2005 Dragon and Tiger

8/6/2019 2005 Dragon and Tiger

1/79

Presented by: Ames Gross

President

Pacific Bridge Medical

www.pacificbridgemedical.com

May 16, 2005

Dragon & Tiger:Emerging Power of India and China

in the Pharmaceutical IndustryPresented to: Canadian Association for Pharmacy Distribution Management


2/79

Overview of Asia and itsPharmaceutical Market


3/79

Demographics

Country Population

Population

Growth (2004

est.) GDP (PPP)

Per Capita

Income

(PPP)

Life Expectancy

(Years)China 1,298,847,624 0.57% $6.449 trillion $5,000 71.96

Hong Kong 6,855,125 0.65% $212.2 billion $28,700 81.39

Philippines 86,241,697 1.88% $390.7 billion $4,600 69.60

Indonesia 238,452,952 1.49% $758.1 billion $3,200 69.26

Japan 127,333,002 0.08% $3.567 trillion $28,000 81.04

Malaysia 23,522,482 1.83% $207.2 billion $9,000 71.95

Singapore 4,353,893 1.71% $109.1 billion $23,700 81.53

South Korea 48,598,175 0.62% $855.3 billion $17,700 75.58

Taiwan 22,749,838 0.64% $528.6 billion $23,400 77.06Thailand 64,865,523 0.91% $475.7 billion $7,400 71.41

Source: CIA World Fact Book 2004


4/79

Healthcare Statistics

Country

Number of

Hospitals

Doctors per

1000 Person

Per Capita Spending

on Healthcare (US$)

China 330,348 1.69 30

Hong Kong 103 1.4 N/A

Philippines 1,652 N/A 33

Indonesia1,089 0.14 19

Japan 169,556 1.91 2,908

Malaysia 360 0.7 101

Singapore 28 1.39 4,107

South Korea 21,686 1.35 584Taiwan 18,265 7.42 677

Thailand 1,392 0.32 71

Source: Compiled from various sources by PBI


5/79

Size of Asian Pharmaceutical Markets

Source: Compiled from various sources by PBI

Country Pharmaceutical Market Size

China US $23 billion

Hong Kong US $1.5 billion

Philippines US $300 million

Indonesia US $350 million

Japan US $53 billionMalaysia US $210 million

Singapore US $400 million

South Korea US $6.3 billionTaiwan US $2.5 billion

Thailand US $1.5 billion


6/79

Overview of Asian

Medical Markets Over 30% of new expenditures on healthcare worldwide is

attributable to Asia

Spending is driven by:

Aging population

Increasing life expectancy

Increasing incidence of major diseases Increasing health consciousness

Higher disposable income


7/79

SourcingOpportunities in China


8/79

Overview of Sourcing in China

More Western medical companies are sourcing drug raw materials,

excipients and active ingredients to reduce their costs

Many drug manufacturers in Asia have made significantimprovements in product quality

In China:

Manufacturers are becoming increasingly sophisticated Product quality has increased dramatically

Prices remain much lower than most other countries

Identifying the right factory in China can be a challenge for a US

company


9/79

Identifying Product Manufacturers in

China Use the Internet and trade catalogues

Will provide you with an initial list of manufacturers

Numerous websites that provide sizeable lists of manufacturersand often include contact information and a brief description ofeach manufacturer

This type of search should only be a starting pointand shouldnot be considered a thorough investigation

Once several potential manufacturers have been identified by theInternet/catalogue search

Examine each manufacturers respective website

To establish an accurate idea of the company, both websites

(English and Mandarin) should be viewed by a person fluent inboth languages

Foreign companies should keep in mind that some of theinformation on the Internet or an individual manufacturerswebsite could be misleading or inaccurate


10/79

Initial Planning and Communication

After compiling a list of potential manufacturers,

contact each one directly Emails and phone calls

Can be used to answer initial questions and confirm the

manufacturers production capabilities

Can the manufacturer produce your products to your

specifications and required standards?

