Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Chinese Companies Go Abroad (Part 6: The Pharmaceutical Sector)

|Includes:Morgan Stanley China A Share Fund (CAF), FXI, GXC, MRK, PFE, PGJ

Part 6: Pharmaceutical

The following is part six of a ten part report evaluating the progress of key Chinese industries as they expand overseas (see the introduction to this series, part 1, part 2, part 3, part 4 and part 5). CMR interviewed several hundred key executives in each of ten industries to better understand the extent of their globalization thus far, their goals and plans going forward, and the major challenges they are meeting along the way. This section describes the opportunities and challenges facing China's pharmaceutical industry.

China's pharmaceutical market will likely become the world's fifth largest by 2010, up from its current rank as ninth, due to rising demand from China's large population and rapidly growing middle class. In light of the financial crisis, the Government has also outlined increased medical coverage and investment as a key priority so that older Chinese feel more comfortable about covering skyrocketing medical costs and start fueling domestic consumption, which should also provide a boost to the sector.

While the industry is still young—90% of China's pharmaceutical manufacturers are small or medium-sized enterprises, and the ten largest companies generate only 13% of the industry's overall revenue, versus 40-50% in developed markets from firms like Merck (MRK) and Pfizer (PFE) — many companies are already looking overseas for their next growth opportunities going forward. Of industry leaders interviewed, all large industry leaders have either already gone abroad or plan to go abroad within the next five years. Sixty percent of smaller industry leaders have also begun the push overseas.


Nearly all respondents who have begun the process of moving overseas or plan to begin within the next five years cite building brand awareness and a trusted brand image domestically as their top priority in the move abroad. Trust is incredibly important as Chinese consumers do not trust many brands -- especially the quality of the ingredients. Most consumers we interviewed were not surprised that there was a dairy scandal here. They were surprised that it was melamine and that certain "trusted" brands like Mengniu and Yili got caught up in the mess.

Pharmaceutical company respondents understood that they operate in a low trust environment and hope that a strong brand image can be used for strategic purposes to increase market share. As one respondent explained, "we believe in winning by the brand. Once you develop a good brand image you can use it as a tool to open further opportunities and create a bigger market." Creating a strong brand image and building brand awareness is especially critical to China's pharmaceutical companies as they look to win consumers' trust in the quality, safety, and effectiveness of their products.

Current Operations

The vast majority of respondents who have begun to move overseas have currently established presence in emerging markets such as Russia, Central and Southeast Asia, and Africa. Emerging markets are a popular destination for Chinese pharmaceutical companies due to their less-strict product requirements and regulatory mechanisms, which often bar entry to more developed markets. Emerging markets are also attractive due to high demand for drugs treating illnesses specific to those areas.

For those respondents mainly producing traditional Chinese medicine (TCM), Asian countries with cultural background similar to China for TCM such as Japan, Korea, and Southeast Asia have been the main targets for overseas expansion due to their large existing demand.

Still, all respondents consider developing a profitable presence in the developed American and/ or European markets their ultimate goal in going abroad. Many have already begun to establish themselves in these markets. As one respondent explained, "the American and European markets together dominate over 70% of the global pharmaceutical industry. If you want to be a truly global brand, you must have presence there." In addition to sheer size of the markets, Chinese pharmaceuticals seek entry into these countries where product standards and regulations are higher as a way of proving the quality of their products and further strengthening brand image, which they hope to use to gain influence and credibility in other markets worldwide.

Methods of Expansion

While respondents are using a variety of different strategies to enter overseas markets, all those that have already established presence abroad have begun by pure export of branded products. One respondent's exports to Russia, Europe, Africa, and America totaled $100 million in 2007.

Going forward, many of the larger industry leaders plan to develop partnerships in their target markets, usually via joint venture or collaboration with research institutions or other MNCs, and/ or set up production and R&D centers abroad. Respondents value such partnerships as easier access routes to worldwide markets, allowing them to build their understanding of the local consumer product demand and the regulatory environment without having to start from scratch. Guangzhou Pharmaceutical Company Ltd., for example, recently established a joint venture with English pharmaceutical giant Alliance Boots. Among other things, their venture provides avenues for both companies' product distribution through wholesale and retail channels in their respective target markets.


Respondents identify cultural differences as the most challenging obstacle facing them in their move overseas. TCM manufacturers in particular fear difficulty finding demand for their drugs in Western markets, given that raw ingredients, and medicine characteristics such as taste and smell differ greatly from Western medicine's. Thus, while a full 80% of respondents produce TCM for the domestic market, only 20% of respondents are looking to take their TCM products abroad.

Chinese pharmaceutical companies also face challenges in obtaining official drug certifications especially in developed markets like Europe and the U.S., where they must go above and beyond what is necessary to meet standards of their own State Food and Drug Administration at home.

75% of respondents moving abroad also feel finding top talent with innovative ability and cutting edge technical knowledge to be a major challenge going forward.

Going Forward

While the Chinese pharmaceutical industry is still quite young and in many ways underdeveloped at home, many companies are already making meaningful inroads into overseas markets. This presence will increase going forward as respect for intellectual property grows and China's innovative capabilities improve in turn, and Chinese who have spent years training abroad return to take advantage of opportunities at home. Together with the Chinese government's dedication to improving R&D capabilities of Chinese universities and research institutions, China is poised to become a leader of innovation in the not so distant future. In the meantime, continued partnerships with MNCs and leading research institutions will offer Chinese pharma companies insight into the workings of international pharmaceutical markets, and access to advanced technology and resources that will further strengthen their abilities as innovators and leaders of the global pharmaceutical industry.


The next several sections of this report will be published on Seeking Alpha by product category. For more information about this report and accompanying charts and graphs, please contact CMR directly at

CMR Senior Analyst Ben Cavender, Analysts Natalie Zhu, Meredith Sun, and Charlotte MacAusland, and Summer Intern Christie Sze Contributed to this report.