform, dialogue and technical exchange should be enhanced between business and government. At the same time, close monitoring of developments in China is suggested, perhaps in the form of an annual Trade Barriers Report, as is done in other countries.


ANNEX 1: PROPOSAL FOR MORE DETAILED SCENARIO Key determining factors in the dimensions economic and regulatory environment have been identified in the frame of this report.

The first step would be to select a set of major influencing factors suitable to develop scenarios: Therefore, the correlations and interdependencies between the economic and regulatory drivers have to be identified. A possible approach is displayed in Figure 6.

Figure 6: Major correlations between determining factors of the economic and regulatory environment of the Chinese pharmaceutical market

Economic Performance

Sociodemographics

Healthcare Expenditure

Domestic Manufacturing

Use of Generics

R&D Basis

Pricing & Reimburs.

Registration

Health Policies

Mid-term correlation

Long-term correlation

IPR

Drug Distribution

Straight-line arrows show a positivecorrelation between the differentfactors shown to the left. For example,China’s economic performance has animmediate short-term impact on thelevel of healthcare expenditure, whichin turn has an immediate impact onChina’s R&D base. Dotted lines show alonger-term correlation. For example,an improved R&D base will have along-term positive impact on economicperformance.

Source: Griesar 2006 “Health care expenditure” is the most important economic factor directly influencing several aspects of the regulatory environment in the mid-term. An increased healthcare expenditure (nurtured by a further improvement of the economic performance of the Chinese economy) would lead to a shift away from current cost-conscious attitudes towards the regulatory environment towards a value-oriented culture. Healthcare expenditure will not immediately follow economic performance The situation regarding IPR enforcement in China can be considered as the key indicator in order to assess the overall regulatory “culture” (cost versus value). Moreover, the long-term correlation between the quality level of Chinese domestic R&D and the level of governmental efforts regarding IPR

enforcement is the key mechanism for establishing a value-oriented regulatory culture. In the long-term, a radical improvement in IP enforcement can be only be expected if emerging home-grown Chinese pharmaceutical brands begin to require IPR protection. This will be the case, if the local R&D basis is strong enough to generate Chinese innovative players capable of competing in the “Big Pharma” business. As a consequence, different scenarios regarding the economic and regulatory pharma environment can be derived by considering the major drivers “heath care expenditure” and ”IPR”. A qualitative structure for a basic framework is presented in Figure 7.


Figure 7: Qualitative structure for a basic framework of scenarios regarding the economic and regulatory pharmaceutical environment in China

Commodity type

generics dominate

Chinese “innovation champions” established

↓

IPR enforcement

China as “Counterfeiting

factory”

Strong focus on IPR protection

“Missed Expectations”

Decelerated economic growth

Focus on cost-conscious measures

Scenario C

“Economic boom and

Protectionism”

Scenario D

“Economic Boom and Level Playing Field”

“China as economic

powerhouse”

Continuous growth

→ Chinese Healthcare spending

Focus on value

Scenario A

“Depression and Protectionism”

Scenario B

“Depression and Level Playing

Field”

Source: Griesar 2006 “Worst case” and “best case” scenarios can be derived by additionally considering two generic scenarios with respect to the future

competitiveness of the European pharmaceutical industry.

Figure 8: Qualitative structure for basic framework of scenarios regarding the opportunities and risks of European pharmaceutical companies in the context “China”

Economic and regulatory environment of Chinas pharmaceutical industry Scenario A Scenario B Scenario C Scenario D



“Economic boom and

Level Playing Field”

“Economic Boom and

Level Playing Field”

“Missed opportunities” Worst case Competitiveness

EU pharmaceutical

industry

“Europe as “pharmacy of the world””

Best case



China Trade and Investment Relations – Study 4 of 12: Pharmaceuticals 39

ANNEX 2: PHARMACEUTICALS GOVERNMENT STRUCTURE

Legislative Affairs Office

Department of Education, Science, Culture and Public

Health

Working Offices

State Council

National Development

& Reform Commission

(NDRC)

• Managing national stock of pharmaceuticals

• Regulation of drug pricing

State Food and Drug Administration

(SFDA)

• Drafting laws and regulations regarding drug approval, importation, and manufacture

• Examining and registering drugs and setting drug standards

• Monitoring clinical trials ,producing processes, drug advertising and control drug quality

Ministries Directly Affiliated Organs

State-owned Assets

Supervision & Administration Commission

(SASAC)

Special Directly Affiliated Organ

Ministry of Health

• Review and approval, along with SFDA, of clinical trials sites and departments

• Regulates drug bidding and drug use

State Council Managed Administrations

State Administration of Traditional Chinese Medicine

(SATCM)

• Formulating policy for developing traditional Chinese Medicine

• Setting qualifying standards for traditional medicines and medical treatment

Key regulatory

bodies

Relevance

• Participating in making relative laws and regulations

Organisation Layer

Ministry of Social Security

• Exercise the rights of shareholder on behalf of the State

• Reimbursement policies for drugs offered through government sponsored health coverage

EU-

ANNEX 3: TABLE OF KEY LAWS AND REGULATIONS PERTAINING TO PHARMACEUTICALS SECTOR Table 18: Key laws and regulations pertaining to pharmaceuticals sector

Sub-sector Key Laws and Regulations

I) Subscription and OTC drugs (value chain)

II) Ethical/patented (various therapeutic areas) Generics/non-patented (various therapeutic areas)

Drug Administration Law, revised on February 28, 2001, effective as of Dec.1, 2001;

Implementing Regulations for of Drug Administration Law, promulgated by SFDA on August 4, 2002, effective as of Sept.15, 2002.

