Pharmaceutical Cluster Shanghai & China InternationalUniversity of Monaco MBA 2011 International University of Monaco MBA 2011.

Pharmaceutical Cluster

Shanghai & China

International University of M

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Insight into China

20% of Global Population

1.5% of global pharmaceutical market - $25.7

billion

Largest pharmaceutical

producers in the world

Annual average growth rate

16.72%


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Economic performance of

China

Macroeconomic Indicators

Size of population – 1.3 billion (2010)

GDP – $4627.7 billion

Inflation – 3.3%

Consumer price Index – 123.6 (3.3% growth)

Exchange Rate – 6.8409 ($/CNY)


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Activity Time Trend

11th November 2001 – Entry into World Trade Organization

Improved transparency & Intensifying of commercial legal procedures

Obligations include

Sharpening of rules on intellectual property

Tariff concessions

Market access of non-Chinese service dealers participating in the distribution of pharmaceuticals

Better patent system, medical insurance has become more widespread

Pharmaceutical-related regulations have been improved

To become the third largest pharmaceuticals market in the world by 2011 according to a report released by a market research firm know as IMS

China's pharmaceutical revenue is growing fast –Market may double by 2013.

Sales of prescription drugs in China will grow by US$40 billion through 2013


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Shanghai & Pudong

Shanghai

18 million Inhabitant – Tenth largest cities in the world

Located at the delta of the Yangtze River, longest and busiest in China

Largest and most important centre of Industry in China

China’s leading port and commercial city

Pudong

Flagship of China’s economic reform

Permanent Population – 4.12 Billion

Gross output value - RMB 400.139 billion


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Development of Pudong Area

Government Support

Development of local physical infrastructure

Provision of funding for Shanghai research institutions and support of venture capital investment to facilitate technology commercialization

Foster favorable trade and tax environments

Provision of financial and insurance freedom and help to expand its capacity as a financial center

Improvement of the legal environment and protection of intellectual property


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Diamond

AnalysisPharmaceutical

Cluster

Firm Strategy &

Rivalry

Demand Conditions

Related & Supporting Industries

Input Conditions


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Input Conditions

A drug supervision and management body was formed in 1998. The goals for this body are to intensify supervision and control over medicines, and gradually set up a drug management system featuring legal management, unified law enforcement, standard codes of conduct, honest practice and high efficiency

Foreign Companies doing R&D in China

Subsequently China’s entry into the WTO, many strong pharmaceutical companies are transferring their research and development centers to China. For example, Roche of Switzerland opened its R&D center in Shanghai recently

Supervision & FDI in China


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Input Conditions

Governmental Policies

The main goal of the government is to improve manufacturing and distribution efficiencies, strengthen drug safety supervision, and separate hospitals from the drug retailing business

To reach these goals the following provisions were required:

Requiring all pharmaceutical manufacturers to meet GMP standards

Diminishing drug sales through hospitals

Bidding publicly for drug purchase

Implementing a national healthcare insurance system and

Strengthening intellectual property protection and SFDA supervision

Governmental Policies


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Input Conditions

The pricing mechanism is based upon three reflections when setting the maximum retail price - production cost, a wholesaler spread set by the government and the prices of comparable products in the market. Any products priced above this level will be removed.

The central government has been playing a significant role in pharmaceutical price readjustment. Future price reductions will originate from hospital pharmaceutical retail shops.Government drug pricing

policy


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Input Conditions

Since 2002, China's pharmaceutical logistics industry has been expanding constantly. A great amount of capital is being injected into this industry. In 2007, China had 3 main pharmaceutical logistics centers put into operation and many more are yet to come.

Pharmaceutical Logistics


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Input Conditions

China’s over-the-counter market is growing fast and has become the fourth largest OTC market in the world. Foreign enterprises have been closely observing the growing OTC market

The central government has been playing a significant role in pharmaceutical price readjustment. Future price reductions will originate from hospital pharmaceutical retail shops.