Even if the Chinese manufacturer has an English

speaker, it is best for the foreign company to have abilingual speaker available

Begin building a relationship


11/79

Determining the Price

If you have a standard product Price quote should be fairly straightforward

If your product has somewhat unique features or specifications, or if you arerequesting atypical quantities General price quote may not be very useful

May be necessary to ask the manufacturer for an itemized quote

Keep in mind:

Many Chinese manufacturers tend to use metric units and may not befamiliar with inches or pounds

The manufacturer may only honor their price quote for a limited amount oftime

Factor in other expenses, such as:

International and domestic shipping Customs duties

Possible travel expenses for visiting the manufacturer


12/79

Know the Difference:

Trading Companies vs. Factories Trading companies act as a middleman, purchasing products from a local

manufacturer and selling the products to a foreign buyer

Trading Company Advantages:

Tend to have a wide variety of products available for purchase A foreign company with numerous product lines may be able to use one trading

company for most of their products

Can often purchase products for better prices since they already have well-establishedrelationships with local manufacturers

Usually easier dealing with a trading company since they tend to have more experience

communicating with foreigners and working with foreign companies Trading companies offer short-term profits and generally business relationships with

these companies can be established in less time

Factory Advantages: Foreign company can develop a long-standing relationship with a local Chinese

manufacturer

Have more control over product design and quality

Hopefully more leverage on prices as the relationship and volumes grow

Trading companies could cut off foreign companys supply at any time


13/79

Due Diligence Before the Site Visit

At this point in the manufacturer investigation, some major problems should havealready surfaced May still be smaller issues that could cause potential problems

Prior to visiting a local Chinese factory or making a final decision on which factory tovisit, due diligence should be conducted by a local person in that country

Investigation should involve: Confirming that the factory exists and has the necessary business licenses/registrations

Make sure they comply with required labor laws and working conditions

Operations should meet the standards of the foreign company If factory uses a great deal of manual labor, as opposed to machinery, quality control

could potentially be an issue

Buyers Beware: A local Chinese company could claim to have a very large manufacturing operation with

hundreds of workers

In reality it is a trading company with a few people acting as go-betweens in a smalloffice space

Or, a Chinese manufacturer could initially offer excellent and speedy service, whileactually experiencing financial trouble and frequent power outages


14/79

Visiting the Factory

After factory investigation is complete, foreign company shouldarrange to visit the factory and begin solidifying the businessrelationship

Face to face communication is necessary

Crucial to developing a good working relationship

During the visit:

Spend time with the key people at the factory

Ask to see business, SFDA and GMP licenses in their offices

If any licenses are missing, this may indicate that the factorylost their license or never held one at all.

Ask whether the factory has passed any international requirements

(GMP, ISO 13845) Get a sense of the factorys financial background and status

If a factory is owned by a single person, it is best to determine thesource of the factorys initial funding when possible


15/79

Examine the Regulatory Requirements

Chinese drug manufacturers exporting to the US

are required to meet specific US FDA regulations These regulations can cause compliance problems

for Chinese manufacturers, making it difficult to

source from certain factories Any Chinese drug manufacturers that export to the

US must register with a US Agent and provide this

information to the FDA


16/79

Negotiating the Contract

Be concise

Specify how long the price quote is valid for Shipping terms should be well-defined

Important to include a dispute resolution clause in

the contract Though it is best to solve sticky issues and

problems via direct face-to-face meetings

Clause should define the law to be applied,arbitration is almost always a better option in Chinarather than a lawsuit


17/79

Establish a Quality

Assurance System Best method for ensuring product quality is to implement a quality assurance

system in China Depending on the shipping terms defined in the contract, the purchaser may

have to pay 100% of the cost of the products at the foreign countrys dock It is preferable to inspect the products prior to shipping

It is possible to hire a local quality control company to conduct an inspection

Many local Chinese manufacturers will not object to a visit from theircustomers own quality control team Higher costs May be more reliable and easier to arrange in some instances

Good idea to select multiple samples from a production run for testing prior topaying 100% of the purchase

If the local Chinese manufacturer is aware of these planned visits or tests, they

may be more conscientious of the factorys quality control methods from thestart


18/79

SourcingOpportunities in India


19/79

Sourcing from India

India offers:

Many skilled and well-educated workers

Low operational costs

Low-cost R&D

Large and diverse population, making clinical trials less

expensive and often more efficient

Increased patent protection for drugs

Some Indian drug companies have built manufacturing

facilities that meet US FDA standards

Over 60 facilities meeting US FDA to date in India


20/79

India company example

Panacea Biotech (India) is a manufacturer of

branded vaccines, pharmaceutical andbiotechnology-based products

Has manufacturing facilities in New Delhi and

Lalru, India Opening a new pharmaceutical formulation plant in

Baddi, India

Facility will meet US FDA, MHRA and WHOregulations


21/79

Example: Foreign Companies

Sourcing in India In 2001, Eli Lilly announced plans to source bulk

drugs from India Wyeth has a manufacturing contract with Bharat

Biotech (Vaccine and bio-therapeutic company in

Hyderabad, India) Bristol Myers Squibb has a manufacturing

contract with Biocon (Biopharmaceutical

company in Bangalore, India)


22/79

Point of Note

In general, the Indian market has focused on anti-

infections As India becomes more Westernized, anti-

hypertension, anti-cholesterol and depression

drugs will become more prevalent


23/79

Outsourcing to Asia


24/79

What is being outsourced?

Pharmaceutical companies are choosing to

outsource: Clinical trials

R&D

Manufacturing


25/79

Outsourcing Clinical Trials

Costs of clinical trials in Asia much less than in US/Europe

Asian population exceeds 4 billion and is geneticallydiverse

Many of these people have never received medication totreat their conditions

These patients are more suitable for trials because theyhave not been influenced by previous treatment

Some Asian countries now offer incentives to clinical trial

volunteers Example: India provides volunteers with free medication and

often better medical attention than what they would receiveat an average hospital


26/79


27/79

Outsourcing Clinical Trials:

Company Examples Pfizer began clinical studies in India several years

ago Kendle, a large US CRO, has said that it will open

an office in Delhi soon

Nicolas Piramal Group, an Indian company, set upa subsidiary called Wellquest, which provides

clinical trial services on a contract basis

16 years ago, sales were $3.5 million

Today, sales are $350 million


28/79

Downsides to Outsourcing Clinical

Trials Standards and regulations may not be as high as in

the US/EuropeNot all medical procedures uniform within some

Asian countries

Testing is not always sufficiently documented

Some Asian countries have restrictions on the type

of clinical trials that can be carried out Example: India does not allow companies to

conduct Phase I clinical studies for drug safety


29/79

Outsourcing Clinical Trials:

India Regulatory Update In the past, a drug had to undergo clinical trial one phase higher in

another country first, before the previous trial phase could beconducted in India

October 2004 Announcement:

MOH plans to amend Drugs and Cosmetics Act to allow foreign anddomestic companies to conduct clinical trials in India and othercountries simultaneously

Applies to Phase II and II trials only Phase I trials not included, since Phase I trials test drug safety

Clearances to conduct trials will be granted on a case-by-case basis

Foreign companies will not be permitted to conduct clinical trials

solely in India MOH will set up special group to monitor clinical trials


30/79

Outsourcing R&D:

A Company Example Roche opened new global R&D center in

Shanghai in Nov. 2004 Expected to be a world-class R&D center for new

pharmaceuticals in 3 to 5 years

CEO says: China not only an important salesmarket, but also a vital R&D center

Roche Group has invested more than $300 million

in China and has maintained double-digit growth

in sales output


31/79

Outsourcing R&D:

Company Examples Nicholas Piramal just opened a 350,000 sq ft research lab in Bombay

Assists foreign companies with R&D

Currently employs 260 scientists - will soon grow to 400 scientists Ipca Laboratories (Bombay, India), is a large supplier of APIs

Employs 150 people in R&D who focus on cost efficientengineering processes for drugs

There is a $60 billion global market for outsourced pharmaceuticalresearch in India, less than $200 million

Expected strong R&D growth in India

Access to Indias R&D market should prove a competitive advantageto other drug companies not in India


32/79

Outsourcing R&D

Drug companies are under intense pressure tocontain R&D expenses

Fewer new drug discoveries, rising drug prices andcompetition from generic drugs

PhD chemist at a U.S. CRO with 10 yearsexperience costs $250,000/year (including salary,benefits, overhead, etc.)

