KPMG China Pharmaceutical 201106

Chinas
pharmaceutical
industry Poised
for the giant leap
kpmg.com/cn

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C hinas pharm aceutical industry
poised for the giant leap

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00
C ontents
Chapter 1 -- The China m arket: Big, grow ing and com plex
1.1 A grow ing and stratified m arket
1.2 H ealthcare reform s dictate industry course
1.3 M ega trends driving drug dem and
1.4 Players race to m eet target
Chapter 2 -- Big players Changing strategy in the new landscape
2.1 Foreign m ultinationals deepen their footprint
2.2 D om estic drug-m akers focus on bulk and brand
2.3 Biotech firm s nurture the future
2.4 TCM takes m odernisation path
Chapter 3 -- Trends and opportunities in Chinas unique m arket
3.1 O utsourcing opens drug discovery options
3.2 Q uality and com pliance to build Brand China
3.3 M ergers and acquisitions, a w inning form ula
3.4 Innovation gains industry attention
3.5 Funding options and fiscal incentives
Conclusion -- Incubating a healthy future

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1 | C hinas pharm aceutical industry - poised for the giant leap

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01
The C hina m arket: B ig,
grow ing and com plex

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H ealth spending, w hich is now only
4.7 percent of G D P and m uch low er
than countries like the U S, G erm any
and Japan, is steadily going up. A R M B
850 billion healthcare package for 2009
to 2011 w ill take spending up to 5.5
percent of G D P.
2
W ith stakes this high, global
pharm aceutical com panies are strongly
focused on C hina for future grow th.
H ow ever, C hinas health environm ent
is m arked by tw o distinctive
characteristics: severe disparities in
rural and urban healthcare system s
and grow ing dem and for superior drug
quality. G overnm ent regulations m ust
m anage these aspects, generating
challenges and prospects.
The 2010 KPM G report The C hanging
Face of H ealthcare in C hinahighlights
the radical advances in public policy
brought about by the 2009 H ealthcare
Reform Plan and the opportunities
generated by these reform s.
Success in C hina thus has m uch to
do w ith responding to the am bitious
targets and sw ift pace set by policy-
m akers, m anaging the com plexities
of a m ulti-tiered m arket and building a
portfolio that includes both specialised
and generic, low -end products. A
strategy to flourish here hinges on
identifying risk factors correctly and on
tim e.
1.1 A growing and stratified market
C hinas status as one of the w orlds
largest m arkets rests m ainly on the size
of its population, rather than its m aturity.
The percentage of healthcare
expenditure in G D P m ay be below five
percent, but C hinas share of spending
on drugs out of its total healthcare
expenditure is as high as 50 percent,
com pared w ith only 13 percent in the
U nited States (U S) in 2009
3
.H ow ever,
in m onetary term s, C hinese per capita
spending on m edicines w as am ong
the low est in the w orld, at U SD 35.1 in
2009.
4
Indexed growth of China healthcare costs
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
199019911992199319941995199619971998199920002001200220032004200520062007200820092010
Outpatientfeesper Hospitalization costper Unbanpercapitadisposable Ruralpercapitaincome
person person income
Source: M inistry of health of the Peoples Republic of C hina, 2010
1 C hina seen as N o. 2 drugs m arket by 2015, 8 N ov 2010, Reuters
2 IM S m arket prognosis 2010-2014 A sia/Australia/C hina
3 Is the C hinese m arket finally ripe for M N C pharm a com panies 22 M ay 2009, Pharm a N ew s
4 Pharm a & B iotech Industry O utlook9 N ovem ber 2010, Zacks Investm ent Research

C hinas pharm aceutical industry - poised for the giant leap | 4
Global pharmaceutical market rank
2003 Rank 2008 Rank 2013 Rank
UnitedStates UnitedStates UnitedStates
Japan Japan Japan
Germany France China
France Germany Germany
Italy China France
UnitedKingdom Italy Italy
Spain Spain Spain
Canada UnitedKingdom Brazil
Brazil Canada Canada
China Brazil UnitedKingdom
Mexico Russia Russia
Australia Mexico Venezuela
India India India
Netherlands Australia SouthKorea
SouthKorea Turkey Mexico
Belgium SouthKorea Australia
Poland Greece Greece
Portugal Netherlands Turkey
Greece Belgium Poland
Switzerland Poland Belgium
Source: IM S H ealth, M arket Prognosis, Sep 2009; Includes Prelim inary Turkey Forecast
D rug revenue has grow n sw iftly and the already has over one m illion C hinese
m arket here m ay double in size by 2013. w ith net w orth m ore than R M B 10
H ospital drug sales, retail pharm acy m illion.
sales and rural drug sales are forecast
H ow ever, vast regional and urban/rural
to grow 20 percent, 13 percent and 40
differences in econom ic developm ent
percent respectively.
5
This contrasts
exist across C hina, w ith rising
starkly w ith developed nations w hich
incom e disparities am ong its people.
are looking at single-digit grow th for the
The m ainland C hinese drug m arket
next few years.
com prises a com plex system of regional
A sm all but rising percentage of the m arkets w here m anufacturing is
urban population, w hose incom e has dom inated by generics and the m ajority
grow n quickly, is likely to becom e of sales com e from over-the-counter
custom ers of high-end healthcare (O TC ) drugs.
products. Even a tiny percentage of
C hinas huge population base is a large
num ber in other m arkets. The country

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5 Pharm a & B iotech Industry O utlook9 N ovem ber 2010, Zacks Investm ent Research


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U
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b
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120
100
80
60
40
20
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Patentedprescriptiondrugs Genericprescriptiondrugs
Overthecounterdrugs(OTC)
N ote: O TC includes both patented and generic over-the-counter pharm aceuticals
Source: C A M D I, SFD A , B M I, C hina C ustom s
OTC options: The over-the-counter
m edicine sector, w hich w as R M B 88
billion in 2009 and roughly R M B 96.4
billion in 2010, is set to grow , but slow ly.
6
In 2009, the average annual grow th w as a
relatively m odest 7.7 percent.
The key driver for the O TC m arket is the
popularity of preventive m edicine am ong
C hinese people and the cultural tendency
to self-m edicate for m inor health
com plaints. The urban population has
becom e increasingly health conscious
and an increasing num ber of people tend
to visit drug stores, bypassing doctors.
7
According to pharm aceutical m arket
research firm IM S H ealth, a study of
the retail pharm acy sector in 13 m ajor
cities reveals that O TC sales are led
by cough, cold and other respiratory
rem edies, follow ed by vitam ins, m inerals
and nutritional supplem ents, and pain
relievers.
M ultinational products occupy prom inent
positions am ong O TC m edicines sold
through retail pharm acies. Foreign
consum er health com panies generally
form joint ventures w ith indigenous
players, w hich dom inate this sector. The
leading JVs operating in C hina are Xian-
Janssen, W yeth O TC and Bayer-Beijing.
They com pete w ith dom estic com panies
such as Revised Pharm aceutical G roup
and H arbin Pharm aceutical G roup.
C om petition in C hina is likely to becom e
fierce as m ajor global players seek
to penetrate this sector. Pricing and
intricate know ledge of the regional
m arkets w ill determ ine w ho gets
ahead, w hile new com ers to the sector
face increasing risks. The governm ent
has adopted an am bivalent attitude
tow ard O TC products and is unw illing to
prom ote self-m edication. The hospital
m arket is an im portant channel for
O TC drugs, m any of w hich are covered
under the reim bursem ent list. If the
governm ent decides to take O TC
products off this list, m anufacturers m ay
be left in the lurch.
The prices of O TC m edicines are
determ ined by the governm ent or m ade
adjustable to m arket forces according to
law . Product prices are listed in C hinas
national basic health insurance schem e
catalogue. B y fixing and adjusting
m edicine prices, the state controls their
affordability and thus the profit m argins
of drug com panies.
Prescription for success: C hina is set
to becom e the w orlds third-largest
prescription drug m arket in 2011,
beating G erm any, according to IM S
H ealth.
8
Strong grow th in governm ent funding
of healthcare and a rise in spending by
an increasingly affluent m iddle class
are expected to help C hina overtake
W estern m arkets. A n increase in
6 C hina Pharm aceuticals & H ealthcare Report Q 4 2010, B usiness M onitor International
7 2010 Report on C hinas O TC D rug M arket, M arch 2010, M arket Avenue
8 C hina could be 3rd largest pharm a m arket by 2011, 16 M arch 2010, A ssociated Press

dem and for certain treatm ents, such
as cardiovascular and central nervous
system therapies, w ill also be a key
driver.
9
O ne of the im portant grow th areas
w ill be hypertension drugs, w ith the
m arket expected to double by 2014, due
to greater aw areness of the disease,
and the increasing prevalence of
contributory factors, such as obesity.
10
Prescription drug sales are set to reach
R M B 442.5 billion by the end of 2014.
The perform ance of this sector has
been better than that of O TC , w ith an
average annual increase of 27.1 percent
in 2009.
11
The recent pricing reform s rem ain
a cause for concern as they are
likely to affect the profitability of the
prescription drug m arket in the short
term . D rug revenues are threatened by
the governm ents setting ceiling prices
on all such products.
Chinas pharmaceutical market market segments in China
Medicaldevices,6%
TraditionalChineseMedicine(TCM),8%
Others,15%
OTCdrugsoverthecounter,38%
Prescriptiondrugs,33%
Source:2009InformationExplorerLtd.(IEL)/BMI

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9 C hina to be top three prescription drug m arket, 7 O ctober 2010, FT.com
10 C hina Pharm aceuticals & H ealthcare Report Q 4 2010
11 Space for dom estic O TC m arket squeezed, 19 Sept 2010, A rticle Leader

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Leveraging the generic market:
G eneric drugs are the backbone of
C hinas pharm aceutical industry. C hina
has m ore than 5,000 pharm aceutical
com panies about 98 percent of w hich
produce generic drugs. B y the end of
2009, the value of the generic drug
sector w as U SD 29.3 billion, form ing
63 percent of the total pharm aceutical
m arket.
12
A nalysts estim ate that the
generic drugs m arket w ill boom for the
next four years, rising at a C AG R of 12.9
percent to a value of U SD 57.1 billion by
2014.
13
D espite the optim ism , generic drugs
are the key com petitive issue for
m ultinationals. The loss of patent
protection for blockbuster drugs
betw een 2011 and 2013 dictates
m uch of m ultinationalspolicies and
strategies. M ajor productspatents
expiring has resulted in a loss of nearly
U SD 137 billion in revenues in 2011,
w hich w ill lim it the grow th of the global
pharm aceutical m arket to 5 to 8 percent
until at least 2013.
14
A s drug-m akers lose som e of their
m onopoly and sales grow th in Europe,
and as grow th in the U S and Japan
stalls, m akers of both prescription and
over-the-counter drugs are targeting
new m arkets particularly in A sia and
Latin A m erica. W ith its rising m iddle
class, C hina is the biggest prize.
15
D rivers of pharm aceutical m arket grow th
C ontinuous G row th :
Rolling out the healthcare reform s and increasing investm ent by foreign
and dom estic com panies w ill be the prim ary grow th drivers for the
industry in the com ing year, especially in the O TC m arket.
Forecasting of C hina to be the w orlds third-largest pharm aceuticals
m arket in 2011, w ith a value above U SD 50 billion.
Increase of 28 percent during the first six m onths of 2010 in the value
of im port and export trade of m edicine and health products in C hina,
com pared to the sam e period in 2009.
Export value of ActivePharm aceutical Ingredients (A PI) is U SD 10
billion, grow th rate 31percent, accounting for 53 percent of exported
pharm aceuticals.
The generic segm ent in C hina
thus rem ains attractive to foreign
investm ents, w ith m ultinational entities
m oving tow ards acquiring generic
drug com panies to com pensate for the
loss of incom e from expiring patents.
G enerics are expected to capture a
larger consum er base ow ing to the
healthcare subsidies put forw ard by the
governm ent since 2009.
M ajor C hinese com panies too are
w aiting in the w ings to snap up the
m arket as patents expire. H ow big
pharm aturns this to its advantage and
spreads its netw ork is the question. In
order to offset losses, pharm aceutical
com panies have established strategic
plans to acquire new revenue stream s
through M & A .
1.2 Healthcare reforms dictate
industry course
M acro and m icro policy changes
guide alm ost every aspect of C hinas
pharm aceutical sector. The single
biggest factor shaping the industry
landscape and im pacting the business
m odels of all enterprises is the radical
healthcare reform plan of 2009.
A fter years of experim enting w ith
a cradle to gravesystem and then
overturning it for crippling m arket-driven
reform s, the adm inistration launched a
fresh round of the H ealthcare Reform
Plan, in A pril 2009, to fix the ailing
m edical system for its 1.3 billion citizens.
W ith accessibility and affordability
being the tw o planks of this reform , the
governm ent pledged to invest R M B
850 billion (U SD 124 billion) over three
years
16
. C hanges are being carried out in
tw o steps.
The first phase, to be com pleted by
the end of 2011, aim s to increase
accessibility.The governm ent is set
to build a netw ork of basic healthcare
facilities, expand the public m edical
insurance system to cover 90 percent or
m ore of the population, and reform the
drug supply system .
13 C hina Pharm aceutical Industry Report 1H 11, February 2011, Em erging M arkets D irect
14 W hy G eneric D rug C om panies W ill D om inate Future Pharm aceutical M arkets, February 1, 2010, B ioJobB log
15 C hina seen as N o. 2 drugs m arket by 2015, 8 N ov, 2010, Reuters
16 C hina speeds up healthcare reform , 10th Sept, 2009, C hina D aily

