Why China's expanding pharma market is still a risky bet
July 21, 2012 | BY
clpstaff &clp articles &China's pharmaceutical market is expanding rapidly, but recent policy developments mean multinationals need to rethink their strategy
Statistics from CITI predict China will have a $200 billion pharmaceutical market by 2020, making it the second largest in the world. “This begs the question can multinationals afford not to expand considering how fast the market is growing compared to the global market?” said Christoph Hezel, a lawyer specialising in healthcare at Taylor Wessing in Beijing.
This expected growth should translate into exciting growth opportunities for healthcare multinationals. But policy developments and government pressure to increase healthcare access while controlling costs are taking a toll.
In order to sell drugs in China, companies must get their drug listed on the national list. At the same time, listed drugs are subject to a capped price that gives a profit margin of around 20% for brand name drugs.
“Definitely there is an additional burden on multinationals and they have to control their costs,” said Hezel.
The so-called “Anhui Model”, an aggressive bid and tender process pioneered by the authorities in Anhui province, has seen the reduction of costs on some drugs by up to 90%. According to Hezel, out of 307 drugs only 17 went to the top 10 multinationals in China. Companies bid as low as possible to win the drug, making them the only supplier in the hopes that volume gains will offset losses.
This tendering and bidding process has raised concerns over quality. Drug companies have argued that the government needs to consider quality control as well as cost.
Part of the problem also lies with provincial leaders, who are under pressure to reach targets to lower the cost of certain prescription drugs.
In addition to the Anhui Model, differential pricing on over 100 drugs multinationals sold in China has been eliminated. Previously, these drugs benefited from special pricing agreements between the government and the industry.
Despite the negative implications of these policies, the expansion of the market keeps observers optimistic. “Multinationals need to look to the high-end drugs,” said Hezel. He added that multinationals often offer higher quality products compared with their local rivals.
“One key strategy we have seen from our clients is expansion through mergers and acquisitions. This allows them to expand quickly or find a niche within the market,” said Hezel.
The modified Measures on Compulsory Patent Licensing (专利实施强制许可办法) are also a cause for concern to pharmaceutical companies. The Measures clarified the application process and raised awareness that compulsory licensing is on the government's agenda. China has yet to grant its first compulsory licence, but a decision earlier this year in India reminded patent owners of the danger.
Despite these policy changes “there is still huge potential for multinationals, but they need to refine their strategies and consider distribution channels, especially consolidation of distribution,” said Hezel.
The Chinese government will need to find a balance between controlling costs, quality and access to public healthcare. The role of multinationals within this mix is certain, but questions remain over what extent they will be a part of this rapidly growing industry.
The July/August issue of China Law and Practice looks at how foreign investors can invest in China's healthcare system, while the May issue considered compulsory licences and had a full text translation of the Measures.
Measures on Compulsory Patent Licensing (专利实施强制许可办法)
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