SDFA Administrative Measures for the Import of Drugs

Regulations on Administrative Protection for Pharmaceuticals, Approved by the State Council on December 12, 1992 and promulgated by the State Pharmaceutical Administration on December 19, 1992.


ANNEX 4: FACTORS INFLUENCING COMPETITIVENESS IN THE CHINESE MARKET In addition to the genuine market driven competitive threats posed by Chinese operators in this sector, European companies also face competitive forces as a result of non-tariff or ‘behind the border’ barriers. The following sections list these NTBs, and provide a brief qualitative description derived both from desk research, and the results of the industry survey. Those NTBs which are deemed to result from strong Chinese government intervention are plotted on the

right of the horizontal access while those derived from genuine competition are plotted to the left. The author has indicated the relative importance of these competitive forces in terms of their position on the vertical axis with those nearer the top deemed as the most significant. The graph is designed as a guide only to give some perspective to the descriptions of competitive forces in this sector.

HIGHER

LOWER

Lower Cost Base Chinese Competitors

Upgrading of CapabilitiesChinese Competitors

Regulatory Environment

Pricing & Reimbursement Policies

Complicated Registration Procedures (Drug Launch)

Restricted Access to Distribution Channels

IPR Infringement

(1) preventing market access by excessive regulatory controls, discriminatory practices in applying laws and regulations, and other forms of local protectionism.

Language Barrier

Industry Consolidation AmongChinese Companies

Government Support & Intervention (1)

Better Local Distribution Networks Chinese Competitors

Knowledge Traditional Chinese MedicineLocal Companies

Staffing Difficulties

Impact on Competition

Nature of Competitiveness MARKET DISTORTINGMARKET DRIVEN

Factors Influencing Competitiveness of European PharmaceuticalCompanies Engaged in China-Related Business

HIGHER

LOWER

Lower Cost Base Chinese Competitors

Upgrading of CapabilitiesChinese Competitors

Regulatory Environment

Pricing & Reimbursement Policies

Complicated Registration Procedures (Drug Launch)

Restricted Access to Distribution Channels

IPR Infringement

(1) preventing market access by excessive regulatory controls, discriminatory practices in applying laws and regulations, and other forms of local protectionism.

Language Barrier

Industry Consolidation AmongChinese Companies

Government Support & Intervention (1)

Better Local Distribution Networks Chinese Competitors

Knowledge Traditional Chinese MedicineLocal Companies

Staffing Difficulties

Impact on Competition

Nature of Competitiveness MARKET DISTORTINGMARKET DRIVEN

Factors Influencing Competitiveness of European PharmaceuticalCompanies Engaged in China-Related Business


ANNEX 5: INDUSTRY SURVEY RESULTS

Pharmaceuticals SECTION 1: SECTOR OVERVIEW 1.1 Sample group profile

Table 1 – Sample Group Profile

MNC SME

WFOE 7 WFOE 4 JV 3 JV 0 BOTH 0 BOTH 0 Unknown 2 Unknown 0 Total 12 Total 4 %Sample 75 %Sample 25

1.2 For how many years has your company been engaged in China-related business?

Chart 1 – Length of Engagement in China-related Business Activities

>10 years 64%

5 to 10 years 29%

< 5 years 7%

< 1 year or intending to

enter China 0%

Approximately 93% of companies interviewed have been engaged in China-related business activities for 5 or more years. 64% of the sample group has more than 10 years of China experience while only 7% of the companies surveyed have been engaged in China-related business for less than 5 years.


1.3 Please specify which activities you have in China and for how many years.

Table 2 - Sales, Production & R&D Activities

% of Total Responding122

>10 yrs 5-10 yrs <5 None n/a Sales Activities 44% 19% 13% 13% 13% Production Activities 25% 6% 13% 38% 19% R&D Activities 13% 13% 13% 44% 19%

Pharmaceuticals companies are heavily involved in sales activities. A significant percentage of the survey respondents (44%) have been conducting business in sales activities for over 10 years. The same number of companies (44%) conducts no R&D activities in China, while 38% have no production facilities. 1.4 Please describe the nature of your engagement in China.

Table 3 – Nature of Engagement in Chinese Market

Number of companies

% of total companies

EU Exports to China 11 68.75% China-based production for exports to EU and other destinations 2 12.50% China-based production for local market 7 43.75% Sourcing 7 43.75% All of the above 1 6.25%

The majority of respondents surveyed (68.75%) indicated that they export pharmaceutical products from the EU to China. 43.75% of respondents indicated they were involved in China-based production for local markets and sourcing. Only 12.5% indicated that the nature of their engagement was China-based production for exports back to Europe and other destinations. 6.25% of respondents are engaged in all of these aspects in China.


1.5 Ethicals versus Generics as a percentage of sales in China

Chart 2 Ethical vs. Generics sales% in China

Ethicals 50%

Generics 30%

Involved in both 20%

Half of the respondents indicated that they only sell Ethicals - products supplied to patients by prescription - in the Chinese market, while 30% sell Generics – products sold under non-proprietary names. 20% of respondents operate in both segments. SECTION 2: CHINA MARKET OPPORTUNITIES 2.1 How important is the Chinese Market for your business?

