China Becoming Pharma Production Hub

Tuesday 26 March 2013, Amsterdam

The new report states that China is an attractive option for pharmaceutical outsourcing, as drug  development costs approximately 20% less than in the West, and takes less development time. Several  multinational players are outsourcing to China and cutting jobs in Western regions, in order to offset financial losses from the impending patent cliff. The Chinese boasted the third largest pharmaceutical market in the world in 2011, with an estimated  value of approximately US$64 billion, and the country also represents the world’s largest exporter  of goods. The Chinese pharmaceutical market is currently highly fragmented, but consolidation is  increasingly being sought among domestic players. The majority of deals made in the Chinese  pharmaceutical industry are mergers and acquisitions, which allow companies to integrate resources  and reduce competition, while phasing out independent companies which are unable to keep up.

Many multinational companies are simply placing orders with contract research organizations and  contract manufacturing organizations, but some are working closely with top domestic players. A high number of deals have taken place within the biotechnology industry, the majority with foreign  companies – for instance, GSK’s co-marketing agreement  with  Sinopharm  for  the  distribution  of  its  vaccines  in  China,  or  ImmunoBiology’s  agreement  with Sinopharm  to  co-develop  a  tuberculosis  vaccine.  Several  multi-nationals  are  also  completing  mergers  and acquisitions  with domestic companies to help integrate themselves into the market. For instance, GSK has  purchased Nanjin Melrul Pharmaceutical Company, and Sanofi has purchased Minsheng Pharma in order to improve its presence in the OTC market.

However, poor drug quality and flawed intellectual property laws make companies hesitant to invest  in Chinese pharmaceutical firms. Although China has tightened its regulations in recent years, stories of poor drug quality continue to slip through the cracks, and intellectual property rights  are also threatened. The Chinese government implemented  a  new  licensing  law  in  July  2012   allowing  them  to  issue  compulsory  licenses  to  domestic pharmaceutical companies for the manufacture of cheap generic copies of patented drugs, in the case of emergency or public interest.  This could dissuade international pharmaceutical companies from investing in drug development, potentially setting back innovative drug research. China also faces competition from popular outsourcing neighbor, India. India’s labor costs tend to  be lower, making the country an appealing prospect to investors, and posing a threat to China’s pharmaceutical market success.