Healthcare reform the implications
Reduce the cost of The N ational Essential D rug List (N ED L) under
m edical services the N ational Essential D rug System (N ED S)
is applicable to governm ent-funded hospitals,
grassroots clinics, and other health institutions.
The 2009 list contains 307 drugs 205 chem ical
and biological drugs and 102 TC M s.
M edicines listed in the N ED S are subject to price
control by the governm ent.
U pgrade 30,000 hospitals, care centers and clinics w ill be
Infrastructure and built or m odernised by the end of 2011.
facilities
Enlarge insurance M ore than 90 percent of citizens to be covered
coverage by insurance by the end of 2011 and coverage of
the entire population by 2020.
Reform of the A ll listed essential drugs are included in C hinas
distribution m odel national Reim bursem ent D rug List (R D L) and
enjoy higher reim bursem ent rates than non-
essential drugs. The national R D L sets the
percentage of drug costs reim bursed under
national insurance.
Source: 2009 N ational Essental D rug List, H ealth are Reform
A t least 1,000 county hospitals w ere
m odernised in 2009 and another 1,000
upgraded in 2010. Plans are afoot to
build a m ix of 30,000 m ore hospitals,
care centres and clinics by the close of
2011.
17
B y 2020, the governm ent plans to
bring the entire population under public
m edical insurance, further strengthen
infrastructure and stream line drug
research and delivery; thus m aking
m edicines and m edical services
accessible to all.
18
National Essential Drug List and
two sides of affordability: A key
aspect of the healthcare reform is the
restructuring of the pharm aceutical
industry, for w hich the governm ent
is overhauling the N ational Essential
D rug List and the N ational Essential
Reim bursem ent D rug List.
O ne of the m ajor challenges left over
from the pre-2009 era is the w ell-
entrenched reim bursem ent schem es,
by w hich hospitals and doctors earn
considerable revenue for prescribing
m edicines. In this practice, hospitals
w ere paid a com m ission based on the
cost of drugs prescribed, leading to
patients being given m edicines they
m ay not have needed.
In addition, betw een 1990 and 2000,
drug-m akers w ere free to fix prices
and the cost of m edicines w ent sky
high. In response to these com plaints,
the central governm ent sought to
im pose controls and announced
w aves of price cuts. C hina slashed
drug prices on 19 occasions from 1996
to 2006. B y M ay 2007, som e 1,500
m edicines had had their prices fixed
by the central governm ent and m ore
than 800 m edicine prices had been
adjusted by local governm ents.
C urrently, m edicines sold in C hina,
prim arily those listed on the Essential
D rugs List (ED L) and those produced
or traded under a m onopoly, are
subject to price controls by the
governm ent. H ospitals and retail
pharm acies are not allow ed to add
m argins to drug product sales, rather,
a pharm acy fee is added to each
physicians prescription. The m axim um

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17 H ealthcare Reform A im s to C over 90% of C hinese C itizens by 2011, N ov 12, 2010, 2point6billion.com
18 C hina Sees C hallenge O n H ealth System , 24 Sept 2010, W all Street Journal


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retail reference price is only applicable
to retail outlets that stock the essential
drugs, and basic m edical insurance
packages reim burse drug costs only
according to the price of generic
products.
19
In 2007, the N ational D evelopm ent
and Reform C om m ission (N D RC )
redefined how drugs should be priced,
and im plem ented a new five-step
procedure, beginning w ith the ED L. This
w as designed to prevent profiteering
and benefit patients and generic drug
m anufacturers.
In 2009, the N D RC drafted a reform for
pricing policies that set the threshold for
new price controls. O n August 18, 2009,
the M inistry of H ealth released a list
of 307 essential m edicines that w ould
becom e available at heavily subsidised
prices.
B y m id-O ctober 2009, the N D RC had
slashed the prices of 45 percent of the
countrys essential m edicines, including
treatm ents for com m on diseases, such
as colds, fever, high blood pressure,
heart disease and diabetes.
A m ajor shake-up for the global
pharm aceutical players cam e in
N ovem ber 2010, w hen the N D RC
announced plans to curb the prices of
essential drugs produced by foreign-
capitalised firm s. Such products had in
the past been excluded from C hinas
regular rounds of price reductions,
and their m akers had independent
pricing pow ers since 2000 as a w ay of
encouraging R & D .
In the 2010 round, a cap w as
announced on the retail prices of 174
self-developedm edicines. A self-
developedm edicine is one developed
by a pharm aceutical com pany on w hich
the patent has expired.
In C hina, these m edicines are ow ned
m ainly by international pharm aceutical
giants. O f the 174 capped, 107 w ere
produced by 40 foreign drug-m akers,
including Pfizer, M erck, Eli Lilly, N ovartis
and Bayer.
20
According to N D RC , this
w ill help save the public R M B 2 billion
annually.
21

This quote style is
set in Univers 65 Bold
33pt on 36pt leading

Complex reimbursement regime
H ealthcare in C hina is governed by
diverse and com plex reim bursem ent
and insurance policies that entitle
patients to com pensation. The system s
differ greatly betw een rural and urban
populations as local governm ents are
entrusted w ith significant pow er to
m ake decisions on the use of drugs.
A fter the dism antling of the barefoot
doctorssystem and deepening rural
healthcare crisis, C hina established
the N ew Rural C ooperative M edical
Schem e (N C M S) in 2003 one of the
largest public sector health insurance
program m es in the w orld.
The system , w hich has now grow n
in strength, requires households to
purchase health insurance for m odest
prem ium s of R M B 10 to 20 per person.
Local and central governm ents each
contribute subsidies of R M B 20 to 40
for each enrolled individual. B y 2008,
N C M S had expanded to include 800
m illion people in rural C hina.
The rural m edical schem e is
adm inistered at the county level
and coverage has varied greatly
across regions. A lthough local health
adm inistrators are guided by central
policies and the national essential drug
list, they are encouraged to define drug
reim bursem ents and benefits on the
basis of local needs and resources.
This local decision-m aking has created
substantial differences in allocating
benefits and reim bursem ents betw een
villages and counties across C hina.
22
NRDL for urban residents: A m ajor
change for urban em ployees cam e in
2009 w hen the governm ent revised
the N ational Reim bursem ent D rug
List (N R D L). This list provides the
reim bursem ent fram ew ork for the
urban em ployee basic m edical
insurance (B M I) schem eand urban
resident B M I schem e.
The N R D L now includes all the drugs on
the Essential D rug List revised in 2009
as part of the healthcare overhaul plan.
According to IM S H ealth, there are
m ore than 2100 products in the latest
N R D L 1140 W estern m edicines and
the rest traditional C hinese m edicines.
The N R D L is further categorised into
tw o groups of A and B lists.
The A List com prises 349 basic W estern
drugs. Listed by chem ical com pound,
the drugs are fully reim bursable and
are com pulsory in all provincial drug
reim bursem ent bulletins.

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2004 National Reimbursement Drug List 2009 National Reimbursement Drug List
315
712
135
688
TCM
WesternDrugs
Total: 1400
Total: 450
TCM
WesternDrugs
Total: 503
Total: 1624
349
154
791
833
ListA ListB ListA ListB
Alist:Generic,low-costproducts,fullyreimbursable;decidedbycentralgovernment.
Blist:MNCproductslargelyfallintoListB,generallyhigherpricethanproductsonListA.Provinceshavetheflexibilitytoadjustatprovinciallevel.
CompounddrugsnotlistedintheNRDL,butmadeupbyNRDL-listeddrugs,arereimbursableasListBdrugsaslongasthecompoundspriceisnothigher
thanthesumofitsingredientdrugs
Source:MOHRSSWebsite
20 C hina plans to curb foreign drug-m akerspricing pow ers, 29 N ov, 2010, B loom berg
21 D rug price cuts not yet felt everyw here, 14 D ec, 2010, C hina D aily
22 Im pact of C hinas N ew Rural C ooperative M edical Schem e and its im plications for rural prim ary healthcare, August 2010,
B M J

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The B List com prises 791 relatively
innovative and patented W estern
drugs. The selection of drugs on List B
can be adjusted up to 243 m olecules/
reim bursem ent com binations by
provinces and m unicipalities to suit their
local econom ic situation and healthcare
needs.
23
Implications of the EDL: A listing on
N R D L m eans the drug is available to
large m asses of the population, w ho
are covered by the various m edical
insurance schem es. Reim bursem ent
by the governm ent m eans drugs are
m ore affordable to patients and there
is a high w illingness from physicians
to prescribe. D rugs on the N R D L are
said to be m uch m ore easily added to
hospital form ularies.
O n the flipside, drugs on the N R D L
are subject to governm ent price
control and likely targets for price cuts.
This has alw ays been a vexing issue
for m ultinationals as the com bined
advantages of low -cost production and
tax rebates begin to erode w hen the
governm ent caps prices.
H ow ever, the im pact need not be
detrim ental. W ith a relatively low price,
drug producers can still earn profits
by selling large am ounts of m edicine.
Even as com panies agonise over the
im plications of their products being
included on the ED L, it is difficult to
ignore that the dom estic m arket for
m edicinal drugs is expected to expand
to R M B 200 billion w ithin three years,
a num ber vastly attractive to foreign
m anufacturers.
24
Self-developed m edicines being
put on the ED L w ill take foreign
pharm aceutical enterprises into C hinas
hom e m arket, including second- and
The cost of building our ow n distribution netw ork
w ithin C hina w ould be too high. Therefore, it is our
intention to continue using the existing distributor
netw ork and partnership to deliver our drugs to
our custom ers over the near and m iddle term .
C hina com m ercial head, A straZeneca
third-tier cities as w ell as rural regions.
A s the num ber of consum ers in these
areas grow s, inclusion of lim ited brands
on the ED L w ill give foreign com panies
a m uch-needed presence in the
grassroots m arket.
The N ational Reim bursem ent D rug List
also rem ains uncertain and risky for
m ultinationals. To access the broadest
m arket in C hina, foreign drug-m akers
need to have their products on this list;
how ever, the list proposes to cap the
sales m argin on brand-nam e drugs at 23
percent.
A num ber of foreign enterprises are
lobbying for the C hinese governm ent to
introduce a m ore balanced system and
to rew ard innovation and quality.
Streamlined purchase process
In the 1980s, C hina launched m arket-
oriented m edical reform s encouraging
hospitals to m ake m oney w ith the
aim of m obilising m edical staff and
im proving hospital efficiency.
Long-standing low governm ent funding
for public hospitals had resulted in
doctors prescribing expensive and
som etim es unnecessary m edicines to
patients in order to m ake profits for the
hospital. This system w as too onerous
for patients and w as heavily criticised.
The authorities are now standardising
the purchase of essential drugs at
governm ent-funded grassroots m edical
institutions to establish a transparent
purchasing system of essential drugs.
25
M oreover, efforts are being m ade
to instill greater transparency in the
hospital tender purchasing system .
A n open tender and bidding system is
now the standard drug procurem ent
m echanism for reim bursed drugs
as w ell as those m edicines local
authorities purchase in bulk.
23 The 2009 revision of N ational D ruf Reim bursem ent List, 2009, IM S H ealth
24 Foreign com panies fight to enter essential drug list, D ec 2, 2010, Econom ic O bserver
25 Prognosis for m edicine costs looking good, 11th D ec, 2010, C hina D aily

