Grosswanwang

3TheGlobalPharmaceuticalIndustryandChina'sPositionMei-lingWangDiscussionsofChina'spharmaceuticalindustryintheWTOframeworkcannotbeseparatedfromananalysisoftheglobalpharmaceuticalindus-try.
Theglobalpharmaceuticalindustryhasneverplayedamoreimportantrolethanitdoestodayinaddressingthemortalityandmorbidityofglobalpopulations,giventhethreateningincreaseofglobalpandemicsandemer-genthealthissues,suchasHIV/AIDS,avianu,SARS,TB,hepatitisanddebilitatingchronicdiseases(cancer,diabetes,Alzheimer'sdiseaseandsoon).
GlobaldevelopmentswillinevitablyhaveanimpactonthepositionoftheChinesepharmaceuticalindustryasChinaisintegratedintotheglobalmarketbytheWTO.
Thepurposeofthischapteristoexamineprospectsfortheglobalpharmaceuticalindustry,China'spharmaceuticalindustryanditspositionintheglobalmarket,andthemajorbenetsandchallengesfacingChina'spharmaceuticalsector.
PotentialofChina'spharmaceuticalmarketChina'spotentialinpharmaceuticaldevelopmentiswidelyrecognized;itisexpectedtobecomethefth-largestdrugmarketintheworldby2010.
Growthwillbedrivenbyfactorssuchasanincreasinglyageingpopulation,theincreaseinlifeexpectancy,thelargemarketsize(urbanandrural),gov-ernmentsupportforrestructuringthehighlyfragmentedindustry,andimprovedIPRpolicies.
Beyonddemographicfactors,itisobviousthatthemarketreformhasledtotheemergenceofalargemiddleclass(thesizeofthetotalUSpopulation).
Thismiddleclassishealthconsciousandhasanexpandedrangeofhealthneeds.
Yetthepotentialofthehealthcaremarkethasnotbeenfullyrealized.
Accordingtoaglobalestimatein2000,theaveragepharmaceuticalconsumptionintheglobewasUS$50perperson:includinganaverageofUS$300intheUSA,US$400inJapan,andUS$40–50inmiddle-incomecountries.
Incomparison,Chinain2000spentanaverageoflessthanUS$10perpersonandwasthereforebelievedtohavemuchroomtogrow.
Risingincomesandfast-pacedeconomic55M.
Wangetal.
,WTO,GlobalizationandChina'sHealthCareSystemMei-lingWang,ShuoZhangandXiao-wanWang2007growthislikelytochangethispicture,however.
ItwasnotedthatChina'spharmaceuticalmarketwasworthUS$19billionin2000andwillincreasetoUS$60billionby2010,withmorethanUS$24billioninrevenues.
In2020,China'spharmaceuticalmarketwillgrossUS$120billion,abovethatintheUSA(seeChinapharm,2002,'ThedevelopmentofthreeventuresinChinainglobalizationframework:Seriesfour',6March2002;seealsoKWAPharmaceuticalServices,2006;andaninterviewwithDrWeiZhang,BeijingUniversity,20January2006).
Onthewhole,Chinawillremainanattractivemarketforforeigndrugcompaniesformanyyearstocome,becauseChinaoffersmanyadvantagesintermsofthesizeofitsmarketplace,itslowlabourcost,anditsunrealizedmarketpotential.
ThemajorimpetusforChina'spharmaceuticalgrowthcomesfromlargercontextualfactors.
Chinahasmadeconsiderableprogresstowardsmacro-economicgrowth,whichhasledtoimprovedlivingstandards,increasingconcernabouthealthissues,moredisposableincomeforhealthneeds,andincreasingdemandsforbetterhealthservices.
Themarketforhigh-quality,patient-orientatedhealthcareservicesissmall,butgrowingsteadily.
ThereisnouniversalhealthcareinChinaandmostChineselackhealthinsur-ance.
Onlyasmallfractionofthepopulation,mainlythoseinmajorcities,canaffordtop-endWesternmedicalcare.
Currently,therearemanysuc-cessfulforeignandjointventurehealthcareserviceprovidersthathavebeenoperatinginChinasincetheearly1980s.
Theirexperiencespointtogrowingopportunitiesinthepharmaceuticalsector.
TheglobalpharmaceuticalindustryandChina'spositionGlobalpharmaceuticalproductionincludesthediscussionsaboutrawmaterials,formulations,Chineseherbalmedicines,Chineseherbalformu-las,antibiotics,biotechproductions,radioactiveproducts,medicalequip-ment,healthcaredevices,andpharmaceuticalproductionfacilitiesandequipment,pharmaceuticalpackagingmaterialsandtrademarks.
Overall,globalpharmaceuticalconsumptionhasincreasedrapidlyyearbyyear.
In2000,thetotalwasmorethanUS$368billionandreachedmorethanUS$550billionby2004.
Theannualgrowthratewasabout7percentinthe2000s(IMSHealth,2006;seealsoChinapharm,2July2004).
'AreviewoftheplanningofpharmaceuticalsectorintheTenthFive-YearPlan'.
Majorglobaleventsandtrendshavealsoinuencedthispicture:(i)theincreaseintheageingpopulationindevelopedcountries,whichhasincreasedpharmaceuticalneeds;(ii)Increasinghealthcarecostsreducethenumberofdaysforin-patientcareforwhichtheinsurersarewillingtopay.
Theuseofpharmaceuticalstorelievetheburdenofhospitalcareisusefultotheindustry;(iii)newdiseasesandepidemicsprovidenewopportunitiesforpharmaceuticaldevelopment;(iv)thepotentialofbiotechnologyhasprovidedunlimitedopportunitiesfordevelopingtestingdevices,vaccines56TheGlobalPharmaceuticalIndustryandpharmaceuticals;and(v)Increasesingenerics,foodsupplementsandpreventivecareproductsalsoincreasetheroomforgrowth.
Inthisenvironment,theglobalpharmaceuticalbusinessisfacingbothchallengesandopportunities.
Severalfactsareworthnoting.
First,itisestimatedthatthecostofdevelopingadrugaveragesmorethanUS$800millionandisincreasing.
Second,onlythreeoutoftendrugsareabletogenerateprots.
Third,onaverage,ittakesabouttenyearstodevelopanewdrug.
Fourth,thepharmaceuticalbusinessisnotapurelycommercialpursuit:ithasapublichealthcomponent.
Fifth,thepharma-ceuticalmarketisexpectedtogrowbysome6–9percenteachyearbetween2005–9;incomparison,thebiotechsectorislikelytoincreaseby20percent,butwithveryriskyprospects(Gerbino,2006;Verret,2006).
ThedevelopmentsinChina'spharmaceuticalsectorhaveatwo-directionalinteractionwiththeglobalmarket;thatis,China'sphar-maceuticalmarketwillhaveanimpactonthegrowthoftheglobalpharmaceuticalindustry,andsimilarlyglobalpharmaceuticalprogresswillaffectChina'spharmaceuticaldomesticsupplyanddemand.
Globally,by2000,thetoptenpharmaceuticalcompaniesheld50percentofmarketshareinprescriptiondrugs,whichhaddecreasedto47percentby2004.
Severalglobaltrendsareworthnoting:(i)Intermsofglobalmarketcompetition,(a)smallerpharmaceuticalcompanieshavebeengrowingatafasterpace;(b)pharmaceuticalmanufactures,especiallythoseinChina,India,Pakistan,BrazilandIndonesiaareexpanding;(c)biotechnologybusinessesaregrowingatafasterpacethanconventionalpharmaceuticalcompanies–forexample,theUScompanyAmgenhasgrossedmorethanUS$10billionandbeenrankedinthetop500;and(d)therateofrollingoutnewproductsisslowbecauseofsetbacksduringtheclinicaltrialstagesofpromisingnewdrugsunexpectedsideeffectsofsuchdrugsandthenearingofexpirationofprotablebrands.
Thesetrendshavebothdirectandindirecteffectsonthereturnsofmultinationals.
(ii)Intermsofpricingandmarketshare,developedcountriesarestillthemajormarkets,butmostofthediseaseburdenisindevelop-ing,resource-poorcountries.
India,China,Africa,LatinAmericaandEasternEuropeancountriessharemostofthediseaseburden,andtheyalsosharethegreatestriskofemergentdiseases.
IthasbeennotedthatpharmaceuticalpriceshaveincreasedfourtimesmorethantheglobalincreaseofGDP.
PharmaceuticalproductionintheUSA,Japan,Germany,FranceandtheUnitedKingdomcombinedaccountedforMei-lingWang57two-thirdsofglobalproduction.
Competitioningenericsisincreas-inglyintense,butprotsderivemainlyfrombrands.
IntheUSA,genericsaccountformorethan50percentofsales.
Multinationalsonthewholecontrolglobalpharmaceuticalproductionandmarketing.
Onaverage,themultinationalshaveseentheirsalesincreaseby30percentinChina,butaslowerrateisexpectedinover-the-counterprod-ucts(OTCs)andgenerics.
(iii)Researchanddevelopmentofnewproductsremainsthekeyfactorforsustainableprotsforallpharmaceuticalmanufactures(Chinapharm,2005).
Thefutureofthepharmaceuticalindustryispromising,butthecom-plexityanddiversityofglobalhealthissuespresentsmanychallengestothesector.
The1990ssawmajorbreakthroughsinpharmaceuticaldevelop-mentsbutitisquestionablewhetherthatgoldenagewillberepeatedinthetwenty-rstcentury,forseveralreasons:(i)decreasingR&Dinvestmentbymultinationals;(ii)adistortedinvestmentstructure.
Forexample,itwasnotedthatonly10percentofinvestmenttargeted90percentofthemajorhealthissuesintheglobalcommunity,while90percentwasinvestedinonly10percentofhumanhealthproblems.
Theincreasingshareofmarketingandadvertisinginpharmaceuticalexpenditurehasalsobeencriticized;and(iii)increasingcostsindevelopingdrugsandahighfailurerateinclinicaltrials.
Thecostofdevelopingnewdrugs,compoundedbytheincreasinglyrigorousstandardsdemandedindevel-opedcountriesbeforeapprovingthem,ismakingitmoredifculttoincreaseinvestmentinnewdrugs.
ThismightexplainwhythenumbersofnewcompoundsapprovedbytheFoodandDrugsAdministration(FDA)havedecreasedsince2000,fromthirty-eightin2000totwenty-threein2004.
Theadvancementinhumangeneticsandbiotechnologyhasprovidedaglimmerofhopefortheindustry,albeitundercertaincon-ditions,suchastheneedtolowerR&Dcostsandprovideafastertransla-tionbetweenupstreamanddownstreamdevelopment.
Inthisglobalenvironment,thecollaborationbetweenconventionalpharmaceuticalbusinessesandnewbiotechnologyresearchcentres,andbetweenmulti-nationalsandpharmaceuticalbusinessesindevelopingcountries,isinevitable.
Overall,themajormotorsforgrowthintheglobalpharmaceuticalindus-tryare:innovationinbiotechnology,anincreaseintheageingpopulation,andemerginggeographicalcentres,suchasChinaandIndia.
Thesephe-nomenahavemotivatedpharmaceuticalcompaniestoincreasecollab-orationwithbiotechcompaniestosharetheirexpertise,productsandoperationstoovercometheproductivitygapandincreasegrowth(BusinessInsights,2005).
ThekeyissuesfacingglobalpharmaceuticalindustriesinChinaintheWTOframeworkwillbe:58TheGlobalPharmaceuticalIndustry(i)themarketentryprinciple:basedonprinciplesofnon-discriminationandfaircompetition;(ii)manufacturingprinciples:price,safetyandefcacy;(iii)theprotectionofpharmaceuticalIPRs;(iv)marketing,advertisinganddistributionissues;(v)understandingthedemographicneedsanddiseaseprolesofpopu-lations(seeChinapharm,2001).
