Development Strategies of Pharmaceutical Industry in China

SHEN Tuan-jie, HUANG Tai-kang,

(1. Research Center of Modern Social Pharmacy, Shenyang Pharmaceutical University, Shenyang 110016, China; 2. China Food and Drug Administration, Beijing 100810, China)

Development Strategies of Pharmaceutical Industry in China

SHEN Tuan-jie1, HUANG Tai-kang1,2

(1. Research Center of Modern Social Pharmacy, Shenyang Pharmaceutical University, Shenyang 110016, China; 2. China Food and Drug Administration, Beijing 100810, China)

Objective To analyze the existing problems of pharmaceutical industry in China and to propose suggestions. Methods The literature study, expert interviews and work practice were applied. Results and Conclusion Factors such as the policy influence, system influence, strategy option are analyzed and suggestions for the long term development of pharmaceutical industry are raised.

pharmaceutical industry; problem; development proposal

1 Problems facing the development of pharmaceutical industry in China

1.1 Overall market capacity has expanded each year, but industry concentration is low

From 2007 to 2010, the compound annual growth rate of Chinese pharmaceutical market was approximately 22.6%. In 2010, Chinese pharmaceutical market scale (calculated at ex-work price) accounted for 18.6% in Asia-Pacific region (including Japan), accounting for 3.7% of the world, ranked the fourth in the world.

By the end of 2009, China had 4696 raw material and drug manufacturers, however, the number of companies with more than RMB 1 billion sales scale accounted for only 1.52%. In 2010, the total revenue of China’s pharmaceutical industry was about $140 billion. In 2009, the companies that ranked in the top ten accounted for only 18%, the companies in the United States that ranked top ten reached 66%, 34% for India and 56% for worldwide average. China’s pharmaceutical industry concentration was the lowest. The industry concentration ratio is an important indicator for industry competitiveness. The yearly growth of pharmaceutical market as well as pharmaceutical companies’ backward development resulted from the phenomenon of “big market, small company” in China[1].

1.2 High-end drug market shares are taken by foreign capital, while domestic companies have to compete for low-end market

After years of market cultivation, domestic enterprises have made some achievements in the pharmaceutical market. In recent years, domestic enterprises began to appear in the top ten sales and have been increasing every year. Although the domestic enterprises accounted for about 70% of the domestic pharmaceutical market, the foreignfunded enterprises occupied an absolute monopoly market share for high value-added drugs. In the relatively highend hospital margins prescription drug market, foreignfunded enterprises accounted for a high market share. In 2009, 65%-80% of the total cost of prescription drugs in the top three hospitals were from foreign enterprises products. The multinational companies also had a leading edge in the retail market. In 2009, the joint venture/foreign-funded enterprises swept the top two of vitamins, gastrointestinal drugs, antihypertensive drug in the retail market, and the top three of cold medication and antibiotics market[2-3].

In contrast, domestic enterprises continue producing generic drugs, intermediate raw materials and low valueadded products. Thus, their profit margins are low for the long-term, a large number of enterprises operate with a deficit, wasting a lot of production equipment and there is no innovation at all[4].

1.3 The poor independence of the pharmaceuticalindustry influenced greatly by health policy documents, prices, health insurance, and other factors

The introduction of the new national health insurance directory and essential drug list will result in great changes in pharmaceutical industry. The price cut made by National Development and Reform Commission can decide the fate of some enterprises, and the drug bidding in the unit of Province decides the profit of regional companies. Better sales products more or less have the policy traces, such as exclusive health insurance directory products, exclusive essential drug list products, and the NDRC pricing products.

The impact of the macropolicy on pharmaceutical industry has made the pharmaceutical industry as policy related industry, and companies have to focus on government public relations rather than research, development, production and marketing aspects.

1.4 Development of pharmaceutical industry is still struggling with the health care system

Due to historical reasons, Chinese hospitals set the internal pharmacies and 15% output of drug procurement is regarded as the hospital’s income. Own to the monopoly on resources and lack of government investment, hospitals are willing to make profits when they purchase drugs and equipment. This would objectively result in excessive prescription and repeated medical examination, and it also leads to the waste of medical resources.

Confined to the health care system, pharmaceutical companies start marketing by bribing medical institutions and medical staff in the method of department promotion conference, academic tourism and rebate marketing. This is far away from the normal market behavior and it disrupts current trade practice which causes virtual-high medicine prices and the waste of medical resources.

1.5 The phenomenon of virtual-high medicine and overall low profit margins, and many enterprises suffering big losses

Circulation costs remain high, especially the gray income occupying large proportion of the price of drugs, which makes pharmaceutical companies increase prices in the process of ex-factory, tendering and other aspects of public relations work, causing the virtual-high prices.

On the contrast, overall profit margins of pharmaceutical production and circulating corporation are low. The average profit is 10% and less than 5% respectively. The cost of production is high because of GMP anticipatory capital input, the high cost of imports raw materials, and the government price cuts and the annual bidding price cuts which also compress the profit margins. Subject to the pressure of circulation and national policy, the profit of the production fells annually, and this seriously hampers the R & D capabilities and quality improvement. All these weaken the competitiveness of domestic enterprises.

2 Proposals on China’s pharmaceutical industry development

2.1 Overall idea

Based on basic health care system, the government can promote health care reform to exclude to the fullest extent of policy factors, prompting the return of market characteristics. We can standardize the low end competition from produce access, prices and other aspects of the Medicare bidding so that the industry’s profits will return to normal. We should integrate circulation enterprises and prompt industry profits back from the circulation to the production processes. We can establish a special fund to encourage product innovation and simplify first imitation procedures for setting up a number of innovative enterprises as soon as possible. 3-5 competitive pharmaceutical industry groups should be founded based on a basic drug system and the designated manufacturer should undertake drug research and development in international competition. Our government should assist enterprises to go through international technical standards for certification, and steadily push forward the process of mutual recognition of Chinese standards and European standards to eliminate the barriers of the technical standards for exporting drugs.

