Lured by the potential for sales and increasingly familiar with the eccentricities of the market, overseas pharmaceutical companies are exploring new ways to cooperate with China.
For example, while most overseas companies use multiple distributors to market their drugs, Boehringer Inglelheim, the world’s largest family owned pharmaceutical, has taken a different route by appointing a single China-wide distributor. In addition, whereas most multinational pharmaceutical companies prefer to establish their own research and development centers, Eli Lilly — the Indianapolis-based pharmaceutical company — is collaborating with local research institutes to help share the risks. A third company, SK, has opened a hospital in Beijing in hopes of reaching a wider market.
Despite their different approaches, most multinational pharmaceutical companies in China share one element in common: robust growth. The past year was a good year for pharmaceuticals; most of them posted their best-ever years in China. Eli Lilly reported 28% growth in sales revenue in China, and other companies were close behind. GlaxoSmithKline, whose global sales growth rose just 2%, increased its sales by 24% in China, while Roche, the world’s leader in cancer drugs, posted 30% sales growth in China compared with global sales growth of 10%.
Similarly, AstraZeneca pushed its sales growth to 25% last year compared to its global growth rate of 7%, while Novartis, one of the world’s top five pharmaceutical manufacturers, saw sales grow by more than 24%. Naturally, such numbers have not gone unnoticed by other players in the industry. “China will be the most important country for Wyeth in the years ahead,” says Robert R. Ruffolo, the company’s president of research and development.
Success in the China market has been fuelled by the diversified strategies pursued by these and other overseas firms, which are no longer content just to manufacture in China. For example, Wyeth recently decided to emphasize China’s role in its global clinical trials. Several years ago, it shifted its Australia-based Clinical Research and Development Center for the Asia Pacific Region to China; in 2006 alone, there were 630 Chinese patients enrolled in Wyeth’s phase II and phase III clinical studies, about four times as many as in the previous year. Further expansion is planned. “We just made the decision this morning to enroll more Chinese patients into our global clinical trials,” Ruffolo said last week.
Exploring News Models
Boehringer Ingelheim and Sinopharm Medicine Holding Co., China’s biggest state-owned distributor of pharmaceuticals by sales, announced on March 27 that they will maintain their close relationship until the end of 2009, following two years of successful collaboration. The partnership, which allows Sinopharm to be the sole distributor for all of Boehringer Ingelheim’s products in China, around 20 in total, is the first of its kind in China. It has been a success since it began in April 2006.
In 2007, the German company’s sales soared 46% compared with 2006 in China, while Sinopharm’s 2007 sales also skyrocketed, hitting RMB 31 billion ($4.42 billion). This represented a robust annual growth of 32%, which doubled, and in some cases tripled, the growth of its competitors. “It’s a win-win collaboration,” says Wei Yulin, Sinopharm’s chief operating officer. Company executives anticipate that the partnership will boost sales further in the near future. “We hope, within three years, that our annual sales can hit RMB 50 billion ($7.12 billion),” says Fu Mingzhong, CEO of Sinopharm.
“In the past few years, the involvement of multinational pharmaceutical companies in China’s market has evolved from manufacturing investment to R&D investment, to distribution, and even to the end of the pharmaceutical supply chain, such as establishing hospitals,” says Rui Guozhong, head of the China Pharmaceutical Technology Transfer Center.
Aside from establishing a growing presence, many of the pharmaceutical companies have also found new ways of reaching the China market, says Rui. “They have explored different models at various stages of the industrial chain to leverage the advantages and resources of the Chinese market.”
Multinational companies in China face a different distribution system than in their home countries. “Pharmaceutical sales in China, especially for prescription drugs, rely largely on hospitals,” says Zong Yungang, a research director with Southern Medicine Economic Research Institute, a subsidiary of China’s State Food and Drug Administration. “In China, more than 70% of the revenues generated from the sales of drugs come from hospitals. Close ties and good relationships with hospitals add greatly to the sales.” Most hospitals have on-site pharmacies where patients with prescriptions can buy drugs. In the U.S., by contrast, pharmacies and hospitals tend to be separated, and most patients go to retail pharmacies for their drugs rather than to hospitals.
