Rapid growth
in pharmaceuticals
Trend Report: China’s Pharmaceutical Industry

The pharmaceutical industry in China has been developing fast since the country’s reforms and opening-up to foreign investment. Production of pharmaceuticals has increased in value by 16.6% annually from 1978 to 2002, making this one of the fastest-developing sectors of the Chinese economy. In the first three quarters of 2003, pharmaceutical production increased by 20.0% and sales increased by 17.2%. The demand for chemical equipment and know-how is tremendous.


The pharmaceutical industry in China is driven mainly by the medical needs of the country’s 1.3 billion people. The industry has grown rapidly since China’s reform and opening-up to foreign investment. During the 8th Five-Year Plan (1990–1995) growth in pharmaceuticals peaked at 22% per year. During the 9th Five-Year Plan (1996–2000), average annual growth was 17%. The total value of the Chinese pharmaceutical industry in 2001 was 277 billion RMB, or 2.9% of GDP; by 2002 this had risen to 330 billion RMB, or 3.2% of GDP, and was increasing at 18.8% annually. For comparison, the average growth rate of the pharmaceutical industry worldwide is 13%. Sales of medicines increased at 21.7% annually from 1990 to 2001, reaching 126 billion RMB in 2001. Among the various branches of the pharmaceutical industry, figures for 2002 show that pharmaceutical equipment grew faster than average, at 28%, and so did the manufacture of active ingredients (21%); growing at below-average rate were traditional Chinese medicine (16%), biotech-based pharmaceuticals (16%), sanitation materials (15%) and medical equipment (12%).
According to the licensing authorities, in 2001 there were 5,146 pharmaceutical companies in China. These included more than 1,700 foreign companies and joint ventures (the 20 largest international pharmaceutical companies have all invested in China). A further 1,100 companies are owned by the state. China’s 5,000 or so pharmaceutical companies include about 4,000 manufacturers of active ingredients, 1,100 traditional Chinese medicine companies and about 200 biotech firms. By the end of 2001, Chinese manufacturers were producing around 1,500 different conventional drugs, with an output of 430,000 t/y, second only to the USA.
Traditional Chinese medicine has become more strictly classified and controlled, with delivery mechanisms now including injection, intravenous bolus and aerosol. More than 8,000 individual traditional Chinese medicines are now available, classified into 40 basic types, and production has reached 370,000 t/y. Biotech firms in China manufacture more than 300 products including bacterins, toxoids, antisera, blood products and diagnosis reagents, including 20 products based on recombinant gene technology. More than 11,000 types of medical equipment are manufactured in China. These include equipment for computed tomography (CT) and magnetic resonance imaging (MRI).
Most pharmaceutical companies in China are relatively small; the combined sales of the top 60 companies account for only 35% of total sales. Pharmaceutical manufacturers are concentrated in eastern China, and this uneven geographical distribution is becoming more pronounced. Ten provinces account for two-thirds of total pharmaceutical sales, and eight of these ten provinces are in the east.
Both imports and exports of pharmaceuticals are increasing. Imports in 2001 were worth $4,532 billion, an increase of 5.4% on the previous year, but 2001 exports were worth $5,864, an increase of 16.6%. Active ingredients and finished drugs account for more than half of both imports and exports. Not all this growth, however, has translated into increased profits. In 1992 most companies reported lower profits than in the previous year, and overall profit margins grew by only 0.6% while costs increased by 6.2%. The domestic retail market for medicines is doing well, with annual growth of over 10%. Together with continuing improvements in China’s medical insurance system, this has encouraged investment in the retail market. Drugstore chains are showing the fastest growth in the medicines retail sector, and competition is increasing.