Besides the policy
driven changes, other
factors affecting
the consolidation in
distribution:
State-backed distribution
players like Sinopharm are
proactively driving M & A
activity
Enforcem ent of regulations
like the G ood Safety
Practice certification, m akes
distribution for start-ups and
sm all players challenging
G row th of pharm acy chains
like M annings and W atsons
N ew distribution m odels via
purchasing platform s, like
e-com m erce are expected
to grow quickly as m any
provincial governm ents are
prom oting online purchasing.
M ore than 80 percent of all drugs pharm aceutical com panies, w hile less
sold through hospitals are now being com m only prescribed drugs can be
purchased through the bidding process. ordered from drug w holesalers.
The selection of products is m ade by
H ow ever, reform ing public hospitals
tendering com m ittees w ithin each
to reduce their dependence on
province and tenders are generally
incom e from drug sales w ill be a m ajor
issued once a year or every tw o
challenge. W ith the goal of elim inating
years for clusters of hospitals w ithin
drug m ark-ups in governm ent hospitals,
a province. The tender system has
a new funding system is being piloted
becom e m ore standardised now w ith
in 100 public hospitals. The success of
m anufacturers and distributors m ore
the policy depends of the availability of
fam iliar w ith the system . W idely used
governm ent funding to com pensate for
drugs can be purchased directly from
the loss of incom e from drugs.
Distribution
Number of Concentration Top Typical net profit
companies in 2007 3: Market share margins
U SA 70 96% 1.5-2.5%
Japan 130 70% 1.0-1.5%
C hina 13,000 21% 0.60%
N ote: The Top three U S distributors --C ardinal, M cKesson and A m erisource Bergen
Source: C hina H ealthcare Industry Research, U TIC . August 2007

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Consolidation of the distribution
sector
C hinas reform policy is geared tow ards
greater consolidation and sw ift
developm ents are taking place in the
drug delivery and distribution sector.
Efforts first started in A pril 2009, w ith
the C PC C entral C om m ittee and State
C ouncil launching the D eepening the
M edical and H ealth System Reform to
encourage m ajor consolidation of the
pharm aceutical industry. B y 2010, the
focus had shifted to overhauling the
distribution and logistics netw ork.
The first national drug circulation
industry m anagem ent policy, released
in M arch 2010, encourages enterprises
to spontaneously m erge, restructure
and elim inate system s and m echanism s
that hinder fair com petition, so that
the drug distribution enterprises can
select the superior and elim inate the
inferior and eventually im prove industry
concentration.
26
A s part of the 12th Five-Year Plan (2010-
2015), the M inistry of C om m erce cam e
out w ith the N ational Pharm aceutical
D istribution Industry D evelopm ent Plan
(D raft), w hich encouraged big C hinese
pharm aceutical com panies to achieve
m ore than R M B 100 billion annual sales
by 2015.
27
B ut consolidation of the U SD 44 billion
pharm aceutical distribution m arket in
C hina is fraught w ith challenges. O f the
m ore than 7,000 distributors in C hina,
80 percent are considered sm all. The
top three distributors Sinopharm ,
Shanghai Pharm aceutical and Jointow n
accounted for about 20.7 percent
of m arket share, far low er than 90.7
percent for the three biggest com panies
in the U S.
28
The degree of fragm entation is apparent
from the fact that the top 100 firm s
accounted for about 67 percent of the
m arket and the first 500 com posed
85 percent in 2009.
29
These sm all,
local distributors lack both the scale to
autom ate and the logistical expertise of
distributors in developed countries.
It is now left to C hinas largest
pharm aceutical players to m ove quickly
to integrate resources and step up the
pace of m ergers and acquisitions to
consolidate the industry. In this, they
have full governm ent support.
For the past tw o years, the top
five dom estic distributors C hina
N ational Pharm aceutical G roup,
Shanghai Pharm aceutical, Jointow n
Pharm aceutical G roup, N anjing
Pharm aceutical and G uangzhou
Pharm aceutical have seen robust
grow th. M & A s w ere key to the increase
in concentration am ong distributors.
This trend is likely to continue and the
practice of providing m ore sophisticated
and integrated logistics services w ill
phase out sm aller players.
30
O ne of the m ost aggressive players is
Sinopharm , a leading drug distribution
com pany w ith strong governm ent ties.
In January 2011, Sinopharm announced
the establishm ent of Sinopharm
Tangshan N ew land C om pany in
Tangshan city, H ebei province, a new
joint venture (JV) w ith local pharm a
unit Tangshan N ew land. Sinopharm
w ill initially invest R M B 21 m illion in
the Tangshan JV and further earm ark
R M B 100 m illion for the construction
of a Tangshan-based pharm aceutical
logistics centre. This new JV deal could
generate a dram atic change in the
countrys dom estic drug distribution
m arket.
31
Shanghai Pharm aceuticals, the
countrys second-largest drug com pany
by revenue, also announced the
acquisition of a 65.2 percent stake in
C hina H ealth System Ltd., the third-
largest drug distributor in Beijing, for
R M B 2.33 billion.
32
The com pany has
been actively striking deals in recent
years as it seeks to accelerate its
expansion. Since 2010, it has acquired
or signed agreem ents to acquire nine
com panies in its effort to expand the
geographical footprint of its distribution
business.
Foreign enterprises are yet to gain a
firm foothold in this sector, but the
possibilities are im m ense. U S drug
w holesaler C ardinal H ealth Inc. m ade
a start w ith buying C hinese distributor,
Zuellig Pharm a C hina, know n locally
26 Large-scale restructuring kicks off in pharm aceutical industry, 11 M arch 2010, H uaXia H ealthcare H oldings Ltd w ebsite
27 Sinopharm s continued expansion: harbinger of change in C hinas pharm aceutical distribution industry, 25 Jan 2011, G B I
A nalysts Inside
28 C hina Pharm aceuticals and H ealthcare Report 2010 report, B usiness M onitor International
29 Large-scale restructuring kicks off in pharm aceutical industry, 11 M arch 2010, H uaXia H ealthcare H oldings Ltd w ebsite
30 C hinas pharm a industry consolidation, concentration on the rise, 7 June 2010, Interfax
32 Sinopharm s continued expansion: H arbinger of change in C hinas pharm aceutical distribution industry, 25 January 2011

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The num ber of m ental health cases has increased
over recent years, especially for neurosis. This
increase cannot sim ply be attributed to urbanisation.
In m y opinion, other reasons include m ore accurate
diagnosis by m edical w orkers and greater aw areness
of neurosis in w ider society.
Lu Zhi D e, A ssociate D ean, M inhang D istrict, Shanghai M ental
H ealth C enter
In particular, urban areas in C hina are
m oving through a rapid nutritional
transition tow ards W estern-style diets,
dom inated by m ore processed foods
and a higher fat content. Increasing
urbanisation also leads to equally
rapid shifts tow ard m ore sedentary
occupations through the acquisition
of new technology. In C hina, these
transitions have contributed to stark
increases in obesity and hypertension,
especially am ong m ale, urban and high-
incom e groups.
34
as Yong Yu, in a U SD 470 m illion
deal in late 2010.
33
The acquisition
m arked the first m ove by one of the
big three U S drug w holesalers, w hich
also include M cKesson C orp and
A m erisourceBergen C orp, outside of
N orth A m erica.
1.3 Mega trends driving drug
demand
The pharm aceutical m arket w ill
experience explosive grow th in the
com ing years, fuelled not only by
healthcare reform but several m acro
trends taking place w ithin C hinas
socio-econom ic structures.
C hronic diseases such as cancer and
respiratory and heart conditions are
C hinas biggest health problem s,
according to the health m inistry,
w hich is urging citizens to change their
lifestyle habits.
Impact of lifestyle diseases: C hina
w ill com plete the urbanisation process
in a few decades it took W estern
countries 300 to 400 years. The
countrys urbanisation rate w as about
43 percent in 2005 and is expected to
rise to w ell over 50 percent over the
next 10 to15 years.
The consequences of this trend on the
pharm aceutical sector w ill be m ixed.
O n the one hand, urban populations,
w ith higher cash incom es, w ill benefit
from better access to health services,
inform ation and education. O n the
other hand, the rapid environm ental,
econom ic and social changes that
follow urbanisation w ill increase the
prevalence of m ajor risk factors for
chronic diseases.
The em ergence of these conditions is
a m ajor health threat in a country still
coping w ith infectious diseases and
m alnutrition. Forecasts estim ate that
C hina w ill lose U SD 556 billion to the
costs of heart disease, stroke, and
diabetes in the period 20052015.
35
Unique disease profiles drive MNC
research: Pharm a com panies have
adopted careful strategies w hile
pouring in funds for R & D . G iven
C hinas m arket size, m ultinational firm s
are starting to analyse each regions
specific m edical needs for potential
sources of profit.
In the next 10 to15 years, C hinas
urbanisation rate is expected to
rise to m ore than 50 percent. R apid
environm ental, econom ic and
social changes have contributed
to stark increases in obesity and
hypertension.
36
These diseases
of affluencehave opened up a big
m arket for pharm aceutical com panies,
particularly because C hina is still
ill-equipped to deal w ith the rise in non-
com m unicable diseases.
According to the W orld H ealth
O rganization, C hina has the w orlds
second largest incidence of cancer.
The country has 2.2 m illion new cancer
patients each year, accounting for
about 20 percent of the total num ber
of cancer patients. M ajor m enaces are
liver, stom ach and lung cancers.
37
W ith the dom estic drug industry
unable to keep pace w ith the increase
in occurrences and com plexity of the
disease, foreign m anufacturers see
potential in the anti-cancer drug m arket
in C hina. M N C s have shifted focus to
conducting clinical trials for ailm ents
m ore com m on to ethnic C hinese.
33 C ardinal buys Zuellig Pharm a C hina w ith $470m , 30th N ov, 2010, Agencies
34 C hina battling w ith lifestyle related diseases, 19 M arch 2010, Reuters
35 U rbanisation and the spread of diseases of affluence in C hina. O ctober 2008, U niversity of York
36 U rbanisation and the spread of diseases of affluence in C hina. O ctober 2008, U niversity of York
37 Foreign com petition for C hina to accelerate R & D cancer drug m arket, D ecem ber 2010, EzineM ark.com

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In 2009, Pfizer, the w orlds largest drug
com pany by sales, began w ork in C hina
on an anti-inflam m atory com pound
to treat liver disease. Pfizer is seeking
collaboration w ith partners in C hina on
liver diseases, such as cirrhosis and
cancer. It is also going for external
innovation team ing up w ith local
biotech com panies and research
institutes to share risks and costs.
N ovartis has a research centre in C hina
studying gastric, liver, naso-pharyngeal
and esophageal cancer and hopes to test
its first experim ental drug specifically
tailored for C hinese cancer patients in
2013. It w ill spend U SD 1.25 billion on
R & D centres in Shanghai that w ill be
pillars of its drug developm ent.
D iabetes, too, is reaching epidem ic
proportions, w ith an estim ated 92
m illion adults 10 per cent of the adult
population now affected. Eli Lilly plans
to open a diabetes research centre in
C hina in the second half of 2011. It has
com m itted about U SD 2.5 m illion over
three years to support collaborative
diabetes program m es betw een C hinese
and European academ ic centres.
38
Ageing population: C hinas ageing
population is another significant factor
for the industry.The population aged
60 and above in C hina reached 167.14
m illion in 2009, w hich is 12.5 percent
of the total population. In 2009, the
population aged above 80 in C hina
reached 18.99 m illion.
Senile dem entia is a com m on disease
am ong the elderly in C hina and its
incidence rate has risen continuously in
recent years. According to the findings of
a report by Research and M arkets, about
four to five percent of people above
the age of 65 suffer senile dem entia,
it afflicts ten percent of those in the
group aged above 75, and 20 percent in
the group w ho are aged m ore than 85.
According to conservative estim ates,
the num ber of senile dem entia patients
(including A lzheim ers disease, vascular
dem entia, m ixed dem entia..) totalled six
to eight m illion.
39
W ith the im provem ent of C hinas living
standards, com m on diseases in the
elderly are gradually attracting closer
attention. Though the C hinese anti-senile
dem entia drug m arket is in the initial
stages, it has w itnessed strong grow th
in recent years. In 2009, the value of
the C hinese anti-senile dem entia drug
m arket rose by about 30 percent year-
on-year. This sector is forecasted to
m aintain the annual grow th rate of 20-30
percent seen in recent years.
1.4 Players race to meet target
So far, C hinas pace has m atched
its goals on healthcare reform . The
governm ent now plans to accelerate this
process and m ake better quality drugs
accessible and affordable for all at the
end of the ten year reform period.
The players com peting for space in
the countrys dynam ic pharm aceutical
m arket include thousands of dom estic
com panies and a handful of foreign
enterprises w hich account for only ten to
20 percent of drug sales.
There is, how ever, im m ense potential
to grow in this policy-driven country.
The industrial environm ent is
transform ing sw iftly, focusing now on
quality as m uch as quantity. C hinese
com panies are investing heavily in both
regulatory com pliance and research and
developm ent. N on-com pliant plants are
shutting dow n as new er facilities adhere
to good m anufacturing practices.
The governm ent has begun to be a
catalyst in helping upgrade C hinas
pharm aceutical value chain. A n
im portant strategy is to increasingly
involve foreign m ultinationals because
the go-it-alonepow er of dom estic
com panies rem ains lim ited. For the
m any dom estic com panies aspiring to
be globally com petitive, m ore m ergers
and acquisitions, exports and research
provide a straighter and faster route to
their goals.
Foreign com panies on their part hope
to leverage the accessibility target of
the health reform s and spread their
netw ork into rural areas and second-
and third-tier cities. M ergers w ith local
com panies have becom e a central part
of the pharm aceutical industrys grow th
strategy given the need to extend
geographic footprint.
Thus, in tim e to com e, dom estic and
foreign players are likely to consolidate
and collaborate, finding innovative
strategies to survive, profit and
effectively m eet C hinas extensive
health goals.
38 Lilly to open diabetes research center in C hina, 2 N ov, 2010, C om pany w ebsite
39 C hinese anti-senile dem entia drug m arket w ill grow 20-30 percent, Sept 21, 2010, The Pharm a Letter
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02
B ig players C hanging
strategy in the new
landscape