Inaverycompetitiveglobalmarket,thegreatestthreatstofullyrealizingsalesandmarketingeffectivenessofallpharmaceuticalbusinesses,includ-ingthoseinChina,arecompetitionandpricecontainment.
Biotechwillbethefocusofattentioninthispicture.
Biotechiscurrentlythefastestgrowingsectorinthepharmaceuticalindustryglobally,andisforecasttohaverecordsalesofUS$250billionby2015(20.
3percentoftheglobalmarket).
BiotechintheUSAgrewatarateofalmosttwicethatoftheoveralldrugmarketinthesecondquarterof2004.
About91percentofindustryexecutivesbelievepharma–biotechmergerswillincreaseduringthenexttenyears,and69percentalsobelievethereislikelytobeincreasedconsolidationbetweencompanieswithinthebiotechsector(BusinessInsights,2005,p.
131).
Itisbelievedthatby2015,thelargepharmaceuticalcompanieswillsynergizetheirR&Dnetworkswithbiotechsandfocusontheircorecompetitivesalesandmarketing(ibid.
).
Chinahastakennoteofthistrendandmademajorinvestmentsindevelopingbiotechproducts.
Itsrecentprogressincancerdrugswasanimportantstepforthegrowthofitsbiotech-relatedpharmaceuticals.
Asmentionedearliertheglobalpharmaceuticalmarketisexpectedtogrowby6–9percentbetween2005–9(Gerbino2006;Verret2006).
Atthetimeofwriting,Chinaaccountsforabout1.
5–2percentoftheglobalphar-maceuticalmarketandthismarketshareislikelytoincreaseto5percentby2010–15.
Chinaisexpectedtorankeighthintheglobalmarket,with13percentto16percentofannualgrowth(Chinapharm,2005).
In2004alone,China'spharmaceuticalmarketwasworthUS$9.
5billion,arecord28percentgrowthover2003,butthiswasstillasmallpercentagecom-paredtotheglobalpicture;forexample,theUSAreachedUS$248billion,accountingfor45percentofglobalgrowth(IMSHealth,2006).
China'spharmaceuticalindustryDespitethefactthatpharmaceuticalsmanufacturingwasnotpreviouslythoughtofasapillarofChineseeconomicdevelopment,theChinesegov-ernmenthasarticulatedadetailedframeworkfortheoveralldevelopmentofthepharmaceuticalsectorintheTenthFive-YearPlan(March2001).
Theconceptualframeworkoutlinesthefollowingguidelinesforincreasingthecompetitivenessofthepharmaceuticalsector:theChinesepharmaceuticalMei-lingWang59sectorwillcontinuetosupportChinesesocialdevelopmentandfocusonstructuraladjustment.
Itwillbemarketandprivate-sector-orientated.
Chinawillalsofocusondevelopingitsnicheareasinpharmaceuticalgrowth.
Itwillsupportpublichealthandimprovethequalityofhealthforitspopulationthroughthedevelopmentofpreventivemedicines.
Itwilllterouthigh-polluting,energy-consumingandlow-efciencyproducts.
Itwillimprovepharmaceuticalinformaticsthroughdigitalizingmonitoringandsurveillancesystems,accountingsystems,andpopulationinformatics.
Itwilldeveloptheasyetunrealizedmarketpotentialintheinlandregionandimprovepharmaceuticalaccessthere.
Itwillupgradethetechnologycapacityofthesector,especiallyforbiotechproductsandChineseherbalmedicines,withtheultimategoalofimprovingproductqualityandincreasingChina'spositioninglobalcompetitiveness.
Itwillglobalizeitsproduction,marketing,distributionandcapitalinvestment.
Thekeyareasselectedforgovernmentsupportare:biotechnology,Chineseherbalmedi-cinesandnicherawmaterials.
Thesubstantivegoalsare:(i)pharmaceuticalmanufacturingisexpectedtogrowbyatleast12percent;(ii)value-addedproductsinthepharmaceuticalsectorareexpectedtogrowbyatleast13percent;(iii)thesalevolumeofpharmaceutical-relatedproductsisexpectedtogrowby9percent;(iv)pharmaceuticalexportsareexpectedtogrowby6percent;and(v)theprotmarginsforthepharmaceuticalindustryareexpectedtogrowby13percent(Chinapharm,2004).
Toreachthesetargets,Chinawillengageinmajorstructuraladjustmentinproductcomposition,R&Dupgrades,andimprovementsincapitalinvestmentandorganizationalstructure.
Onproductcomposition,Chinawillaimtoincreasetheshareofhigh-endproductsinthemarket.
Forexample,Chinaplanstoholdthepatentsofabouttennewbrandsthatwillentertheglobalmarketplace.
Aboutftynewdrugswillbeattheclinicaltrialstages.
Abouttentofteenthbiotechproductsareexpectedtoentertheglobalmarkets.
MorethantwentyGoodManufacturingPractice(GMP)-certiedfacilitieswillbecompletedtoprocessmultiplepharmaceuticaltasks.
ExportsofChineseherbalmedicineswillgrow.
Chemicalrawmateri-als,suchasartemisininandVitaminC,willincreasetheirglobalmarketshare.
Thepercentageofformulationsintotalshareofexportsmarketwillincreasefromthecurrent0.
2percentto5percent.
OnR&Dupgrades,large-scalepharmaceuticalbusinessesswillestablishtheirR&Dcentresanditisexpectedthattheywillincreasefromthecurrent2percentto5percent.
Thebiotechsectorisexpectedtomakemajorprogressingeneticengi-neering,suchasrecombinanttechnology.
Thetechnologyforchemical60TheGlobalPharmaceuticalIndustryproduction,especiallyforartemisininandVitaminC,willbeenhanced.
Oncapitalinvestmentandorganizationalstructure,Chinawillfocusontheestablishmentoflarge-scalepharmaceuticalbusinessesthroughbothverti-calandhorizontalintegration,suchasIPOs(InitialPublicOfferings),mergers,jointventures,andreorganizations.
Itwasnotedthatefciencywasamajorissuepriorto2004.
Forexample,in2003,onaverage,only44–60percentofproductioncapacitywasrealizedinthepharmaceuticalsector.
TheexcessivenumberofsmallpharmaceuticalcompanieshasdecreasedChina'sglobalcompetitiveness.
Incontrast,theglobaltopten'pharmas'accountedfor47percentofpharmaceuticalproductionacrosstheworld;inIndia,thetoptwentypharmaceuticalproducersaccountedfor50percentofallrevenue;intheUSA,thetopthreewholesalersaccountedformorethan90percentofmedicines(Chinapharm,2003).
Theopeningofthenancialsectorwillallowanincreaseofventurecapitalinpharma-ceuticalinvestment.
Chinaisdeterminedtostreamlinepharmaceuticalproductionintheareasofunrealizedproductioncapacities,unhealthycompetitionamongsmall-sizedproducersforduplicatedproducts,andlackofefciency.
Itwillstrengthenitsenforcementandcontrolofpharmaceu-ticalqualitycontrol.
Itisexpectedthatthetenlargestmanufacturingbusi-nesses,grossingmorethanUS$6.
25billioneach,willown30percentofthemarketshareinChina.
Chinawillfacilitatetheformationoflarge-scaledistributors,eachofwhichisexpectedtohaveacapitalinvestmentofmorethanUS$2.
5billion.
Chinawillalsobeinstrumentalintheestablishmentoftenlargeretailchains,eachowningmorethan1,000storesaswellassmallerregionalchainsthatareexpectedtoownmorethan100storeseachChinapharm2004).
China'spharmaceuticaldevelopmenthasshownalargegrowthpotential:(i)ithasbeennotedthatitsgrowthsinceinthe1980shasoutpacedtheincreaseinChina'sGDP.
Thefactthatitstotalvalueaccountsfor5.
5percentofChina'sGDP,lessthanthe10–15percentofthetotalGDPsharefortheindustrializedcountries,showsthatitstillhasmuchroomtogrow(Chinapharm,2005;seealsoChinaPharmaceuticals,2002).
Inoneestimate,intheearly1990s,thepharmaceuticalsectorinChinawascalculatedtoaccountforonly1.
83percentofitstotalindustrialvalue,andwasrankedatonly22outof37sectors;by1999,thevaluehadincreasedto2.
1percentandranked19;andin1999,itsvaluewas2.
4percentanditwasranked17th.
In1999,thetotalprots,protreturnrate,costreturnrateandproductionefciencywereranked7th,5th,4th,and8threspectively(Chinapharm,2004);and(ii)despitesomeoperationalissuesinChina,thecountryisstillthefastest-growingpharmaceuticalsmarketintheworld.
Between1978Mei-lingWang61and2005,thegrossvalueofChina'spharmaceuticalindustryincreasedby17percentannually,oneofthefastest-growingindustriesinChina(Chinapharm,2005).
Inanotherestimate,thepharmaceuticalmarketwascalculatedtohaveincreasedby28percentbetween2000and2005,comparedtoa7percentglobalgrowth.
Thetotalpharmaceuti-calneedswereestimatedtobemorethanUS$2.
7billion(Chinapharm,2005).
Itwaspredictedthat,atthecurrentgrowthrate,Chinaislikelytobethefth-largestpharmaceuticalmarketintheworld,andwillexceedthemarketvolumeofGermanyandFrance,respectively,by2015.
ThemajorareastohaveshownalargepotentialareChineseherbalmedicinesandrawchemicals.
Domesticpharmaceuticalinvest-menthasalsobeenincreasingthroughthecapitalaccumulatedinthestockmarket.
Mostofthepharmaceuticalstocksreceivedpositiveratingsbecauseoflowerriskscomparedtootherstocks.
ItisalsohopedthattheinuxofventurecapitaltotheChinesemarketwillencouragedynamicgrowthinthissector(ChinaPharmaceuticals,2002).
ThepresenceofmultinationalsinChinaisincreasing.
SinceChinaapprovedtherstjointventureinpharmaceuticalsinMay1980,thetoptwentypharmaceuticalmultinationalshaveallestablishedtheirpresenceinChina.
AfterChina'sWTOentry,themultinationalscouldnotwaittocap-italizeonthispotential.
Forexample,asearlyas2002,theBoehringerIngelheimInternationalGroup,theworld'slargestprivatemedicinemanu-facturer,investedUS$41millioninAsia'ssecond-largestpharmaceuticalplant,inPudong,China(ChinaHealthSciencesNewsletter,2002).
ThemultinationalsenteredtheChinesemarketeitherindividuallyorasjointventures.
Itwasestimatedthatdrugsproducedbyjointventuresclaimed30percentofthemarketshare,andimporteddrugsaccountedfor23percent,by2002(HongKongDevelopmentCouncil,2002).
Overall,theforeignpharmas'positioninChina'smarkethaschangedsignicantly,havingdecreasedfromanaveragerateof20percentsalesgrowthandquickreturnstoalowerrate.
BeforetheWTOaccession,China'slawsweremoreprotectiveofdomesticproducers,butsinceWTOmembership,thecompetitionforprotshasledtomoredomestic–foreignpartnerships,suchasintheformofforeign-investedenterprises(FIEs).
By2005,thevalueofforeigninvestmentwasaboutUS$2billioninthepharmaceuticalsector(Gross,1998).
ArelatedpointisthatcapitalcompositioninChina'spharmaceuticalindustryhasalsochangedtremendouslysince1978.
Jointventuresaccountedfor18.
8percentin2004,increasingfrom15percentin1995;privatepro-ducersaccountedfor33.
2percent,risingfrom12percentin1995,andstate-controlledbusinesseshavedecreasedfrom55percentto36.
1percentsince1995(Chinapharm,2004).
By2004,Chinaalreadysawmorethan62TheGlobalPharmaceuticalIndustry200retailpharmaceuticalbusinessescontrollingmorethan5,000retailpharmacies.