As China’s largest pharmaceutical distributor, and one that has strong support from the central government, Sinopharm has established solid relationships with hospitals in China. This advantage has helped make Sinopharm the top pharmaceutical distributor in China for several consecutive years: The company, established in 2003, held 10.3% of the pharmaceutical distribution market at the end of 2007.
By partnering with Sinopharm, Boehringer Ingelheim is able to take advantage of this existing network. “If Boehringer Ingelheim chose to cooperate with all the major pharmaceutical distributors in China, as most other multinationals do, the sales of its products couldn’t grow that fast,” says Zong. “Pharmaceutical distributors naturally will focus on the distribution of products with higher profit margins, and it is impossible to make all Boehringer Ingelheim’s products priorities. However, under this cooperation model, Boehringer Ingelheim becomes Sinopharm’s most important client, and Sinopharm will put more emphasis on the sales of Boehringer Ingelheim’s products.” Last year, Boehringer Ingelheim’s sales in China reached RMB 700 million (US$98 million).
Sinopharm is the only nationwide distributor in China, although other companies, through mergers and acquisitions, are set to become national distributors. So far, Boehringer Ingelheim is happy with the arrangement. “Under this model, we can streamline our sales channel management,” says Paul Bonnabel, chairman and chief executive officer of Boehringer Ingelheim Shanghai Pharmaceuticals Co., Boehringer Ingelheim’s China-based subsidiary. “And Sinopharm can pull all its resources to better distribute our products. We take the risk, but we are important for each other.”
Outsourced R&D Efforts
Boehringer Ingelheim is not alone in creating a deep-seated cooperation with local partners. Eli Lilly, famous for bringing Prozac to market, has also been a pioneer in cooperation with Chinese partners to leverage existing R&D advantages and resources in China.
While most other multinational pharmaceutical companies seem intent on establishing their own R&D centers in China to leverage the country’s low costs and rich talent pool, Eli Lilly has chosen instead to collaborate heavily with various local drug research institutes as well as local contract research organizations, a strategy that allows it to share the risks inherent in R&D.
Last September, Eli Lilly signed a strategic agreement with Hutchison Medipharma — the R&D-focused subsidiary of Hutchison China MediTech, the London listed company which belongs to Hongkong Billionaire Lee Ka-Shing — for a pre-clinical collaboration in the discovery and development of drugs focused on cancers and inflammation. In addition, Eli Lilly has additional collaborations with other research companies and institutions in China.
“We have been cooperating with Shanghai ChemExplorer [a Shanghai-based research company] since 2002, and now our other partners include BioExplorer and PharmExplorer, which are doing pharmaceutical and biology development services for us,” said Sidney Taurel, chairman and CEO of Eli Lilly, in a visit to Shanghai in late March, just before his retirement. “We will also leverage our venture capital fund, Lilly Venture Asia, with its investment in Bioveda [a venture capital fund focused on China’s life sciences sector] to source new drug candidates.” Analysts are generally positive about its R&D strategy. “Eli Lilly’s model for R&D in China bodes well for its development strategy,” says Rui Guozhong.
R&D is one of the biggest challenges for multinational pharmaceutical companies. Faced with expiring patents, growing R&D expenses, an aging population that pays less for medical expenses, and limited sources for finding new drugs, multinational companies are keen to find new methods of saving on R&D costs and increasing R&D efficiency. “Outsourcing R&D is a very important measure in controlling the R&D budget, and China and India are the top choices for R&D outsourcing,” says Taurel, adding that Eli Lilly will continue to outsource biology research and clinical trials in the coming years.
Eventually, Eli Lilly hopes to reduce the costs of developing a new drug from $1.1 billion to $800 million by 2010. “To help them reach this goal, intensive cooperation with various research partners naturally becomes a good option,” says Rui.
Eli Lilly started its R&D activities in China in 2002 through a full time equivalent partnership with Shanghai ChemExplorer Co. “Lilly’s cooperation with Shanghai ChemExplorer is quite unique,” notes Rui. “Shanghai ChemExplorer was actually established to serve Eli Lilly at that time.” Indeed, under the agreed-upon outsourcing model, ChemExplorer pays the infrastructure and equipment expenses for the research, and Eli Lilly pays for its services. To ensure that the research meets quality standards, Eli Lilly recruits the researchers who work in ChemExplorer, but outsources the human resources management to ChemExplorer. In this way, Eli Lilly reduces its R&D costs. “In essence, ChemExplorer is an R&D center for Eli Lilly,” adds Rui.
