Chapter 13

The Pharmaceutical Industry

China¡¯s WTO commitments concerning the pharmaceutical industry mainly include the reduction of custom duties on pharmaceutical products, the gradual abolition of non-tariff barriers, the decentralization of pricing, trading and distribution powers for some pharmaceutical products, and the protection of relevant intellectual property rights. In Shanghai, revenues from the pharmaceutical industry from January to November this year amount to RMB 16,654 million, growing by 4.7% in the annual term, and the total profits for the same period come to RMB 1,461 million, representing an annual growth of 16.2%.

 

I. Relevant WTO Commitments and Major Countermeasures

1. Intellectual property protection. The chemicals produced in the country so far are mainly imitations of foreign products. After the implementation of the new patent law in China, imitation has been banned, and protection has been enforced for new drugs produced in foreign countries, including their production process and their chemical materials. Shanghai Pharmaceutical Group has set up a research institute which has nurtured a high quality team of researchers and developers. The institute has established partnerships with foreign pharmaceutical research institutions and managed to stay abreast with the latest development in pharmaceutics. The institute focuses on the research and development of preparation products and especially new drugs above the level of Class II. The institute has fostered its special feature in research and development in an effort to establish its brand competitiveness.

2. Tariff reduction. The impact of imported drugs on the pharmaceutical market is less than apparent, since the prices of imported drugs are much higher than those of domestic drugs and the imported drugs are not included in the government-initiated medical guarantee program. In fact, the major influence comes from government policies, such as the adjustment of drug prices, the governmental purchase of drugs, the reform of the medical care system, and the development of medical insurance programs.

3. Cancellation of the administrative control over the import of large medical equipment. The market potential for further growth is rather limited as large medical equipment belongs to durables and, more importantly, most large and mid-sized hospitals in China have already been equipped with high-grade medical instruments. In this light, pharmaceutical enterprises in Shanghai have cast their eyes on overseas markets. For example, Siemens Medical Equipment (Shanghai) has witnessed a steady growth over the years and has received mainly export orders.

4. Liberalization of pharmaceutical distribution and services. With the entry of foreign capital and the liberalization of the retail market, competition in this industry is getting more and more severe and therefore the average profitability is declining and will decline further. In this light, some pharmaceutical enterprise groups in Shanghai attach an extreme importance to the exploration and exploitation of the national market and overseas markets so as to consolidate their market position and increase their potential for further development. They have agreed on and started to implement the strategy of strengthening and expanding their drug distribution capacity and accelerating the development of chain retail stores. According to the development of the market, they will enhance the construction of retail networks by integrating the rich resources of the enterprise groups.

 

II. Development of the Pharmaceutical Industry in Shanghai during the Three Years after China¡¯s Accession to the WTO

1. During the three years after China¡¯s accession to the WTO, the pharmaceutical industry in Shanghai has presented a fair record of steady development.

In 2001, the pharmaceutical industry of the city contributed a total industrial value of RMB 14,290 million, accounting for 7% of the country¡¯s total. The total number for the year 2002 was RMB 18,120 million and the percentage in the country¡¯s total 7.7%. For the year 200, the total number reached RMB 17,077 million, and the percentage was 9.8%. For the year 2004, Shanghai Pharmaceutical Group expects to reap a total sales volume of RMB 30 billion which would represent an annual growth of 49.9%. The total profits are expected to reach RMB 1.4 billion, an annual growth of 109%, and the net profits will reach RMB 700 million, an annual increase of 118%.

 

Box 13.1     Shanghai Pharmaceutical Group

As China¡¯s pharmaceutical sector globalizes after the accession to the WTO, many policies, laws and regulations for the domestic pharmaceutical industry have undergone corresponding changes and adjustments to be compatible with international practices. To accommodate these changes, after special research and investigation the Group has established a special department and a special team that will provide the Group and its subsidiaries with necessary policy guidance and support in their domestic and international operations.

1. The Group has started in full swing the brand strategy throughout the Group in an effort to further heighten the public recognition and the reputation of Shanghai Pharmaceutical Group, and thereby maintain or even increase the value of its intangible assets.

2. The Group has highlighted its focus on key medical fields and products. Generic anti-infection drugs, drugs for the cardiovascular system, drugs for the digestion and metabolism system, and anti-cancer and immunity drugs are the four key medical fields where special efforts will be made. The Group will at the same time focus on 27 focus products, in which ten core products are expected to contribute RMB 500 ¨C 1,000 million in two or three years with an annual growth of 5%.

3. The Group has achieved scale economy through strategic restructuring. Both industrial concentration and enterprise scale economy have been enhanced and advanced.

In order to adapt to the new situations after the country¡¯s accession to the WTO, enterprises are obliged to increase their market competitiveness. For this purpose, Shanghai Pharmaceutical Group has restructured and consolidated many of its subsidiaries and established in this process five business divisions. In this way, the administrations of personnel, of business and of assets have been integrated to form an effective performance management system that meets the demand of the market. The outlook of the Group has therefore changed totally: work pace has greatly accelerated, the work efficiency has obviously increased, the operation dynamic has dramatically strengthened, and the profitability has therefore gained phenomenal growth.

The Group has achieved scale economy not through new investments but instead by breaking the geographical, departmental, trade and ownership boundaries. With capital, products and networks as the bonds, the Group has managed to expand its market coverage through reorganization, association, acquisition and shareholding, and thereby increased its market dominance. The Group has accelerated the nurturing and construction of large companies and groups with international competitive capabilities. On the other hand, the Group pays special attention to the mutual enhancement of different resources and advantages of different enterprises in the process of restructuring, and has managed to attain progress in scale and profitability at the same time. The Group has acquired and held many industrial enterprise including Qingdao Guofeng Pharmaceutics, Liaoning Meiya Pharmaceutics, Shandong Heze Pharmaceutics, Jiangsu Jinkang Pharmaceutics, and Shanxi Sine Pharmaceutics. At the same time, the Group has acquired over 800 drug stores in Jiangxi Province and a lot other drug stores in Beijing, Anhui, Jiangsu and Zhenjiang and, by reorganizing and integrating relevant resources, established a strong national retail chain and a sound structured commercial network.