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In C hinas com plex pharm aceutical m arket, global and
dom estic players operate in an extrem ely crow ded and
com petitive environm ent. M ore than a thousand international
enterprises vie for space, along w ith in excess of 5,000
dom estic players.
40
The w orlds top 20 m ultinational
m edicine m akers have extensive operations in the country,
including R & D facilities, joint ventures and w holly ow ned
com panies.
41
M ultinationals, m ost of w hich have had
bases here for m ore than a decade,
continue to view C hina as a leading
overseas m arket w ith dazzling grow th
potential. U S and European drug-m akers
have invested m ore than a billion dollars
since 2009 into building R & D and
m anufacturing facilities.
In addition to facing severe com petition
from dom estic firm s, foreign com panies
investing in C hina face considerable
risks due to a strong regulatory regim e
and price controls. M N C s can achieve
differentiation and com petitive advantage
by cultivating a diverse portfolio, ranging
from generics to niche biotech drugs.
B ig dom estic players, on the other hand,
have form idable distribution netw orks
and a m eticulous know ledge of the
different tiered m arkets of C hina. Eager
to be m ajor players in the international
m arkets, local com panies are
aggressively consolidating and no longer
w ant to be know n as m anufacturers of
generic drugs.
This com petitive landscape has throw n
up an industry canvas that is uniquely
C hinese. Innovative research in
biotechnology now vies w ith traditional
C hinese m edicine com panies eager to
adopt m odern scientific standards.
2.1 Foreign multinationals deepen
their footprint
G lobal m arket leaders face m ultiple
pressures on their m argins, especially the
loss of patent protection on blockbuster
drugs. C om panies such as Pfizer,
Sanofi, B ristol-M yers Squibb and
G laxoSm ithKline stand to lose their
best-selling products w ithin the next
five years, as generic versions of
popular drugs get ready to flood the
m arket as soon as patents expire. In
2011, products w orth m ore than U SD
30 billion w ill lose patent cover.
Pfizers 20-year patent for its popular
cholesterol m edicine Lipitor, w hich
saw U SD 11.8 billion in sales in 2010,
expires in 2011.
42
Plavix C lopidogrel,
used to treat blood clots, brought its
joint developers, Sanofi and B ristol-
M yers Squibb, about U SD 9 billion in
annual sales since 2008. Its patent
expires in N ovem ber 2011.
Such high-profile ageing patents join a
long list of m edicines by m ultinationals
that have expired over the past decade
w ith m ore, w orth about U SD 77
billion to com e betw een 2011 and
2015.
43
A fter patent expiry, generic
versions are estim ated to take over 50
percent of the m arket in the first year
and as m uch as 70 to 80 percent of
sales in the second.
44
The year 2012
w ill be a challenging one for several
com panies
45
. Patent losses now drive
m uch of M N C strategies and policies.
H igh research costs and a long
incubation tim e m ake it increasingly
difficult to bring new drugs to m arket.
N ew products m ay not generate the
sam e level of sales as those losing
patent protection. Thus, foreign firm s
40 C hinas boom ing pharm a sector w elcom es w estern investors, 4 A pril 2011, InPharm aTechnologist.com
41 C hina Boom s: The new superpow er, January 17, 2011, B ioSpectrum
42 B itter pill for m ultinationals as top drug patents expire, 30 M arch 2011, C hina D aily
43 Pharm a & B iotech Industry O utlook, Zacks Investm ent Research, N ovem ber 9, 2010
45 W hy generic drug com panies w ill dom inate future pharm aceutical M arkets, February 1, 2010, B ioJobB log

m ust strategise effectively to m ake up for
the loss of revenues that arises from losing
intellectual property exclusivity.
C om panies, how ever, need to m ake
fundam ental changes in their strategies
for C hina to deal w ith the crisis of patents.
This could be through internal restructuring
to hire the m ost effective team of
salespersons, or by opting for m ergers and
acquisitions that bring niche advantages.
For instance, strategic alliances w ith local
com panies help share costs, bridge the
revenue gap and also help m ake inroads
into the fast grow ing rural m arket.
46
In
addition, m ultinationals should consider
investing in disease-driven research.
Specialised research and product launches
tailored for C hinas unique dem ands and
m arket are fast becom ing the norm .
Restructure to survive
A lm ost half of the top 10 pharm aceutical
com panies in C hina are m ultinationals
but none of them controls m ore than 2.5
percent of the total m arket.
47
N ow , driven by the urgency to m ake up
for the loss of patent rights and cash in
on C hinas burgeoning healthcare m arket,
global com panies are executing drastic
internal restructuring. In com ing years,
com petition for talent and m arket share
w ill intensify in C hina am ong m ultinational
and dom estic pharm aceutical com panies.
Enterprises are racing to stream line
every departm ent, from R & D to sales.
W estern drug firm s have been expanding
aggressively in C hina, hiring thousands of
salespersons besides researchers.
48
For the m ulti-billion renm inbi
pharm aceutical m arketing industry,
keeping up w ith the fast expanding interior
m arkets requires increasing agility, skill and
know ledge. Sanofi has reduced its staff
in the U S and Europe and is expanding its
C hinese w orkforce by one-fifth each year.
It plans to recruit thousands of new sales
representatives w ho w ill fan out across
m ainland C hina in pursuit of untapped
m arkets.
49
C orporations like Pfizer and G SK are
also renovating by diversifying, laying off
em ployees in the W est and executing
m ergers all w hile bidding to develop
the C hina m arket, w hich w ill soon have
hundreds of m illions of citizens able to
purchase m ore expensive prescription
drugs.
Pfizer w ill slash about 1,100 R & D jobs
in the U S in 2011 and close dow n its
research centre w ith 2,400 em ployees in
B ritain before 2013. The com pany plans
to increase its representatives in C hina
m any of them trained doctors by 39

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47 G lobal drug firm s take aim at m ade-for-C hina healthcare, 16 Septem ber 2010, Reuters
48 G lobal drug firm s take aim at m ade-for-C hina healthcare, 16 Septem ber 16 2010, Reuters
49 B ig Pharm as C hallenge: Figuring out C hina, 23 Septem ber, 2010


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percent to 3,200 in 252 cities by 2012.
According to Pfizer, m any reps are
m edical inform ation specialists, trained
in biosciences.
50
G SK, too, has been steadily escalating
its sales force num bers in C hina and as
at M arch 2010, m ore than 2,500 reps
w ere w orking across the country.
51
Sw iss pharm aceuticals group Roche
decided to increase its em ployee
strength in C hina by 25 percent back
in 2009, even at the cost of trim m ing
jobs in the U S and Europe. The
com pany is w orking on a com plete
value chain in C hina, and the new jobs
cover pharm aceutical research, clinical
developm ent, production, m arketing
and sales. Roche has invested m ore
than U SD 1.5 billion in C hina and
realised double-digit grow th in the
past few years. C hina also accounted
for m ore than 40 percent of its total
turnover in the A sia-Pacific region.
52
M erck has announced it w ill reduce
its staff by 15 percent, a total of about
16,000 lost jobs across the globe. A t the
sam e tim e,, it is substantially increasing
its presence and field force in em erging
m arkets, like C hina, B razil and Russia.
53
M ajor drug com panies also say intense
com petition and high costs m ake it
harder to support the old w ay of drug
research of keeping large team s of
in-house researchers and w aiting for
results.
Top 10 multinationals MNCs in China in 2011 Q1
Company Sales (US$mn) Growth (%) Share (%)
Pfizer 835 31 8.32
A straZeneca 749 32 7.47
Bayer H ealthC are 663 20 6.61
Sanofi 620 31 6.18
Roche 531 31 5.29
M erck 443 15 4.42
N ovartis 440 25 4.39
G laxoSm ithKline 378 30 3.77
N ovo N ordisk 359 30 3.58
Sanofi is restructuring to close 20 of
its 30 labs in Europe, a m ove expected
to save EU R 2 billion (U SD 2.8 billion)
this year. Its R & D spending for 2012
is projected at U SD 6.5 billion to U SD
7 billion, m uch less than the U SD 9.4
billion in 2010.
London-based A straZeneca also
unveiled a plan to further cut labour
costs after 12,600 em ployees w ere let
go over the past tw o years. The pharm a
industrys rush into C hina has led to
m ore than a battle for m arket share. It
has created a parallel battle for good
em ployees. D rug-m akers are faced w ith
a w ar for talent, particularly in m arketing
and sales. Every year, about 20 percent
of G SKs sales force quits to take jobs at
rival firm s, w hich is the average for the
pharm a industry in C hina and India.
54
C om panies like Takeda Pharm aceuticals,
w hich has faced sales-rep turnover of up
to 60 percent annually, brought in new
m anagem ent to focus specifically on the
attrition problem , figuring that if it could
fix its sales turnover, it could boost sales
in the country tenfold w ithin five years.
Expansion a common strategy
Foreign enterprises have one strategy
for C hina in com m on all have
expanded heavily in recent years and
expect the country to bring in m uch of
their future grow th. C hinese consum ers
have greater faith in m ultinational
products, but foreign com panies need
m ore visibility.
In recent years, W estern pharm aceutical
players have stepped up their presence
in C hina be it in m anufacturing,
m arketing or research. O ne im m ediate
advantage is low er costs. The cost of
developing a new drug in the W est
is higher than ever about U SD 1.3
billion.
55
It is also difficult for com panies
to predict w hich drugs w ill becom e
blockbusters that yield an annual
revenue of at least U SD 1 billion. In this
context, C hina rem ains a cost haven.
Based on their C hina projections,
each com pany has w orked out its ow n
unique strategy.
Johnson & Johnson 288 30 2.87
Source: B M I C hina Pharm ceutical report, 2011 Q 1
50 Pfizer sees strong grow th in C hina, 4 A pril 2010, C hina D aily
51 M erck, G SK expand sales forces in C hina, 13 January 13, 2011, M edical M arketing & M edia
52 Roche to boost C hina headcount by 25% , Sept 9, 2009
53 M erck, G SK expand sales forces in C hina, January 13, 2011, M edical M arketing & M edia
54 G SK suffers sales-rep poaching in C hina, India, A pril 4, 2011, Fierce Pharm a
55 D rug developers are changing the w ay they do R & D , 5 January 2011, Tufts C enter for the Study of D rug D evelopm ent

Pfizer
Ever since entering the C hina m arket in
the 1980s, Pfizer has introduced a broad
product portfolio in the country. It has
invested U SD 1 billion in C hina and has
business operations in m ore than 200
cities w ith 9,000 em ployees distributed
across the country. It has established
eight state-of-the-art plants in D alian,
Suzhou and W uxi that m anufacture
products for the pharm aceutical,
nutrition, consum er healthcare, anim al
health and capsule users sectors.
A fter Pfizers m erger w ith W yeth, its
C hina business w as divided into tw o
units, the bio-pharm aceutical business
(W B B ) and the diversified business
(PD B ). Through the W B B, the com pany
introduced m ore than 50 innovative
drugs into C hina.
Its show piece is the C hina Research and
D evelopm ent C enter (C R D C ), a state-of-
the-art facility in Shanghai, established
in O ctober 2005. The C R D C provides
global drug developm ent support
capabilities, research collaborations and
strategic alliance opportunities to C hina
and the A sia region.
56 2010 C om pany A nnual report available on w ebsite
The Shanghai centre also collaborates
w ith leading academ ic researchers and
top institutions in C hina including Peking
U niversity,Tsinghua U niversity, Fudan
U niversity, Institute of B iophysics of the
C hinese Academ y of Sciences, and the
Shanghai Institute of B iochem istry and
C ell B iology.
Pfizer has also been partnering
aggressively w ith local com panies.
In A pril 2011, it signed an M oU w ith
Shanghai Pharm aceuticals to jointly
pursue potential business opportunities
in C hina.
56
AstraZeneca
A nglo-Sw edish com pany A straZeneca
is one of the largest m ultinationals
operating in the prescription m arket in
C hina, w ith headquarters in Shanghai
and 23 branch offices in m ajor cities
across the m ainland. The com pany
deals in a variety of therapeutic classes,
w ith the m ain focus on cardiovascular,
respiratory, anaesthetic, oncology and
central nervous system m edicines, apart
from som e O TC m edicines.

