Beyond Borders: Global biotechnology report 2010

China year in review
Accelerating reforms
It is evident that China will be an
increasingly important market for
biotechnology and pharmaceutical
products and companies in the years
to come. Indeed, it is now considered
essential for companies with commercial
operations or aspirations to formulate
a strategy for the Chinese market — a
market currently dominated by generics
(including generic versions of Western
biologic drugs) and traditional Chinese
medicines (TCMs). Meanwhile, the
Chinese Government is encouraging the
development of a domestic innovative
biotechnology sector through a combination
of direct investment, intellectual property
reforms and commercial incentives. Yet
for all the promise, the sheer volume of
change — driven both by market dynamics
and Government reforms — is daunting,
creating uncertainties for investors in
China’s biotech sector.
Growth and consolidation
China’s pharmaceutical market continues
to post impressive year-over-year
growth driven by macro trends — an
aging population, Government programs
to significantly broaden access to
medicines, increasing personal wealth
and the increasing incidence of “middle
class diseases,” such as diabetes and
hypertension. A recent IMS Health report
pegged the market’s annual growth rate
at 27% from 2006 to 2009 and projected
that China would surpass Germany and
France to become the third-largest drug
market in the world by 2011 (behind only
the US and Japan).
At present, the industry is highly
fragmented, with several thousand
domestic manufacturers and distributors
competing alongside most of the major
multinational companies from the US,
Europe and Japan. To boost efficiency and
quality, the Government is encouraging
consolidation of the domestic industry,
partially through changes to the drug
distribution system and price reforms.
It is aiming to reshape the industry with
fewer financially strong entities that have
the scale necessary to undertake national
distribution and investments in innovative
R&D and, eventually, compete globally
through exports.
Beyond the market opportunity, China
remains a highly attractive outsourcing
destination in terms of cost efficiency and,
increasingly, patient availability for clinical
trials, expertise and infrastructure.
Essential reform
In March 2009, China adopted a massive
reform of the health care system,
committing RMB 850 billion (US$124
billion) over the next three years to
increase health insurance for the
non-employed urban and rural
populations. While health care reform
was driven by the realization that a
healthy population is necessary to
sustain economic growth, the 2009
policies were accelerated by the global
recession. Chinese leaders concluded
that the country needed to decrease its
dependence on exports while maintaining
employment levels through encouraging
domestic consumption. The Chinese
population has historically had a very
high savings rate, in part to save for
unexpected and uncovered medical
expenditures; thus, providing greater
30 Beyond borders Global biotechnology report 2010
health coverage will presumably free up
capacity for non-health related spending.
The increased coverage will lead to higher
pharmaceutical sales, but distribution
to second- and third-tier cities and rural
populations will remain a challenge for
many manufacturers.
Beyond health insurance coverage, the
Government is also addressing the drug
distribution process itself as part of the
reform efforts. A significant majority
of drug sales are now made through
state-owned hospitals. Hospitals depend on
the margin from these sales (generally 15%)
to fund their operations and are therefore
motivated to prescribe higher-priced
medicines to maximize the margin earned.
This drives up overall system costs and
creates an environment that encourages
improper sales practices.
Finally, in August 2009, China updated
its Essential Drugs List (EDL), which
includes 307 medicines that will be given
priority from a usage and reimbursement
standpoint. Approximately two-thirds of the
EDL is composed of products discovered and
developed outside China (most of which are
available in generic form in China already)
and one-third is composed of TCMs. The
Government will set the prices for drugs on
the EDL, which will put a premium on costeffective
manufacturing and distribution and
generally benefit larger players. Innovative
and patented drugs sold by multinational
companies will continue to be funded largely
by patients.
Despite their higher cost, brand-name
drugs that no longer have patent protection
are often favored by populations in more
affluent urban settings as they are
perceived to be of higher quality than
generic competitors.