Onthewhole,multinationalshavethemostinuenceonglobaleconomicdevelopment,andithasbeenestimatedthattheyaccountedforone-thirdoftheworld'sGDPandcontrolled50percentofworld'strade,80percentofpatents,and75percentoftechnologytransferby2001.
Thisisalsotrueforthepharmaceuticalsector.
AccordingtoanestimatebyForbes,therewerefourteenpharmaceuticalmultinationalsinthetop500Fortunecompanies.
Eachofthetopthree(Merck,PzerandNovartis)grossedmorethanthecombinedrevenuesofallthepharmaceuti-calmanufacturersinChinain2000.
Allnationsandbusinessesconsidered,multinationalsaccountedforthetop50percentoftheGDPintheworld.
AndthetotalrevenuesofChinesepharmaswaslessthanthesheervolumeofPzer'sin2005(Chinapharm,2002).
Torecap,themajoradvantagesofChinesemarketsarethesizeofitsmarket,emerginghealthcareissuesanddiseaseproles,potentialforR&D,humanresources,thegovernment'scommitmenttoimprovingthehealthsector,therelativelyeasyaccesstopatientsavailableforclinicaltrials,andlowerclinicaltrialcosts(ResearchandMarkets,2005;DigitalVector,2005,p.
360).
Forexample,becauseofchanginglifestylesandchangingdemographicneeds,China'sdemandforcardiovasculardrugsandcancertreatmenthavegrownatafastpacein2004,anditwasesti-matedthatupto2009,bothproductionanddemandwillcontinuetogrow(AMID,2003).
Chinahascontinuedtoimproveitsinternationalcompetitivenessandhaschangeditsstrategytowardsthepharmaceuticalmarket,fromacquir-ingamarketsharetocomprehensivecompetition.
Biomedicineisgrowingsteadily,withmajorinputforresearchanddevelopment,andtraditionalChinesemedicineisbeingmodernizedbutstillfacesmajorchallenges(seerelateddiscussionsinOkokokResearchCentre,2005).
In2004,Chinarankedastheseventh-largestpharmaceuticalmarketglobally,withavalueofUS$14billion(upfromUS$4billionin1996),comparedtoIndia'sUS$4.
5billion(BusinessIndia,2005,p.
92).
Pharmaceuticalimportshavebeengrowingatarateof20percentsincetheearly1990sandexceededUS$930millionby2000.
In2004,China'spharmaceuticalindustrycon-tinuedtomaintainitsgrowthmomentum,achievingastableriseinbothoutputandsalesrevenues.
Lookingtothefuture,Chinaisexpectedtobecomethefth-largestdrugmarketintheworldby2015,withanestimatedvalueofUS$24billion(BusinessIndia,2005,p.
92).
Itisalsoexpectedtobecometheworld'slargestpharmaceuticalmarketby2020(Gross,1998).
Asdiscussedearlier,themajordriversofgrowtharechangingdemographictrends,thediseaseandhealthproleinChina,andsocioeconomicchanges,suchaseconomicgrowthandincreasesinincomes,populationgrowth,anincreasinglyageingpopulation,increasingpharmaceuticalconsumptionpercapita,Mei-lingWang63marketsize(urbanandrural),governmentsupportinrestructuringthehighlyfragmentedindustry,IPRpolicies,increasinglifeexpectancies,HIV,lifestylechanges,andliberatedsexualbehaviour.
Improvementsinlivingstandards,reducedlevelsofpovertyandstrongmacroeconomicgrowth,alsoaffectthehealthcaremarketasawhole.
Thesedevelopmentshavebothpositiveandnegativeconsequencesforhealth.
Manydevelopmentsalsomeantremendouspotentialforthegrowthofpharmaceuticalsconsumptionamongthepopulation.
Forexample,in2004,pharmaceuticalsconsumptionwaslessthanUS$10percapitainChina;incomparison,itwasmorethanUS$300intheUSAandotherindustrializedcountries.
Withhealthcarereform,boththepublicandprivatesectorswillpaymorefortheirpharmaceuticalneeds,andtheChinesegovernmentisdeterminedtoimplementuniversalhealthcareinallvillagesby2008.
Urbanizationhasalsoincreasedpharmaceuticalneeds.
Forexample,about460millionChineselivedincitiesandtownsin2000andthistrendisincreasingby2.
7percenteachyear–morethan10millionpopulationareaddedtothecitiesannually.
Pharmaceuticalsconsumptionhasaratioof7:1betweenurbanandruralpopulations,andurbanizationwillalsoincreasethesizeofthepharmaceuticalsmarket.
China'spopulationgrewtomorethan1.
3billionby2005.
Inaddition,theageingpopulationisincreasingby3percenteachyear.
Theregulatoryenvironmenthasalsohelpedthepharmceuticalsmarket,anditisestimatedthatretailpharmaciesareincreas-inginnumberby15percenteachyear.
Asmentionedearlier,thedecreaseoftariffsintheWTOframeworkwillalsohelpbothdomesticandmulti-nationalproducers.
Themarketforhighqualityandpatient-orientatedhealthservicesissmall,butisgrowingsteadily.
MostChinesedonothavehealthinsurance.
Onlyafractionofthepopulationcanaffordhigh-endWesternmedicalcare.
Economicdevelopmentanddemographictrendsareconducivetophar-maceuticalgrowth,andthetotalvolumeofChina'spharmaceuticalindus-tryisgrowing.
By2005,about6,000domesticpharmamanufacturerscontrolledroughly70percentofthepharmaceuticalsmarket(BusinessIndia,2005,p.
92).
Thereareabout17,000jointventureswithChina,includingalltheleadingpharmaceuticalcompanies.
Bytheendof2004,3,731pharmaceuticalmanufacturersinChinawereGMP-certied(Chinapharm,2005),ByJuly2004,Chinahadabout3,613pharmaceuticals-relatedmanufacturers,inwhichonly423(11.
7percent),wereconsideredtobelarge-scaleproducers.
Themajorityofproducersweresmall-scale,lackeddistinctproductsandbrandrecognition,hadanout-of-date,traditionalmanagementstyleandwerelooselyorganized.
Theyproducedmorethan15,000kindsofpharmaceutical-relatedmaterials,totalling430,000tonsannually(Chinapharm,2004).
Theyalsoproduced34formu-lationsandmorethan4,000kindsofdrugs.
Thetop60businessesaccountedfor35.
7percentmarketshareinChinawhileincontrasttop64TheGlobalPharmaceuticalIndustry20globalproducersaccountedfor60percentofglobalmarket(ibid.
).
About97percentoftheproductsaregeneric.
Onaverage,eachbatchofrawmaterialcanmakethreeformulations.
Incontrast,themultinationalscanmake18–80formulations(ibid.
).
By17February2004,therewere7,486pharmaceuticalwholesalers,including6,936businessownersand551partners.
Incomparison,intheUSAthereareten,andinSweden,two.
Thepreferredglobalstandardforretailersisthatthereshouldbelessthan7minutes'walkingdistancebetweenaneighbourhoodandapharmacy.
Chinaisbelowthisstandard.
Chinanowhas15,1760retailers,and719chains.
Intotal,thetotalnumberofstoresandchainsthatsellphar-maceuticalproductsis230,000(SinaNewsTaiwan,2004).
In5–10years,itisbelievedthatgenericswillaccountfor70percentandprescriptions30percentofChina'spharmaceuticalmarket(Chinapharm,2005).
China'spotentialforpharmaceuticalproductionandconsumptionwasrecognizedinthe1990s.
China'spharmaceuticalsectorisexperiencingamulti-directionaldynamictoimproveitsdomesticpositioning.
China'spharmaceuticalindustriesarecatchinguptoglobalcompetitionbyformingalliances,andemployinghorizontalandverticalintegration.
Forexample,inthersthalfof2005,LAMPacquiredNewWorldforUS$14million;theGreenValleyGroup'sUS$6.
25milliondevelopedastrategicallianceandR&DinvestmentwithChineseAcademySciences;TaiGenpartneredP&GPharmaceuticaltodevelopanovelantibiotictoaddressdrug-resistantpathogens;andtheShanghaiPharmaceuticalGroupCo.
Ltd(SPGC)investedUS$12milliontolaunchajointventureinChongquingwithalocaldrugrm,theMokomGroup,andSPGCplanstoholda60percentstakeinthenewcompany,ShanghaiPharmaceuticalMokom.
TheChongqingMokomGroupwillretain40percentinreturnforcontributingitsinfrastructure.
ThiswillallowtheSPGCtoexpanditssalesnetworksintoruralmarkets.
Mokomhasthethird-largestchainofdrugstoresinChongquingandmajorsalesnetworkintheruralmarketsofSouth-westChina.
Anallianceofvemajorpharmaceuticalholdingcompaniesaimstopoolresourcesandshareregionaldistributionrightsandchannelstoincreasecompetitivenessandcutcosts.
Eachofthevealliancemembers–ShanghaiPharmaceuticalHoldingsLtd;BeijingPharmaceuticalHoldingsLtd;TienjingPacicGroupLtd;ChongqingPharmaceuticalHoldingsLtd;andGuangzhouPharmaceu-ticalGroupLtdisoneofthetoptenrevenueproducersinitssegment.
AXMPharmaInc.
,theownerofAXMPharmaShenyangthroughawholly-ownedsubsidiaryofWerkePharmaceuticals,Inc.
,reachedadistributionagreementwithSinopharmHoldingGuangzhouCo.
Ltd,anafliateofChinaNationalPharmaceuticalGroupCorp.
TheagreementwasforanexpectedUS$6.
5millioninsalesofElegancefemininehygieneproductsbyDecember2005,andthesalesterritoryincludesregionsinSouthernChina(BGCG,2005,p.
17).
ItwasnotedthatfemininehygieneproductshaveaMei-lingWang65majorpotentialinChina.
ThiskindofdynamicislikelytohelpdomesticproducersincreasetheirR&Dandmanagementcapacity,andinreturnthemultinationalscangaindomesticdistributionchannels.
CreativepartnershipsarebeinggeneratedtobuildcompetitivecapacityinChina.
Forexample,TaiGenBiotechnologyCo.
,aprivatelyheldbiotechwithheadquartersinTaiwanandwithsubsidiariesinmainlandChina,hascom-pletedaprojectwithProcter&GamblePharmaceuticals(P&G).
Thisagree-mentwilltakeadvantageofTaiGen'snetworkofclinicalinvestigatorsandberesponsibleforthePhaseIBandPhaseIIclinicaltestingofanovel,nonuori-nated-quinoloneantibioticfromP&G.
P&GretainstherighttoevaluatetheproductgivenpositivePhaseIIstudies,andwithTaiGenmayseekanotherpharmaceuticalcompanyforPhaseIIIdevelopmentandcommercialization.
Foritsrisk-sharing,TaiGenwillberewardedwithashareofthenancialrewardsfromthere-partneringofthePhaseIII-readyantibioticandwillretaintherightsofthiscompoundinChina,KoreaandSoutheastAsia.
ProcterandGamblehasobtainedUS$133billionmarketcapitalization.
Butrisksremainforbothcompanies:forexample,forP&G,anti-infectivesarenotacorestrate-gicfocusforitsrevenues,anditneedstolowerdevelopmentcosts.
Italsoneedsaccesstopatientsforclinicaltrials.
Partialcollaborationwithafocusedtargetisalsoacleverstrategy.
Forexample,PharmaEngine,anotherTaiwanlifesciencecompanyfocusingoncancer,immunologyandinfectiousdiseasetherapeutics,obtainedexclusiverightstoXenovaGroupPLC'sbraincancertreatment,TransMID,inChinaandSouthKorea.
WhatXenovagetsisanadvancepaymentaswellasmilestoneandroyaltypaymentsanditwillretainmanufacturingrightsandtheexclusivesupplierrightofTransMIDtoPharma-Engine.