Chart 3 - Importance of the Chinese Market123

19%

0%

19%

6%

31%25%

13%

38%

19%

31%

0%

10%

20%

30%

40%

50%

60%

Today In 5 years

% o

f res

pons

es

1 little importance 2 some importance 3 moderate importance4 significant importance 5 utmost importance

19% of respondents consider the Chinese market today to be of utmost importance and 13% to be of significant importance. Another 31% regard it as of moderate importance. In comparison, in five years time, 31% of surveyed pharmaceutical companies expect the Chinese market to be of utmost importance and an even higher 38% to be of significant importance. Although 19% of the surveyed pharmaceuticals companies regard the Chinese market as of little importance today, none of the respondents have this expectation for the next five years. Total responses indicated that the importance of the Chinese market to European pharmaceutical companies would increase from an average of 2.9 rating to 4.0 in five years time. 124


2.2 What is the percentage of your company’s turnover in China today compared to overall / global turnover in sales and market share?

Respondents are equally divided over three groups separated by the percentage of each company’s global turnover. A third of respondents place their turnover in the Chinese market to be less than 1% of their global turnover. Another third, estimate that between 1% and 5% of their global turnover is in China. The last third record more than 5% of their global turnover in China. Market share among respondents remains low, with only a few indicating a market share of up to 5% in particular therapeutic areas. 2.3 Over the next 5 years, how do you expect business opportunities to evolve in your

sector of operation in China? How will this likely impact on your sales/ market share figures?

All companies interviewed expect a significant increase in sales over the next 5 years, with most expecting sales to double or even triple over the next five years. However, most of the growth expected would benefit the generic drugs rather than the ethical branded ones, where most European companies have their stake. 2.4 How important is China as a production site?

Chart 4 - China as a Production Site

33%

20%

7%0%

40%

20%13%

47%

7%13%

0%

10%

20%

30%

40%

50%

60%

Today In 5 years

% o

f res

pons

es


Overall, the surveyed companies expect that the importance of China as a production site will grow over the next five years. A sharp drop is notable for those replies that consider this importance to be ‘little’, ‘some’ or ‘moderate’ in five years time. Correspondingly, a considerable rise is apparent in the ‘significant’ and ‘utmost’ importance categories. Today only 13% of respondents consider China as a production site of ‘significant’ importance. However, in five years time, 47% expect this to be the case. Calculations of the average ratings on the importance of China as a production site rise from 2.5 today to 3.4 in five years time – indicating a similar trend to question 2.1.



2.5 How important is China as an R&D site?

Chart 5 - China as an Investment Destination for R&D

31%

20%

31%

7%15% 13%15%

33%

8%

27%

0%

10%

20%

30%

40%

50%

60%

70%

Today In 5 years

% o

f res

pons

es


Respondents indicated that today China did not represent an important site for R&D. 61% regard China as only ‘little’ or ‘some’ importance as a R&D site. When asked to predict the importance of China as an R&D site in five years, this figure drops to 27%, while the figure for those who regard China as ‘significant’ or ‘utmost’ importance for R&D rises from 23% to 60%. Overall those surveyed indicated that there would be a large rise in the importance of R&D investment with the average rating rising from 2.3 to 3.4. 2.6 How much of a problem would you rate market access and other commercial practices

by China?

Chart 6 - Market Access and other Commercial Practice Problems in China125

0%

19%25%

38%

19%

0%

10%

20%

30%

40%

50%

60%

70%

Today

% o

f res

pons

es

6%

19%

31%38%

6%

In 5 years


It is noteworthy that all companies regard market access and commercial practice problems as of ‘some’ importance or more today. Responses indicate that problems in market access and other commercial practices in China are of moderate to significant importance today, with an average 3.5 response score. This average is expected to decrease only slightly to 3.1 over the next five years.

Approximately 38% of respondents rate market access obstacles to be of ‘significant ‘ and 19% of ‘utmost’ importance today, while only 19% consider these problems of only some importance. Over the next 5 years some of the worst market obstacles are expected to be reduced with 31% expecting market obstacles to be of moderate importance only 19% of some importance and 6% of little importance. 38% however, still expect market access obstacles to be of significant importance in five years time. 2.7 What are the main current obstacles preventing you from expanding further in the

Chinese market? Please list in terms of priority (e.g. market access constraints, IP protection, Chinese standards/ operating practices, etc.).

Chart 7 – Market Access Obstacles by Priority

Number of Times Mentioned

75.0% 75.0%

62.5%

37.5%

25.0%18.75%

Pre-marketEntry

Constraints*

IPRInfringements

Lack of LevelPlaying Field

Pricing Staff ing Other

Pre-market entry constraints126 and IP Infringement are most frequently cited (75%) by those surveyed as preventing their operations from expanding further in the Chinese market. The lack of a level playing field is cited in 62.5% of surveys, while over a third of respondents (37.5%) regard the pricing system as a substantial market obstacle to their operations in China. A quarter of respondents (25%) mentioned the lack of qualified staff. ‘Other’ market restrictions mentioned include difficulties such as the language barrier and payment difficulties.


2.8 How will this situation likely evolve during the next 5 years?

Chart 8 – Expected Improvements in Market Access Obstacles

Positive 37.50%

No change 56.25%

Negative 6.25%

Overall responses have indicated scepticism towards any improvement over the next 5 years, particularly in the area of pricing. The majority (62.50%) indicate that they expect no change or for things to get worse. A large minority (37.50%) indicate that there might be improvements in selected areas such as in IP enforcements, market access and distribution restrictions.

Table 4 – Expected Improvements in Market Access Obstacles

Selected Comments

Positive “-IP enforcement will slowly improve, probably first in the important Eastern provinces; -Staffing: Managers in MNCs need to have adequate career and rotation schemes in Western MNCs; -Commercial Practices: Will slowly change for the better, perhaps further integration into the WTO [will have] an impact.”

