Catching The Chinese Dragon

Catching The Chinese Dragon

China and India have emerged as important for the multinationals’ global market strategy. With vast populations, and scientific and technical resources, both countries have a lot to offer the pharmaceutical industry. How do the two compare? Sapna Dogra finds out.

Multinational pharmaceutical companies are upbeat about market opportunities in China. China’s admission to the World Trade Organisation (WTO) in 2001 and its subsequent acceptance of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement have made multinationals eye China with great interest. An interest that may conflict the interests of Indian pharmacos.

Enforcement of the new product patent regime in India will attract investment by MNCs and induce Indian companies to become innovative. Utkarsh Palnitkar, Health-sciences Industry Leader, Ernst & Young, suggests that exports can be increased by entering emerging markets such as Latin America and regulated markets like Europe.

Advantage China

The Chinese healthcare market is very competitive with significant investments by major multinational pharmaceutical companies and with several local Chinese manufacturers active in varying degrees. Looking at the market size, labour arbitrage, efficient manufacturing process and overall cost advantage, more MNCs will head towards China. Also, there’s no price control in China unlike India, suggests DG Shah, Secretary General, IPA and adds that this helps big pharma sell their products at a premium.

According to JM Khanna, Executive Director, Jubilant Organosys, “China is developing its infrastructure and competencies very fast and very soon it will start doing well in intermediates and formulations. India should strengthen its manufacturing capacities because in no time China will outdo India.”

Why China?

China has lower electricity costs than India. (Rs 1.50 to 2.50 per KWH versus Rs.4.5 to 6.0 per KWH (according to a FICCI study). Labour charges are 40 percent lower in China than India and labour policies are favourable. Overall, China is has an invariable cost advantage in the manufacturing sector.

The FICCI study Competitiveness of the Indian Pharmaceutical Industry in the New product patent regime further states that China has already implemented clear intellectual property laws and data exclusivity rules that take it a step ahead of India in attracting foreign players. In addition, China has established a large number of profit-oriented research and development institutions, which are independent of government funding, in contrast to institutions in India. “China is clearly ahead in terms of supplying pharmaceutical raw materials,” adds Palnitkar.

China follows an FDI-driven export-led business model unlike India where much of the recent success is driven largely by domestic private enterprise. “China is currently the second largest manufacturer of basic medicines, and the largest producer and exporter of penicillin, beta-lactam and vitamins,” reveals Palnitkar. The Chinese Government provides an income tax holiday of 100 percent for the first two winning years (profit making years) and 50 percent for the next three years. Companies are allowed duty-free import of capital equipment. Lower turnaround time for ships at Chinese ports make it a conducive export base.

There are over 6,500 products listed by the SFDA (State Food and Drug Administration) as new drugs approved for clinical trials. The SFDA has had to add dozens of new hospitals to the list of 165 already permitted to conduct clinical trials. The agency is currently receiving several hundred applications per month, which are processed by about 100 New Drug Evaluation Centre employees.

Quality standards are improving at a rapid pace. Many pharma companies are building out their clinical trial operations to support both national and international approval filings. In March 2004, the SFDA implemented new certification requirements entitled “Measures on the Certification of Drug Clinical Trial Institution” to further strengthen clinical trial regulations.

How the numbers stack up

The Chinese market, estimated to be worth $10 billion. By 2010, it is expected to become the fifth largest drug market in the world, worth $25 billion. According to Palnitkar, based on conservative estimates, China is now the fastest growing pharmaceutical market in the world (growth rate 28 percent per annum) and projected growth rates estimate that it will become the world’s largest pharmaceutical market by 2050. (Source: IMS Health, April 2005). “FDI flows of $60 billion and a growing GDP of nine percent have ensured higher disposable incomes to the growing middle class and have enhanced personal health spend,” says Palnitkar.

According to the World Bank, China spends 60 percent of its health budget on pharmaceuticals, compared with other OECD (Organisation for Economic Cooperation and Development) countries. According to the Economist Intelligence Unit (EIU), the People’s Republic of China has over 5,000 domestic pharmaceutical manufacturers.

“India has the largest number of USFDA approved plants outside the US, which is a testimony to our quality standards,” argues a Hikal official. Moreover, pharma operations in India are more vertically integrated than they are in China. The Indian pharma industry is estimated to be worth $4.5 billion, growing at about eight to nine percent annually. Indian companies are proving to be better at developing APIs than their competitors from target markets. It is considered the most vibrant, generic and low-cost pharmaceutical industry in the world.

According to DG Shah, as Indian strength lies in generics, there is no fear from China, and hence there is no competition. The pharmaceutical industry in India meets around 70 percent of the country’s demand for bulk drugs, drug intermediates, pharmaceutical formulations, chemicals, tablets, capsules, orals and injectibles. However, Chinese Government is motivated to provide financial support to domestic generic companies. “Hence, it would not be that difficult to build generic companies such as those in India given China’s access to skilled human resources and the low cost of production,” warns Palnitkar.