Atthetimeofwriting,TransMIDisinPhaseIIIclinicaltrialsforthetreatmentofglioblastomamultiforme(GBM).
PharmaEngine'scurrentprospectsincludeonePhaseIcandidateforcancerandonePhaseIIcandidateforbothasthmaandchronicobstructivepulmonarydisease(COPD)(BGCG,2005,p.
17).
InApril2005,theShanghaiInstituteofMateriaMedica(SIMM)attheChineseAcademyofSciencesShanghaiLifeScienceInstitutemadeajointannouncementwiththeGreenValleyGroupaboutapartnershipandco-developmentagreementfortraditionalChinesemedicine(TCM).
TheGreenValleyGroupwillinvestUS$6.
25millionasstart-upfundingforpro-jectsincancerandcardiovasculardiseases.
GreenValleyspecializesinmarket-ingandsellingTCMproducts.
IthasofcesandsubsidiariesacrossChinaandownstwostate-of-the-artGMPmanufacturingfacilitiesinShanghaiandXian,withathirdbeingbuiltinShanghai(GreenValleyFinancialServices,2005).
Chinahasalsobecomeacentreofoutsourcingformultinationalphar-maceuticals,includingR&D.
ToaccesstheChinesemarketanditslow-costmanufacturingcapabilities,theLamPharmaceuticalCorp.
ofLewiston,NY,signedanagreementinJanuary2005,toacquireprivately-heldNewWorldKellertoninXinyangforUS$14millionincashandstocks.
TheNewWorld'sleadingproductisHipreomycin,approvedfortreatingTBinChina66TheGlobalPharmaceuticalIndustryandIndia.
Thisalsohasthepotentialtobeexportedtootherdevelopingcountries.
CibaSpecialtyChemicalshasopenedanewUS$20millionR&DcentreinShanghai.
ItwillbridgechemicalknowledgewithformulationsciencetocreatenewproductsandsolutionsforbothAsiaandtheworldatlarge.
BesidestheR&Dcentre,Cibaalreadyhassixbranchofces,twelveproductionsitesandthreetradingcompanies.
Ciba'sChineseoperationaccountedfor7percentofitsUS$5.
8billionglobalsalesin2004.
Chinaisalsomakinganefforttoreachglobalmarkets.
YangzijiangPharmacyCorp.
reachedanagreementwithStanfordUniversityintheUSAtobuildaresearchfacilityinShanghaifornewdrugs.
ThisisthesecondR&DfacilityafteritscollaborationwithMercktobuildasimilarcentreinBeijing,whereitsinvestmenttotalledUS$2.
25million.
TheShanghaiprojectwillfocusoncardiovascularmedication.
YangzijiangwillprovidethefundingfacilitiesandtestingandStanfordtheintellectualexpertise.
Yangzijiangwillhaverstclaimtoanyproductsdeveloped(BGCG,2005,p.
17).
Chinahasincreaseditsqualitycontrolinpharmaceuticalproductionincrementally,especiallyinGMPandGSP(GoodScienticPractice)cer-tication.
Onaverage,GMPcerticationcostsaboutUS$2.
5–3.
75million.
By2003,between1,800and2,000,companies,aboutathirdofallmanu-facturersinChina,spentmorethanUS$6.
25billiononbecomingGMPcertied(Chinapharm,2003).
By2004,60percentofallmanufacturers(controlling90percentoftotalproduction)wereGMPcertied.
ThosewhodidnothaveGMPorGSPcertication,(includingmorethan2,000businesses,900wholesalersand5,000retailers),weretoldtoclosedowntheircompany(Chinapharm,2004).
ForeignpharmaceuticalshavetakennoteofChina'sneedtodealwithemergentdiseases,andthattacklinginfectiousdiseasesisatthetopofChina'spublichealthagenda.
SinovacBiotechLtd(SVA),aleadingbiotechcompanyinChina,hasobtainedencouragingresultsfromitsclinicaltrialsofaSARSvaccine.
TheChineseCDC(CentreofDiseaseControl)revealedthat,ininitialclinicaltrials,theSARSantibodywasfoundinallvolunteerssixmonthsafterreceivingthetestvaccine.
SVAalsoreceivedChinesemar-ketingandsalesapprovalforitsSlitInuenzavaccineandforBilive,acom-binedhepatitisAandBvaccine(BGCG,2005,p.
17).
YetChina'spharmaceuticalsectorisalsofacinggravechallenges,whichwillbefurtherdiscussedlater.
However,intheWTO-regulatedeconomy,thepossibleopportunitiesfacingChinesepharmaceuticalmakerscanalsobeenormous(AccessChinaManagementConsultingLtd,2005,p.
39).
ThecompetitiveadvantagesofChina'spharmaceuticalsectorOverall,China'spharmaceuticalsectorandmarkethasseveralmajoradvantages,asmentionedearlier:mainlythesizeofitsmarket,lowercostsforlabour,productionandclinicaltrials,andquickerdrugapprovals,aMei-lingWang67talentpool,policyenvironmentandcommitmenttohealthcareimprove-ment,andemerginghealthissues.
AsbecameobviousafterChina'sentryintotheWTO,thecountry'spharmaceuticalindustryisatamajorturningpoint.
Chinahasbecomeamulti-taskingcentreforglobalpharmaceuticalproducts(WorldJournal,2003).
Specically,China'smajoradvantagesareasfollows.
AfutureR&DandglobalmanufacturingcentrefornewdrugsItisestimatedthatintheUSAandEurope,developinganewdrugcostsanaverageofUS$800milliontoUS$1billionbecauseofthehighcostofclini-caltrialsandthehighattritionrate,whichmeansthatonly15percentofnewdrugsenteringdevelopmenteventuallyreachthemarket(TuftsCenterfortheStudyofDrugDevelopment,2002;seealsoKemani,andFindlay,2000).
Findingthemselvesinthisdisadvantageousposition,Westernphar-maceuticalcompaniesareconstantlylookingforwaystocutcosts,suchasidentifyingnewpathwaystodevelopnewmolecularmedicineandacceler-atingtargetsbyusingnewtechnologies.
Thisexplainswhymostmajorpharmaceuticalcompanies,suchasPharmacia-Upjohn,GlaxoSmithKline,NovartisandsoonhadestablishedtheirR&DcentresinChinabytheearly2000s.
Yet,thechallengetoglobalpharmaceuticalbusinessesistondinnovativeoperationalmodelsfordrugdevelopment.
ThisnewframeworkofthinkingputsChinainanadvantageousposition:(i)Cost-effectiveness:China'sresearchscientistsarepaidafractionofthesalariesoftheirWesterncounterparts,whichlowerstheoverallcostofdevelopingnewdrugs,testingdrugcompoundsandmanufacturinginahighlyscalablefashion.
Evencomparedwithotherdevelopingcountries,China'slabouradvantagescannotbeunderestimated.
Forexample,China'slabourcostsareathirdoraquarterofthoseinBrazilorMexico(SinaNews,2006).
(ii)Avastresearchtalentpool:ThereturnofalargenumberofWestern-trainedtalentinthepharmaceuticalsectorincreasesChina'scompeti-tiveness(Wang,2005).
BySeptember2005,morethan200,000hadreturned,mostofthemhighlyeducatedhavingreceivedadvancedtrainingintheWest,especiallytheUSA.
(iii)Increasingexpertise.
Inhighlyspecializedareas,suchasbiopharmaceu-ticaldiscoveryresearchandclinicaldevelopment.
(iv)Increasinginvestment.
China'sincreasinginvestmentthroughpublicandprivateexpenditureondrugs.
(v)Anincreasingshareofthepharmaceuticalmarket.
However,forChinatobecomeaformidableplayerinagloballycompeti-tiveenvironment,itneedstoaddressthefollowingissues:(1)itneedstoimproveitsdrugdevelopmentinfrastructuretocomplywithinternational68TheGlobalPharmaceuticalIndustryregulatorystandardsifitwishestobecomepartofthefullyintegratedglobal'virtualdrugdevelopmentmodel'.
ChinahasmovedintherightdirectionwithitsmandatoryimplementationofGoodLaboratoryPractice(GLP)inSeptember2003,whichrequirethatalldataforthesafetyevalua-tionofnewdrugsmustcomefromGLPapprovedlabs;and(ii)Chinaneedssuchchannelsas'theLifeSciencesBridges'tofacilitatethebi-directionaltransferofknowledge,technology,capitalandotherresourcesbetweenitsowntechhubsandotherlifesciencehubsintheworld.
Chinaneedsmajorinformationchannelstoabsorbup-to-datebiomedicalscienticdiscoveriesintheWestandtotransferitsowndiscoveriestotheWesttorealizethefullcommercialvalueofitspharmaceuticalresearch(BGCG,2005,p.
14).
Invitrogen'sacquisitionofChinesecompetitorBioAsiainDecember2004showsthatlifescienceR&DcapacityinChinahasbeennotedbyforeigncompetitorsinbiotechresearchequipmentandreagents.
ItalsoshowsthatChinahasmadesomeprogressinintegratingitselfintothenewglobaldrugdevelopmentparadigm.
Overall,(i)thetraditionalcostlydrugdevelopmentparadigmisbeingevaluatedbyWesternpharmas.
Multinationalsneedtoassessthecost-effectivenessofthismodelandnalalternativestoreduceproductioncosts;(ii)Chinacanprovideanewparadigmfordrugdevelopmentthat'leveragesthemostefcientdrugdevelopmentresourcesworldwide'(BGCG,2005,p.
15);and(iii)China'sengagementininfrastructureandcapacitybuildingtocomplywithglobalstandardsisagoodrststeptobecomingarespectablepartnerintheglobalarena.
Intermsofmanufacturing,low-costprescriptionsandgenericshavemul-tipleglobalmarkets.
TheroleofsuchemergingpharmaceuticalproducersasChina,IndiaandBrazilareworthnoting.
TheUSAandJapanarethelargestpharmaceuticalexportingcountries,butalsothelargestimportingcountriesofpharmaceuticals.
USpharmaceuticalssalesaccountedfor18.
4percentintheglobalmarketplacein1976,and52percentormoresince2000.
EUsalestotalmorethan26percent;Japanesesalesgrossesmorethan10percent,butChinesesalesareabout2percent(ChinaPhar-maceuticals,2005).
Highincomecountries,whichaccountformorethan15percentoftheglobalpopulationconsumemorethan90percentofthepharmaceuticals,andpharmaceuticalconsumptionintheleastdevelopedcountrieshasbeendecreasing,from3.
5percentin1985to2.
9percentin1999.
Pharmaceuticalssalesinthesecountriesdecreasedfrom0.
98percentin1990to0.
64percentin2000.
Yet,pharmaceuticalssalesandconsump-tionhavebeenincreasinginmiddle-incomecountries,includingChina.
Intermsofaccess,aboutaquarteroftheglobalpopulationhadlessthanUS$5availableforpharmaceuticalexpenses.
Morethanhalfoftheglobalpopulationhaddifcultyinpayingformedicines,andinChina,morethan60percentpopulationhadproblemsinpayingforhealthcare.
Thereisabouta100timesdifferencebetweenhigh-incomeandlow-incomecoun-Mei-lingWang69tries.
Onaverage,pharmaceuticalsaccountedfor15percentoftotalhealthcarecostforglobalpopulations,whileinChinatheyaccountedformorethan60percent.
PharmaceuticalsareamajorhealthcareexpenditureformostChinesepeople(ibid.
).
Aswellasthosemarketsindevelopedcountries,thepotentialindevelop-ingcountriescannotbeignoredbyproducersinChina.
Thesemarketsarenotasourceofprotformultinationalsandarethereforenotthefocusoftheirattention.
Accordingtoa2004WHOreport,morethan2billionpeopledidnothaveaccesstoessentialmedicines,including1billioninChina.