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A straZeneca entered C hina in 1993 and
w as one of the first m ultinationals to
establish a local clinical research base.
A t present, m ost of A straZenecas
business com es from big hospitals in
200 of the largest cities. The com pany is
now trying to boost its sales capabilities
in an additional 100 cities and build a
sustainable business in the broader
rural m arket. A straZeneca has m ore
than 3,500 em ployees w orking in
m anufacturing, sales, clinical research
and new product developm ent.
In 2001, the com pany inaugurated the
A straZeneca C hina Supply Point in W uxi
N ew D istrict, Jiangsu Province. The site,
the largest m anufacturing investm ent
for the com pany in A sia, is authorised
to export products to the European
U nion (EU ). The com pany opened the
Innovation C enter C hina in Zhangjiang
H i-tech Park, Shanghai, in 2007, now one
of its m ain R & D facilities.
57
O ur revenue grow th last year w as 6% above
benchm ark of C hina m arket grow th, thanks to
healthcare reform that continues to expand
m edical insurance coverage and new ly approved
reim bursem ent list im plem entation.
C hina com m ercial head, A stra Zeneca
Bayer
Bayer H ealthC are has m aintained a
presence in C hina since 1936. In 1997,
it began producing drugs in Beijing and
now m anufactures and m arkets a w ide
range of products. O ne of its m ost
popular products is G lucobay, C hinas
best-selling diabetes m edication. In
2005, it acquired Roches O TC business
and tw o years later, Bayer H ealthC are
and Schering Pharm aceuticals
com pleted a m erger to form Bayer
Schering Pharm a. In 2009, this joint
venture launched a EU R 100 m illion
investm ent for a global scale R & D
centre in Beijing.
The com pany proposes to add 2,500
new jobs in em erging m arkets,
particularly C hina, by 2012. A key
elem ent of Bayers strategy in A sian
countries is selective expansion of
super-specialised drugs. In 2010 it
launched Betaferon in C hina to treat
m ultiple sclerosis.
58
Sanofi
For this leading French com pany,
em erging countries are a m ajor focus
area. Sanofi has grow n sw iftly in
C hina, em ploying 6,000 people in
m ore than 200 cities. It specialises
in key therapeutic areas such as
cardiovascular/throm bosis, diabetes,
oncology, internal m edicine and the
central nervous system .
In 2010, Sanofi took tw o decisions it
acquired local com pany B M P Sunstone
C orporation and form ed a joint venture
H angzhou Sanofi M insheng C onsum er
H ealthcare. This now enables the group
to position itself as a leader in tw o
grow th m arkets vitam ins and m ineral
supplem ents w ith M insheng, and cough
and cold drugs w ith B M P Sunstone.
Sanofi currently has six m anufacturing
facilities in Beijing, H angzhou,
Shenzhen and Tangshan, in order to
m eet the increasing dem and of the
C hinese m arket. The com pany is also
engaged in integrated R & D in C hina
from drug target identification to late
stage clinical studies.
59
Roche
Sw iss m ultinational Roche is focusing
on em erging m arkets, w hich are
expected to generate 50-60 percent
of its overall sales grow th over the
next tw o to three years. Like its
com petitors, Roche too is banking
on C hinas healthcare reform s, but
its strategy differs. U nlike other
com panies, the Sw iss drug-m aker w ill
not pursue branded generic products
in the em erging m arkets. It w ill instead
focus on innovation and differentiated
m edicines, and leveraging pharm a and
diagnostics to develop personalised
healthcare strategies.
Roches recent cost-cutting exercise
w ill result in 4,800 job cuts w orldw ide,
or 6 percent of the w orkforce. In
C hina, how ever, the com pany scaled
up its field force from 960 sales reps
in 2009 to 1,300 in 2010. The m ajority
of this force is responsible for selling
Roches speciality-care products
to the C hinese m arket. For C hina,
57 A straZeneca W ebsite new s
58 Bayer w ebsite and 2010 A nnual Report
59 2010 C om pany A nnual report

the com pany is w orking out a m ulti-
disciplinary approach to m arketing w ith
scientists, key account m anagem ent
and reim bursem ent team s w orking w ith
sales reps.
60
In A pril 2011, Roche announced that it
w ill m ake Shanghai its third strategic
operations centre in the w orld, after
Basel, Sw itzerland, and San Francisco
in the U S. The com pany com pleted
the Roche Shanghai expansion (RoSE)
project at Zhangjiang H i-Tech Park in
Shanghais Pudong N ew A rea a m ajor
step since its A sia-Pacific headquarters
m oved to the city in 2009.
61
Roche Pharm a C hina has also obtained
approval from the U S Food and D rug
Adm inistration to export C hina-m ade
Xeloda (C apecitabine, a drug used in
the treatm ent of m etastatic breast
and colo-rectal cancers) to the U S. In
2011, at least 50 percent of the Xeloda
m ade in C hina w ill be exported to the
EU and the U S, an im portant step
tow ards upgrading the entire C hinese
pharm aceutical industry chain.
Innovation is the key success factor in the pharm a
sector. Increasingly m ore returnees are bringing
their innovative projects to C hina and bringing
the results to m arket. Thats great for C hinas
pharm aceutical m arket.
Frank G ram s, Executive D irector, Roche Partnering, Roche
Merck
M erck, w hich cam e to C hina in the
1900s, has undertaken w ide-ranging
operations through its various
subsidiaries. M erck Sharp & D ohm e,
w hich is the tradem ark of U S-based
M erck & C o Inc, has been expanding
its investm ent in C hina in recent
years. The unit started w ork on a new
m anufacturing site in H angzhou in July
2010. W ith a total investm ent of R M B
1.1 billion, this is one of the largest
pharm aceutical packaging projects
undertaken by M erck in recent tim es.
The unit is expected to start production
by the first quarter of 2012 and w ill have
an annual packaging capacity in excess
of 300 m illion packs.
62
Like its m ultinationals peers, M SD is
also aligning w ith local com panies. In
M arch 2011, it signed an agreem ent
w ith C hongqing Zhifei B iological
Products to prom ote its vaccines in
C hina. The prom otion w ill involve R M B
220 m illion w orth of products m ade
by M SD . The com pany plans to launch
m ore advanced products in the C hinese
m arket w ith its local partner.
63
Novartis
The Sw iss com pany has been
continuously expanding in em erging
m arkets and is conducting extensive
research in C hina.
A t the N ovartis Institutes for B ioM edical
Research (N IB R ) in Shanghai, scientists
are focusing on liver cancer w hile
building broad expertise about other
form s of liver disease prevalent in A sia.
N ovartis has also undertaken joint
developm ent of a pioneering m edicine
against m alaria w ith C hinese partners,
the Shanghai Institute of M ateria
M edica (SIM M ), w hich played a key role
in discovery of the antim alarial m edicine
C oartem .
In 2001, N ovartis and SIM M announced
a collaboration on drug discovery
based on natural products. U nder
the agreem ent, SIM M has isolated
hundreds of new com pounds from
m edicinal plants know n in traditional
C hinese m edicine. In return, N ovartis
has provided financial support, and
shared natural product research and
advanced drug discovery techniques.
N ovartis is now expanding its vaccine
business in em erging m arkets. The
planned acquisition of a m ajority
holding in Zhejiang Tianyuan B io-
Pharm aceuticals w ill pave the w ay for
local production of vaccines in C hina.
64
GlaxoSmithKline
G laxoSm ithKline (G SK) w as one of the
first foreign pharm aceutical com panies
to establish successful joint ventures
in C hina. W ith five m anufacturing sites,
of w hich three are joint ventures, G SKs
total investm ent in C hina now exceeds
U SD 400 m illion.

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60 Re-engineering Roche, Interview of Pascal Soriot, C O O of Roche Pharm aceuticals, Scrip 100, June 2010, available on
Roche W ebsite
61 Roche sees new Shanghai center one of its hubs, 15 A pril 2011, C hina D aily
62 M erck begins w ork on new unit ,13 July 2010, C hina D aily
63 M SD to prom ote vaccines through, C hongqing Zhifei, 9 M ay 2011, C hina Pharm a Review
64 N ovartis W ebsite and 2010 A nnual Report

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The com pany em ploys about 5,000
people in C hina and has offices in m ajor
cities. Its business units here include
prescription m edicines, vaccines,
over-the-counter drugs and consum er
healthcare, headquartered separately in
Shanghai, Beijing and H ong Kong.
In 2010, G SK signed im portant strategic
alliances w ith m ajor local pharm aceutical
com panies and acquired N anjing M eiRui
Pharm a C o. M eiRui is a leading C hinese
pharm aceutical business w ith a strong
portfolio of urology and allergy products.
G SK w ill gain these as w ell as M eiRuis
established sales and m arketing
platform and a m anufacturing facility in
N anjing C ity.
G SK also has a strong research and
developm ent presence in C hina w ith
m ore than 200 drug developm ent
projects conducted in collaboration
w ith in excess of 30 leading m edical
universities/hospitals. It is developing
m edicines for hepatitis, asthm a,
diabetes, oncology and m ood disorders
in C hina. Recently, G SK boosted its R & D
investm ent w ith an em phasis on cancer
prevention and treatm ent. The com pany
has an O TC research centre in Tianjin
and a global R & D centre in Shanghai.
65
Novo Nordisk
N ovo N ordisk has been operating in
C hina for nearly 50 years and w as one of
the first international biopharm aceutical
com panies to establish its R & D
presence here in 1997. The N ovo N ordisk
R & D C entre C hina in Zhongguancun Life
Science Park in Beijing specialises in
m olecular biology, protein chem istry and
cell biology. B y 2015 it w ill expand this
centre and double staff strength from
100 to 200 em ployees. C hina is N ovo
N ordisks third largest m arket.
The D anish com pany, headquartered
in Beijing, has tw o production plants
in Tianjin and local offices at Shanghai,
G uangzhou, Shenyang, W uhan, Jinan
and H ong Kong. In C hina, it conducts
a holistic diabetes program m e that
includes physician training, patient and
public aw areness, strengthening the
healthcare system , local production and
R & D .
66
N ovo N ordisk currently holds 63% of
the total insulin m arket and 70% of the
m odern insulin m arket of C hina.
J ohnson & J ohnson
Em erging m arkets are an im portant
focus area for J& J. The com pany hopes
to leverage C hinas healthcare reform s
and enhanced spending pow er. In
order to tap the m ass m arket here,
J& J is focusing on sm aller and m ore
rural healthcare settings. The com pany
w ill also beef up on research and
developm ent centres.
It w ill launch a m edical devices and
diagnostics R & D centre in Suzhou
in 2011 and has also entered into
pharm aceutical research partnerships
that connect biotech, m edical and
academ ic com m unities to its global
research centres. In 2008, it tied up
w ith Tianjin M edical U niversity C ancer
H ospital, w hile in N ovem ber 2010,
a research collaboration betw een
Tsinghua U niversity and Janssen
Pharm aceutica w as announced.
67
Eli Lilly
Eli Lilly has been building its organisation
in C hina for tw o decades. Eli Lilly (C hina)
R & D C o. Ltd. w as officially launched in
Shanghai on 14 M arch 2011, to develop
m edications for diabetes patients in
C hina and the rest of A sia. Lilly has
invested m ore than R M B 2 billion in
C hina including an R & D centre in
Zhangjiang H i-Tech Park in Shanghai
and built strategic partnerships w ith
m ore than 10 local com panies and
academ ic institutions since the late
1990s.
According to the com pany, it is the first
global pharm aceutical player to create
a venture capital fund focused on the
biopharm aceutical industry in C hina.
The fund, know n as Lilly A sian Ventures,
has m ade six investm ents and deployed
m ore than R M B 250 m illion since it w as
established in 2007.
Eli Lilly is now in the process of losing
im portant patents that w ill hurt its
top-line and bottom -line. O ne of the
strategies to counter the loss is to focus
on the em erging m arkets.
65 2010 C om pany G SK A nnual report
66 2010 N ovo N ordisk W ebsite new s
67 Johnson & Johnson W ebsite