PhD chemist in India (with 10 years experience)costs $30,000 $40,000/year

PhD chemist in China (with 10 years experience)costs $40,000 - $60,000/year


33/79

Outsourcing R&D

Concern still exists over communication and

timeliness problems but the situation is gettingbetter

Some Asian CROs can claim business efficiency

equivalent to U.S.-based CRO. Communication typically done through email with

10-12 hour time difference taken into account

Many CROs now have in-house videoconferencingfacilities


34/79

Downsides to Outsourcing R&D

Lack of Intellectual Property Rights

This situation is improving, but not great Logistics of moving raw materials and finished

compounds between laboratories, overseas

collaborators, and drug companies can beburdensome


35/79

Update: Generic Drugs in India

Increased generic drug use by US and Europe

due to rising costs of healthcare During the next 4 years, $45 billion worth of

drugs to go off-patent

Indian generic drug firms will benefit Have the capabilities to manufacture many of

these drugs

Many US/European drug firms now lookingfor partnerships, mergers or acquisitions inIndia


36/79

Update: Patent Protection in India

Previously: India granted process patents

Another drug inventor could patent the same product as longas it was created by a new process

A tiny modification in the synthesis of a molecule wouldjustify a new patent

Passed a new patent law March 23, 2005 Sellers of already-approved generic drugs in India will now

have to pay licensing fees

Generic drug producers can apply to copy a patented drug,

but only after it has been on the market for 3 years Generic producer may have to pay royalty fees

The patent owner can object to the copying


37/79

Outsourcing Manufacturing

Cost of labor very low, but quality of work typically

getting better

Some Asian countries (India, the Philippines, Singapore,

etc.) have many workers with fluent English

Large pool of talent in Asia with education and ability to

run manufacturing plants equaling U.S. complexity and

quality

Asian manufacturers are becoming more sensitive to FDA

regulations, ISO and other international standards


38/79


39/79

Special Economic

Zones (SEZs) Traditionally located in the southern and coastal regions of

China. More areas now being designated by the

government SEZs offer significant tax concessions during early life of

a project

Income tax can be exempt during first 5 years of operation Exemption start date begins when company reaches a

specified percentage of production capacity

Incentives vary from region to region research and

comparison is necessary

Carefully examine conditions placed on SEZ incentives

Export quotas or price ceilings may be too restrictive

China


40/79

Outsourcing Manufacturing:

A Company Example Divis Laboratories (Hyderabad, India)

Manufacturer of active pharmaceutical ingredientsand advanced intermediates

Built a 1000m3 GMP fine chemicals plant on 300

acres of land for US$25 million in the mid-1990s In the US, the same facility would have cost

US$250-$400 million

Labor costs in Hyderabad are about 1/10 of those

in the West


41/79


A Company Example Respironics Inc., a US medical device company

(Murrysville, PA) Set up manufacturing facilities in China and the

Philippines

Contracts out components to Hong Kong China and Hong Kong provide Respironics with a

substantial number of well-trained and experienced

workers, many of whom are fluent in English


42/79


A Company Example Hikal, an Indian company and originally an

agrochemical producer which expanded into thepharmaceutical industry

Acquired a pharmaceutical ingredient plant in

Bangalore, India in 2001 Overhauled the entire facility, implemented GMP

standards, obtained USFDA approval


43/79

Outsourcing :A Company Example

Actavis, an Icelandic pharmaceutical company,purchased Lotus Laboratories in Bangalore, Indiafor approximately $25 million

Actavis will have access to technical expertiseoffered by Indian employees

Lowers R&D expenses

Actavis now looking to source:

APIs and finished dosage forms

Formulation development

Clinical trials

Manufacturing


44/79


China Regulatory Update July 1, 2004

GMP required for all drug manufacturers

January 1, 2006

GMP required for IVD reagents (administered as drugs)

January 1, 2007

GMP required for medicinal gas manufacturers

January 1, 2008

GMP required for crude drugs for Chinese medicine

How manufacturer processes and contains preparedslices of drugs, including the cleaning, cutting andsteaming processes


45/79


China Regulatory Update September 2004: SFDA issuedInterim Provisions for Drug Safety