Essentialmedicinesareexemptfromtariffsinallbuttencountries,butinthosetencountries,importedrawmaterialsforessentialmedicinesaretaxedat23percent,whileanaveragerateof12percentisleviedonnishedproducts.
Mostmiddle-andlow-incomecountriesstillpurchasetheirmedicinesfromotherlow-andmiddle-incomecountries.
LikeBrazilandIndia,Chinaiswell-positionedtoenterthosemarketswithessentialmedicines,low-costgenericsandherbalmedicines.
China'slargestcom-petitorinthisareawillbeIndia,whosepharmaceuticalproductsarepricedat60percentlessthanChineseproducts(ibid.
).
ArapidlygrowingmarketChinahaschangeditspositionfrombeingrankedeleventhin1996toseventhin2002,andisprojectedtobethefthby2010,withestimatedsalesofUS$24–26billionperyear.
ThesheersizeofpopulationandthedemographictrendsoftheChinesepopulationofferagrowingpotentialforpharmaceuticalproducts,asmentionedearlier.
In2004,prescriptionsalesgrossedmorethanUS$10billion,witharateofincreaseof27percentoverthepreviousyear.
Asawhole,China'spharmaceuticalsretailtotalledmorethanUS$97billion;hospitalpharmaciessalestotalledUS$141.
4billion;andpharmaceuticaladvertisingtotalledUS$20.
5billion.
ProtswereUS$30billionforthepharmaceuticalindustries;US$11.
7billionforretail;andUS$44.
4billionforhospitalsales(ibid.
).
SeveralspecicdemographiccharacteristicsandtrendsinChinaare:(i)thesizeofpopulationis1.
36billionanditisincreasinglyconsciousofitshealthneeds;(ii)since1998,pharmaceuticalssaleshaveincreasedbyatleastUS$500million;(iii)theageingpopulationleadstoincreasedpharma-ceuticalconsumption.
AccordingtoChina's2000census,about10percentoftheChinesepopulationwereagedover60yearsold,andthispopulationisincreasingby3percenteveryyear.
Forthepurposeofcomparison,theJapanesearethesecond-largestpharmaceuticalmarketbecauseofthehighpercentageofelderlypeopleinitsdemographiccomposition;(iv)therapidpaceofurbanizationinChinahasalsoincreasedthepharmaceuticalneedforOTCsinretailpharmacies,especiallytheneedforimportedmedicines.
Urbanizationincreasedby4.
4percentbetween1990and1995,andby30.
89percentbetween1998and1999.
Ifthistrendcontinues,therewill70TheGlobalPharmaceuticalIndustrybeplentyofroomforthegrowthofpharmaceuticalproducts(BGCG,2005,p.
1).
Thelong-termpredictionisthat,bythemiddleofthecentury,drugsalesinChinawilloutstripthoseineveryotherregion(seealso'Analysisofstrategiesandmarketsformultinationals',ChinaPharmaceuticals,2002).
CostadvantagesChina'slowproductioncostsareitsmajoradvantage.
Theseincludethecostsoflabour,facilitiesandequipment,rawmaterials,distribution,mar-ketingandadvertising.
Certainly,themostconspicuousisthecostoflabour,asmentionedearlier.
Chinaisknownforhavingoneofthelargest,mostinexpensive,andbest-trainedlabourforces.
IthasbeenestimatedthattheaveragesalaryforaPh.
D.
-levelscientistinChinawasUS$25,000ayear–about10percentofacorrespondingUScompensationpackage.
Inaddi-tion,thelargenumberofreturningscientistsfromtheWestaddsafurtheradvantagetoChina'scostcalculations.
Aglobalhumanresourcerm,WatsonWyatt,foundthattheannualsalarybeforetaxforR&Dprofession-alsinChinawasevenlowerthaninSouthAmerica.
Incontrast,itwasesti-matedthat80percentoftotalR&DcoststypicallypayforthesalariesofresearchscientistsintheWest.
ThisexplainstheincreasinginterestoftheWestinturningtoChinesescientiststoconductnewdrugresearch.
CentresofclinicaltrialsThecostofconductingclinicaltrials,includingtheassociatedhospitalfees,isalsomuchlessinChinathanintheWest.
Accordingtosomeconserva-tiveestimates,clinicaltrialscostsinChinaareathirdofthoseintheUSA.
(PriceWaterhouseCoopers,2004).
Onaverage,forthedrugdevelopmentprocessesinChina,thepreclinicalcostisapproximately20percentofthatintheUSA.
IthasbeenestimatedthatitcostsaboutUS$120milliontodevelopanewdruginChina(GeneralBiologic,2004).
Itwasnotedthatthatmorethan800drugs,mostofwhicharenewdrugsinPhaseIIIofclinicaltrials,aretestedannuallyinChina.
Usually,morethan500,000Chineseareinvolvedintheprocess(WorldJournal,2005).
Thescienticresearchtradition(i)Chinahasalonghistoryofscienticresearchandhasdevelopeditstalentsoveratwenty-yearperiod.
ScientistsofChineseoriginhavewonfourNobelprizesinscience-relatedelds,andthethirdandfourthgenerationsofChineseleaderswereallfromscienceback-grounds.
Chinahasawell-establisheduniversaleducationsystem,generatedabout1.
87millionundergraduatedegreeholdersand111,000postgraduatesin2003,accordingtotheChineseMinistryofEducation.
Ithasatalentpoolofmorethan50,000researchscientists.
Inaddition,eachyear,about500–1000ChinesewhohaveobtaineddoctoratedegreesfromoverseasinstitutionsreturntoChina,providingMei-lingWang71majorsupportforlargeresearchinstitutions(seeAsiaPacicBiotechNews,2005).
TheChinesegovernmentalsoimplementedapolicythatencouragedcollaborationbetweentheprivatesectoranduniversities,todeveloppatentableproducts.
Thispolicyhasprovidedamajorimpetusforresearchinstitutes.
Forexample,theShanghaiInstituteofMateriaMedica,China'sleadingcentreforpharmaceuticalresearchanddevelopment,isalsoamajortargetforcollaborationbymulti-nationals.
(ii)AlargenumberofpharmaceuticalresearchersinUSpharmascamefromChina,andagoodpercentageofthemhavereturnedtoChina,asmentionedearlier.
(iii)TheChineseethnomedicalsystem,whichhasbeenpractisedformorethan3,000years,hasprovidedmanyinnovativeideasfordrugdevel-opment.
Itsuggestsgreatpotentialforfuturenewdrugdevelopments.
(iv)TherehavebeenmanysuccessfulcollaborationsbetweenChineseresearchinstitutesandmultinationalssincethe1978economicreform.
Theirprotreturnshavebeenthemajordriversforthemulti-nationals'stayintheChinesemarket(Chinapharm,2001).
GovernmentsupportTheChinesegovernmentissupportiveofpharmaceuticaldevelopment.
Sincethelate1990s,governmentpolicieshaveencouragedforeigninvest-mentinthepharmaceuticalsectorinChina.
Forexample,(i)Chinaofferedspecialtaxincentivesforpharmaceuticalinvestors,reducingthelevyontheircapitalgainsfrom33percentto17percent;(ii)therewasnolimitonthemaximuminvestmentthatforeigninvestorscouldtransferfromthegainsoftheirpreviousinvestmentintopharmaceuticalinvestment;and(iii)thegovernmentincludessuchproductsasgeneticengineering,vaccinesandadvancedbiotechnologyinthegovernment'spurchasingpriorities,butChineseherbalproductsremainthemonopolyoflocalmanufacturers(seealsoChinaPharmaceuticals,2002).
In2000,theChinesegovernmentmadefurtherendeavourstoimprovethepolicyenvironmenttomakeitconducivetomultinationalinvestment,throughlegislationsuchasthePeople'sRepublicofChinaJointInvestmentLaw,People'sRepublicofChinaJointVenturesLaw,andPeople'sRepublicofChinaForeignVenturesLaw.
On1December2002,ChinaalsopassedtheQualiedForeignInstitutionalInvestorAct(QFII),whichallowedforeignentrytoChinesestockmarkets.
ThismadeitpossibleforforeigncapitaltobeanengineofgrowthforChinesebusinesses,includingthehealthcaresector(ChinaPharmaceuticals,2002).
InJanuary2003,theChinesegovernmentalsoabolishedawiderangeoflimitationsonforeigninvestments,suchasthevolumeofstocksinwhichforeignpartiescouldinvest,theChinesegovernment'sprotectionofmultinationalrights,andtheamountofcommissionchargedforpharmaceuticalinvestment.
This72TheGlobalPharmaceuticalIndustrystepwascrucialtofunnellingforeignfundsintohigh-growthsectors,suchaspharmaceuticals.
Inthisenvironment,on29September,2003thelargestpharmaceuticalretailer,MedicineShoppeInternationalInc.
,enteredtheChinesemarket(ibid.
).
Chinaalsoapprovedtherstforeignmultinational,RochePharma-ceuticals,toenterChineseretailmarket,on16May2003,whichdemon-stratedChina'sfullmentofitsWTOcommitments.
Priortothisdeal,RochehadalreadysetupasubsidiaryinShanghai(intheearly1990s),whichcoveredmorethan100citiesand400hospitals.
TheframeworkofRoche'sentrywasthroughajointventurewiththeChinesepharmaceuticalcompanyShingHsing,inwhichRocheprovided49percentoftheinvest-ment.
Thepossibletargetsofthisjointventureincludedhospitals,retailpharmacies,andpharmaceuticalimportsandwholesaling.
ItwasalsonotedthatforeigninvestmentaccountedforahighergrowthrateinChina'sexports(ChinaPharmaceuticals,2003).
Asmentionedearlier,theChinesegovernmentalsoprovidessupportforresearchinstitutesanduniversities.
ThemajoragencyinchargeofscienceandtechnologypolicyandresourceallocationistheStateScienceandTechnologyCommission.
WithanoverallR&DbudgetofUS$18.
7billionin2003(1.
31percentofGDP),Chinahasincreaseditsannualinvestmentinscienceandtechnology.
Thisrapidprogressinscienceandeducationsince1978arosefromthepolicydirectiveissuedbytheChineseCommunistPartyCentralCommitteeandtheStateCouncil,on6May,1995entitledthe'DecisionoftheCentralCommitteeoftheChineseCommunistPartyandtheStateCouncilontheAccelerationofProgressinScienceandTechnology'.
The'Decision'aimedatbothpublicandprivatesectorsreachingChineseR&Dspendingequivalentto1.
5percentofGDPbytheyear2000.
Thiswasabreakthroughdecisionthaturgedscienticacademiesandinstitutesofhighereducationtoestablishtheirownhigh-techcompanies.
The'Decision'paidattentiontospecialdevelopmentissues,suchaspopulationcontrol,foodsecurity,environmentalprotection(includingpollutionabatementtechnologies),andpublichealth(suchaspharmaceuticalsdevelopment).
TheStateCouncilalsosuggestedthatscienceshouldmoveoutoftheinstitutesandintoprivateenterprise.
GovernmentresearchinstitutesshouldjoinChineseandforeigncompaniesinco-operativeventures,decidetheirownresearchfocusandberesponsi-bleforprotmanagement.
Theowofpersonnel,informationandcapitalareexpectedtoimprovetomeetthemarket'sneedforresearch(Wikipedia,2006;seealsoLouet,2004;BGCG,2002,p.
1).
ThispolicywasconducivetoChina'shigh-techresearch.
Theinvestmentinbiotechnologybeganin1986withthelaunchofthe863Programmeforhigh-techinvestment,whichhasreachedUS$500millionperyearandincludesmajorinfrastructurebuildinginresearchinstitutes,laboratories,centresanduniversities.
AboutfourteenofMei-lingWang73theeighteengeneticallyengineereddrugsapprovedbythestateweresponsoredbythe863Programme.