Since 2008, the com pany has doubled
its sales force in C hina and increased its
presence through a grow ing netw ork
of alliances and external partnerships,
venture capital investm ents and m ore
clinical trials.
68
2.2 Domestic drug-makers focus on
bulk and brand
U nlike the stream lined foreign
enterprises, C hinas dom estic industry
is dotted w ith m ajor and m inor players,
num bering m ore than a w hopping
5,000 com panies. A lthough lacking
in the adm inistrative and research
sophistication of their foreign
counterparts, local com panies m ake up
for it by their sheer scale of operations
and penetration into the hinterlands.
The strength of dom estic com panies
lies in m anufacturing generics and
active pharm aceutical ingredients (A PI)
for export.
69
C hinese com panies have m anaged
to m aintain a high m om entum of
grow th in recent years in the chem ical
pharm aceutical segm ent. In 2009, the
num ber of chem ical pharm aceutical
m anufacturers reached 2,434, up 7.5
percent year-on-year.
70
A s at August 2010, C hina had roughly
1,200 A PI m anufacturers, capable of
producing m ore than 1,500 categories
of active pharm aceutical ingredients.
It w as ranked first in the w orld in
term s of output of ingredients for
penicillin, vitam ins and antipyretics
and analgesics. C hina has also
becom e the w orlds biggest exporter
of active pharm aceutical ingredients,
w ith the export volum e nearly half
of the dom estic output of A PI. These
ingredients also accounted for 80
percent of C hinas total pharm aceutical
export value in 2009.
The governm ent is reportedly draw ing
up a plan to invest U SD 761 m illion for
A PI m anufacturers, w ith the goal of
raising the countrys export value of
products by U SD 4 billion annually.
71
68 Eli Lilly com pany W ebsite
69 Specialty D rugm aker Sinobiopharm a Takes on B ig Pharm a in C hina, N ov 13, 2010, B loom berg
70 C hinas chem ical pharm aceutical industry in 2010, D ec 13, 2010, Research and M arkets
71 C hina, w eek in review , 1 M arch 2011, C hina Venture

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Building up trust
D espite significant headw ay in the
chem ical m anufacturing sector, the
dom estic industry is yet to m ature and
consolidate nearly 90 percent of
C hinas pharm aceutical m anufacturers
are sm all or m edium -sized enterprises
and the 10 largest com panies
generate only 13 percent of the
industrys overall revenue.
72
H ow ever, their aspirations are high.
M any com panies are aim ing to
go overseas for their next grow th
opportunities. The m ain m otivation for
them to go abroad is a deep concern for
building brand aw areness and a trusted
im age dom estically. It is im portant for
local com panies to w ork on the trust
factor because C hinese consum ers tend
to have m ore faith in foreign brands.
Local drug-m akers understand that
they operate in a low trust environm ent
so building a strong brand is a sound
strategy for increasing m arket share.
For the past three years, C hinese
com panies have established a presence
in em erging m arkets such as Russia,
C entral and Southeast A sia, and
A frica. These m arkets are a popular
destination, at tim es, due to their
less-strict product requirem ents and
regulatory m echanism s.
H ow ever, developing a profitable
presence in the A m erican or European
m arkets rem ains the ultim ate goal.
C hinese com panies are keen to gain
entry into W estern countries because
product standards and regulations
are higher. Acceptance in the W est
rem ains a w ay of proving the quality of
their drugs, strengthening their brand
im age and increasing credibility in other
m arkets w orldw ide.
Collaborate and consolidate
Expanding overseas follow s a variety
of strategies. M any of the C hinese
industry leaders develop partnerships
in their target m arkets, usually via
joint venture or collaboration w ith
research institutions or other M N C s
or set up production and R & D centres
abroad. This m akes it easier to access
w orldw ide m arkets, allow ing them to
understand the regulatory environm ent
and local consum er dem and w ithout
having to start from scratch.
Zhejiang H isun Pharm aceutical, a
leading pharm aceutical group based
in Zhejiang, m ade a U SD 5 m illion
investm ent in Photolitec of B uffalo,
U SA , in M arch 2011 for cancer
treatm ent. The partnership w ith
Photolitec is a strategy adopted by
H isun to transform itself into a global
com pany. H isun also has licensing
agreem ents w ith Rosw ell Park and
C leveland B ioLabs Inc. in the U S and
has opened its A m erican headquarters
in Princeton.
73
The m ain challenge facing C hinese
com panies is obtaining official drug
certifications in the developed m arkets
of Europe and the U S. D rug-m akers
have to go above and beyond w hat
is necessary to m eet the standards
of C hinas ow n State Food and D rug
Adm inistration in order to gain a toehold
in the W est.
Together w ith the governm ents
dedication to im proving the R & D
capabilities of C hinese universities
and research institutions, dom estic
pharm aceuticals com panies have
show n the potential for becom ing the
leaders of innovation in the near future.
C ontinued partnerships w ith M N C s
and leading research institutions w ill
offer them insight into the w orkings of
international pharm aceutical m arkets
and access to advanced technology and
resources.
The local champions
W hile the C hinese pharm aceutical
industry is still quite young and in m any
w ays underdeveloped, it has begun
to invest heavily in innovation and
research. In the m eantim e, it continues
to build its distribution and supply chain
netw orks, thus providing form idable
com petition to m ultinationals.
72 C hinese com panies go abroad, 12 January 2009, Seeking A lpha
73 C hinese investm ents boost W N Y biotech com panies, 28 M arch 2011, bizjournals.com

Top listed local pharmaceutical companies according to market
capitalisation
Market
State Revenue
Company Name capitalization
related T12M(USDmn)
(USDbn)
Sinopharm 8.20 6,886.52
Shenzhen H epalink 8.13 325.41
Jiangsu H engrui M edicine 6.52 544.95
Shanghai Pharm aceuticals 6.35 5,512.73
Yunnan Baiyao G roup 6.12 1,044.34
Sichuan Kelun 5.52 590.32
Shandong D ong-E E-Jiao 4.88 301.72
Kangm ei Pharm aceutical 4.88 346.98
H arbin Pharm aceutical 4.09 1,552.77
H ualan B iological Engineering 4.07 178.25
Shanghai Fosun 3.74 563.60
Source: B M I C hina Pharm ceutical report, 2011 Q 1
Sinopharm
Sinopharm G roup, the largest distributor
of pharm aceutical and healthcare
products in C hina, is now w orking on
extending its distribution netw ork. It is
targeting nationw ide coverage by the
end of 2012 from its current level of 40
percent.
74
In 2010, the com pany extended its
presence to provinces such as Jilin,
Jiangxi, G uizhou and G ansu prim arily
through acquisition of distribution
businesses in those places. D istribution
of pharm aceutical and healthcare
products accounted for 93.4 percent of
the com panys revenue for 2010.
W ith presence in 29 provinces,
Sinopharm supplies about 56.76
percent of all hospitals on the m ainland
and som e 77,087 pharm aceutical
distributors, retail pharm acies and
other healthcare institutions. B y the
end of 2012, the com panys distribution
netw ork w ill cover all 333 cities at
or above prefecture-level in C hina,
com pared w ith 133 cities as of now .
In 2010, the retail business at Sinopharm
recorded revenue of R M B 1.72 billion,
a rise of 23.74 percent com pared
w ith 2009, during w hich the com pany
opened another 447 drug stores,
bringing the total num ber of retail
pharm acies it operates to 1,394. The
com pany is headquartered in Beijing.
Shenzhen Hepalink Pharmaceutical
Shenzhen H epalink is one of the
w orlds largest producers and sellers of
heparin sodium active pharm aceutical
ingredients, as w ell as C hinas
only A m erican FD A and European
U nion C EP certified com pany.The
com panys clients include leading global
pharm aceutical com panies.
H epalinks m ain product is highly
purified heparin, a substance m ade
from the m ucous m em branes of pig
intestines. H eparin is a blood thinner
used to prevent clots. The com pany
has been focusing on the production of
injectable grade heparin products since
1986 and is com pliant w ith the latest
cG M P regulations.
W ith m ore than 500 em ployees,
H epalink has experienced huge grow th
in recent years. In 2007, G oldm an Sachs
bought a 12.5 percent stake in the
com pany for U SD 4.9 m illion.
In M ay 2010, it had a successful
IPO launch at the Shenzhen stock
exchange.
75

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74 Sinopharm aim s for nationw ide presence, 26 M arch 2011, C hina D aily
75 In C hina, strong debut for supplier of heparin, 6 M ay 2010, N ew York Tim ess


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The com pany also announced plans
to establish a subsidiary in H ong Kong
and a joint venture in C hengdu C ity,
Sichuan Province, w ith C hengdu Tongde
Pharm aceutical.
J iangsu Hengrui Medicine
Jiangsu H engrui M edicine, established
in 1970, is principally engaged in the
m anufacturing and distribution of
pharm aceutical tablets, injections and
raw m aterials in the dom estic m arket.
The com pany provides drugs for a range
of treatm ents including cardiovascular
disease, endocrine ailm ents, antibiotics
and for infusions during surgery. W ith
m ore than 1,500 em ployees, Jiangsu
H engrui now plans to boost research
and developm ent investm ent to about
R M B 430 m illion in 2011, alm ost 10
percent of its projected revenue for the
year.
76
Jiangsu H engrui is one of the
few C hinese com panies to get
approval from the U S Food and D rug
Adm inistration for clinical trials to treat
Type II diabetes.
Shanghai Pharmaceuticals
Shanghai Pharm aceuticals is the only
integrated drug com pany in C hina that
leads both in product developm ent
and distribution. The com pany, w ith
its headquarters in Shanghai, engages
w idely in research and developm ent.
Its strength, though, lies in distribution,
w arehousing, logistics and value-added
pharm aceutical supply chain solutions
to drug m anufacturers and dispensers,
such as hospitals, distributors and
pharm acies.
It has a netw ork of retail pharm acies
across nine provinces, m unicipalities
and autonom ous regions. The com pany
also has collaborations w ith various
m ultinationals. In A pril it signed an M oU
w ith Pfizer. The collaboration is m eant
to leverage both com paniesstrengths,
m atching Pfizers global capabilities
in developing innovative m edicines
w ith Shanghai Pharm aceuticals
capabilities and reach in the C hina
m arket. The com panies are currently
exploring potential cooperation for
the registration, com m ercialisation
and distribution in C hina of Pfizer
products. They are also looking at equity
investm ent opportunities.
77
Yunnan Baiyao Group
Yunnan Baiyao G roup, is a Kunm ing-
based com pany engaged in
the research, developm ent and
m anufacture of pharm aceuticals as w ell
as the w holesale and retail distribution
of drugs produced by other com panies.
The com pany is one of the m ost
influential C hinese traditional m edicine
m anufacturing enterprises w ith G M P
certified plant operations.
It has18 subsidiaries in C hina and has
been listed on the Shenzhen Stock
Exchange since 1993. The com pany
has an im pressive sales netw ork
throughout C hina and is also venturing
abroad. Its tradem ark product Yunnan
Baiyaois said to be effective for clotting
and healing w ounds.
78
2.3 Biotech firms nurture the future
The strength of C hinas pharm aceutical
players lies in their new -found
w illingness to invest in innovative drug
research and biopharm aceuticals. This
is now a high-priority sector w ithin the
pharm a industry, w hich has gained
extraordinary m om entum during its
short lifespan.
In fact, the C hinese biotechnology
scene has transform ed from an initial
collection of com panies w ith m ixed
innovator/service business m odels
to a differentiated landscape w ith an
international im pact.
76 C om pany profile, Reuters w ebsite
77 Pfizer and Shanghai Pharm aceutical sign
m em orandum of understanding for potential strategic
partnership, 20 A pril 2011, 4-Traders
78 C om pany w ebsite profile