From a global perspective, pharmaceutical industry is not only a high-tech sunrise industry, but also closely related to the national economy and even national security, We should draft guidelines for industry development from the national level and make macroeconomic policies in line with the industry development and national need. We can guide a few medical innovation benchmarking enterprises to meet the domestic pharmaceutical needs as well to participate in international competition. Favorable policies and special assistance should be given to a number of enterprises with innovation capability, and the government should develop a supporting system on financial, personnel training, and health insurance to make the industry grow in good order.

2.2 Reconstructing the production enterprise, improving industry concentration

We can promote the list of essential medicines sentinel production and encourage the production of corporate to merge to form large scale economy, and internal corporate is allowed to use production capacity within the group so that the production equipment operates at full capacity.

5 to 10 state pharmaceutical production platforms should be set up, the regional drug production corporation will merge by introducing the competition mechanism to form pharmaceutical companies which have a competitive advantage and sustainable development capacity. These companies have R & D, production and sales chain competitiveness, and they can participate in international competition to form a virtuous cycle of development trend.

2.3 Encouraging innovative drugs, prompting the industry to undertake reasonable research and development

Government should take drug innovation factors into national pricing as to encourage industry to develop drug innovation. The government should price the drugs for national health insurance and tendering part according to tech innovation, imitation and other factors. At the same time, strict supervision on the patent system should be carried out to eliminate the false patent, worthless patent and to protect the enthusiasm of innovative enterprises.

Our government can set up a special fund to guide the scientific and technological innovation in pharmaceutical industry, giving a great assistance on cutting-edge basic research which combines research institutes and universities. The enterprises’ transfer of scientific and technological achievements are encouraged and a, medical technology Intellectual property trading platform should be set up timely. Reward should be given to enterprises that have achieved industrialization of pharmaceutical research, for example, tax refund or a reward to research institutions and production enterprises can motivate the pharmaceutical industry to carry out innovative research and development actively.

2.4 Developing examination and approval policy for rating, eliminating disordered low level of competition

A rigorous re-examination of existing drugs approved document should be done and eliminating approved drug that does not meet the technical requirements. Drug approval documents should be standardized to prevent the approval documents and separation of enterprise, and crack down speculative behavior on research and development. We can evaluate manufacturers who have too many document of approval and eliminate the bad ones, avoiding vicious competition that lead to rent-seeking behavior and production quality problems. We should encourage the imitation of the expired patent product to reduce the sales price of patent drugs and imported drugs. A system of commendation and reward should be established and limit the number of approval documents to protect the positive and long-term development of the generic companies. A special fund should be set up to reward innovative drugs and imitation drugs. The found can be used as the start-up capital for production and conversion process. Commercial and financial assistance should be given to the enterprises to cultivate R & D capability.

2.5 Carrying out the reform of medical system, standardizing the medical industry

The government should regulate industrial from national level and make the industry back to good order of market competition. We can cancel 15% of drug purchasing addition gradually and establish doctors income compensation mechanism; we should set up the laws and regulations against bribery in the field of buying and selling drugs; if any illegal acts in circulation, drug approval, prices, tender, medical insurance occur, they should be punished severely. We should crack down rent-seeking involved in government action. After the medical order has been set up, the policy of separating accounting and management for medical and pharmaceutical income should be gradually adopted. The mechanism of economic compensation should be standardized and the hospital’s pharmacy should be socialized so that the income of hospital will come from medical services, pharmaceutical market competition will become normalized.

2.6 Regulating the circulation, excluding gray income to make industry profit normal

Commercial channels should be standardized to remove gray income and rent-seeking behavior, and then the industry profits will become normal. We need to improve the execution of “drug price control measures” so that we can carry out the supervision of drug distribution price. We must implement the two-vote system from manufacturingenterprises to the hospital and control profit strictly. We should strengthen the tax regulatory and put them into the GSP evaluation system. We must enhance the threshold of re-certification for pharmaceutical company and promote the standardized operation as to strengthen the inspection and supervision. The regional integration of pharmaceutical companies should be encouraged. We can standardize the circulation through the market and administrative means. From the beginning of the companies’ medication distribution bidding, except for tendering pharmaceutical production enterprises in the field of buying and selling drugs, we should tender in the distribution sectors as well. By promoting the integration and restructuring of the circulation, we can encourage the large-scale circulation enterprises to develop fast. And gradually the delivery of health care products can be extended through the establishment of a limited number of commercial companies and distribution places. We can draft special medicine circulation bribery regulations to supervise the circulation system from a legal perspective so that the circulation will develop standardly and orderly.

[1] LEI-Peng. Generic Strategically Perspective [J]. Healthcare Executive, 2010, 12(9):24-29.

[2] Chinese Medical Statistical Yearbook, 2009.

[3] Ceinet Data Limited. China Pharmaceutical, Chemicals, Biological Agents, Traditional Chinese Medicine Industry Research Report [R]. 2010.

[4] LI Si-cheng, WEN De-liang, FENG Yan-li. Current Situation and Development Trend of Pharmaceutical Industry in China [J]. Chinese Pharmacy, 2003, (3): 132-135.

Author’s information: HUANG Tai-kang, Professor. Major research area: Social pharmacy. Tel: 025-86228290, E-mail: onion09@126.com