Chinas Growing Drug Market Contender Jul2002

8/2/2019 Chinas Growing Drug Market Contender Jul2002

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Opportunities for Action in Health Care

Chinas Growing Drug Market:

Will You Be a Contender?


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Chinas Growing Drug Market:Will You Be a Contender?

Even though Chinas 1.25 billion people represent

significant untapped opportunity, most global drugcompanies dont consider the nation a priority. Thatsbecause few of the multinational firms that haveoperated there since the 1980s have yet realized thecountrys immense potential as a drug market.Frustrated by Chinas complex regulations and

distribution networks, its seemingly unenforceableintellectual-property laws, and its comparatively lowexpenditures on health care, foreign players foreseeminimal near-term success in China. They haveresponded by investing cautiously in the marketmany overly so. Most important, these players have

withheld their most innovative drugs from themarket, fearing that Chinas traditionally weak patentprotection would expose breakthrough drugs tocopycat versions and price erosion.

Despite the challenges, however, analysis by The

Boston Consulting Group indicates that China is fastbecoming a major opportunity that cant be ignored.Indeed, by 2010 we expect the country to emerge asthe fifth-largest pharmaceutical market in the world,

with revenues of over $24 billionmore than tripleits current size.1 (See the exhibit China Will Become

the Fifth-Largest Pharmaceutical Market.) Suchgrowth would catapult Chinas market, which cur-rently ranks seventh behind the markets of Italy andthe United Kingdom, to a position right behind thedrug markets of France and Germany. Driving thisgrowth are Chinas ongoing economic development

1. All market sizes are calculated in nominal local currency at 2001exchange rates.


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and its recent entry into the World Trade Organ-

ization (WTO).

The most promising opportunities will emerge in theareas of greatest unmet need: innovative ethical, orprescription, drugs and differentiated over-the-counter(OTC) products. The market for ethical drugs in

China, valued at $5.8 billion in 2000, will climb toapproximately $19 billion by 2010. Innovative drugs

will fare particularly well, commanding 30 percent ofrevenues and, more important, about 70 percent ofthe profit generated in the ethical category. The OTCmarket, practically nonexistent today as defined by

Western standards, will grow at a compound annualrate of 19 percent, from about $1 billion in 2000 toabout $5.7 billion in 2010.

China Will Become the Fifth-LargestPharmaceutical Market

SOURCE: BCG analysis.

Estimated Market Size for Ethicaland OTC Drugs (U.S.$billions)

1996 Top 11

United 91States

Japan 52

Germany 20

France 18

Italy 10

Brazil 8.4United 8.2Kingdom

Spain 6.0

South 4.5Korea

Canada 4.3

China 4.3

2000 Top 10

United 150States

Japan 58

Germany 17

France 17

United 11Kingdom

Italy 11

China 6.8

Brazil 6.7

Canada 6.3

Spain 6.2

2005 Top 10

United 262States

Japan 65

Germany 24

France 21

United 16Kingdom

Italy 15

China 14

Brazil 10

Canada 10

Spain 9.8

2010 Top 10

United 466States

Japan 81

Germany 37

France 28

China 24

United 24Kingdom

Italy 23

Canada 17

Spain 16

Brazil 15


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Best positioned to fill these needs are multinationalcompanies (MNCs), which possess superior R&Dcapabilities as well as scale and experience in market-ing, distribution, and sales. But if they are to becomemajor players in China, MNCs must move forwardmore aggressively as changing regulations and eco-nomics open the window of opportunity. That meansbetter anticipating the needs of the market as itevolves in order to build true local capabilities as wellas relationships with regulators and distributors.

The Transformation in China

Several powerful forces will converge over the nextdecade to transform Chinas competitive landscape.First, China is a rapidly developing nation with a

rising gross domestic product. As the country andits economy modernize, demand for advancedhealth care will increase, and with it health-careexpenditures. The population will move beyond thebasic anti-infective treatments common in Chinatoday to embrace drugs that will improve the quality

of their lives. This latter category includes medicinesthat address chronic conditions that are widelytreated in already developed nations.

Second, although Chinas rural areas will remain lessdeveloped, pockets of wealth are already emerging in

urban areas such as the Shanghai Delta and theBeijingTianjin and GuangdongPearl River Deltaregions. Increased affluence in these areas will usherin increased demand forand ability to pay for

world-class ethical and OTC drugs. In fact, this trendis already taking shape, as evidenced by the success of

Heptodin, a treatment for hepatitis B. Although notcurrently covered by the state, Heptodin has becomea top-selling drug in China, largely because patientsdemand it and are willing to pay for it.