No Change “Pre-market access entry obstacles [certification and registration] and access to hospital listings will not get better. Pricing is critical and will become even tenser. The bidding system must see some improvement. However, doctors get paid little and see kick-backs [financial contributions obtained from companies for recommending certain products] as a natural supplement to their salary so it will be difficult to resolve this if salaries are not increased. Whether of not there will be an improvement in the enforcement of IP in the future is difficult to predict.”

Negative “The pricing system will worsen and puts increasing pressure on prices. The RX area [prescription drugs] and the related essential drug list is another problem and a continued formula for corrupt practices.”


2.9 What are the quantitative costs or impacts resulting from these obstacles on your business today?

Table 5 – Quantitative Costs or Impacts from Market Access Obstacles

Where respondents made specific calculations:


Licensing requirements for new products

“Should pre-market requirements be more lenient this would reduce our cost of entering the market with a new product by 30-40%”

●

Staffing “10-20% higher costs for staff and lack of innovative R&D environment”

● ●

Business registration “Just to register our operations and employ 18 staff employees we had to invest over 1 million EUR over for the last 3 years”

● ●

Where respondents made estimates: Sub-sector Comment

Ethicals Generics

“20% of sales revenue in China” - IV solutions; prenatal nutrition; anaesthetics drugs ● “Around 10% of turnover” - Anti-infective drugs Hard to estimate, ● “Our development is stymied by 100%” – Cardiovascular; respiratory drugs ● “More than 20% loss in revenue” – Hepatitis, antibiotic; respiratory; CNS; metabolic drugs ● ● “Preventing growth by a factor of 1.5 to 2” - Cardiology ; Gastroenterological drugs ● “[A]bout 20% of our sales” – Respiratory drugs ● “10-20% of local revenues are lost” – Prescription Drugs ● Where respondents found it difficult to quantify market access obstacles:


“Most costs are passed down to the consumer. Other than that, we are not really able to put a figure on our financial losses resulting from market access obstacles.”

● ●

“Difficult to say and depends on further price cuts and whether are drugs will be put on hospital lists or not. If we were to compete like Chinese competitors (i.e. through corruption and kick-backs) this would double our business but this is too risky for a foreign MNC.”

●


2.10 How is this situation likely to evolve in the next 5 years?

Chart 9 – Expected Improvements in Quantitative Costs in 5 Years

Positive 28.57%

Negative 7.14%No Change 64.29%

The majority of respondents (64.29%) indicated that they expected no change over the next 5 years in the costs of market obstacles. Just under a third (28.57%) expect slow positive change but with the qualification that the affect of this would be very minor. A little over 7.14% of respondents expect costs due to market obstacles to increase over the next 5 years.

Table 6 – Expected Improvements in Quantitative Costs in 5 Years

Selected Comments

Positive “[We are] adapting to the Chinese market so our costs [resulting from market obstacles] are likely to decrease to around 10%-15%”

No Change “Very difficult to change if we do not push hard”

No Change “Continued price pressures but probably there will be some future acknowledgement of the need to promote innovative products”

Negative “If local regulations stay in place, the recruitment situation of talented staff will get worse”


2.11 How does the Pharmaceutical sector plan to maximise the opportunities brought about by the Chinese market?

Chart 10 – Means of Maximising Opportunities through the Chinese Market

Number of times mentioned

38.9%

22.2%

11.1% 11.1%16.7%

Further DirectInvestment

Outsourcing ofBasic Operations

SourcingMaterials

Export fromChina

Other

In over a third of the surveys, further direct investment127 is cited by pharmaceutical companies (35.3%) as the method respondents intend to maximise the opportunities brought about by the Chinese market. Outsourcing of lower-end operations is something which is also mentioned frequently (22.2%). Other ways of maximising opportunities mentioned include increased sourcing of materials (11.1%) exporting from China (11.1%) and other ways (16.7%) including integrating China into their global strategy or focusing more on the Chinese domestic market in future. 2.12 China’s 11th Five-Year Programme (2006 to 2011) sets ambitious targets and priorities

for rural development, environmental protection (rural and urban), energy efficiency (rural and urban context) as well as the need for a home grown innovation society, affecting all sectors. This direction would represent a major step change in China’s approach to sustainable development.

a) Please consider how the direction of China’s sustainable development as described

above provides opportunities and challenges within your own sector and business units.

b) What will likely be the challenges and constraints of realising these opportunities? a) The majority of the pharmaceutical companies surveyed mentioned that the 11th Five Year

Programme would bring about new opportunities, particularly in rural and self-medication markets. Better social security will also mean a shift towards high-end markets such as private clinics and medical care.

b) Local protectionism, especially in rural areas will continue to cause problems in realising future

opportunities. Also mentioned were cost containment issues such as pricing restrictions by the government and enforcement of IP protection regimes.


Table 7 – Implications of China’s 11th Five-Year Programme

a) Selected Comments

New market opportunities (1)

“An increase in demand from the rural population is expected as a result of better access to healthcare, which presents a huge market potential. Further increases in the size and wealth of the middle class means that the dynamic of the China market will shift and create new higher-end markets (private clinics, etc.)”