Credit Classification

Applies to foreign and domestic drug companies, includingmanufacturers, distributors, R&D units

Officials will conduct inspections of facilities and assign one of fourcategories based on compliance with drug regulations:

1) Initial compliance or made improvement and is now in compliance

2) Received one warning due to non-compliance3) Received second warning due to non-compliance

4) Received multiple warnings; no effort to comply

Companies with low credit ratings

Subject to higher level of supervision; more frequent inspections Companies with high credit ratings

Less inspections; priority in administrative approval processes


46/79

Selling to Asia


47/79


48/79

Market Research

Is there a demand for your product? If

it sells here, that doesnt mean that itwill sell there

How do you do market research?Real primary research is the way to

go


49/79

Market Research

In addition to conducting primary market research

Determine how your competitors do business

How do competitors distribute to:

Doctors

Clinics OEMs

Hospitals

Does competitor export products and use localdistributors? Have local manufacturingcapabilities and their own sales forces?


50/79

Finding The Right

Distributor in China


51/79

Finding The Right Distributor

Use the same criteria as you would for a

distributor search in the rest of the world In China, relationships and trust are key

Not Lawsuits!Need introductions how do you do this?


52/79

China Distributor Search

Previously, distributors in China were state-

owned companiesSlow and methodical

No marketing just here are the productsToday, emergence of private companies that

are usually not well-funded. Many still lack

expertise in selling Western products


53/79


There are very few large-scale private national

medical device distributors in China; thus it isnecessary to put together several private regional

groups

Recent WTO regulations have opened Chinasmedical device market to foreign companies, but

foreigners have been slow to move in

Some foreign companies have been successful in

the China market, i.e. Zuellig


54/79


Be careful when selecting a distributor. Whatyou think of the group might not actually be thecase. Always use local insight to get real

background

For foreigners it is hard to tell if local distributorgroups:

Really know the local drug regulations

Have financial staying power, etc.

Bottled water story what you think is not whatyou get

E t bli hi d l ti hi


55/79

Establishing a good relationship

with a new distributor Asians put their trust in personal relationships, which

take time to develop

Introductions from friends, colleagues, or classmatesis key

Asian distributor who does not have personal

connection with manufacturer may: Misrepresent himself

Copy manufacturer's technology

Cheat the manufacturer Reputation is not on the line as it would be with a

personal connection


56/79

Selling to Asia:Regulations on Drug Sampling and

Promotion


57/79

Drug Promotion in Malaysia

Promotional material should be checked by asenior official (preferably a doctor or pharmacist)of the company prior to distribution

Any medical claims promoted must be supportedwith clinical evidence

Promotional material for prescription drugs canonly be provided to medical professionals

Direct consumer advertising is not permitted forprescription drugs, but is allowed for OTCproducts


58/79

Drug Promotion in Vietnam

Some forms of promotional activities:

Giving free samples to customers for trial use

Selling goods/providing services at prices lower than normalprices

Who can promote?

Vietnamese enterprises

Foreign-invested enterprises

Branches of Vietnamese and foreign enterprises

Promotional material must be approved by Drug Administration of

Vietnam (DAV) prior to distribution Approved material can be distributed to medical professionals

All promotional material must be in Vietnamese (and can also be inother languages)


59/79

Giving Drug Samples in Malaysia

Pharmaceutical Association of Malaysia (PhAMA)regulates the distribution of pharmaceutical samples

Samples can only be given to a doctor or someoneauthorized by a doctor to receive samples on the doctorsbehalf

Cannot be used as an incentive to encourage doctors to

purchase a particular product Companies generally use standard sales packs with the

words sample not for sale

Companies should keep good records of which doctorshave received samples

International companies may request that doctors sign anofficial receipt


60/79

Giving Drug Samples in Vietnam

Law states that, Free samples given to customers

must be goods which are currently sold or will be

sold in the market

Ministry of Health states that giving samples to

doctors is not permitted no law exists thatsupports their statement

Non-prescription drugs canbe distributed as

samples to the public, but is not common practice


61/79

Business Structures

in China

(If you want to do more than just sell via adistributor)


62/79

Business Structures

There are three main types of foreign direct investment

(FDI) in China:

Chinese-foreign equity joint venture (EJV)

Chinese-foreign co-operative joint venture (CJV)

Wholly foreign-owned enterprise (WFOE)

Choice of contract manufacturing, entering into an EJV

or CJV, or setting up a WFOE depends on long-term

goals

Extensive research should be done before selecting

business structure

Chinese Foreign Eq it Joint


63/79

Chinese-Foreign Equity Joint

Venture (EJV) Equity joint ventures take the form of a limited

liability company with Chinese legal personstatus

Parties invest together, manage together andshare risks, losses and benefits in proportion totheir contribution to registered capital

Proportion of foreign party's contribution tothe registered capital must not be less than25 percent.

Parties may not reduce amount of registered

capital during the period of the venture

Chinese Foreign Contractual Joint


64/79

Chinese-Foreign Contractual Joint

Venture (CJV) Parties determine manner of operation and

management, obligations, risk and profit

sharing, etc. through contract at beginning of

venture

In most CJVs: Foreign party provides all or most of the

funding, technology and key equipment

Chinese party provides land, natural

resources, facilities, and labor

Wholly Owned Foreign


65/79

Wholly-Owned Foreign

Enterprises (WFOE) Enterprises established in China in which all funds are

provided by foreign investors

Products made by WFOEs must be sold abroad. If productsintended for Chinese market, separate approval must beobtained

Most WFOEs are greenfield operations

Some result from buyouts of existing partners Risk level higher for WFOE than for JV

Decreased chance to develop relationships and contacts intarget market with WFOE

IBM set up WFOE in 1992 10 years after first enteringChina market

Success stories: 3M, Procter & Gamble


66/79

Business Structures

Previously, joint ventures were 50/50

(foreign/Chinese), then 80/20 or 90/10Multiple parties, multiple interests

Communism to capitalism

What is the conflict of interest?

(Experience at one negotiation)


67/79

Business Structures

in India


68/79

Business Structures in India

Foreign companies may establish presence in

India through:

Liaison/Representative Office

Branch Office

Joint Venture Wholly-Owned Subsidiary


69/79


70/79


71/79


72/79

Joint Venture

Advantages:

Indian partner has already-established distribution and

marketing channels

Financial resources of Indian partner

Indian partner has local contacts

Foreign investments are approved by one of two methods:

Automatic Route:

Approvals for foreign equity up to 50%

Government Approval:

Approval from Foreign Investment Promotion Board

(FIPB) when the foreign equity exceeds 50%


73/79


74/79

Important Cultural Issues When

Doing Business in Asia


75/79

Cultural Issues

It is important to understand the cultural

and business norms that are unique to aspecific country or ethnic group

Western Approach Eastern Approach*Do a deal *Build relationships

*Maximize short-term profits *Establish long-term foundations

*Assess competitive capabilities *Assess integrity and trust

*Be frank *Dont deliver bad news

*Make changes fast *Move when ready


76/79

Understanding the Chinese

Chinese mentality Importance of family

Concept of face Conducting effective business

Introductions

Negotiating

Little things that mean a lot Gifts

Body language

Conversation


77/79

Understanding People in India

Hierarchy (caste system) plays a large role in Indian society

Relationships and trust are key to successful business

Language

Different regions have different dialects

English commonly used for international business

Meetings

Should be arranged well in advance

Greet the most senior person first with a handshake

Exchange business cards

Use formal titles, Dr., Mrs., etc.

Start with informal conversation small talk Negotiations

Can be slow; Middle East mentality

Can be very confrontational


78/79

Understanding Southeast Asians

Intercultural communication differentiate Chinese fromlocals

Conducting effective business Personal connections

Negotiating with locals more harmonious

Do not point seen as a threatening gesture Dress conservatively

Do not touch anyones head

Do not point feet towards another

person


79/79

Cultural Issues

For each other Asian country you must know the

local religious traditions and other unique cultural

factors

Not all Asian countries share the same Asian

attitudes, values and mindset (India is very differentthan China)

Must pay close attention to the particulars of

each individual country

Pearl Harbor

2005 Dragon and Tiger

Documents

Transcript of 2005 Dragon and Tiger