As China continues its pursuit of creating a base living standard for all, healthcare and more specifically the pharmaceutical market is booming strongly.
Thanks to China’s robust economic growth, its pharmaceutical market is the world’s fifth largest and one of the most attractive markets. The reason why the healthcare market in China is so attractive rests on the country’s population rather than on its maturity. When you have 1.35 billion people who demand better medicine and healthcare services, one can certainly understand the context. This demand is also due to the urbanization phenomenon discussed in previous papers. While sales of pharmaceuticals in developed markets led by Western Europe and North America only achieved single digit growth of late, double digit growth in China is not only promising but also not surprising.
Back in 2008, China’s healthcare spending was only 4.3% of the GDP. This figure was lower than the average of BRIC countries (5.48%) and developed countries (around 10%). In March 2009, given this backward situation, plans which were aimed at conducting a sweeping overhaul of the healthcare system were unveiled by the Chinese government.
Among these plans, approximately 850 billion yuan (AUD 137 billion) was allocated to develop the country’s healthcare system between 2009 and 2011. In the first phase of the overhaul, the Basic Medical Insurance (BMI) was planned to cover about 65 percent to 90 percent of the population by 2011. The national Essential Drug List (EDL), which is a list of medicines that meet the basic medical requirements under BMI, as well as pricing for medicines were revised and regulated at this stage. The second stage, which began in 2011 and is expected to be completed by 2020, is to establish a universal healthcare system. This means all citizens will be able to access affordable medicines and healthcare services.
On top of this, some major developments that will benefit the healthcare industry have also been released in the government’s 12th Five-Year Plan (FYP). The 12th FYP is covering the period from 2011 to 2015. Like all the previous FYPs, its objectives are set to cause far-reaching impacts on the economic growth of China rather than focusing on a specific industry.
With the current FYP, urbanisation is expected to give rise to the demand for pharmaceuticals and boost the growth of the pharmaceutical industry. In addition, as income levels increase, the demand for better healthcare services as well as healthcare products will increase in the pursuit of a healthier wellbeing. Last but not least, one of the national goals for next five years is to push industrial consolidation and advancement so in order to strengthen their pharmaceutical business, companies are encouraged to consolidate domestically, remove excess capacity and solidify market share and technologies.
From 2007 to 2010, China’s Pharmaceuticals market achieved a cumulative annual growth rate (CAGR) of 25.9%. This is expected to continue to grow at a modest CAGR of 15.5% till 2015. With such a bright outlook, the market has attracted numerous multi-national corporations (MNCs). This is especially true in the increasing market share of generic brands.
With global market leaders such as Pfizer, Sanofi, Bristol-Myers Squibb and GlaxoSmithKline standing to lose patent protections for some of their best sellers before 2015, the generic versions of those popular medicines are likely to take over around 80% of the market that is valued at around USD 77 billion (AUD 75 billion) when those patents expire. In the next few years, competition between domestic pharmaceutical companies and MNCs are expected to intensify for both market share as well as establishing a skilled workforce.
Competition for market share also exists in China’s over-the-counter (OTC) market as global producers seek opportunities to penetrate the market. According to a survey conducted in 2010 by IMS Health (a global company that provides information, services and technology for the healthcare industry), approximately 53% of the respondents preferred self-treatment for relatively light symptoms such as colds through OTC medicines rather than going to a doctor.
Driven by such cultural tendency and popularity of preventive medicines, the OTC medicine sector in China has reached an annual growth rate of 17% in the last few years – the fastest in the Asia-Pacific region. So far, there are around 4,000 different OTC medicines on the government’s EDL. This number is likely to be further expanded as awareness increases and reform progresses.
While we are seeing great growth momentum and market demand potential, there are still challenges that lie ahead for Chinese healthcare reforms, especially with regards to intellectual property (IP). The protection of new technologies has been an issue for China for many years. Fortunately the central government has acknowledged that it needs to intensify its efforts to protect new innovations in order to attract manufacturers. This has given confidence to large MNCs including Bayer AG (Berocca) and Novartis AG (Voltaren) to expand their OTC medicine offerings in China from late 2007. In November 2011, Novartis also started a USD 25 million (AUD 24.5 million) project to develop a new generic pharmaceutical manufacturing facility in Zhongshan.
With increasing disposable income and rapid urbanisation in China, there will be more demand for better standards of living. One key part of that will be healthcare. With the 12th Five-Year Plan expecting to boost healthcare expenditure, enhance healthcare services and push industrial advancement, both domestic and international companies are seeing great growth potential in China’s market. The cheaper medicine and greater access will then aid China and its population to the next level of economic development.
2 July 2012