Current highlights by sector and product type
Medical equipment is one area of the pharmaceutical industry in China that is not currently performing as well as it could. Chinese companies manufacture many thousands of types of medical equipment, but in terms of technology they are well behind the world leaders. For instance, 90% of the country’s electrocardiographs and 100% of top-grade medical imaging equipment are currently imported. World sales of medical equipment are estimated at $200 billion, with 7% annual growth, so this is a market in which Chinese companies could do well.
The market for SARS vaccines began to develop rapidly almost immediately after the SARS virus was recognized in March 2003. The average world market for vaccines is estimated to be growing at 10% annually, but the Chinese domestic market is growing at 15%. According to Wang Hexiang, secretary-general of the China Preventive Medicine Association, investment in vaccines and other medicines related to the immune system was 800 million RMB in 2002 and 1,200 million RMB in 2003. Many companies, both Chinese and foreign, are trying to cash in on this market. GlaxoSmithKline, the largest vaccine supplier to the World Health Organisation, is very active in the Chinese market. China National Biological Products Corporation, the country’s biggest vaccine manufacturer, is investing 500 million RMB to establish the largest vaccine R&D centre in China.
Demand for propanoic acid in China already outstrips supply, and is set to increase considerably. Current production capacity is around 1,000 t/y, but actual output is only about 200 t/y. Increasing production of vitamin B6 and drugs such as naproxen and tolperisone will require an increase in either domestic production or imports of propanoic acid.
Chinese production capacity for gamma-butyrolactone is increasing by around 10% annually. More than 20 companies in China now produce a total of 16,000 t/y of gamma-butyrolactone, but domestic demand is around 18,000 t/y. The markets for 1,4-butylene glycol and butanoic anhydride are also developing fast.
Demand for vitamin B12 in China has grown fast in recent years. As late as the 1980s demand was only 200 kg/y, but it has now reached 1,200 kg/y and is growing at more than 10% annually. Consumption has increased as vitamin B12 has become an accepted part of basic medical care in China. Thanks in part to its availability in over-the-counter multivitamins, more than 90% of the population in many large Chinese cities now take vitamin B12 as a supplement.
WTO membership: challenges and opportunities
China’s accession to the World Trade Organization has brought new challenges and new opportunities to the pharmaceutical industry. In the long term, WTO membership will improve the quality and competitiveness of the pharmaceutical industry, with benefits including:
-development of the Chinese pharmaceutical regulatory system through collaboration with foreign organizations;
-positive effects on R&D and intellectual property rights;
-more international resources for the Chinese pharmaceutical industry;
-promotion of exports for the more competitive parts of the Chinese pharmaceutical sector, including generic drugs, traditional Chinese medicine and some types of medical equipment;
-better management of Chinese pharmaceutical companies.
In the short term, however, China faces three main challenges:
-import duties for medical products will fall from the current 20% to 5.5–6.5%, in line with other WTO members. This will have different effects on different parts of the pharmaceutical industry;
-pharmaceutical patents will be enforced more rigidly;
-competition from foreign companies in the wholesale and retail markets will increase, and many Chinese firms are not prepared for this.
Trends include steady growth, GMP and biotech
Under the 10th Five-Year Plan the Chinese pharmaceutical industry is on track to increase sales by 12% annually until 2005. The need for this is driven mainly by China’s increasing population and rising standard of living. Sales of medicines in China are forecast to reach $14 billion by 2005 and $24 billion by 2010, at which
point China will be the fifth-largest medicine market in the world after the USA, Japan, Germany and France.
An important change currently under way is the Chinese government’s move to ensure that all pharmaceutical plants meet GMP (Good Manufacturing Practice) and GSP (Good Supply Practice) standards by 30 June 2004. Forcible GMP compliance, administered by the National Medicine Supervising Bureau, is intended to restrict the number of pharmaceutical manufacturers and improve product quality. Its effects will be severe, because to convert a standard production line to GMP status costs an estimated 40–200 million RMB. Of China’s 5,000 pharmaceutical companies, 2,585 had at least one GMP approval by October 2003. Nearly 30% of these approvals were gained between June and October 2003.
World sales of biotech-based medicine have risen at an average annual rate of 30% since 1995, but by 2000 investment was starting to fall and the industry was in some trouble. In China, biotech investment by joint-stock companies fell from 700 million RMB to 596 million RMB. Slow product development, falling profits and lack of capital are hitting the biotech companies. Thanks in part to more stringent proof of effectiveness required by the FDA in the USA, and to the launch of several new biotech-based drugs, investor confidence has started to recover. It now seems as if the industry hit bottom at the end of 2002, and since then the situation has improved.
The SARS epidemic in 2003 was a big shock to both the economy and society, but it also provided opportunities for the bio-pharmaceutical industry. Biotech-based pharmaceuticals in China were worth about 20 billion RMB in 2002, or about 6% of the total pharmaceutical industry. This share is predicted to rise to 12% in the years to come.
Traditional Chinese medicine (TCM) offers around 2,000 kinds of herbal medicine and 3,300 other traditional remedies. The citizens of developed countries are increasingly discovering benefits in a “natural” approach to medicine, while 60% of Asians already use herbal medicines. As a result, world demand for herbal and other natural medicines increases daily. Experts predict that demand for traditional medicines in African and Arabian countries will increase by 10–20% annually for the next 5–10 years, and that sales in these countries will reach $10–20 billion. On the same reckoning, global sales of traditional medicines will reach $200–300 billion.
The next 40 years is therefore a key period for China to expand its production of traditional medicines and to promote them across the world. China currently has just 5% of the global market in traditional medicines, and the target is to increase this share to 15% by the end of the 10th Five-Year Plan in 2005. Aiding this growth are the current efforts to standardize and rationalize the systems used to classify and prepare TCM.
Basic medicines, the retail market and OTCs
Basic pharmaceuticals are the mainstay of the industry in China. China is now the world’s second-largest producer of basic medicines, and the largest producer and exporter country of penicillin, beta-lactam and vitamins. Chinese output of basic pharmaceuticals reached 562,000 t in 2002, an annual rise of 11%, and made up 22% of global sales. Exports in this sector increased by 28% to $2.99 billion, and accounted for 52% of China’s total pharmaceutical exports. As the big foreign companies transfer the manufacture of basic pharmaceuticals to China, the country’s strength in this sector will grow. However, India is a serious challenger in this regard. Indian pharmaceutical companies also have low production costs, and in many cases they have better technology and are more competitive than their Chinese counterparts. Ultimately, Chinese manufacturers can only survive through innovation.
Another growth area is the medical retail sector. Traditional Chinese medicine companies, large pharmaceutical manufacturers and many other private companies have all invested heavily in the retail sector, and are waiting for correspondingly high profits. Competition is fierce. As a result of this and other competition, plus government control, prices of medicines are falling from their previously very high levels. According to the National Statistics Bureau, the government has cut the prices of more than 200 medicines 10 times since 1997.
Price cuts increase the demand for medicines, but whether such increases are enough to maintain manufacturers’ profits is debatable. It seems that in its future policies the government may be prepared to balance the benefits to industry of maintaining prices against the benefits to consumers of cutting them.
OTC (over-the-counter, or non-prescription) medicines are growing at the fastest rate in the world, and although per-capita sales are still below the world average, this is set to change by 2005. OTC sales in China were $250 million in 1990, $1,010 million in 1994 and $1,300 million in 1996. The current figure is 24 billion RMB (20% of all pharmaceutical sales), and demand is forecast to rise to 60 billion RMB by 2005. This would make China one of the world’s biggest markets for OTC drugs. Demand for OTC pharmaceuticals in China is stimulated by changes in the healthcare system. As people become more responsible for their own medical treatment, they will buy more OTC products.kem