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Third, Chinas entry into the WTO in December 2001promises to bring the countrys regulations and distri-bution networks in line with world-class standards overthe next five years. Among its most important changesin the pharmaceutical arena, the WTO agreementspecifies that China will do the following:

Enhance its protection of intellectual property rights

(IPRs). China is now obligated to enforce foreign andinternational patents in accordance with the Agree-ment on Trade-Related Aspects of Intellectual PropertyRights (TRIPS) of 1995, the most comprehensive mul-tilateral agreement on IPRs. TRIPS mandates thatdrugs receive at least 20 years of patent protection.

Reduce import tariffs on pharmaceuticals.Withinthree years of joining the WTO, China will reduce tar-iffs on imported pharmaceuticals from, on average,todays 9.6 percent to 4.2 percent.

Increase foreign participation in the drug distribution

industry. China has already opened pharmaceuticalretail in Beijing and Shanghai to foreign companies.

Within three years, the nations retail and wholesalemarkets will open entirely.

Comply fully with global regulatory standards.As aWTO member, China must guarantee efficiency andquality when licensing drug companies and approvingor denying drugs. In addition, the WTO requires trans-parency from regulatory agencies; this will ensure thatcompanies have information about regulatory deci-sions that affect drug pricing and availability.

Significant changes will sweep China in the wake of itsentry into the WTO, thereby providing foreign players

with new opportunities in health care. We focus hereon the largest of the opportunities: branded ethicaldrugs and OTC products.


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Delivering Innovative Ethical Drugs:From Me-Too to Breakthrough

In China today, the pharmaceutical market is awashin me-too drugs, with almost all of the approximately

6,000 local manufacturers producing primarily gener-ics and competing almost entirely on price. Three fac-tors drive this glut of undifferentiated drugs:

The Chinese government has concentrated ini-tially on basic medical needs, such as anti-infective

products.

In doing so, it has focused the state-owned localindustry on generics and hasnt been particularlyeffective in preventing local manufacturers frominfringing on foreign drug patents.

At least historically, new drugs in China have beenquickly copied and their price points eroded by theresulting generics. Thus, MNCs in China havefound it difficult to justify the investments requiredto bring new, innovative drugs to market.

In this environment, where as many as 40 knockoffsmay compete illegally with a patent-protected drug,enforcing the provisions of TRIPS will naturally taketime. Nonetheless, we expect that within five years,significantly enhanced intellectual-property protec-

tion and reduced import tariffs will give MNCs agreater incentive to introduce breakthrough drugsthat address illnesses that otherwise go untreatedorare treated inadequately by existing or generic drugs.In fact, we have found that executives at MNCs areincreasingly foreseeing a future for innovative drugs

in China. More than two-thirds of the 35 senior exec-utives BCG surveyed at multinational pharmaceuticalcompanies said that they expect the WTO agreementto strengthen IPR protection.


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The shift to breakthrough drugs will be further fueledby the enormity of the opportunity: the unmet needfor sophisticated drugs is vast in China, and thepotential payoff is significant. China is, after all, anation where 100 million to 150 million peoplecarry the hepatitis-B virus and where neck and headcancers are more prevalent than anywhere else inthe world. China also has its share of patients withchronic conditions routinely treated in the West, suchas high blood pressure, high cholesterol, diabetes,depression, osteoporosis, and arthritis. In addition,

AIDS is just beginning to be acknowledged in China,and demand is emerging for the pharmaceuticalsused to treat the disease and its related compli-cations.

Differentiating OTC Products for Consumers

Like branded ethical drugs, OTC medications are sig-nificantly underrepresented and often misunderstoodamong the Chinese today. Thats because OTC drugstend to be dispensed and reimbursed as prescription

medications, are not widely available for purchase,and are not marketed. Many Chinese also have astrong attachment to traditional home remedies.

As the country phases out government reimburse-ment for OTC drugs, however, consumers across the

nation are likely to behave as we have already seen inChinas more affluent areaswhere a willingness toself-medicate with home remedies translates quicklyinto demand for Western OTC drugs. In addition, asChinese authorities encourage growth in the retailpharmacy arena and open it to foreign players, con-

sumers will gain an outlet (which they currently lack)for selecting and purchasing OTC drugs on theirownfurther accelerating the development of theOTC market. In this transformed environment, the


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key to succeeding in the OTC sector will be a com-panys ability to market directly to the consumer.

To date, the prohibitive cost of establishing a strongOTC brand with consumersexacerbated by the lackof clarity in OTC regulations as well as a general lackof marketing expertise in Chinahas deterred mostdrug companies from aggressively pursuing the OTCsector. There are, of course, some notable exceptions,such as Harbin Pharmaceutical Group, Xian-Janssen,and Tianjin Smith Kline & French. Eventually, how-ever, we expect that on the heels of Chinas entry intothe WTO, a handful of large, international players willemerge to lead this segment. Today that space remainsopen and up for grabs.