“Pharmaceutical producers have so far focused on coastal areas. They are now definitely looking more towards rural areas to expand their business. Whatever government support is forthcoming in terms of improved infrastructure (etc.) will aide this process”


“The ambitious plan will provide more market opportunities for new drugs, increased investment in RD and partnership opportunities in some areas”

Higher standards (1)

“European companies already have a good record in environmental protection. If distribution channels can be improved, then the market for European companies can really expand. An increase in rural income will be equal to an increase in demand”

Higher standards (2)

“Higher standards should benefit us. Our plant in China is the first high-standard approved site according to Australian standards and certified as such (both in consumer safety as well as environmental requirements). We therefore already surpass Chinese national standards even if these were to improve. Any movement in this regard should shift the price-quality ratio in our favour”

b) Selected Comments

Local protectionism

“Competition in 2nd tier cities is already becoming more intense. However rural areas still have a long way to go. Local protectionism will remain a major problem in the pharmaceutical industry”


SECTION 3: CHINESE SECTOR COMPETITION 3.1 How significant is the competitive challenge of Chinese enterprises operating in your

core sectors in the Chinese market?

Chart 11 – The Challenges Presented by Chinese Enterprises Operating in the Chinese Market128

13%

0%

19%

6%

19%

31%31%

19%19%

44%

0%

10%

20%

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Today In 5 years

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The surveyed companies expect the competitive challenge from Chinese enterprises to markedly increase in the next 5 years. Today’s average response rate of 3.2 places the challenge of Chinese enterprises at a level of moderate importance. This average response rate rises to 4.0 when respondents are asked to rate the challenge from Chinese enterprises in five years time. European pharmaceutical companies surveyed qualified this challenge to be of ‘significant’ (31%) or ‘utmost’ importance (19%) today, while this figure climbs for the five year outlook (44% outmost importance and 19% significant importance). The most marked contrast is in the most extreme bloc of ‘utmost’ importance where the percentage of responses which believe Chinese companies will be extremely competitive rises from 19% to 44% over the next five years.


3.2 Please describe the nature of this challenge. Include the role of SOE’s in your description. How is it evolving?

Chart 12 – Competitive Challenge from Chinese Enterprises


25%

10%15%

20%

30%

Upgrading ofCapabilitiesLocal Firms

GovernmentSupport &

Intervention

IndustryConsolidation

Low er CostBase

Other

Although local competitors still sacrifice innovation for more production, European companies surveyed indicate that, in future, the main competitive challenge will come from the upgrading of their indigenous capabilities (30% of overall replies). This upgrade consists of reaching international standards for quality and investing in R&D, among others. In relation to this, 15% of the answers highlighted that the present fragmented Chinese pharmaceutical industry is expected to consolidate – a factor which will add to the competitiveness of those local companies investing in upgrading their capabilities. Furthermore, Chinese enterprises benefit from local government support and intervention (20%) through favouritism and protectionist measures, which makes it easier for them to win bidding contests and access to hospital listings. A much lower cost-base (10%) further adds to the advantages Chinese companies have vis-à-vis EU companies. Other challenges (25%) include increasing knowledge and expertise offered by competitors on the Chinese market and local conditions, better distribution networks, and their natural advantage in traditional Chinese medicine (TCM).


Table 8 – Competitive Challenge from Chinese Enterprises

Selected Comments

Upgrading of Capabilities Local Firms (1)

“95% of the raw material (Penicillin G) is [already] produced in China, and these producers threaten our operations by forward integration to other intermediates and APIs [Active Pharmaceutical Ingredients]”

Upgrading of Capabilities Local Firms (2)

“There seems to be a natural progression in the quality of Chinese products.” “More Chinese companies will be able to deliver first-class R&D results and gain IP protection for their products to go into Western Markets. However, this will also have the result that their cost base will be increased.”

Government support & Intervention (1)

“Due to local protectionism, local company own above 70% of the market share and 4 out of the top 10 pharmaceutical companies in China (in terms of market share) are local pharmaceuticals”

Government support & Intervention (2)

“Chinese companies benefit from their close relationship to government. This allows them to obtain hospital listings and win bidding contests (often through un-ethical means or irrational pricing offers). At the same time Chinese drug makers are able to offer cheap generic drugs but are supported by government policy to move up the value chain and to become more innovative. However to some extent these efforts might be undermined if the government continues to cut prices - to my knowledge the pharmaceutical sector is the only sector in China where prices are continuously decreasing rather than increasing. This puts pressure on pharmaceutical producers to focus on increasing volume and new products at the expense of other important factors.”

Industry Consolidation

“There are already a few (around 3% of companies) who are very strong competitors in our segment. Consolidation will continue (currently there are about 6000 pharma companies, this should reduce to around 2000 in the next few years) and the survivors will be very strong…[Currently, local companies] fight on price and high volume but lose a lot of money, but they are not always punished for this as they do not apply proper accounting systems. However, we are convinced that in the longer term a scientific approach will win and the industry will need to consolidate.”

Lower Cost Base “Chinese firms have a lower cost-base structure. Also, they have a better knowledge of the local Chinese market. They can also sell and distribute better in China than foreign competitors”

3.3 What are the main advantages your company has in China compared to Chinese

competitors?

Chart 13 – Main Advantages of European Companies over Chinese Competitors


22.2% 22.2%

13.3% 13.3%17.8%

13.3%

InnovativeProducts

Quality/Service

Marketing &Branding

HumanResources

R&D, TechDev

Other

Innovative products, quality and services (both 22.2%) and R&D/technical development (17.8%) form the bulk of advantages the companies surveyed felt they possess over their Chinese counterparts. Stronger human resources and marketing & branding (both 13.3%) also feature


strongly as competitive advantages. Other advantages (13.3%) include access to a global network, safety standards and efficiency.

