China's pharmaceutical market is expanding rapidly, but its drug companies have a long way to go to meet international standards
China's pharmaceutical market has grown 10 to 15 percent per year for the last 15 years or so and is expected to triple between 2000 and 2010. Sales of prescription drugs were around $6.8 billion in China in 2000; this number is expected to hit $14 billion by 2005 and $24 billion by 2010, according to the Boston Consulting Group. And the market for over-the-counter drugs (OTCs) is expected to more than quintuple between 2000 and 2010 to reach $5.7 billion. The driving forces behind this surge include the country's continually expanding and aging population, rising incomes, and recent tariff cuts. In the case of OTCs, healthcare reform, which is forcing Chinese to pay for more of their medicines, is also boosting sales as patients shift from prescription to OTC drugs. If the industry is to maintain this level of growth, however, it must become more efficient, meet international quality standards, and invest more in innovation.
Still a generic market
China currently has more than 6,000 pharmaceutical businesses, of which about 700 are foreign-invested. According to the Economist Intelligence Unit's Business China, though foreign companies make 40 of the 50 most popular brands of drugs in China, their products, including imports, account for only 20 to 30 percent of the market by value. Pharmaceutical operations range from wholly owned Chinese companies to Sino-foreign joint ventures to wholly foreign-owned facilities in China. Most of these firms are located in and around the big coastal cities, such as Beijing, Guangzhou, and Shanghai, but in recent years, some companies have set up in places rich in biodiversity, such as Yunnan or Hainan, or in interior cities, heeding the government's call to invest in the west (see the CBR, March-April 2004, p.8).
The majority of finished products made in China are for domestic consumption. Of the drugs made by the domestic Chinese pharmaceutical industry, according to China Briefing, more than 97 percent of the types of drugs, and 70 percent by volume, are generics or copies of existing drugs produced to meet the basic health needs of the population. To date, the PRC domestic pharmaceutical industry has invested very little in the research and development (R&D) of new drugs, though the central government is encouraging R&D through investment and other incentives in an effort to build a world-class pharmaceutical industry in China. Several foreign drug companies, such as AstraZeneca plc, Eli Lilly and Co., Pfizer Inc., and F. Hoffman-La Roche Ltd., have set up R&D or clinical trial centers in China.
Active pharmaceutical ingredients (API), or bulk pharmaceuticals, are also a major component of the product base (China is one of the largest global manufacturers of API), as are traditional Chinese medicines (TCM). The market for quality API is expanding worldwide and, as finished dosage facilities-the main consumers of API-come up to standard within China, demand will also increase domestically. Growing global and domestic demand for API and TCM, as well as China's low production costs, make China a viable production base for these products. But global markets require products of high and consistent quality. Until recently, the manufacture of TCM has been loosely regulated in China, at least in comparison with the production of chemical pharmaceuticals.
Building a domestic industry
To encourage the emergence of large domestic companies that can compete internationally, the PRC State Food and Drug Administration (SFDA) plans to cut the number of manufacturers down to around 2,000 over the next three years by attrition (poor performers will either be closed or sold) and by requiring remaining firms to meet the new Good Manufacturing Practices (GMP) standards. In fact, SFDA required all pharmaceutical companies in China, including foreign-invested ones, to obtain GMP certificates from SFDA by June 30, 2004 to be licensed to sell their drug products in China. About half of the companies met the deadline; companies in the process of obtaining certification may subcontract secondary production (but not production of intermediates and ingredients) to a certified company until June 30, 2005.
China's pharmaceutical industry has room for consolidation. China's 5,000 or so domestic companies account for 70 percent of the market, and the top 10 companies about 20 percent, according to Business China. In contrast, the top 10 companies in most developed countries control about half the market. The cost of bringing a facility into compliance with the new GMP standards will likely cause some manufacturers to close. DECHMA eV, the Germany-based Society for Chemical Engineering and Biotechnology, estimates that converting a standard production line in China to meet GMP requirements costs ¥40 million-¥200 million ($4.8 million-$24.2 million). But China's drug manufacturers must also adopt or acquire technology standards and a knowledge base to achieve full GMP compliance. This level of expertise is present in organizations either owned by or in partnership with international companies but must essentially be imported by fully domestic pharmaceutical companies. Since June 30, SFDA has been closing down manufacturers that do not meet the new standards.
Ensuring safety and quality
Pharmaceutical regulations, both in China and elsewhere, affect nearly every aspect of drug manufacturing, from the design and construction of manufacturing facilities to the development of procedures and the training of operations personnel performing them. International organizations establishing businesses in China, such as Johnson and Johnson, Bristol Myers Squibb Co., and GlaxoSmithKline have already adopted these standards internally, because of regulatory requirements in other regions. In some cases, company internal standards are even stricter than PRC government regulations. Compliance with the SFDA GMP should not pose a problem for companies with international affiliations, as new SFDA regulations are similar to those found in other regulatory regimes.
Most industry analysts expect that China will soon also require international current GMP compliance, so that more PRC-produced drugs can be exported. The current GMP are a set of regulations that govern all aspects of pharmaceutical manufacturing with the goal of producing a safe and efficacious product. PRC current GMP, which are similar to US and EU current GMP, deal with finished products, biological and blood products, and medical devices. They also include specific guidelines that cover the manufacture of API.
The rules of distribution
Like drug manufacturing, the pharmaceutical distribution sector is also ripe for consolidation. In 2000, China had about 16,000 state-owned pharmaceutical wholesalers, according to China Briefing. As in other sectors, China plans to create 5 to 10 large pharmaceutical distribution companies in the next five years. Retail and wholesale distribution, including for pharmaceuticals, opens to foreign investors this December.
An industry on the rise
China's pharmaceutical industry is set to undergo a tremendous series of changes as a result of its WTO membership and the development and expansion of the Chinese economy. Within the industry, the bulk chemicals and TCM sectors will expand further, and the production of finished dosage forms will continue to develop. All of these developments require advanced technical knowledge and regulatory compliance expertise-perhaps giving foreign firms an edge over their Chinese counterparts, at least temporarily.
The PRC State Food and Drug Administration plans to cut the number of manufacturers down to around 2,000 over the next three years.
Shelly Weiss and Dave Forrester are operations manager and director of regulatory compliance, respectively, at Fluor Corp.…