Sino-India business ventures

Companies such as Ranbaxy, Orchid, Hikal, and Aurobindo have already tested the waters in the Chinese market through marketing offices or joint ventures and soon more companies will go there. As per a Ranbaxy spokesperson, the company’s focus in China will be on patent protected products with limited competition. It is also now increasing its hospital reach. The Chinese subsidiary, Ranbaxy Guangzhou China Limited (RGCL), which was incorporated in 1993, is expected to attain its first year of profits in 2006.

Likewise, Hikal has recently signed a JV partnership with Sinochem Corporation, a $20 billion (in which currency?) company engaged in the import and export of chemical resources, pesticides, dyes, pigments, plastics, petrochemicals, active pharma ingredients, intermediates, neutraceuticals, biochemicals, food additives, medical equipment, textiles and electromechanical products. Hikal has taken a minority stake in Chemstar Jiangsu, a subsidiary of Sinochem Corp, which might increase. The JV venture will market Chemstar’s products in India and use Sinochem’s R&D skills.

Policy works

In the past five years, PRC policymakers have made significant headway in aligning domestic quality standards with those followed internationally. China is all set to refute its reputation as a low-quality manufacturing base. In order to attract foreign investment and build a strong indigenous industry, policymakers aligned China’s quality requirements with international standards. As of June 2004, all manufacturers in China must comply with Good Manufacturing Practices (GMPs). Gradually, confidence in the quality of Chinese products is growing, and many of the smaller, low-quality operations have been culled from the market because of the high costs associated with upgrading existing production lines. Manufacturers are not the only segment of the value chain to encounter new quality standards. Effective from late 2004, distributors and retail pharmacies must comply with Good Selling Practices (GSPs) and be subject to audits. Consolidation has ensued in the domestic market, and many smaller firms have exited the market. Next in the new regulatory order are Good Laboratory Practices (GLPs), compliance with which will be required in the next couple of years.

In a bid to improve manufacturing and distribution efficiencies, strengthen drug safety supervision, and separate hospitals from the drug retailing business, the Chinese Government has implemented various structural reforms. These include meeting GMP standards by 2004 by all pharmaceutical manufacturers, State Food and Drug Administration (SFDA) supervision, strengthening intellectual property protection, implementing a national healthcare insurance system, withdrawing drug sales through hospitals, and public bidding for drug purchase.

The Chinese Government plans to invest $1.45 billion in biotech between 2001 and 2005. In addition to investing directly in the life sciences industry, the Chinese Government provides tax incentives to attract foreign investment nationally and locally. For example, both domestic firms and MNCs are exempted from the 17 percent value added tax for AIDS and contraceptives. MNCs hope that the government’s plan to separate the prescribing and dispensing of medicines will improve patient access to prescription medicines.

Over India Over the rest of the world
Low power costs Lower input costs
Low labour charges and more favourable labour policies Access to labour pool trained in chemistry. More Chinese chemical engineers graduate every year than the total size of the pool in countries such as Italy
Duty-free import of capital equipment Advances achieved by many players in terms of reliability and uality standards
Government support in the form of income tax holidays A favourable investment climate for pharmaceutical related activities

Treading cautiously

Despite the improving scenario, there are certain impediments in the Chinese market that are causing multinational companies to proceed with care. Though China’s administration has stepped up its efforts to enforce IPR, it has made several controversial high-profile patent rulings, points out the E&Y report (Unmasking China‚Äôs pharmaceutical future). The SFDA’s office of Administrative Protection (AP) has issued a new policy interpretation that aims to limit follow-on uses of innovative drugs. AP will apply only to the original use of a drug, as stated in a patent. This “one drug, one patent” rule hurts MNCs, which seek to develop new uses for existing drugs. MNCs are encountering import hurdles. China’s IP law excludes imports from “new drug” IP protection because they are not produced domestically. Indian Government appears to be committed to the industry and this is evident by the proposals to create specialised IP courts and set up modern patent offices in the country. The patent law in India will not cover the drugs already in the market; rather it will cover only the products in the R&D pipeline for patent protection. Counterfeiting and data security are other business hurdles. SFDA has committed to continue its efforts in fighting counterfeit drugs. However, China appears to lack the tools required to enforce judicial and other government decisions.

India pharma is witnessing increasing consolidation and inorganic growth. Indian players are active in terms of acquisitions in US and Europe. However, Palnitkar says, “To make a mark, globally firms will need to scale up operations yet maintain international quality of the drugs.” This is already happening by joining hands with IT and financial services to streamline and optimise processes.