Table 9 – Main Advantages of European Companies over Chinese Competitors

Selected Comment

Advantages in competing with Chinese companies

“[1] Branding and long experience in our market segments; [2] Innovation, but we believe some Chinese competitors will be able to compete with us in this area in the near future. [3] Work-force, however every year we are surprised by the speed the Chinese are increasing their human capital.” – Phyto-pharmaceutical company (Ethicals)


3.4 How significant is the competitiveness of Chinese enterprises operating in your sector in the US market?

75%

50%

25% 25%

0%

19%

0%6%

0% 0%0%

10%

20%

30%

40%

50%

60%

70%

80%

Today In 5 years

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Chart 14 - Significance of Chinese Companies in the US

On average responses indicated that the overall importance of Chinese competitors in the US market today is minimal. With an average response rate of 1.2, all (100%) of responses indicated that they consider the challenge to be of only little or some importance. Over the next 5 years this sentiment stays largely the same with an average rate of 1.8 and 75% of responses. 25% expect Chinese pharmaceutical producers to pose a moderate or significant challenge in the US market in 5 years. 3.5 Please describe the nature of this competitiveness and its likely evolution over the

next 5 years.

Pessimistic67%

Optimistic33%

Chart 15 - Expected Competitiveness from Chinese Companies in US Market in 5 Years

Although there is a general expectation among the surveyed companies that China will at some stage in the long-term future become a competitor in the US market, it is generally agreed that, at this juncture, and in the next 5 years, Chinese firms are not set to become significant competitors. Many respondents pointed out that some Chinese companies already have a presence within the


US market, but factors such as high regulatory obstacles and a relative preference for ethical branded drugs would hamper Chinese competitors in the US.

Table 10 – Expected Competitiveness from Chinese Companies in US Market in 5 Years

Selected Comments

Optimistic “Chinese competitor will develop very fast to catch up US market as a source of APIs [Active Pharmaceutical Ingredients]”

Optimistic “Like Indian companies, Chinese pharmaceutical companies might in future make acquisitions abroad. These companies started as generics but are developing increasingly specialized drugs.”

Pessimistic “Some Chinese companies are operating in the US, despite high regulatory obstacles. Even a large number of other EU companies did not make it in the US market because of this. It will be interesting if Chinese companies can overcome these hurdle”

Pessimistic “[The] China pharma industry is a generic-based industry and it is hard for them to enter into US market”

Pessimistic “Unlikely to be strong unless America jumps on a TCM [Traditional Chinese Medicine Craze.”

3.6 How significant is the competitiveness of Chinese enterprises operating in the ASEAN

market?

63%

44%

25% 25%

13% 13%

0%

19%

0% 0%0%

10%

20%

30%

40%

50%

60%

70%

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Chart 16 – Significance of Chinese Competitors in ASEAN Market

Although higher than in the US market, the average responses indicated that the overall importance of Chinese competitors in the ASEAN market today is similarly of little or some importance. With an average response rate of 1.5, 88% of responses indicated that they consider the challenge to be only of little or some importance today. Over the next 5 years this increases to an average of 2.0. However, 19% of respondents expect Chinese pharmaceutical companies to become significantly competitive in the ASEAN region over the next five years.


3.7 Please describe the nature of this competitiveness and its likely evolution in the next 5 years?

Pessimistic50%

Optimistic50%

Chart 17 – Expected Outlook in the ASEAN Market in 5 Years

Opinions concerning Chinese pharmaceutical companies competitiveness vis-à-vis European companies in the ASEAN region are more optimistic than for the US region. Optimistic opinions are evenly divided with pessimistic opinions, regarding Chinese prospects over the next 5 years. Generally, more of a presence in the ASEAN market is expected relative to the US both in terms of Chinese exports to this region as well as acquisitions of local ASEAN pharmaceutical companies. Chinese companies have been able, to some extent; develop lower-end market segments and the traditional Chinese medicine market in ASEAN. They are hampered in other segments by a lack of ethical products in their portfolio.

Table 11 – Expected Outlook in the ASEAN Market in 5 Years

Selected Comments

Optimistic “Increase in presence in the ASEAN market likely both in imports of Chinese pharmaceutical products and acquisition of local ASEAN pharmaceutical companies”

Pessimistic “China pharmaceutical industry is a generic-based industry and it is hard for them to enter into ASEAN market”


3.8 To what extent does the infringement on IPR affect your business with China?

Chart 18 - Significance of IPR Infringement

20%

40%

20%

0%

10%

20%20% 20%

30%

20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

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Today In 5 years

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On the subject of IPR infringement, the survey indicates no uniform body of opinion on the extent infringements have on current business. The percentage of responses is similar across each of the five fields from ‘little’ to ‘utmost’ importance resulting in an average rating of 3.2. In comparison, companies are marginally more in concurrence on the predicted impact of IPR infringements in 5 years. 40% expect the issue to be of little importance then, leading to an average rating of 2.7. 3.9 How will this situation likely evolve in the next 5 years? On average respondents indicated that the time frame is too short and that over the next 5 years there will be very little change in this situation. Some companies indicated that they accepted that their products will be copied. Mentioned also is the possible improvement in patenting production techniques.

Table 12 – Expected IPR Infringement Situation in 5 Years

Selected Comments

“The reason we do not have a large amount of R&D in China is because China is not a patent market… We hope that increased international pressure might yield some results.” “Most of our products (e.g. liver) compound patents have expired in Germany. We do have a number of remaining process patents but there is no point trying to enforce these in China. We accept that our products will be copied in that sense, and as Chinese companies increase their absorptive capacity more and more of our products will be copied.” “[The] time frame is to short for anything serious to happen. Especially in the Pharmaceuticals market. Patenting production techniques could be an interesting development for the future.”


