Pharmaceutical Industry Overview

The pharmaceutical industry is one of the fastest growing sectors in China. The market has maintained a steady growth for the past decade and the production capacity has increased at the same pace. Import and export trade is active and growing at a double-digit rate. Foreign investors are flocking into China for a slice of the market. The industry will continue its growing trend. Like many other sectors in China, the government plays a crucial role. Several recent changes in policy will reshape the industry and the market. This article presents an overview of the industry.

Market and production

The pharmaceutical industry in China produces and provides chemical drugs, chemical materials, raw medicine, traditional Chinese medicine, medical instruments and equipment, health care medicine and other materiel such as chemical reagents and laboratory glassware. The output of the Chinese pharmaceutical industry reached RMB 87.02 billion in 1995, increasing by 25.6% over 1994. The ratio between sales and production was 95.1% in 1995, a 2.7% increase over 1994.

Table 1: Type of Manufacturers

Table 2: Growth in Production of Raw Materials

Chemical drugs

In 1995, there were more than 1,300 manufacturers producing raw materials. The total production of raw medicine last year amounted to 330,000 tons with 24 different kinds, such as antibiotics, analgesics, antipyretics, vitamins, sulfonamides, anti-tuberculotics, anti-viral medicines, anti-neoplastics, cardiovascular medicines, respiratory medicines and antacids. Table 2 shows the growth in production of raw materials from 1980 to 1995.

Table 3: Top Ten Pharmaceutical Companies by Gross Sales in China

Source: China Statistical Information & Consultancy Center 1995/96 China Leading Companies

Traditional Chinese medicines

The production of traditional Chinese medicines can be divided into two parts: a) the production and preparation of herbal medicines and other raw medicines; and b) the production and fine processing of end-products, in various forms, using the raw medicines. In 1993, the production output value reached RMB 12 billion with 269,500 tons of end-products. In 1992, US$ 500 million worth of traditional Chinese medicines was exported.

Medical instruments and equipment

China now has the capacity to produce more than 6,000 kinds of medical equipment, 8,500 types of chemical reagents and more than 2,000 kinds of glass apparatus. Major medical instrument enterprises with foreign investment include Siemens Shanghai Medical Equipment Limited, Shanghai Johnson & Johnson Limited and Bayer Shanghai Dental Limited. By mid-December of 1995, the State Pharmaceutical Administration of China (SPAC) had approved 102 domestically registered and 38 overseas registered first class medical equipment.

Distribution and sales

There are three regular channels to distribute and sell medications in China:

• direct sale by pharmaceutical manufacturers;
• state-owned nationwide sales network; and
• specialized medication wholesalers and retailers.

Manufacturers are only allowed to sell their own products. About 25% of total drugs are sold directly to hospitals by manufacturers; 50% of the medicine is distributed through the national network, which is controlled by the China Pharmaceutical Co. with six regional distribution centers, 29 provincial centers and more than 2,000 county centers. In addition to their primary function as distributors and sellers, these centers also act as medical supply providers for disaster and drug reserve banks. Other wholesalers and retailers occupy 25% of the market.

Foreign investment

The Chinese pharmaceutical industry has been attractive to foreign capital and the world's top pharmaceutical companies. Many foreign investors have invested in pharmaceutical joint ventures and expect excellent return. So far, 17 of the 20 largest pharmaceutical companies in the world have set up branches in China. Table 4 lists the foreign-funded joint ventures by type of products.

Table 4: Foreign-funded Pharmaceutical Joint Ventures in China (by the end of 1995)

Source: State Pharmaceutical Administration of China

According to 1994 statistics, companies in Hong Kong, Macao and Taiwan had investments in 71.1% of pharmaceutical joint ventures, the U. S. companies had 15%, European countries 6% and other Asian countries 5%.

In the chemical drugs sector, 475 foreign-funded manufacturers accounted for 28.4% of the total compared with 12.5% in 1992. In 1995 these companies occupied 15% of the sales market.

Export and import

China exports raw medicines to more than 100 countries. In 1995, it exported more than 60,000 tons in over 300 varieties, making China one of the main exporters of pharmaceutical raw material. At present, China leads the world in production(30%) and export of penicillin and is second in Vitamin C. The major importers include Hong Kong, Germany, UK, USA, Belgium, Romania, Denmark, Pakistan and Poland. In addition, more than 20 kinds of raw medicines have received approval from the US Food and Drug Administration.

The value of China's imports of bulk and finished pharmaceutical preparations was US$ 752 million in 1995, up by 33% over 1994. Anti-infection continued to be the leading category, totaling US$ 318 million, followed by biologics, US$ 72 million. The five leading pharmaceutical

exporters to China in 1995 were Japan (US$ 125.76 million), Germany (US$ 107.16 million), Italy (US$ 83.52 million), Switzerland (US$ 60.93 million), and Hong Kong-Macao-Taiwan (US$ 51.67 million). The United States was number nine (US$ 30.15 million).

The two leading pharmaceutical formulations of the 831 exported to China in 1995 were BASF's Cerebrolysin iv (porcine brain extract), totaling US$ 42 million, and Hoechai' Tarivid (oflozacin), US$ 33 million.

