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Indian pharma firms hit the Chinese Wall

P B Jayakumar  |  Mumbai 

Indian pharmaceutical may have spread their wings far and wide, but they have been hitting the wall in China.

India's largest pharmaceutical company Ranbaxy Laboratories was the first to set up a joint venture in China in 1993, but divested its stake in in December last year even though it spent millions of rupees and launched over 40 products.

Reason: Strong barriers for market access, longer time to build commercial infrastructure and difficulty in competing with Chinese players on cost.

Satish Reddy, managing director and chief operating officer (COO) of Dr Reddy's Laboratories, India's second largest drug maker, says "the Chinese market historically has been challenging for global generics players as well as mid-sized foreign pharma "

So, the Indian pharmaceutical companies, which aggressively tapped various global drug markets in the past two decades, have not been able to crack the Chinese drug market with their finished drugs so far. This is despite the fact that China's drug market grew over three times in the last seven years and is predicted to become the world's third largest after the US and Japan within two-three years.

Orchid Chemicals & Pharmaceuticals, which entered into a joint venture in China in 2003 to primarily sell antibiotic cephalosporin based formulations in that country, has not been able to make much headway either. Seven years later, the joint venture's profits are only around $2-4 million and turnover is less than $40 million.

"In China, you require to have specialised products in niche therapeutic areas to compete with domestic players,” said Ch Ram, Orchid's spokesperson.

Another India drug company, Lupin, has been operating in China for many years, though it is yet to start manufacturing in that country, says a company spokesperson. Lupin declined to reveal its annual revenues from China.

"Language is a major issue in dealing with Chinese players and it is not possible to sell products in that market without a local partner", says TS Jaishankar, chairman of Confederation of Indian Pharmaceutical Industries (CIPI).

Finding a trustworthy partner and establishing distribution set up in the highly government regulated Chinese market is a major issue for overseas companies, says Sujay Shetty, associate director with Pricewater-houseCoopers (PwC).

According to an estimate by China based publishing group Wicon, the size of the Chinese drug market for all drugs was valued at about $50 billion in 2007. That country has about 3,500 domestic drug manufacturers and they account for over 70 per cent of the fragmented domestic market. The top 10 in that country account for only about 20 per cent of the market.

But things could be changing for the better. In April last year, the Chinese government kicked off healthcare reforms to revamp the ailing medical system and to ensure fair and affordable health services for all its 1.3 billion citizens with an investment of 850 billion yuan ($124 billion) in three years. Of this, the government will invest $64 billion on basic healthcare insurance and $38 billion to build and upgrade community and rural hospitals.

IMS Health estimates that China will become the world's third-largest prescription drug market in 2011. Sale of prescription drugs will grow to $40 billion by 2013, with a growth rate of over 16 per cent, the firm estimates.

Factors such as rapidly increasing urbanisation, demographic shift, life style changes and a huge investment to support Health Care reform between 2009 to 2011 is likely to drive the drug market size in China and will help Indian generic companies to penetrate that market, says Satish Reddy.

"Considering the external business environment and our own capabilities, we are bullish on the Chinese market," he said. Dr Reddy's Laboratories had started operations in China in 2000 through a joint venture.

First Published: Tue, April 13 2010. 00:43 IST