U ntil now , the U S had been the
m ost active country in research and
innovation, holding nearly 60 percent of
the w orlds biotechnology patents. In
com parison, C hina is still at a nascent
stage but is fast catching up, w ith m ore
than 700 com panies in the biological
and bio-chem ical sector and sales
revenue forecast to grow at a C AG R of
about 23 percent over 2010 - 2012.
79
According to H enry Lee, C EO , Techpool
B ioPharm aceutical C o, The bio-technology sector is
not lim ited by traditional chem istry and provides m ind-
boggling options. It is a platform for the next-generation
m edicines. For exam ple, m y com pany is in the
process of extracting com pounds from hum an urine to
convert to m edical products. If this is successful, the
possibilities are im m ense, as it is possible to extract
com pounds from anim al blood as w ell.
Several factors m ake C hina a good
place for biopharm aceuticals to flourish.
Better IP protection, strengthened
over years of aw areness and law
enforcem ent, has im proved C hinas
im age, m aking it m ore attractive for
global com panies to harness the
countrys biotech services. Additionally,
governm ents at various levels
strongly encourage and support the
developm ent of this industry.
The sector has been accorded the
status of strategic industryin the
12th Five Year Plan, ensuring that tens
of m illions of renm inbi in governm ent
funds flow into this segm ent.
R apid innovation in biotechnology is
also expected to spur the grow th of
the entire pharm aceutical industry as
traditional drug com panies increasingly
collaborate w ith these firm s to leverage
their expertise.
C hinas biotech industry is providing
one of the m ost effective solutions for
beleaguered global drug com panies,
now under pressure to m ake their
operations m ore efficient and cost
effective. It is likely that pharm a-biotech
m ergers w ill increase in the next few
years. B y 2015 big pharm aceutical
com panies m ay be supported by a
netw orked R & D organisation, consisting
of m ultiple long-term relationships w ith
these new firm s.
For instance, Sw iss-based N ycom ed
acquired a m ajority stake in G uangdong
Techpool B iopharm a in late 2010.
Techpool, founded in 1993, specialises
in the research, m anufacturing and
m arketing of biologic drugs derived from
natural sources. The C hinese com pany
has a num ber of innovative protein
drugs, including U linastatin for the
treatm ent of sepsis and m ultiple organ
dysfunctions.
80
B iotech com panies also attract
generous funds. Five C hinese
biopharm a com panies w ent public
in the first five m onths of 2011 and
raised an average of U SD 172 m illion
in their debuts on the Shenzhen Stock
Exchange.
81
Chinas prospects in biosimilar sector
B iosim ilars are the closest that the
biotech w orld has to generic drugs.
H ow ever, because biotech drugs
are grow n in cultures, rather than
constructed out of chem icals like
traditional pharm a drugs, it is im possible
to have a generic version that is an
exact reproduction of the original. This
m akes biosim ilars difficult to produce
and they are regulated under stringent
guidelines.
82
B iotech drugs are the m ost expensive
drugs in the w orld and the price m odel
for the blockbustersis fundam entally
different from traditional pharm a big-
sellers. For exam ple, the w orlds biggest
selling cholesterol drug, Lipitors cost
per patient is extrem ely low .The sam e
is not true for biotech drugs that address
cancer. B iologics are taken only by
people w ho are seriously ill and there
are never enough people suffering from
these diseases to m ake for a traditional
blockbuster product such as Lipitor. So
to get a blockbuster in biologics, the
drug needs to be sold for a lot of m oney.
This price m odel is the reason w hy
m aking generic versions, or biosim ilars,
is an attractive proposition for
com panies. According to a report by the
IM S Institute for H ealthcare Inform atics,

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79 G lobal and C hina bio-pharm aceutical industry report, Sept 2010, Research in C hina
80 N ycom ed expands C hina presence w ith Techpool stake, 2 N ov 2010, InPharm
81 IPO U pdate, 5 A pril 2011, B io G enerics and B iosim ilars Initiative
82 B iosim ilars and C hina: A natural com bination, but w ill it happen, 15 June 2007, Seeking A lpha

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by 2015, spending on biosim ilars is
expected to exceed U SD 2 billion
annually, or about 1% of total global
spending on biologicals.
83
U nder an agreem ent w ith U S in 1993,
C hina has been m aking generic versions
of biological products patented before
1985, including insulin. Since then,
C hinese authorities have been revising
various law s and regulations on patents,
tradem arks and copyrights to conform
w ith international standards.
Som e of the m ajor local biosim ilar
com panies are - Beijing Tiantan
B iological Products, C hengdu
Rongsheng Pharm aceuticals, Shanghai
Institute of B iological Products,
C hangchun Institute of B iological
Products and Shengyang Sunshine
Pharm a.
The future looks bright for biosim ilars.
In M ay 2011, Shanghai C elgen B io-
Pharm aceutical received approval from
C hinese authorities for Q iangkea
biosim ilar version of etanercept.
Q iangke is a recom binant hum an
tum our necrosis factor receptor-IgG
fusion protein for injection. It is used
for treatm ent of ankylosing spondylitis.
Pfizer/A m gen has the originator version,
Enbrel, w hich posted record sales in
2010. The U S patent on Enbrel expires
in O ctober 2012, w hich opens up the
m arket for biosim ilars, such as Shanghai
C elgen.
84
2.4 TCM takes modernisation path
Traditional C hinese m edicine (TC M )
generally refers to the com prehensive
C hinese m edical system based upon
the bodys balance and harm ony. It is
w idely used in C hina, and policy m akers
are prom oting it to reduce burdensom e
m edical costs and allow universal
access to healthcare. H ow ever, the
share of TC M in the global m edical
m arket, w hich is dom inated by W estern
m edicine, rem ains low .
M ore people globally now think C hinese
herbal m edicines have few side effects,
and the W orld H ealth O rganization has
accepted it as a m ethod to treat illness
and protect health. W ith its grow ing
popularity, the C hinese governm ent has
stepped in to stream line the sector.
In 2009, C hina spent R M B 10.97 billion
supporting TC M , an increase of 165
percent over 2005. From 2005 to 2009,
the num ber of TC M hospitals grew 9.6
percent to 3,299 w ith 449,000 beds,
42.6 percent higher than in 2005.
85
The governm ent w ill now help upgrade
TC M research and developm ent in 2011
by im proving the system s for historical
research and innovation. The sector is
being urged to establish databases of
ancient, traditional C hinese m edicine
publications and to study its basic
theories. Innovation is also being
prom oted to build a clinical R & D system ,
setting up keyTC M labs, facilitating
technology transfers into the industry
and im proving R & D m anagem ent and
quality control.
A n interesting and uniquely C hinese
developm ent is the grow ing use of
biotech in traditional C hinese m edicine.
Since TC M has dem onstrated its
effectiveness in the treatm ent of various
diseases over a long period in history,
a large group of experts believe they
are likely to possess natural products
that can be isolated for their therapeutic
value.
H ong Kong based B iotechnology
Research Institute or B R I is involved in
evaluating the efficacy of TC M products,
identifying those w ith therapeutic
potential and discovering prom ising
com pounds for new drug developm ent.
B R I utilises biological assays to screen
TC M products and botanicals for
therapeutically active com pounds. Its
focus areas are neurodegenerative
diseases, such as A lzheim ers,
Parkinsonss, A m yotrophic Lateral
Sclerosis, stroke, epilepsy and also
cancer.
TC M enterprises like C hengdu
Kanghong G roup are also involved in
com bining biotechnology and TC M .
The com pany has been researching,
producing and selling traditional C hinese
m edicines as w ell as biotechnology
products. Its subsidiary, Kanghong
Sagent (C hengdu) Pharm aceutical is a
50:50 joint venture form ed in D ecem ber
2006 w ith U S-based Sagent. The
com pany has built an FD A -approvable,
sterile m anufacturing facility in C hengdu
83 G enerics and biosim ilars to drive dow n drug spending, 20 M ay 2011, Seeking A lpha
84 TN F biosim ilar approved in C hina, 23 M ay 2011, G enerics and B iosim ilars Initiative
85 C hina to strengthen TC M research and developm ent, 14 January 2011, C hina D aily

and operations are expected to
com m ence in 2011 in preparation for an
FD A inspection, possibly in 2012.
86
O ther innovative m easures to upgrade
TC M include a new index of C hinese
herbal m edicines published in C hengdu,
the capital of Sichuan province, launched
in A pril 2011. This w ill help both the
governm ent and businesses in the field
understand trends and prom ote further
developm ent of the industry.
Authorised by the M inistry of
C om m erce, the C hengdu Index carries
prices and purchase data on m edicines
reflecting the overall com m erce in
traditional C hinese m edicines.
TC M herbal treatm ents received a m ajor
blow w hen they w ere m ade illegal in
the EU in M ay unless they registered
their products under the European
U nion Traditional H erbal M edicines
Registration Schem e. The European
m arket consum es about one fourth
of the total TC M exports from C hina
according to statistics from C hinas State
Adm inistration of Traditional C hinese
M edicine. The new legislation is likely
to cost the industry U SD 500 m illion a
year and put about 100,000 practitioners
out of w ork.
87
The EU s Traditional H erbal
M edicinal Products D irective prohibits
selling any traditional herbal m edicines
that have not received official approval.
So far, none of the TC M products that
had been sold in the EU have been
approved.

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86 Sagent launches initial public offering, 11 M ay 2011, The Pharm aceutical N ew s
87 EU s rules on traditional treatm ents to cost m illions, 14 A pril 2011 C hina D aily
33 | Section or B rochure nam e

03
Trends and
opportunities in C hinas
unique m arket

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The policy-driven pharm aceutical industry of C hina is in a race
to m eet the tw in targets of quantity and quality set by the
am bitious health reform plan of 2009. The industry finds
itself w ell-positioned to support the reform and leverage the
opportunities that abound here.
A com bination of traditional and next-
generation advantages is turning
C hina into a haven for pharm aceutical
m anufacturers. From drug developm ent
to delivery, every segm ent of C hinas
pharm aceutical industry is seeing vast
and sim ultaneous transform ation. The
country is building an environm ent ideal
for M N C s, w here five m ajor trends
converge to give drug com panies,
struggling w ith cost-containm ent
strategies, a base for their future.
First, the outsourcing sector is
evolving in a sophisticated m anner,
and is capable of handling the
com plex dem ands of W estern biotech
com panies. Second, the governm ents
stand on quality and com pliance should
go a long w ay tow ards im proving trust in
C hinas drugs. In addition, international
com panies can also benefit from
the higher quality standards. Third,
m ergers and acquisitions and greater
collaboration betw een m ultinationals
and dom estic com panies are an
im portant developm ent. Fourth, heavy
investm ent in innovative research,
tailored to diseases prevalent in A sia
and specifically C hina, are helping to
drive this industry.
The fifth trend revolves around funding
this vast scale of business change, new
sources of capital need to be tapped,
creating great potential for venture
capitalists and m arket investors. Both
dom estic and foreign investm ents can
contribute significantly to upgrading the
overall quality of healthcare in C hina.
3.1 Outsourcing opens drug
discovery options
Foreign com panies plagued by
pressures to reduce costs increasingly
view outsourcing to C hina as a
sound strategy. C hina is now a top
pharm aceutical outsourcing destination,
especially for drug discovery.
Throughout 2010, the dem and for
C hinese outsourcing services rem ained
strong and the sector grew about
23 percent year-on-year. The current
m arket size of the local outsourcing
industry is valued at about U SD 2.05
billion, crossing the U SD 2 billion m ark
for the first tim e.
88
It is likely to grow at
an approxim ate rate of 25.2 percent in
2011.
89
C hina has a num ber of com pelling
strengths that m ake it a leader in the
global outsourcing industry. Foreign
com panies can tap a less expensive
patient pool and talented scientists and
can easily access anim als for research
program m es all supported by
governm ent regulators anxious to foster
the industry.
Unique patient pool: A m ajor attraction
of outsourcing in C hina is its vast
patient pool. Studies that require patient
stratification are difficult to pursue in
the U S, hence countries such as India
and C hina are ideal locations due to
the availability of large num bers of
88 C hina Pharm a O utsourcing A nnual Review - Latest D evelopm ent Trends, 10 M arch 2010, Research and M arkets
89 C hina Pharm a outsourcing annual review - Latest developm ent trends, 10 M arch 2010, Research and M arkets

suitable, receptive patients. U nlike the
U S and EU , C hina has a pool of highly
desirable treatm ent naive patientsfor
conducting clinical studies. For cultural
reasons, patients in C hina tend to be
m ore com pliant w ith their m edical
care, resulting in low er attrition rates
in clinical trials. Studies in C hina have
dem onstrated, on average, a 70 percent
cost savings over those done in the U S
due to low er per patient costs.
90
In addition, the presence of unique gene
pools in C hinas population is valuable
for pharm acogenom ic studies. C ertain
patient populations are m ore easily
accessible here than in other countries,
providing an opportunity for the
focused developm ent of niche m arkets.
Exam ples include gastrointestinal
cancers (esophageal, gastric, and liver);
hepatitis; nasopharyngeal cancers; and
neural tube defects.
91
Talent pool: C hina offers a large pool
of talented people in the sciences,
including an increasing num ber of
W estern-educated graduates. G lobal
pharm a firm s have been forced to
slim dow n and cut research staff, so
m any now see C hina as a com pelling
destination to conduct cutting edge
research. A t least 80,000 PhD s in the
life sciences from W estern institutions
have returned to C hina to w ork in the
industry or in academ ic institutes,
bringing w ith them leading skills and
know ledge. This trend, com bined w ith
state-ofthe-art research facilities and
infrastructure, positions C hina as a
leader of the outsourcing industry.
92
Integration through Contract
Research Organisations: A ssured by
these advantages, drug com panies are
increasingly turning to contract research
organisations in C hina and (C RO s
are by definition outsource). Industry
estim ates suggest that the global C RO
m arket is expected to reach U SD 24
billion by 2012, w ith the m ajority of this
grow th com ing from India and C hina.