Over the Counter Market and Pricing


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Strategy & Rivalry -Buyer Power

International University of Monaco MBA 2011


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Strategy & Rivalry -Supplier Power



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Strategy & Rivalry -New Entrants



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Strategy & Rivalry -Substitutes



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Strategy & Rivalry -Degree of Rivalry



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Demand Conditions

Longer Life-span

The average lifespan for Shanghai people reached 81.08 in 2010 - the first time it has passed 81

China: 75 years

Infant mortality Shanghai: 3 per 1,000 China: 6 per 1,000

The pre and post-natal mortality rate for women was 6.68 in 100,000

Age Structure: Larger older population

Com-pared with the 5th national census in 2000, the proportion of those aged 0-14 in the city population dropped 3.4 %

Aged 65 and above rose by 0.5 %

BuyersLocal Consumers


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Demand Conditions

Employment

Employs 9.4607 million people

4.2 % unemployment rate

Local labor markets -sub regional chemical fields

Middle Class Expansion/China

Present estimates of middle class in China range from 100 million to 247 million

An income of about $9,000 is necessary to be considered middle class

China could have over 600 million middle class citizens by 2015

Per Capita Income

China is on track to create a 700% growth in per capita income in just 20 years

Shanghai: $18, 400

“Sophisticated demanding buyers pressure companies to meet high standards, to innovate and to move forward more developed segments.” Michael Porter


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Demand Conditions

Total: 5,898,415

Type A and Type B infectious diseases (3,499,582)

Plague, Cholera, HIV, Viral, Tuberculosis

Type C infectious diseases (2,398,833)

Leprosy, Camp Fever

Health Conditions


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Demand Conditions

Hospitals

67,000 in China; 759 in Shanghai

Managed Care Organizations (MCOs)

Medical facilities provided 132.17 million out-patient and emergency services and 647,000 surgical procedures for hospitalized patients, both increasing by about 13 %

Medical services at the 228 involved 1,190 teams of general practitioners and a health database covering 1.7 million families

Health supervision agencies shut 3,369 illegal clinics, withdrawing the licenses of four facilities and collecting 16.91 million yuan

Government Agencies

International Companies

Large range and product differentiation reduces buyer power

Overall, buyer power is moderate

Key Buyers


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Demand Conditions

Pharmaceutical market is growing more than 20% a year

Demand is projected to increase 13.6 % annually to 375 billion yuan in 2011

Growth decline from 2011-2015 to $48.8 billion by 2015

Aggressive government spending , economic boom, rapidly aging population

The trend toward unhealthy lifestyles and an increasing demand for drugs to treat chronic diseaseLocal Demand


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Market Segmentation


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Market Share



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Leading Companies

AstraZeneca PLC

GlaxoSmithKline Plc

Northeast Pharmaceutical Group Company Limited

Pfizer Inc.

Yangtze River Pharmaceutical Group


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Demand Conditions

Global pharmaceutical sales will rise 5% -7% in 2011 to $880 billion

The 2011 projection compares with 2010’s 4% to 5 % growth in drug sales to $840 billion

It is expected for drug spending in China to increase at least 25% in 2011

China is expected to expand by as much as 17% to $180 billion worldwide while growth in the United States market slows

Global Demand

The ultimate size and forecast exponential growth in future demand for pharmaceuticals, coupled with the inherent low-cost structure of Chinese manufacturing offer huge opportunities for pharmaceutical enterprises.


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Demand Conditions

Patent Protection

Over the next five years, multinational corporations will lose patent protection of products worth US$140 billion in annual sales

Example:

Novartis, $1.25 billion in R&D

Bayer, $5 billion sales increase by 2015

Global Demand

“arguably ranking as the best pharmaceutical outsourcing destination among all Asian territories when looking at the multiple factors of cost, risks and market opportunities” PriceWaterhouseCooper


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Related and Supporting Industries

Biotechnology Industry

Chemical Industry

Engineering Industry

Packaging Industry

Hospital andMedical Services

Drugs Discover and

DevelopmentManufacture Market

The Shanghai Pharmaceutical cluster benefits from internationally competitive related and supporting industries, able to

deliver cost-effective inputs (materials, machinery, services) in an efficient and preferential way thank to the geographical proximity

provide advantages in innovation and upgrading through close cooperation and sharing of information with pharmaceutical firms

Pharmaceutical Value Chain

Other Services


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Biotechnology Industry

The field shows immense importance in augmenting existing technologies in the pharmaceutical industry (i.e. research of simple molecules through trial-and-error to treat symptoms of diseases)

In Shanghai-Pudong the establishment of the Zhangjiang Hi-Tech park fostered the development of biotech industry

1996 - Agreement of National Shanghai Biotechnology and Pharmaceutical Industry Base

Many biotech firms raised as spin-offs from local universities with proven record in the field

Shanghai Fudan-Zhangjiang Bio-Pharmaceutical, founded by six teachers from Fudan University