By collaborating with local partners, says Gary M. Noonan, Eli Lilly’s senior director of corporate business development, the company is able to leverage the existing resources of its partners and quickly become more familiar with the new environment, a strategy that minimizes risks and makes R&D more flexible.
Behind the scenes, the collaboration with Shanghai ChemExplorer brings Eli Lilly even greater benefits, because the founder of Shanghai ChemExplorer, Hui Yongzheng, is the former vice minister of China’s Ministry of Science and Technology. Although Hui said he joined Eli Lilly as a scientist rather than a retired government official, his involvement in the company sparked controversy. But Eli Lilly’s cooperation with a local partner also entails some risks, suggests Rui. “If the management of ChemExplorer is not strict enough, there is risk regarding intellectual property” There is also the risk that the local partner will use the talent recruited by Eli Lilly to work on other projects, he adds.
Establishing Hospitals in China
Meanwhile, Korean company SK, a diversified firm that is active in telecommunications, energy and life sciences, has made a bold push into China’s hospital market. The company, Korea’s third largest, established the Shanghai Institute of Technology in 2002 with the aim of developing traditional Chinese medicine-based natural drugs. By leveraging the rich herbal resources of China, the institute was expected to engage in cooperative research into the development of new drugs with its pharmaceutical research centers in Korea and the U.S.
But then in 2003, with a total investment of RMB 29 million ($4.13 million), SK surprised the market by launching SK Hospital in Beijing. With its 70% stake in the hospital, SK became the world’s first Fortune 500 company to have the maximum permitted shareholding in a joint-venture hospital in China. The hospital offers services including cosmetic procedures, plastic surgery, skincare, ophthalmology, obstetrics, pediatrics, traditional Chinese medicine, and ear, nose and throat services.
According to Rui, SK’s decision to stretch its investment to the final stop in the pharmaceutical supply chain displays a deep understanding of the Chinese system. More than 98% of the hospitals in China are publicly owned, which means the medical services sector is far from diversified, and it is often unable to meet the different levels of demand. Therefore, the creation of such joint-venture hospitals helps cater to the unmet demand for higher-level medical services.
However, it is not clear whether SK Hospital in Beijing is a success. When it opened the hospital in 2003, the company said it had plans to open hospitals in 20 cities in China, but currently, SK Hospital in Beijing is SK’s only hospital in China. “This illustrates the dilemma that foreign investors are facing,” says an industry expert. “A lot of foreign investors are eying the medical service market in China, and the investment return here is very high. However, though the Chinese government has encouraged foreign investment in this sector, it is still very difficult for those investors to obtain licenses for running joint-venture hospitals.”
Would-be investors also face other restrictions, including a minimum amount of investment (RMB 20 million) that doesn’t allow foreign investors to take complete control of the hospital, and the fact that joint-venture hospitals cannot be adopted in the medical insurance system.
However, some companies are pursuing other forms of cooperation with hospitals. On April 3, Royal Philips Electronics signed a long-term research partnership agreement with West China Hospital, one of the biggest hospitals in China, making it the first multinational to do so in the country. Under the agreement, Philips will collaborate with West China Hospital to develop new imaging procedures for the diagnosis and monitoring of cardiovascular disease, including coronary artery disease, along with cancer and mental illness.
Chronic diseases, including those related to the cardiovascular system, cancer and diabetes, caused 80% of all deaths in China during 1991 to 2000. The lack of timely medical treatment and efficient prevention measures was the main reason for the high mortality rates of such diseases. The partnership, which covers eight projects and will last for seven years, aims to help doctors interpret medical imagery, and diagnose illnesses at an earlier stage, by developing a better information system and devising faster procedures.
“As one of the largest medical facilities in China, West China Hospital hopes to leverage the industry-leading imaging capabilities of Philips through this research collaboration,” said Zhou Zongguang, vice dean of West China Hospital in a press conference. “This will accelerate the advancement of our imaging methodologies in areas such as cardiology, oncology and certain mental diseases.” Philips, for its part, hopes later to sell the information system to other hospitals around the world.