StreetTalk: Enter the Dragon: China Biopharm Market is a Land of Opportunity for Investors

June 1, 2006
Brian O'Connell

BioPharm International, BioPharm International-06-01-2006, Volume 19, Issue 6

The top 10 Chinese companies in the biopharm sector account for only 20% of the market... leaving plenty of room for growth for Western companies.

Big market + Low Competition = $$$$$$. These days you might as well write this formula in Mandarin Chinese because it's the exact recipe for success that more and more biopharm companies are brewing in China.

Brian O'Connell

Let's take a look at the numbers. China accounts for roughly 20% of the world's population (in comparison, the US accounts for 5%) but it corners only 1.5% of the worldwide pharmaceutical market.

That won't last long as the life sciences industry in China is growing at a 10% per year clip and has been over the last decade. It's the ninth-largest drug market in the world and by 2008, will step up to the 8th spot. (Wall Street pegs the overall market at $10 billion in 2006.)

As China's burgeoning middle class settles in for some of the creature comforts enjoyed by its counterparts in Europe and North America; (things like Burger King Whoppers and Buick convertibles); the need for drugs and medicine to satisfy China's booming health care needs is paramount for the country.

And, needless to say, paramount for companies in the biopharm industry that would love to get there first.

GOLDEN OPPORTUNITY

US drug companies are heading in that direction. To get there, they'll have to sidestep Chinese drug companies, which comprise 70% of the life sciences companies in the region, and clear onerous regulatory hurdles initiated by the Chinese government, which historically has treated foreign companies much like a teetotaler treats an open bar. Right now there are about 3,500 biopharm companies operating in China. That number is down from 5,000 in 2004, so the arena is already swallowing up pretenders and wanna-be's.

Consider the fact that over 38% of Chinese biopharm companies are state-owned, giving them a distinct advantage over Western competitors. And, many of these companies not only produce the prescription drugs they sell, they also own and operate the pharmacies that sell those drugs. Imagine you were a Bacardi Rum salesman and half the bars you visit used their own rum. How many cases of rum could you sell? Not too many.

Still, Chinese pharmaceutical companies have no shortage of competitive issues. Compared to Western giants like Merck and Roche, Chinese drug companies are much smaller in size, and are much less innovative in areas like technology and financing. One Wall Street pundit points out that the overall research and development for all Chinese life sciences companies combined doesn't match up to the R&D efforts of any of the top five Western drug companies.

But a closer look at the numbers reveal a potential gold mine for Western life sciences companies and investors who pour money into them looking for a good return.

The top 10 Chinese companies in the biopharm sector account for only 20% of the market. But in the US, the top 10 companies account for 50% of the market. That gap between China and the US indicates that there is plenty of room for growth for Western companies in the China market.

Granted, this is no secret to Western drug makers. Roche touts China as one of its ten-largest global markets and plans to increase over-the-counter drug sales by 50% by 2010. Novartis and Wyeth are also pouring billions into the Chinese market.

STEPS TO SUCCESS

What does the competitive landscape look like for Western biopharm companies hurdling the Great Wall?

It's not as intimidating as you might think, once you get past the state-sponsored control of a large part of the biopharm market in China. First, most Chinese pharmaceutical companies are generic drug makers, leaving the brand name prescription drug market to outsiders. American pharmaceutical companies with savvy marketing plans should be able to make inroads in the Chinese drug market by convincing increasingly health-conscious Chinese that they're putting their health in jeopardy by using second-tier drugs.

Fair play? Maybe not. But eminently possible in a country that takes so many of its health care cues from the West. Another door opens for US drug makers because the vast majority of life sciences companies in China are marketing traditional Chinese medicine, where quality issues comes into play. With so many American-educated Chinese doctors and medical researchers heading back home to ply their craft in China, chances are many will be taking their US training back home with them—at the expense of Chinese medicine and drugs. These doctorate-carrying expatriates will convince their countrymen and women that Nexium is probably a better bet for stomach problems than bear bile or gum tree extract.

Another issue that is potentially beneficial to US biopharm companies is the fact that 90% of Chinese in major cities like Shanghai, Beijing, and Guangzhou are covered by state-sponsored health plans. That's a ready made customer base that's at least 80 million strong, leaving plenty of opportunities for US companies to make their case to Chinese consumers, if they can get past the preference (for now) of cheaper generic drugs by thrifty government health care officials.

CAUSE FOR CONCERN

One issue that has haunted US drug companies looking to operate in China is the propensity of Chinese biopharm companies to rely on counterfeit drugs. But in July 2005, the US and China agreed on a long-awaited reform on patent protections that should inoculate US companies from Chinese counterfeiters. Now, Chinese companies that engage in patent infringement and counterfeiting could face fines and penalties of anywhere between $400 million and $1 billion.

Outside of the intellectual property issue, US biopharm companies can't expect too much more help from Chinese authorities, especially in terms of seed money for new life sciences ventures.

While the Chinese government does spend about $600 million annually on biotech research and development, further sources of local funding are few and far between. In recent years, China has opened a funding pipeline through local venture capital firms but money is scarce and typical investments rarely reach the $1 million or $2 million that new biopharm ventures can count on in Western countries. Still, labor costs are low in China and the government can contribute in other ways, especially in added funding for infrastructure and other industrial needs that foreign companies need when setting up shop in China.

US companies who have yet to establish a presence in China run the risk of being left behind. Already, firms from other Western countries like Canada (Dragon Pharmaceuticals) and the United Kingdom (GeneMedix PLC) have established successful manufacturing bases in China.

Some companies are looking to play catch-up via the acquisition route. That's what US-based Invitrogen Corporation did through its purchase of BioAsia, a Shanghai-based bio-services company.

Invitrogen, like the handful of US companies that preceded it into China, all see the same profitable landscape. Low-cost levels of entry, a low-cost, yet highly-skilled labor pool, a government bound and determined to establish a haven for life sciences companies, and a vast consumer market of Chinese looking to step forward into the healing light of 21st century healthcare.

"Add in China's entrepreneurial culture and it all indicates a promising future," notes Matthew Chervenak, president and founder of General Biologic, a Shanghai-based professional services firm. "If China implements appropriate regulatory structures for IP protection and capital markets, which may take a long time, the industry's natural drivers will make China's emergence as a strong player in the field inevitable. Within many products and services sectors, China is poised for dominance."

Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive, Doylestown, PA 18901, 267.880.3144, fax 267.880.1939, brian.oco@verizon.net

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