Otherprogrammesarethe'TorchProgramme'andthe'NaturalScienceFoundation',whichenabledChinatostrengthenitsresearchcapacityingenomesequencing,bio-agriculture,tra-ditionalChinesemedicine,tissueengineeringandgenetherapy,whichhavestrongpotentialforfuturegrowth(BGCG,2002,p.
12).
Inthisenvi-ronment,geneticengineeringhasmadeprogressinChina.
China'sGenomeProjectisheadquarteredinShanghai.
Since1993,theChineseGenomeProjecthascarriedoutstructuralanalysesofgenomes,collectedsamplesfromChineseminoritiesforanationaldepository,anddevelopedtechniquesforhumangenomeresearchinformatics.
Theprojectstartedwiththericegenomeandexpandedtohumangenomeresearch,withafocusondisease-causinggenes.
Alivercancergeneprojectthatbeganin1993isnowfocusingonchromosome17.
Othergroupsfocusongenesassociatedwithoesophagealcancerandpsychologicaldisorders.
AresearchgroupattheInstituteofMedicalBiologyattheWestChinaUniversityinChengduislookingfordisease-causinggenesinseveralcelllines.
Twelveinstitutesandnineteenresearchgroupsareinvolvedinthehumangenomeproject.
Largecitieswithsufcientinfrastructurehavebecomemajorscientichubs,thus,ShanghaihasbecomealeadingChinesecentreforbiotechnologyandhumangenomeresearch(Wikipedia,2006).
TheSouthCentreofHumanGenomeResearchhasparticipatedintheinternationalundertakingofthesequencingofthehumangenome,andtheBeijingGlobalBiotechnologyCentrehasmadeamajorinvestmentindevelopinganinternationalbiotechnologyresearchparkinHangzhou(ibid.
).
China'sparticipationinbiopharmasisalsoworthnoting.
Therearenow139drugsinChina'sbiopharmapipeline,60biologics,43generics,19anti-bodiesand11vaccines(ChinaPipeline,2004.
).
Ofthe139drugs,96(69percent)areatapreclinicalstage,whileonlyabout13(9percent),areatPhaseIII,comparedto700biologicsinclinicaldevelopmentworldwide,150ofwhichareinalateclinicalstage(Anscomb,2004).
China'sbiopharmasarelikelytoexpandinanenvironmentofincreasedgovernment-sponsoredresearch,increasinglyavailableprivateventurecapitalinvestment,andinnovativeR&Dinthebiopharmasector(BGCG,2005,p.
1).
TransgeneticresearchInnovativeresearchthrivesinaexiblepolicyenvironment.
Chineseresearchinstitutes,suchtheCentreforStemCellBiologyandTissueEngineeringinGuangzhou,areestablishinganewprimateresearchcentrethataimstocreatetransgenicprimatesforuseasmodelsofhumandiseaseandasaglobalsourceofprimatestemcells.
TheUSAusedabout57,000primatesin2000,andChinaisamajorsupplier,whichisconducivetotheclinicaltrialsbusinessthatChinaisestablishing.
Conductinganimaltestingclosetoitssourcecouldsavealargeamountonthecostsrelatedtobreedingand74TheGlobalPharmaceuticalIndustrytransportation.
Theuseofnon-humanprimatesisasourceofmajorpoliti-calcontroversyandatargetforattackbyanimalrightssupportersintheWest,whichgivesChinatheopportunitytobecomeamajoranimaltestingcentreforclinicaltrials.
However,itisalsoimportantthatChinadevelopsmechanismsintransgeneticresearchthatcananswertheconcernsofanimalrightssupporters.
LiberalattitudesandfewerideologicalinterventionsinscienticresearchThedebateaboutstemcellsandtherapeuticcloningresearchintheUSAislesscontentiousinChina.
WhenChinaapprovedGendicineinDecember2003,developedbyShenzhen'sSiBionoGenTech,Chinawastherstcountryintheworldtoofciallyapproveagenetherapyforheadandnecksquamouscellcarcinoma.
Intotal,in2004,therewereabouttengenetherapyproductsindevelopmentinChina,comparedtoforty-threeintheUSAandteninEurope(seeNatureNews,2004;seealsoAsiaPacicBiotechNews,2004).
Similarly,China'sapprovalofgeneticmedicinesforthetreat-mentofcancerin2006alsoshowedChina'sadvantageinprioritizingscienticresearchwithoutideologicalbaggage.
ThechangingdemandsofdomesticmarketsThedemandsforbiomedicinehaveincreased,especiallyfordrugsthatdealwithageing,chronicdiseasesandinfectiousdiseasesglobally.
Tomeetthesedemands,pharmaceuticalresearch,especiallybiotechmedicine,hasalsoreceivedincreasingsupportforresearchanddevelopment.
ThecaseofGendicinewasinstructive.
IthasbecometherstgeneticallymodiedmedicineapprovedbyChina'sregulatoryauthority.
Thegrowthinbio-medicineingeneralhasbeensteadyoverrecentdecadesinChina.
Thelargestgrowthhasbeeninbiomedicineandthemanufactureofequipmentdesignedforpharmaceuticalindustry.
ThegrowthoftraditionalChinesemedicinewasslowerthantheaverageratebecauseofdifcultiesinthemodernizationandindustrializationprocess.
Medicalapparatusandequip-mentinmanufacturedecreasedfromagrowthrateof50percentin2002to7.
76percentin2003.
Salesrevenuein2002wasUS$40.
05billion,a16.
4percentincreaseover2001,withaprotmarginof22.
02percent.
Importsinthesecategoriesincreasedsteadilyfrom2002to2005(seeChinaIndustryDevelopmentReport,2003).
PolicyenvironmentAsmentionedearlier,theChinesegovernmentissupportiveofmulti-nationalsconductingR&DinChina.
Themostimportantpolicywas'Item863',whichwasapprovedbyChineseleaderDengXiao-pinginMarch1986andencouragestechnologytransferfromindustrializedcountriesandscienticresearchinvarioussectors.
DengapprovedaboutUS$1.
2billionofinvestmentinscienticandtechnologyresearchfromChina'spublicMei-lingWang75funds.
ThispolicyhasimportantimplicationsforChina'spharmaceuticalsector.
Forexample,in2000,China'sSFDAallowedexemptionsfromimportdutiesandothercustomstaxes,toencourageR&Dbymultinationals.
Chinahasalsolistedbiotechasaprioritysectortoenlistforeigninvest-mentinitsCataloguefortheGuidanceofIndustriesforForeignInvestment.
Thiswillrenderforeigncompanieseligibleforalowerrateofcorporateincometax,abouthalfofthe33percentpaidbydomesticcompanies.
ForeignR&Dcanimportequipmentwithouttariffs,andtherevenuesreinvestedinresearcharetax-free.
ItisbelievedthatmultinationalinvestmentinR&DcansupportthebottomlineintheirglobalbudgetsaswellasstrengthenthenancialperformanceintheirChineseoperation(BGCG,2005,p.
12).
TheChinesepolicyenvironmentisbelievedtobeoneexplanatoryfactorfortheincreaseofR&Dindrugdevelopment.
About96percentofthe8,000newdrugapplicationssubmittedtoChina'sSFDAin2003wereman-ufacturedbylocalcompanies,andabout40percentofthenewdrugsareimitations(seeVasella,fromBGCG,2005).
Since2002,centralgovernmenthasmappedoutaplantoencourageinnovationinthepharmaceuticalindustry.
TheChinesegovernmentsetouttoinvestUS$120millionbetween2002and2005,tentimeshigherthantheperiod1996–2000,tostrengthenresearchanddevelopmentofnewdrugs,insteadofduplicatingcurrentgenerics.
TraditionalChinesemedicineistreatedequallyinthisinvestment.
ThepursuitofpatentownershipshouldbeapriorityfortheChinesegovernmentbecauseChineseownershipofpharmaceuticalpatentsissparse.
Forexample,in2002,Chinesepharmaceuticaldevelopersownedonly2percentofthepatentsofthemedicinessoldonthedomesticmarket(ChinaInternetInformationCentre,2002).
ChallengesChina'spharmaceuticalsectorisfacingchallengesinseveralareas,suchasintheneedforR&D,alackofpatentedpharmaceuticalsdevelopeddomes-tically,theenforcementofintellectualpropertyrights,ascatteredgeo-graphicallayout,duplicatedproductionprocesses,theneedtomodernizemanufacturingtechnologyandmanagementstructure,alowermarketcon-centrationininternationaltradingcompetitiveness,anditspositionintheworld'spharmaceuticalindustryandtheregulationenvironmentunderWTO.
Policyandthelegalenvironment(i)Sinceearly2000,Chinahasbeenmovingsteadilytowardsimprovingthelegalandpolicyenvironmentbyencouraginginnovationandincreasingpatentprotection.
By2002,Chinawasproducing1,350typesofcrudepharmaceuticals,in24categories,amongwhich97percentdonothavepatentprotection.
Todate,Chinahasonlytwoinno-76TheGlobalPharmaceuticalIndustryvativedrugs,arteannuinandsodiumdimercapto-succinate,thathadinternationalpatents(HongKongDevelopmentCouncil,2002):(ii)Manufacturersshoulddecreaseduplicationofproductsandstreamlinethepharmaceuticalbusiness.
By2001,Chinahad5,164orfewercom-paniesproducingcrudedrugs,medicineandchemicalreagents,andpreparations.
Itwasbelievedthattherewasexcessiveduplicationintheproductionofpharmaceuticals.
Atthetime,questionswereraisedaboutthecompetitivenessofsuchalargenumberofindigenousphar-maceuticalcompaniesinthefaceofstrongforeigncompetition.
Itwassuggestedthatthegovernmentshouldraisethethresholdfortheentryofnewpharmaceuticalenterprises.
Theothersolution–verticalandhorizontalintegration–isimportanttodecreasethenumberofindigenouspharmaceuticalcompanies.
Thisstrategyisworkinggradu-ally.
Inthe1985–98period,therewasasharpadditionof500newcompaniestothelistofpharmaceuticalproduction.
In1999,therewasanincreaseofonlyadditionalvecompanies;17in2002,and23in2001.
Itwasalsomandatedbythenewlawthatotherinstitutionsorcompanieswouldnotbeallowedtoreplicatesimilarproductiononceanewapplicationhadpassedtherststepoftheapplicationprocess.
Third,thenewlawalsomadeitdifcultforsmallpharmaceu-ticalcompaniesnotmeetingtheGMPstandardtocontinuebychang-ingthedrugproductioncerticationprocessorenforcingGMPauthentication.
In2001,about10percentofsmallerbusinesseswereeliminatedinthisway.
(iii)ChinashouldenforceGMPstandards.
EnforcingthesestandardshasbeencrucialtoupgradingthepharmaceuticalindustryinChina.
In2002,China'sStateDrugAdministrationsetatimetableforallChinesepharmaceuticalcompaniestoqualifyforGMPauthenticationby30June2004.
Allmedicines,preparationsandcrudedrugshadtoconformtoGMPstandardsandgainGMPcerticates.
ItwasacrucialstepforqualitycontrolinChinesepharmaceuticalcompanies.
Althoughthishascausedsmaller,lesscompetitivepharmaceuticalcompaniesintobankruptcyandforcedmergersofothers,ithasbeenbenecialtotheindustryoverall;(iv)Thegovernmentshouldfacilitatetheowofdistributionchannels,implementaclassieddrugmanagementsystem,andseparatethemedicaltreatmentfromdrugmanagement.
Retailpharmaceuticalsaremainlysoldthroughtwotypesofoutlet:hospitalsandpharmacies.
Itwasestimatedthatabout85percentofdrugsaleswerethroughhos-pitals.
