China and the Emerging Markets Challenge

Mar 01, 2013

This month signals the arrival of new political leadership in China, as President Xi Jinping and his six colleagues on the ruling Politburo Standing Committee begin a mandate likely to last for the next decade. With health reform already tagged as a key domestic priority, their policies will pose new opportunities and challenges for Big Pharma companies active in China. In the following feature, experts from the Boston Consulting Group highlight the importance of building a customized market strategy that reflects the actual environment rather than assumptions reflective of the HQ culture at home—a rule that works not just in China but in all the major emerging country markets.

—William Looney, Editor-in-Chief

Getty Images/Gavin Hellier
There is no disputing the fact that for the pharmaceutical industry, growth in the future will come in large measure from emerging markets. The potential is tremendous as living standards rise, a middle class emerges, and populations age.

But there is a danger confronting companies in these markets: despite healthy revenue growth rates in recent years, in many cases the positions of multinational pharmaceutical companies are at risk as local players gain strength. This is the stark reality in China, which is on track to become the second largest global pharmaceutical market after the United States by 2016 and where multinational pharmaceutical companies are losing market share to local firms. The challenges seen there and elsewhere epitomize the need for pharmaceutical companies to adopt a new strategy in emerging markets. Simply trying to apply or extend the traditional approaches they have used in developing countries is likely to court competitive failure.

China sets the standard

The complex balance between opportunity and challenges in China underscore what is at stake. Industry sales in China have gone from just $8 billion in 2000, when it was the 10th largest market, to $48 billion in 2010, making it the number four market that year. By 2016, sales in China are projected to hit $139 billion, surpassing Japan to take the number two position globally.

A number of factors will continue to drive China's expanding demand for pharmaceuticals. The Chinese population is aging, contributing, along with lifestyle changes, to a rise in chronic illnesses. Consider that by 2020 one in three adults in China will have hypertension and one in 10 will have type 2 diabetes. Growing wealth in China—by 2020 the affluent and middle class population will triple from 142 million to 401 million—will support more healthcare spending as well.

At the same time healthcare reform in China is also driving expansion of the market. The 2009 reform plan extended medical coverage to rural and urban unemployed populations; poorer groups previously had to pay out of pocket for medical care. The change has created a new market for pharmaceuticals consisting of urban community health centers and rural county and township hospitals, one that will grow faster than the core market and potentially represent roughly 40 percent of the total Chinese market by 2020.

Such dynamics have led pharmaceutical companies to move aggressively into China—efforts that until now have been largely successful. It was not surprising to see some of the leading global pharmaceutical companies in China generate annual revenue growth rates in the neighborhood of 30 percent to 40 percent in the last decade. That growth was driven by a rapid expansion of field forces, with the number of combined sales reps for the top seven multinational companies soaring from 2,400 in 2002 to 18,400 by 2011.

Changing price points

The future, however, looks to be markedly different—despite the strong demographic underpinnings, growth rates for multinational pharmaceutical companies are likely to slow as pricing pressures mount. Until now, the Chinese government has set generous reimbursement policies aimed at encouraging investment by multinational pharmaceutical firms. It's not uncommon to see prices for products sold by those multinationals set at two to three times the Chinese GMP (guaranteed maximum price) for primary care products, or five to six times higher in the case of oncology and specialty care drugs. Going forward, however, as China tries to improve the affordability of medicines, the government is expected to push for price reductions of at least 15 percent every two to three years on off-patent products. If that policy is implemented successfully, the impact on multinationals will be significant: nine out of the top 10 multinational pharmaceutical companies in China have between 70 percent to 90 percent of their revenue coming from off-patent products.

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