Positioning for Competitive Advantagein China

In an increasingly competitive and global business en-vironment, multinational pharmaceutical companiescannot afford to ignore the real opportunities immi-

nent in China. To stake out a position in this frontiermarket, MNCs must pursue two goals simultaneously:

Assemble and prioritize a portfolio of patented and

OTC products tailored uniquely to the Chinese mar-

ket. The first step is to review your existing global port-

folio of drugs. Your company may be able to meet theneeds of the Chinese market simply by tweaking itscurrent product offering. You may, however, need tomake a more significant investment in overhauling theportfolio, either by accelerating well-suited productsstill in the late stages of development or byinlicensing

promising drugs from other players.

The best drugs for China will be those in therapeuticareas likely to experience the highest growth, includ-


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ing medicines for chronic diseases already treated inthe developed world. Following this logic, your com-pany might want to focus resources in the cardiovas-cular, central-nervous-system, and endocrine areas,addressing conditions such as heart disease, depres-sion, and diabetes.

Once the right mix of products has been identified,corporate and local resources should coordinateclosely to begin securing Chinese regulatory approvalfor these offeringsa process that could take as longas 48 months. Because we believe that the window forenhanced IPR protection in China will begin to openin about 18 to 24 months, it is critical that MNCs initi-ate this step immediately so they can best exploit theimpending opportunities.

Focus the head of Chinese operations on assessing

and sharpening local capabilities in the sales, market-

ing, and distribution of ethical and OTC products.

Your marketing capabilities in particular will becomemore critical as self-pay patients and commercialinsurers become more common. Of course, youshould keep in mind that when it comes to consumermarketing, the superpowers in consumer productsProcter & Gamble, for examplemay currentlyexceed pharmaceutical companies in scale and skill.But MNCs in the drug industry neednt cede thisspace automatically. Certain drug players, for exam-ple, may determine that they themselves possess supe-rior skills that they can enhance for greater advantage.For instance, companies such as GlaxoSmithKline and

Johnson & Johnson could further exploit their cur-rent strengths in marketing to consumers in China.

Other companies, concluding that they lack the capa-bilities required to succeed in China, can buy or bor-row them. Some may gain the needed skills throughacquisition, a strategy that is already being used fre-


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quently as consolidation ripples through the industry.Still other players may borrow the capabilities of oth-ers by opting to license their most promising productsto companies that already demonstrate marketingprowess in China. Note, however, that another alter-nativebuilding the required capabilities fromscratchwill likely prove to be prohibitively expensiveand take too long.

Ultimately, to accomplish bothgoalsimproving theportfolio of drugs and developing marketing andother capabilitiesMNCs must build critical mass inhuman resources, supporting their Chinese opera-tions with world-class regulatory specialists and mar-keters. Future contenders will need to staff up now togain scientific and marketing expertise in all the ther-apeutic areas critical to China, including those thatmay not even be recognized there yet. Consider, forexample, that although cholesterol and obesity arenot yet prevalent among the Chinese, as the economychanges, diet and health trends will also changeandso, too, will treatment needs. Companies seeking tostake a claim in China will also need to hire more sys-tematically and train more intensively the humanresources they deploy on the ground. Relying solelyon a handful of Western expatriates or less-expensiveand less-experienced locals will expose a foreign com-pany to the high risk that its few key experts could belured away.

Because none of these tasks will be easy, MNCs willalso need to engage their corporate and local leader-ship in an ongoing dialogue about which expectationscan be realistically achievedand when. Previously,

without such alignment, many corporate leadersentered China overly enthusiastic about the near-termpotential. Once disappointed, many have sincebecome too conservative about investing in the mar-


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ket. In contrast, by understanding local realities,MNCs will view China more accurately: as a burgeon-ing opportunity that will take a few yearsand someinvestmentbefore it blossoms fully.

Over the next decade, as the pharmaceutical marketin China continues to evolve, drug regulations willbecome clearer, enforcement of IPRs more stringent,distribution systems more efficient, and the countrysmedical needs more advanced. In concert, these fac-tors will no doubt sweeten the attraction of China fordrug companies and heighten the competition there.But most important, they will also level the very play-ing field on which the competition plays outmaking

victory more likely for foreign drug companies.

John WongXudong Yin

John Wong is a senior vice president and director in the

Hong Kong office of The Boston Consulting Group. Xudong

Yin is a manager in the firms Shanghai office.

You may contact the authors by e-mail at:

[email protected]

[email protected]

The Boston Consulting Group, Inc. 2002. All rights reserved.


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Chinas Growing Drug Market Contender Jul2002

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