China 2020: Walled In No More

Dec 01, 2010

Aug. 16 marked a new milestone in China's history: After three decades of double-digit economic growth, China surpassed Japan to become the world's second-largest economy—outpaced only by the United States. More telling, however, is China's continued GDP growth amidst a harsh global economic downturn—a robust 11.9 percent in 2009 versus 1 percent in Asia's other market leader, Japan. China also last year overtook Germany to become the world's biggest exporter. Some economists predict that in another two decades, China will more than double its GDP to unseat the $14 trillion US economy as the world's largest.

Each of these trends underscore the growing influence of China on the world stage. For companies active in the life sciences sector, the message is simple: There will be less growth for your global market plan if it does not include China as a key priority.

Will China Be Tops in Pharma?

In the pharmaceutical industry, China currently ranks fourth in terms of sales but is expected to topple Germany to become the No. 3 market by next year. The most aggressive forecast puts China in the top spot in another 10 to 15 years.

Several key factors are driving these heady projections. First is the meteoric rise of China's "middle class" and its demand for better healthcare products and services. A recent Boston Consulting Group study estimates that the cohort of China's middle and affluent classes—defined as individuals with an annual household income above $9,000—will nearly triple, from 148 million currently to almost 415 million by 2020.

Most of the new growth is to come from consumers in smaller, second- and third-tier cities; it is not well known that, beyond the megacities along the coast, China has nearly 70 municipalities with populations of more than 1 million. The trend toward urbanization has significant implications for how medicines and healthcare are distributed. Anticipation of this change should be a key element in pharma's strategic planning for China, as it allows for closer contact with customers and a more targeted approach to building brand awareness.

"The key to success is recognizing that this is a different marketplace. We must pay close attention to the needs of physicians and patients in partnership with government, with the overall aim of improving health outcomes," Mervyn Turner, chief strategy officer for Merck in China, told Pharm Exec.

Another driver of the rosy outlook for China's pharmaceutical market is the epidemic of "diseases of affluence" (diabetes, heart disease, obesity, etc.), which require frequent and costly treatment. Due to this epidemiological transition, cardiovascular disease has now become the leading cause of death in China. This is a result of a combination of the 'Westernization' of Chinese lifestyle (high consumption of unhealthy diet, fast-paced work environment, lack of exercise), rapid urbanization (nearly 230 million "migrant rural workers" live and work in the cities), increased life expectancy, and accelerated growth of the aging population, which is projected to reach 11.2 percent by 2020 and 22 percent by 2040 for people 65 and older, according to the National Bureau of Statistics.

An extensive study conducted in 14 provinces and municipalities in China, published in the New England Journal of Medicine in March, concluded that over 92 million people are estimated to have diabetes, representing almost 10 percent of the Chinese population. Those with impaired fasting glucose or impaired glucose tolerance (defined as pre-diabetes) represent even higher figures—148 million, or 15.5 percent. Compared to previous national studies where the diabetes estimate was 2.5 percent in 1994 and 5.5 percent in 2001, the new result is alarming in demonstrating one major negative consequence of China's astonishing economic development, and highlights a substantial healthcare challenge for the Chinese government.

China realizes that in order to sustain its phenomenal economic growth, it has to shift the focus from historically export- and investment-driven outlays to one that is anchored by strong domestic consumption and indigenous innovation. According to data from Hong Kong University economist Lang Xianping, China's 2009 domestic consumption as a percent of GDP, at 29 percent, is one of the lowest in the world, compared to about 70 percent for the US and 50 percent for Africa. Aside from the high savings rate, a main reason for the low domestic consumption percentage is low wages: in terms of GDP distribution, it is only 8 percent for China, compared to 58 percent for the US, 33 percent for Mexico, and 20 percent for most of Africa.

One fly in the ointment is the fact that China's population is aging rapidly, which has convinced consumers to save more for the "rainy days" of old age and impaired health. The government is pursuing some modest experiments in subsidizing elder care services and long-term institutionalization. Currently, only 2 percent of the population is receiving any form of this care, and the cost burden suggests that any formal engagement to address the aging problem will have to follow on the heels of health reform—in other words, until well after 2020. In the interim, pharma companies should consider how to enhance their presence in the market with services and products that focus on prevention and the ability to live productively with chronic disease.

To stimulate domestic consumption, a major element in the government's 12th Five-Year Plan is raising personal incomes to allow all citizens to prosper in the new economy and to reduce the huge income gaps in Chinese society. This initiative will have a far-reaching global economic impact—as wages go up, the cost of Chinese goods and services will increase. For companies relying on inexpensive Chinese labor to outsource their manufacturing and services, the cost advantage will erode and eventually disappear over the next five to 10 years. This is true for the pharmaceutical industry in particular. Foreign companies need to anticipate the long-term change in China's economy and develop strategies that position themselves for participation in the next phase of innovation-driven growth. Low-cost labor should no longer serve as the rationale for investing in China's life sciences sector; rather, market size and potential as a high-value-added source of drug discovery and development should count most.