3.10 What are the overall efforts undertaken in your industry’s field of operation to maintain competitiveness vis-à-vis China?

Chart 19 – Efforts Undertaken by the Pharmaceutical Industry to Maintain Competitiveness


26.7%

46.7%

13.3% 13.3%

Quality &Innovation

Further DirectInvestment

Lobby ChineseGovernment

Other

Increasing direct investment129 is most frequently mentioned (46.7%) as a measure to maintain competitiveness vis-à-vis China, usually with a view to reduce costs. Emphasising quality and innovation (26.7%), lobbying the Chinese government (13.3%) is also mentioned. Other measures (13.3%), such as exploring the potential for strategic alliances or offering advanced medical education to local doctors are also suggested. Table 13 – Efforts Undertaken by the Pharmaceutical Industry to Maintain Competitiveness

Selected Comment

“Measures taken by us include: [1] We do not sell or register our drugs with active substance patents in the Chinese market; [2] We ensure that all our operations are considered and checked in detail with paperwork properly filed to limit our exposure to knowledge transfer. [3] Innovation, quality & support: as a mere generic company we could never compete on price”


3.11 What is your priority in dealing with the challenge posed by the emergence of China/ Chinese industry as competitors?

Chart 20 – Priorities for Dealing with Chinese Competition


35.3%

29.4%

23.5%

11.8%

Lobby ChineseGovernment

Improve Qualityand Innovation

Develop LocalPresence

Other

Lobbying the Chinese government (35.3%) on key market access and operation issues such as IPR enforcement, better regulatory environment, pricing, transparency, and predictability is the top priority for European pharmaceuticals operating in China. Investing in the quality and innovation of products (29.4%) is the next priority with development of local resources following with 23.5%. This category involves building a strong commercial identity in the Chinese market, establishing partnerships with Chinese companies in particular on TCM products, and recruiting local talents. Other priorities (11.8%) include introducing competitive pricing and improving standards in promotion.

Table 14 – Priorities for Dealing with Chinese Competition

Selected Comments

“We see the US embassy and Chamber exerting much more pressure on the above issues. We would like the EU to adopt a similar stance.” “1) We are currently considering setting up a WOFE. Our main concern is that we will experience the same difficulties we had in setting up our rep office: new regulations surfaced almost every day, 2) pre-market access (recognition of previous international best practice trails and studies) 3) Pricing & tender system: Leaves door open to corruption. To illustrate: Hospitals are state-financed, however do not receive enough funding. This means that hospitals finance themselves through selling drugs and explains why 80-85% of Chinese medicines are distributed through hospitals. 4) Branding issues: Recently draft legislation has been circulated which stipulates that the generic name of the product is displayed prominently on the front of the package while the brand name would be allowed to be displayed only very small or even on the back. This increases our risk due to difficulties of building our brand and further increases competition with generics. The foreign pharmaceutical industry is lobbying very strongly to avoid this legislation from becoming a reality.”


3.12 Please highlight ideas for acceptable investment scenarios in China outside those currently permitted by the Chinese government?

There are few commonly mentioned suggestions. Some of the ideas mentioned are: re-evaluation of the Chinese Yuan; changes in the duration of payment of accounts; allowing TCMs into the EU market to use as leverage later when discussing EU companies in China; and improved registration processes.

Table 15 – Suggested Investment Scenarios

Selected Comments

“1) Revaluation of the Chinese Yuan 2) Accounts payable have to be done in 180 days, there is no flexibility in this. 3) Review laws (e.g. company law) to be able to integrate business functions under one umbrella legal entity. 4) Difficulties in acquiring local producers which are operationally not in order. 5) Because of the aforementioned problems (pricing; registration; hospital listings; bidding process; IPR) active substance patents only account for 3% of the Chinese market.” “We should really treat China as an equal partner and we should review in good faith some of our policies concerning TCM entering the EU market (recently some TCM’s have been blocked). In the long-term if we are not flexible on this issue we will have little leverage over the Chinese concerning ‘western’ chemical pharmaceuticals being sold in China. All the big foreign pharma players in China only roll out a limited portfolio of their products, this indicates a number of blockages have still not been overcome. I doubt a more open trade & investment environment can be achieved by a more aggressive trade policy stance, it will be a process of give and take (with perhaps the exception of IPR issues) and equal partnership which will see the market open up.” “Registration: no answer from the authorities -too long processing time -changes in legislature too frequent, impossible to plan -Support from the EU and having them talk to the ministries on these issues would be highly appreciated since they will not receive individual companies, especially those of small size Creating an overall R&D based environment for pharmaceutical business. This is a win-win situation for Chinese companies and MNC’s. Standards in overall pharmaceutical promotion models and commercial behavior.” “Creating an overall R&D based environment for pharmaceutical business. This is a win-win situation for Chinese companies and MNC’s. Standards in overall pharmaceutical promotion models and commercial behavior.”