Table 5: Total Export & Import Volume (in US $ million)

Market growth

Pharmaceutical sales increased from RMB 5.9 billion in 1984 to RMB 22.1 billion in 1994. The compounded annual sales growth rate was 14% in US dollars from 1984 to 1994. The compounded annual market growth in 1995-1999 is estimated at 15% in US dollars. Figure 1 demonstrates an overall growth trend of the industry. 1988 witnessed a peak year with growth rate at 29.4%. A negative growth (-4.0%) in 1994 over 1993 was due to the devaluation of RMB aga~0st US dollar by 46.9%.

It is envisaged that the growth trend will continue for a number of reasons:

• Increasing demand. It is estimated that the market capacity for pharmaceutical products will expand at an annual rate of 20% up to the year 2000.
• High priority in the government's modernization plan. From 1991 to 1995, the central government invested RMB 2.4 billion in projects of traditional Chinese medicines, and RMB 377.07 million was put in projects of medical instruments and equipment, such as medical electronic apparatus and medical accelerators.In1996-2000, investment on traditional Chinese medicines is expected to increase by 16%.
• Encouragement of foreign investment. The total investment in the 10 largest Sino-foreign pharmaceutical joint ventures is estimated to exceed US$ 100 million. China will continue to offer attractive investment opportunities to foreign investors.

Factors impairing future development

In addition to capital shortage and price controls, there are more factors affecting the future development of the industry. First, rapid increase in the prices of chemical raw materials and energy has imposed a higher cost burden on pharmaceutical manufacturers. Second, the debt problem among enterprises has long affected their financial ability. Finally, poor management, especially the "kick-back" problem, greatly affects the operation of the pharmaceutical market.

Effects of policy changes in the industry

Effects of the new patent regulations

Up until now, approximately 97% of the raw medicines produced in China are imitations of foreign ones. No product developed in China can be registered in a developed country or as a patented product on the international market.

Since January 1, 1993, the government has been exercising patent law protection for all pharmaceutical products manufactured in China and also providing administrative protection for certain new pharmaceutical products imported from developed countries. By August 8, 1995, 34 medications had been approved for administrative protection. Thus, manufacturers can no longer reproduce foreign medicines. As a result, import of new pharmaceutical products will increase and the market for products produced by joint venture enterprises will expand.

GMP Standard

In 1988, the Ministry of Public Health promulgated the Good Manufacture Procedure (GMP) standard for the pharmaceutical industry and the Good Supplying Practice (GSP) Committee was established by the SPAC to bring the entire industry up to GMP.

By the end of 1993, only about 10% of all production factories and joint ventures engaged in pharmaceutical production conformed with GMP. However, in light of China's intention to enter the World Trade Organization, it is estimated that investment of RMB 20 billion in the pharmaceutical industry will be needed in order to bring the other 90% of pharmaceutical producers up to GMP. In 1995, the SPAC issued several GMP standards and guides for pharmaceutical enterprises and inspected 24 major drug wholesalers nationwide for GMP approval.

Effect of the reform of the public health system

About 20% of the Chinese population (mostly urban residents) have full coverage for medical treatment provided by the state or enterprises. This system has been charged with waste of medical resources and the dramatic increase in medical expenditures.

The system has in recent years undergone a fundamental reform toward a more market-oriented one in which patients would pay some proportion of their medical expenses. State and provincial governments have published lists of reimbursable drugs which have experienced a significant increase in sales. Since imported drugs and drugs produced in China by foreign companies usually cost more than domestic drugs, the reform should have a significant impact on the price and sales of these imported and products.

However, foreign companies still have privileges in pricing. While domestic products from domestic companies are co-controlled by the State Medicine Administration and the State Price Control Administration, there is no price-control on the products of foreign-founded companies. And, among more than 4,000 types of imported medications, only 34 are under price-control.

Policies on foreign capital and technology

China's pharmaceutical industry has long suffered from a serious lack of capital for research and development, new projects and modem technology. Some enterprises have to reduce their production and sales because of a shortage of capital. When China joins the World Trade Organization, the need for capital and technology by pharmaceutical factories in China will be exacerbated. More foreign medicines will be imported as a result of the lowering of the tariff. Thus, many domestic pharmaceutical manufacturers will face a direct challenge from their foreign counterparts. China's pharmaceutical administration is focusing on getting more foreign investment in new technology and the development of new drugs, including the production of new drugs under licensing agreements.

Foreigners are encouraged to participate in the following areas:

• chemical raw materials under the Chinese Patent Law or administrative protection, and much needed medical intermediates
• antichloristic and antipyretics (not yet produced in China)
• vitamins: Vitamin D3 and Nicotinic Acid
• new anti-cancer drugs
• new cardiovascular and encephalovascular drugs
• pharmaceutical dosage forms, including sustained-release, controlled-release, target-delivery and transdermal-delivery
• new and efficient contraceptive drugs and instruments
• new biopharmaceutics

The SPAC recently stated that it wilt be more selective in permitting foreign manufacturers to establish production facilities in China, aiming to pursue quality, not quantity, in investment projects. Investment in the following projects or drugs is controlled:

• Antibiotics: penicillin, chloromcetin and Gentamicin
• Vitamin C
• Analgin, Vitamin B2 and Vitamin B6
• Qinghao anti-malarial drugs
• Anesthesia drugs, psychical treatment drugs, and toxin
• Blood-related products