Since2000,Chinesegovernmenthasmandatedtheuseofaclassieddrugmanagementsystem,andtheseparationofprescriptionandOTCdrugsaleswastriedoutinanumberofvenues,toencouragethedevelopmentofpharmacies/drugstores.
ThereisalsoapolicythatencouragesretaildrugstorestosetupchainsandlargemedicalretailMei-lingWang77enterprisestoexpandtrans-regionalbusiness.
ChinahasalsograduallyimprovedtheOTC(over-the-counter)system.
Asystemof'medicalinsurancedesignateddrugstores'withmeasures'separatingmedicaltreatmentfromdrugs'hasalsobeenintroduced.
Now,withdoctors'prescriptions,patientscanbuydrugsoutsidehospitals.
Thisencour-agestheexpansionofretailpharmacies.
Thesepolicydirectionswillalsoopenupdistributionchannelsforpharmaceuticalcompanies;(v)Thegovernmentshouldimprovecentralizedbiddingandeffortstoreducedrugprices.
Centralizedbiddingthroughhospitalswasdesignedtoreducedoctors'backdoordealingswhenpurchasingdrugs–so-called'greyincome'–andtodecreaseexpensesforpatients.
But,thispolicywasfoundtohaveseriousdefects.
Asmentionedearlier,theChinesegovernmenthasmadestrongeffortstocutpharmaceuticalprices.
Since1997,theStateDevelopmentandPlanningCommissionhascutthepricesmanytimesofmorethan200varietiesofcentral-izedmanagerialdrugsandreagents.
Thegoalwastocutretailpriceswhilewholesalepricesremainthesame.
Thispolicywashardtoimplementbecausethereductionofretailpriceshurttheprotsofhospitalsanddrugwholesalers,shiftingthelossofprotsbadetopharmaceuticalsproducers.
CreatingbrandawarenessInthisarea,themajorissuesfacingChinaare:theprotectionofintellectualpropertyrights(IPR);alackofnance;alackofstate-of-the-artdrugdevel-opmentinfrastructures;alackofmanagementtalent;difcultyinexiting;poorcorporategovernance;currencyexchange;reductionoftariffs;domes-ticharmonizationandcompliancewithWTOregulationsatthecentralandlocallevels;competitivenessofdomesticpharmaceuticalindustries;productregistrationregulation;theregulationoftheChineseherbalindus-try;thecompetitiveadvantagesofbiochemicalmedicines;andthepublic–privatesectorpartnership(BGCG,2005,p.
1).
IPRprotectionAccordingtothePharmaceuticalResearchandManufacturersAssociation,theIPRsituationinChinaremainsaconcern.
Majorchallengesinclude'alackofdateexclusivityprotection,counterfeiting,andinconsistentadmin-istrativeprotection'.
In2004,Pzer'spatentonViagra(Sildenal/citrate)wasoverturnedinJuly2004;andGlaxoSmithKlineabandonedanattempttodefenditspatentonAvandia(Rosiglitazonemaleate)inAugust2004(BGCG,2005,p.
1).
ThecaseofPzerarousedsomeconcerns.
In2001,Pzer'spatentofViagrawasinvalidatedbyChina'sStateIntellectualPropertyOfceafteritwaschallengedbyChinesedrugmakersonthebasisthatPzerhadnotsuppliedenoughlaboratorydatainitsoriginalapplica-tion(BusinessIndia,2005,pp.
92–3).
TheresolutionbytheChineseCourt78TheGlobalPharmaceuticalIndustrythatPzershouldbeawardeditsViagrapatentin2006wasagoodsignfortheChinesegovernment'scredibilityinIPRenforcement.
UndertheWTO,theChinesegovernmenthasworkedhardtoimproveIPR-relatedissues.
IthashadthepositiveeffectofencouragingmajorglobalcompaniestobuildupontheirinitialinvolvementinChina.
Inasurvey(BGCG,2005),morethantwo-thirdsofthethirty-veseniorexecutivesofmultinationalpharmaceuticalcompaniesquestionedsaidthattheyexpecttheWTOagreementtostrengthenIPRprotectioninChina.
ThefactthatmultinationalsareexpandingtheR&Dcapabilities–multinationalssuchasNovartis,RocheandEliLilly,whohaveoperatedinChinaforasignicantamountoftime–suggeststhatChina'sIPRissuesarenotseriousenoughtodiminishChina'sstrengths(BGCG,2005,p.
1).
ChinesegovernmentofcialsbelievethatintellectualpropertyrightsissuesareimprovinginChinaandthattheyhavebeenoverlypoliticized(SinaNews,2006).
TheissueofR&Dmeritsanin-depthdiscussionThemajorchallengefacingallpharmasoperatinginChinaisR&D:(i)domesticproducersneedtoharmonizetheirR&Dpractices.
IthasbeennotedbysomeanalyststhatChineseresearchersengagedindifferentR&Dprocessesfromthemultinationalsindrugdevelopment,suchasdevelopingdetailedresearchplans,establishingwell-denedtargetsandtimetables,anddiscussingprogresswithcolleagues(BGCG,2005,p.
11);and(ii)Chinaneedstostrengthenitsdrugdevelopmentcapabilities.
Itwasnotedthatmostofitsdrugdevelopmentfacilitiesdonotreachglobalstandards.
GLPwasrecentlyintroducedinChina,buttheendofMay2005,thetotalnumberofGLP-compliantfacilitiesinthecountrywasstillfewerthantwenty.
ItwaspointedoutthatChinalacksinnovativedrugs,andmostdomesticproducersinChinastillrelyoncopyingexistingdrugsratherthandevelopingnewones.
Between1985and1996,mostpatenteddrugswererawmaterialsorherbalmedicineproducts.
Asmentionedearlier,Chinahashadonlytwodrugs,arteanninandsodiumdimercapto-succinate,approvedinternationally(Wang,2002).
TheissueofR&Disparticularlyimportantinbiopharmaceuticals.
China'sbiopharmaindustryishighlyfragmented,with4,000producers.
ThefactthatfewdomesticmanufacturersarelargeenoughtoruneffectiveR&Dprogrammesshowsthatintegrationisnecessary.
Thedomesticbio-pharmasneedtospendahigherpercentageonR&D,giventhefactthatleadingmultinationalcompaniesspendaround15percentoftheirrev-enuesonR&D.
Onaverage,Chinesecompaniesspendlessthan5percent(ibid.
).
ThenicheoftraditionalChinesemedicineTraditionalChinesemedicinehasbeenfoundtobeeffectiveintreatingsomelong-term,chronicdiseases,butitneedsmajorresearchinvestmentMei-lingWang79aswellasimprovementsinmarketingandmanufacturing,whichwillbefurtherdiscussedlater.
Forexample,in2002,activeingredientsofonly2,000(outof10,000ormorepopularmedicines)wereknowntotheresearchers.
IntheChineseherbalindustry,localresearchersownmorethan80percentofthepatents,butmostofthemareaboutacombinationofherbs(ChinaInternetInformationCentre,2002).
EnforcementofpharmaceuticallawsandregulationsTheissueofcounterfeiteddrugsmeritsdiscussioninChina.
Worldwide,counterfeitingisamajorissuefacingglobalhealth.
Itaffectsthelegitimatepharmaceuticalindustries;wasteshealthcareresources;causesincreasedhealthcareexpenses;decreasesmedicaleffectiveness;itcancausefatalresults.
Intheenvironmentofglobalizationandinternettrade,conven-tionalregulationsonpharmaceuticaltradearenolongerpowerfulenough.
Theinternetmakesitmucheasierforconsumerstocomparepricesandobtainprescriptions.
Theglobalpharmaceuticalcounterfeitingbusiness,withouteffectivecontrol,willbeaseriousthreattoglobalhealth.
Ithasbeenestimatedthat10percentofdrugsintheglobalmarketand50percentofthedrugssoldindevelopingcountriesarecounterfeit.
Mostcoun-terfeitdrugsareadvertisedascuresforobesity,impotency,baldness,ormalaria.
Theproductionchainforcounterfeitdrugsiscomplex:theingre-dientsmightbefoundincountryA,whilethenalproductismanufac-turedincountryB.
Counterfeitingrequiresglobalcollaboration.
TheWorldHealthOrganization(WHO)hasestablishedanemergencycommunicationsystemprovidingaplatformtoupdateinformationoncounterfeitdrugs,andthiscanprovideamodelformonitoringChinesecounterfeitdrugs(Lee,2005).
CounterfeitdrugsareamajorpublichealthissueinChina.
Forexample,inSuanzhouCity,thelocalFDAconscatedtwenty-sevenillegaldrugsthatclaimedtohavetherapeuticeffectsincardiovasculardiseases,prostateproblemsorimpotency.
Thelabelsweremisleading,andfrequentlythecompanieslistedonthelabelsdonotexist(WorldJournal,2005).
InamajorcityinChina'sNorth-westregion,ViagrawassoldfortheequivalentofUS60pertablet.
WithsimilarpackagingasthatproducedbyPzer,ChinesecounterfeitViagracostthirtytimeslessthantheAmericanversion.
InanotherpharmacyinHenan,ViagrawassoldforUS$20perpackandnoprescriptionwasrequired.
TheChinesemedicalauthoritieshaveincreasedtheirsurveillanceovercounterfeitdrugsyetchal-lengesremainformidable.
Forexample,collaboratingwiththepolice,theprovincialFoodandPharmaceuticalSupervisionandManagementOfcereported17,664violations,andconscatedillegalmedicalequipmentandpharmaceuticalsworthatotalofUS$900,000.
Yetcounterfeitdrugsarenowsoldinhealthfoodstores.
Locally-madeViagraisamajorsourceofprotforsellersofcounterfeitdrugs.
Itwasreportedthat,byAugust2000,80TheGlobalPharmaceuticalIndustryabout500,000counterfeitViagrapillshadbeenproducedinZhejiangProvince,andbythetimethemanufacturerwasarrested,80percentofthepillshadalreadybeensoldinthemarket.
CounterfeitersusuallybuyrealViagrafromlicensedsellers,analysetheactiveingredientsandcounterfeitthedrugintheirownfactories.
Inmanycases,thecounterfeitViagraisjustcolouredsugarpills.
Inparticular,HenanProvincehasbecomeamajorcentreforcounterfeit-ing,withcounterfeitingmanufacturersevengainingnamerecognitionamongChineseconsumers.
Someconsumershavemistakenthe'Henanmade'markforqualityassurance.
ThecounterfeitdrugshavealsogainedsomeshareoftheoverseasmarketviamailordertoabouttencountriesincludingtheUSA,Britain,andasfarasIsrael.
ThekingofcounterfeitViagra,MrMoHueiBiao,soldmostofitviatheinternet.
Hewasabletoproduce10,000pillsaday,ataproductioncostofUS$0.
28pertablet.
Localpostofceclerks,whowerepartoftheoperation,receivedacommissionfromthecounterfeiters.
Somelocalgovernmentclerksevenbecameaccom-plicesinthisbusiness.
Now,localfoodanddrugsupervisionandmanage-mentauthoritiesworkwithawiderangeofgovernmentofcestostemtheowofcounterfeitdrugs.
Theseincludethepolicedepartment,thepostofce,telecommunications,bankingandmobilecommunications.
Inthefaceofthegovernment'shigh-pressuretactics,thecounterfeitingopera-tionshavealsodiversiedtheiroperations.
Themanufacturing,packaging,transportationandpaymentarenowdispersedtodifferentlocations(SinaNewsBeijing,27September2005).
Relatedtocounterfeitingistheissueoftherecallanddisposalofexpireddrugs.
ThisproblemiswidespreadinChinesevillagesdespitetheeffortsbytheChinesegovernmenttoissueanationalmandatetorecallanddisposeofallexpireddrugs.
Somerecalleddrugshavebeenrepackagedandsoldinremotevillages(SinaNewsBeijing,24May2005).