Local Government is accommodating in the proactive search for new park residents, with regard to research-intensive activities

Drugs Discover and Development

Manufacture Market


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Chemical Industry

Raw Materials

Weighing of Recipes

Batching & Mixing

Tableting/Capsuling/Filtering/

Stirring

Filling

Sealing and Labeling

Packaging

Provides bulk drugs and raw materials for the production of all pharma’s product categories

Tablet/Capsules, Oral liquid, External Preparation

As average, raw materials account for 33% of the drug’s MRP - Maximum Retail Price

(i.e. bulk drugs, dyes, preservatives, glycerin, lactose, solvents)

The growth of the chemical industry in Shanghai-Pudong specialized in areas such as pharmaceuticals, biotechnology and specialty chemicals

Gross production value of the Yangtze Delta chemical industry increased from 333.18bn Yuan (41.6bn USD) to 1,304.90bn Yuan (163.1bn USD) between 1998 and 2005


Manufacture Market


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Raw Materials

Weighing of Recipes

Batching & Mixing


Stirring

Filling


Packaging

Engineering Industry

Pharmaceutical industry is highly capital intensive requiring consistent investments in custom design machinery, in accordance with stringent regulations

As average, Pharmaceutical’s processing expenditure accounts for 25% of the drug’s MRP - Maximum Retail Price

Machinery for mixing and granulating, tablet coating, capsule manufacturing, autoclaves, drying chambers, etc.

In Shanghai-Pudong, the Jinqiao Export Processing Zone achieved great development in the machinery industry, attracting multinational corporations to produce and sell quality machinery worldwide

As of July 2005, the development zone absorbed investment totaling USD14.159 billion, of which USD12.721 billion made by foreign enterprises


Manufacture Market


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Raw Materials

Weighing of Recipes

Batching & Mixing


Stirring

Filling


Packaging

Packaging Industry

The pharmaceutical packaging industry encompasses all activities including package testing and validation, package designing and development, package prototyping of pharmaceutical products

High cooperation with pharmaceutical firms

Products can be subdivided into different packaging segments: blisters, blow-molded plastics, ampules, caps and closures, tubes and glass, bottles, strip packs

Pharmaceutical packaging materials industry’s contribution rate in China is lower than other developed countries (10% compared to average 30%)

Over the next five years predicted a rapid development of the local pharmaceutical packaging industry

Actual packaging industry’s annual output can only meet 80% of the domestic pharmaceutical demand


Manufacture Market


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Hospitals and OTC Pharma Industry

China has a large and fast-growing over the counter (OTC) pharmaceuticals industry

Retail sales value of OTC drugs expanded by 102% between 2003 and 2009

Total OTC pharmaceuticals retail market increased to 72.02bn Yuan in 2009, and the market is expected to surpass 100bn Yuan by 2013

Growth in the OTC pharmaceutical market propelled by increasing public awareness about health care, rapid rise in urban living standard & growing disposable income levels

China’s 124bn USD healthcare reform (April 2009) boosts demand for pharmaceutical products ranging from generic drugs to medical equipment.

As part of the reform essential drugs are to be sold at government hospitals at wholesale prices

40-60% decline in traffic in some of the drugstores located where implemented the healthcare reform


Manufacture Market


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Major Challenges

Current operation mode of most distributors is not in line with the requirements of modern distribution, especially with regard to scale and automation.

Many distributors lack logistics management knowledge and talented managerial professionals

Macro regulation and control from the government is limited.

Profits today are at very low levels. The existence of a large number of undersized distributors has caused malignant competition and chaotic growth, which has resulted in higher costs, lower profits, and conflicts over limited market shares

Many distributors have limited market development and service capabilities.


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Future Trends & Recommendations

Scale-up to achieve economies of scale required for economic performance

Merging with domestic and foreign-owned companies

Narrowing their focus to specific geographic market or healthcare areas

Enhancing modern logistics management

China's domestic pharmaceutical industry growth is exploding. With 17% growth, the future looks bright. However, systemic planning will be required.


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Contact Us

Gabriele Cavargna Bontosi [email protected]

Ola Farahat [email protected]

Rajesh Namagiri [email protected]

Camilla Sorina [email protected]

Elena Vertlib [email protected]

Kseniya [email protected]

Thank You !

Q&A


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mailto:[email protected]






Pharmaceutical Cluster Shanghai & China InternationalUniversity of Monaco MBA 2011 International University of Monaco MBA 2011.

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