ENDNOTES 1 EFPIA. Personal Communication 2 IMS Health. Web Pages: http://www.imshealth.com/web/end/0,3150,64576068_63872702_77974518,00.html 3 Business Insights, The Pharmaceutical Market Outlook to 2015, 2005 4 IMS Health. Web Pages: http://www.imshealth.com/web/end/0,3150,64576068_63872702_77974518,00.html 5 EFPIA, The Pharmaceutical Industry in Figures, 2006 6 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry. March 2006 and EFPIA, The Pharmaceutical Industry in Figures, 2006 7 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 8 Accenture, Fast forward to China, 2005 9 Accenture, Fast forward to China, 2005 10 Pricewaterhousecoopers, China-perscription for growth, 2004 11 Pricewaterhousecoopers, China-perscription for growth, 2004 12 Accenture, Fast forward to China, 2005 13 Accenture, Fast forward to China, 2005, BI05] 14 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 15 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 16 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 17 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 18 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 19 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 20 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry. March 2006 and Datamonitor Premium Report. OTC Pharmaceuticals in China. 2005 21 Accenture, Fast forward to China, 2005 22 Accenture, Fast forward to China, 2005 and PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry. March 23 Datamonitor Premium Report. OTC Pharmaceuticals in China. 2005 24 Accenture, Fast forward to China, 2005 and PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry. March 2006 25 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006 and Datamonitor Premium Report. OTC Pharmaceuticals in China. 2005 26 National Bureau of Statistics of China. China Statistical Yearbook. 2005 27 World Health Organization. A health situation analysis of the People’s Republic of China, 2005 28 Accenture, Fast forward to China, 2005 29 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006 30 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter

1, 2006 and PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry. March 2006 31 Wang, A., v. Zedtwitz, M., Developing the pharmaceutical business in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 32 Accenture, Fast forward to China, 2005 33 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M. 2005 34 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 35 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry. March 2006 and Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006 36 Accenture, Fast forward to China, 2005 37 Webber, D.E., China’s approach to innovative pharmaceutical R&D. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 38 Webber, D.E., China’s approach to innovative pharmaceutical R&D. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 39 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 40 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 41 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 42 Accenture, Fast forward to China, 2005 43 Accenture, Fast forward to China, 2005 44 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 45 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 46 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M. 2005 47 Accenture, Fast forward to China, 2005and Wang, A., v. Zedtwitz, M., Developing the pharmaceutical business in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 48 Wang, A., v. Zedtwitz, M., Developing the pharmaceutical business in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 49 [IMS03] 50 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 51 Accenture, Fast forward to China, 2005 52 Accenture, Fast forward to China, 2005 53 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006.


http://www.imshealth.com/web/end/0,3150,64576068_63872702_77974518,00.html




54 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 55 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 56 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 57 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 58 Accenture, Fast forward to China, 2005 59 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 60 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 61 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 62 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 63 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 64 Accenture, Fast forward to China, 2005 65 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 66 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M. 2005 67 Wang, A., v. Zedtwitz, M., Developing the pharmaceutical business in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 and Accenture, Fast forward to China, 2005 68 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M. 2005 69 [Brü05, Wang, A., v. Zedtwitz, M., Developing the pharmaceutical business in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 and Accenture, Fast forward to China, 2005 70 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 71 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 72 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M. 2005 73 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 74 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 75 Accenture, Fast forward to China, 2005 76 Accenture, Fast forward to China, 2005 77 Accenture, Fast forward to China, 2005 78 EFPIA. Personal Communication 79 EFPIA. Personal Communication 80 Accenture, Fast forward to China, 2005, PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006

81 Wang, A., v. Zedtwitz, M., Developing the pharmaceutical business in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 82 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 83 EFPIA. Personal Communication 84 EFPIA. Personal Communication 85 Accenture, Fast forward to China, 2005 86 WHO Factsheet no.275 Counterfeit Medicines, 2006 87 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M. 2005 88 EFPIA. Personal Communication 89 EFPIA. Personal Communication 90 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 91 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 92 Further details regarding the methodology for deriving the partial equilibrium model can be found in the qualitative analysis technical supplement. 93 Accenture, Fast forward to China, 2005 94 Accenture, Fast forward to China, 2005 95 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M. 2005 96 EFPIA. Personal Communication 97 European Chamber China. European Business in China: Position paper. 2006/07 98 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 99 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 100 Accenture, Fast forward to China, 2005 101 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 102 Espicom Business Intelligence, China – Pharmaceutical Market Intelligence Report. Quarter 1, 2006. 103 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 104 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 105 Datamonitor. Global generics guide. 2006 106 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 107 Datamonitor Premium Report. OTC Pharmaceuticals in China. 2005 108 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 109 PricewaterhouseCoopers, Investing in China’s Pharmaceutical Industry, March 2006 110 Accenture, Fast forward to China, 2005


111 Webber, D.E., China’s approach to innovative pharmaceutical R&D. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 112 Accenture, Fast forward to China, 2005 113 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M. 2005 114 Webber, D.E., China’s approach to innovative pharmaceutical R&D. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 115 Accenture, Fast forward to China, 2005 116 A proposition for a more detailed scenario is outlined in Annex 1. 117 Wikipedia 118 Wikipedia 119 Brückner, M., Phillip, M.P., Luithle, J.E.A.; Business Environment for the Pharmaceutical Industry in China. In: The Chemical and Pharmaceutical Industry in China. Eds.: Festel, G., Kreimeyer, A., Oels U., v. Zedtwitz, M.. Springer, Berlin, Heidelberg, 2005 120 Accenture, Fast forward to China, 2005 121 People's Daily (27 October 2005) 122 These percentages have been rounded to two significant figures. 123 These percentages have been rounded to two significant figures. 124 These percentages have been rounded to two significant figures. 125 These percentages have been rounded to two significant figures. 126 Market requirements and systems here refers to: Pre-market access constraints (e.g. certification, registration); tendering system, distribution constraints 127 This includes: setting up of new entry vehicles; investment in and acquisition of existing local companies; and setting up of R&D facilities 128 These percentages have been rounded to two significant figures. 129 This includes further direct investment in production facilities, R&D, sourcing and investment in local Chinese companies


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