Thepriceattractspoorerconsumersbecauseitisusuallysome50percentlessthanthedrugs'originalprice(SinaNewsBeijing,16May2005).
ControlofclassieddrugsOn6November2005,1,360,000pillsoftriazolamweresoldtotheblackmarketbythe'JinlingPharmaceuticalCompany'inJilinProvince.
Triazolam,aClassIclassieddrug,isoneofthemoststrictlyregulatedpharmaceuticalsinChinabecauseofitsanestheticeffects.
Itisusedclini-callytotreatinsomniabutitisoftenusedasarapeorrobberydrugbycriminals.
JinglingPharmaceuticalCompanywasoneofonlytwocompa-niespermittedbytheChinesegovernmenttoproducetriazolam.
InaroutineinspectioninMay,2005,localauthoritiesfoundthatonly18percenthadbeensoldtolicensedpharmaceuticalwholesalers;therestwenttoillegalsellers.
Theproblemstemmedfromthelackofvigilanceonthepartofthesalesagentsatthepharmaceuticalcompany.
ThesalesagentsdidnotMei-lingWang81inspectthelicencesofthebuyers,andmostwerecounterfeitssoldonthestreetforUS$1.
7(WorldJournal,6November2005).
Evidence-basedpharmaceuticaltrackingandconsumerprotectionChinaneedsasystemtosuperviseretailersinthetrackingandmonitoringofdruguse.
Inthepast,consumerscouldnotsuepharmacistsformal-practicewhensufferingseveresideeffectscausedbypharmacisterrorindispensingdrugs.
TheexperimentalapplicationinaGuanzhoudrugstoreoftrackingpatients'drugreactionshistorycanimprovethisproblem.
Moni-toringandtracingsideeffectsisespeciallyimportantwhenassessingtheeffectivenessofpharmaceuticalproducts.
MisuseandabuseofprescriptionsAbuseofprescriptiondrugsisontheriseinChina.
Forexample,itwasreportedthatprescriptionsusedforhumanproblemsweresoldatveteri-naryclinicsattentimestheoriginalprices.
Theoverpricingandmisuseofveterinarymedicineisprevalent,especiallyinlargecitiessuchasBeijing.
Beijingcitymandatesthatallpetdogsshouldbevaccinatedinpublicclinics,asprivateclinicsoftenuseillegalvaccines.
Thedangerofusinghumanprescriptionsforveterinaryproblemsisthat,oncethediseasecrossesthespeciesbarriers,itposesagraverisktohumans.
TheepidemicsofSARSandavianu,whereviruseshavecrossedthespeciesbarrier,shouldbeinstructivetoChinesepharmaceuticalcontrolofcials.
RegulatingclinicaltrialsChinahasbecomeamajorclinicaltrialscentreformultinationalpharma-ceuticalcompanies.
YetthistrendmighthaveanadverseeffectonChina'sparticipationinthisbusinessifitisnotcloselymonitored.
Asmentionedearlier,itwasestimatedthatmorethan800drugsinPhaseIVofclinicaltrialsaretestedannuallyinChina,directlyorindirectlyinvolvingmorethan500,000Chineseintheprocess.
TherehasbeenalackofcoherentpolicyandregulatoryframeworktomonitortheclinicaltrialsbusinessinChina.
ItisreportedthatmanymultinationalsengagedinPhaseIIIandIVtrialslabelled'freephysicalexaminations'or'freecures',withthecollabo-rationoflocalstatehealthagencies.
Thevictimswereoftenpoorfarmers.
ThemostappallingincidentinvolvedaKoreandrugmanufacturer.
TheKoreancancerdrugmanufacturerreportedlyengagedinclinicaltrialsonagroupof593farmersbetween1997and2001.
Allofthembecameseriouslyillordiedduringtheprocess(WorldJournal,22May2005).
PharmaceuticalpricingcontrolPricingisachallengingissuefacingChinesepharmaceuticalregulatorsandotherstakeholders.
Ithasseriousimplicationsforallpartiesinvolved.
InMay2005,thePharmaceuticalAssociationintwenty-oneprovincesin82TheGlobalPharmaceuticalIndustryChinaappealedtotheChinesegovernmentforpharmaceuticaldiscount(SinaNewsBeijing,19May2005).
Anissuerelatedtopricingisaccess.
Thereneedtobemorepharmaciesinruralandremoteareasofferingaffordablemedicines.
Largecitiesandtownsbenetcomparedtosmalltownsandruralvillagesinthequalityandquantityofservicestheyreceive,whileruralhealthcareisfallingapart.
Accesstoqualitymedicineisaseriousissueinthevillages.
Thereneedstobemajorinfrastructurebuildingandpublic–privatepartnershipstoimprovethedistributionchannelsofpharma-ceuticalsinremoteareas(BusinessIndia,2005,p.
92).
TheChineseauthoritiesareinadifcultpositionvis-à-vispharmaceuticalpricecontrols.
Ontheonehand,theyhavetomeetpublichealthobjec-tivesandsocialsolidaritygoals;butontheother,theyareconcernedabouttheimpactofsuchmeasuresonlocalpharmaceuticalproducers.
Forexample,inJune2005,theChinesegovernmenttookmeasurestolowerthepricesofsixantibioticsandsixotherdrugsonthestatehealthinsur-ancelist.
Therateofreductionreachedmorethan60percentfordomesticdrugmanufacturers,butlessforjointventuresorforeignventures.
On,average,thereductionrateonbrandnameswas20percent.
Themainpurposeofthiswastolowerdrugscostsinhospitals,butitwassaidtohavehadamajorimpactonlocaldrugmanufacturersratherthanonthefor-eignerpharmas,becauseantibioticssalesaccountedforabout30percentofpharmaceuticalsales.
ItwasestimatedthatmostlargeChinesephar-maceuticalcompaniessawtheirprotsfromantibioticsalesreducedbyaround50percent(WorldJournal,23May2005).
Moreoftenthannot,thewell-intendedpricecontrolmeasuresdidnotachievetheintendedeffectofreducingtheburdenonthepatients,ashospitalsmightinfactrecommendmoreprotabledrugstopatients.
China'spublichealthobjectivescannotbeignoredinthisdiscussion.
Onthewhole,theChineseMedicalReformCommissionhasmadeadeliberateplantoimprovepharmaceuticalaccess,andtheloweringofpricesforantibioticswasjusttherststep.
TheMedicalReformCommissionaimstosolvetheissuesofpharmaceuticaloverpricing,providingmorepricingexibility,andstoppingtheabuseofantibiotics.
Theroleofdoctorsandhospitalsintheuseofpharmaceuticalsisamajorissueinoverpricing.
Generally,doctorsandhospitalstendtochargeacommissionforpharma-ceuticalproducts.
UnlikethesituationintheUSAortheEU,medicalprac-ticeisnotseparatefrompharmaceuticalsalesinChina.
SinceChina'seconomicreforms,hospitalsreceivefewersubsidiesfromthegovernmentandhavetorelyontheprotsmadeonpharmaceuticalstopayforhospitaloperations.
ThelowerdiscountrateforjointventuresandforeigndrugmakersistotakeintoaccountthehighR&Dcostforthoseproducers.
Yetthesepublichealthmeasureshavenotachievedtheirintendedeffects.
Thisplanresultedfromconsultationswithexpertsandlocalpharma-ceuticalvendors,theMinistryofHealthandChina'sStateDepartment.
TheMei-lingWang83publicly-ownedChinesepharmaceuticalindustriesareapprehensivethatthismeasurewouldallowtheircompetitorstoerodetheirdiscountdrugmarketandshrinktheshareofthedomesticpharmaceuticalsmarketheldbypublicly-ownedpharmasinChina.
Thedomesticpharmasbelievedthatshrinkingprotswouldforcethemoutofthemarketwhilejointventuresorforeignpharmaswouldmaintaintheirprotmargins.
AccordingtotheChinaPharmaceuticalSalesAssociation,in2004,theaveragesalepricesforpharmaceuticalsdecreasedoverall;forexample,inthreemajorpharma-ceuticalcategoriespriceswereloweredby4.
98percent.
PharmaceuticalsproducedbyChinesedomesticmanufacturersshowedthegreatestrateofdecrease,whichseriouslyaffectedtheirprotmargins.
ThistrendwasfeltpainfullybysuchmajordomesticpharmaceuticalindustriesasHaPharmaceuticals,NorthernChinaPharmaceuticalsandNewChinaPharmaceuticals.
Intherstquarterof2005,protsoftwenty-threestate-ownedpharmaceuticalsdecreasedby12.
1percentcomparedtotherstquarterof2004.
Theseindustriesfacethecombinedchallengesofrisingpricesofrawmaterialsandpolicypressure.
Somewereforcedtodecreaseantibioticsproduction,streamlineorchangethatproductstructure,reduceproductioncostsbymovingfacilitiestothevillages,increaseexports,ormoveintohealthfoodsbusinesses.
Infact,thehealthfoodsindustrycanbeapotentialgrowthareafordomesticstate-ownedpharmasiftheycannotcopewiththecompetitionintheconventionalpharmaceuticalssector.
Onemajorpotentialmarketisvillages,whichhouseforsome80percentoftheChinesepopulation.
NewpoliciesbytheChinesegovernmenttosupportareformedhealthcaresysteminthevillagesprovidesroomfordis-counteddrugs.
Accordingtoonestudy,themarketatthecountryandvillagelevelreachedaboutUS$630millionby2005.
Theotherpossibilityistoenlargetheexportmarket(Jing,2005).
Inconsequence,pharmaceuticalpricingreformsarelikelyto:(i)lteroutdomesticpharmasthatarenotcompetitive;(ii)leadtoaconcentrationofownershipofantibioticmakers,allowingforhorizontalintegration;(iii)allowpharmaceuticalproducersthatarestronginR&Dtogainlargermarketshare;(iv)increasepartnershipsbetweenmultinationalsanddomesticpharma-ceuticalcompanies;(v)changethemarketingstrategyamongcompetitors;and(vi)thiswillalsobelikelytoincreasegenericsanddecreasetheeffortmadetoproducebrandeddrugs.
Yet,itisimportanttonotethatthepricingissueisjustthetipoftheice-berg.
ThemainproblemisthenancingofChina'shealthsystem,especiallytheuseofpharmaceuticalprotstosupportthecostofhospitaloperations.
84TheGlobalPharmaceuticalIndustryInconclusion,thischapterhasofferedanin-depthanalysisofChina'spharmaceuticalindustry,itspotentialintheglobalmarket,andthemajoradvantagesofandchallengesfacingtheChinesepharmaceuticalsector.
Overall,globalpharmaceuticaldevelopmentissupportiveofChina'sposi-tionintheglobalmarketplace.
China'sdomesticmarketalsoofferstre-mendousopportunitiesforglobalstakeholders.
Itiswidelyanticipatedthatwithinfteen(around2020)years,China'swillbethelargestpharmaceuti-calsmarketintheworld.
China'sadvantageslieinthesizeofitsmarket;lowercostsforlabour,productionclinicaltrialsandquickerdrugapprovals;atalentpool;policyenvironmentandcommitmenttohealthcareimprove-ment;andemerginghealthissues.
Yetthechallengesarealsoenormous,suchasaneedforR&D,alackofpatentedpharmaceuticalsdevelopeddomestically,theenforcementofintellectualpropertyrights,ascatteredpopulationgeographicallyduplicatedproductionprocesses,theneedtomodernizemanufacturingtechnologyandmanagementstructures,alowermarketconcentrationininternationaltradingcompetitiveness,andaweakpositionintheglobalpharmaceuticalindustry,andtheregulatoryenviron-mentundertheWTO.
ThenextchapterwillofferananalysisofthewaysinwhichtheWTOwouldhaveanimpactonthemajorstakeholdersinChina'spharmaceuticalsector.
Mei-lingWang85