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Upcoming trends the CRO market in China
The 400 C RO com panies in C hina m ainly focus on Recent exam ples of C RO
the pre-clinical and clinical testing of new drugs. activity include:
A bout 1/3 of C hinas C RO com panies are C harles R iver Laboratories
in Beijing due to incentives from the local Internationals U SD 1.6
governm ent. A nother fast grow ing m arket is billion buyout of C hinas
Shanghai. W uxi Pharm atech in 2010
It is estim ated that the A sia Pacific C RO m arket Partnership betw een
for clinical services (excluding drug discovery) the m ultinational C RO
generated approxim ately U SD 1.0 billion in IC O N w ith local Tigerm ed
revenues and is projected to grow at a C AG R of C onsulting in 2010.
20% to reach close to U SD 2.5 billion by 2015.
PE and VC have been active in the dom estic C RO
field, despite historic profitability challenges, they
are attracted by double and triple digit grow th
figures as C hinas credentials as an R & D and trial
hub develops.
Source: Frost & Sullivan
90 G lobal O utsourcing: D efining C hinas Leading Edge Frank L. D ouglas and G igi H irsch, 2008
91 G lobal O utsourcing: D efining C hinas leading edge Frank L. D ouglas and G igi H irsch, 2008
92 C hina to becom e life science pow erhouse by 2010, 17 N ovem ber 2010, M onitor G roup


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The C hinese C RO m arket is expected to
flourish at a com pound annual grow th
rate of 33 percent.
93
Leading C hinese C RO s offer research
services at significantly low er costs
and are increasing their ability to m eet
W estern standards in drug quality and
safety.
The first C RO s focused largely on
standardised chem istry-based studies.
Initially big pharm a w as reluctant
to outsource its chem istry-based
operations as these w ere seen as a core
function. C om pound chem istry, w hich
is basic to the drug discovery process,
held som e of the com panys m ost
sensitive intellectual property.These
notions have changed fast, largely due
to the scarcity of chem ists and dem and
for new com pounds exceeding the
supply. C om panies sim ply couldnt hire
enough chem ists to get the job done.
W hile 60 percent of C hinese
professional service providers are still
chem istry-focused, enterprises are now
m oving up the R & D value chain. The
num ber of firm s that are able to offer
services w ith biotech capabilities has
increased significantly, from only about
10 percent three years ago to now about
40 percent.
94
Future of outsourcing: Local
authorities in C hina have been quick to
accom m odate the needs of outsourcing
com panies. M ajor C hinese C RO s
are located prim arily in tw o centres:
Shanghai Zhangjiang B iopharm aceutical
Park and Beijing Zhonguancun Life
Science Park.
W hile ShangPharm a rem ains one of
C hinas earliest providers of chem istry
outsourcing services, W uxi Pharm aTech
is the poster boy of the C RO industry.
The com pany show ed a solid 24 percent
grow th in revenues during 2010, w ith
sales totalling U SD 334.1 m illion. The
com pany predicts it w ill reach about
U SD 400 m illion in 2011. W uxis contract
m anufacturing segm ent provided the
biggest percentage gains in revenue.
95
O utsourcing of biopharm aceutical
R & D has m ostly been tactical to
date, as opposed to strategic. Tactical
outsourcing tends to be a fall-back
position w hen in-house resources
unexpectedly prove inadequate to
com plete a project and the com pany
turns to short-term solutions. Strategic
outsourcing, on the other hand, em ploys
a deliberate m ix of in-house and external
resources w ith a view tow ard long-term
cost and resource m anagem ent.
The strategic m odel prioritises longer
term collaborative partnerships over
short-term project tasks w ith a vendor.
This allow s com panies to focus on
building core areas of excellence
internally, w hile establishing reliable
external partnerships to m eet
tem porary needs. They can thus
optim ise productivity.
A lthough the prospects for the m arket
look upbeat, there are som e challenges
clouding its landscape. W ith econom ic
reform s and the expected inflation in
C hina, labour and raw m aterial costs
are increasing. Furtherm ore, cost
differentials betw een inland-based
C RO s and coastal-based C RO s now
have to be considered. Inland-based
C RO s m ay now be able to com pete
m ore effectively on costs, perhaps by as
m uch as 2030 percent.
Check-list for companies: Foreign
firm s need to track several aspects
w hen entering into a C RO arrangem ent
because local C RO s have been
developing and bringing their ow n
new drugs to m arket. They m ust
take proactive m easures to ensure
intellectual property (IP) protection,
pick suppliers w ith w hom strong and
stable relationships can be developed
and understand and check for potential
conflicts of interest.
93 C onsiderations in Pharm aceutical O utsourcing in C hina, 1 D ecem ber 2010, D C ATISM Sourcing Sum m it: Forw ard
Thinking Sourcing Sum m it
94 C hina Pharm a O utsourcing A nnual Review - Latest D evelopm ent Trends, 10 M arch 2010, Research and M arkets
95 W uXi Pharm aTech on the R ight Track W ith 24% G row th in Revenues, 10 M arch 2011, Seeking A lpha

H ow KPM G can help the benefits of outsourcing
am ong pharm aceutical firm s
Pharm aceutical firm s across the
globe are facing m any different
challenges, ranging from operational
efficiency issues to com petitive
pressures and regulatory m atters.
The situation becom es all the m ore
alarm ing as patents expire and
the new drugs pipeline shrinks. In
response, pharm aceutical players
have adopted outsourcing, allow ing
them to m ake their operations m ore
cost efficient, gain access to new
ideas and m axim ise their use of
existing resources.
Strategic considerations -- such as
grow th prospects, IP protection
and legal infrastructure -- have
becom e just as im portant as costs
in the outsourcing decisions of
pharm aceutical firm s. The shifting
of the global econom ic balance
from the developed econom ies to
em erging econom ies becam e visible
in the current decade. Em erging
m arkets are extrem ely im portant to
m any pharm a com panies,w ith C hina
being a m ain focus. Pharm aceutical
firm s have m ade huge investm ents
and are conducting a w ide variety
of activities in the country. C hinas
grow ing pool of scientists is leading
to the rapid developm ent in the life
sciences area in general.
Pharm aceutical firm s have adopted
various different m odels in C hina.
O ne global pharm aceutical player has
joined forces w ith C hinese partners,
both to leverage existing R & D
advantages and resources in C hina
and also to collaborate w ith various
local drug research institutes and
C RO s. This strategy allow s sharing
the risks inherent in R & D . A nother
m ultinational pharm aceutical firm
is looking to establish its ow n R & D
centre in C hina to take advantage
of the countrys low costs and rich
talent pool. It plans to locate research
activities in Shanghai and to build a
fully integrated R & D centre.
In order to gain a significant cost
advantage in pharm aceutical
m anufacturing, another global
pharm aceutical player is planning to
increase its A PI sourcing from C hina
and the rest of A sia. The com pany
has also decided to produce its entire
A PI externally w ithin a decade as a
part of their long-term strategy.
Benefits of outsourcing
In order to rem ain com petitive
in the high-risk, high-rew ard
pharm aceutical industry, com panies
need to constantly innovate. M any
pharm aceutical firm s are now m ore
w illing to engage in outsourcing,
recognising its num erous
advantages. The key benefits include
cost efficiency, access to skills,
process im provem ent, avoidance of
capital cost and the opportunity to
focus on core com petence.
O utsourcing can bring significant
benefits to a com pany as long as
it is able to answ er som e basic
questions. Is the com panys
outsourcing strategy effective? Is the
com pany w ell prepared to em brace
outsourcing? D oes the com pany
have a strategic intent to outsource
research and developm ent as w ell as
m anufacturing? Is the com pany in a
position to m axim ise opportunities
for collaborative netw orking?
The business potential of outsourcing
in the pharm aceutical industry
is clear: outsourcing is playing a
grow ing and increasingly im portant
role in defining the next generation
of pharm aceutical businesses and
operating m odels. W ith continuous
grow th in the pharm aceutical sector,
as w ell as in C RO and M RO , C hina
offers m any strengths, including
cost advantages, a large talent pool,
and end user m arket potential. It
is perfectly positioned to becom e
a w orld class player in providing
outsourced pharm aceutical services.

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Upcoming trends growing importance of GMP
O n February 12, 2011, the M inistry of H ealth of C hina (M O H ) published the final
version of C hinas new drug G M P (G M P 2010).
G M P 2010 dem onstrates the C hinese G overnm ents determ ination to
upgrade C hinas drug quality system and advance C hinese drug com panies
com petitiveness in the international m arket.
W ith drug m anufacturing standards significantly raised, m anufacturing costs w ill
increase and som e sm all-sized com panies could be elim inated from the m arket.
M ultinational drug com panies need to review their m anufacturing practices in
C hina com prehensively to ensure full com pliance w ith G M P 2010.
M ultinational drug com panies also need to take new G M P standards into
account in their M & A and joint venture projects in C hina to ensure their
acquisition targets or joint venture partners com ply w ith G M P 2010.
3.2 Quality and compliance to build
Brand China
Reshaping the pharm aceutical industrys
quality standards is currently a top
priority for the C hinese governm ent.
W ith the country becom ing a m ajor hub
for the w orlds drug industry, lapses
in quality are a m atter of international
concern.
96
The State Food and D rug Adm inistration
has been m aking constant efforts to
upgrade quality, and the new est set
of standards for drug production is
expected to bring quality on par w ith
international standards.
G ood m anufacturing practices and their
im plications: Since 1998, C hina has
experim ented w ith and stream lined
its quality norm s as part of its G ood
M anufacturing Practices (G M P). A
new set of G M P 2010 rules w hich
significantly elevates drug quality
standards in C hina cam e into effect on
1 M arch 2011. The regulations contain
m ore detailed requirem ents for key
aspects of the drug m anufacturing
96 The problem s and potential of C hinas pharm aceutical industry, A pril 2009, A EI O utlook Series

process. They introduce the concept
of quality risk m anagem ent, and
encourage the use of standard operating
procedures and efficient m anagem ent of
m anufacturing records.
The new standards codify in great detail
the responsibilities of key personnel
in the m anufacturing process and
quality control of drugs. The definition
of key personnelhas been expanded
to include the com pany head, and
persons responsible for m anufacturing
m anagem ent and quality m anagem ent.
97
Existing drug m anufacturers, depending
on the risks of the products they
m anufacture, w ill be given a grace
period of up to five years to com ply w ith
G M P 2010. C om panies that fail to bring
m anufacturing sites into com pliance
w ithin the deadlines w ill no longer be
perm itted to continue m aking their drug
products at the facilities.
H ow ever, elevated standards under
the new G M P w ill m ean higher
m anufacturing costs for drug com panies.
Industry em ployees are now required
to receive periodic training and the
drug production process including
purchasing, processing and packaging
w ill have higher standards. The
new G M P standards also require
m anufacturers to set up a drug recall
system a first in C hina and each
step of the drug production process w ill
be recorded in order to m onitor quality.
98
A lthough analysts agree that the new
standards are the best w ay to build
C hinas international reputation, they
w arn that the changes are expected
to be m et w ith som e resistance from
the industry. W hile the changes are
likely to benefit big enterprises w ith
resources, particularly those that have
already adopted higher G M P standards,
m any sm aller com panies w ill likely be
elim inated.
The State Food and D rug Adm inistration
estim ates that the new regulations could
shut dow n as m any as 500 sm all and
m edium -sized drug producers, w hich w ill
be hardest hit by rising operational costs.
N early 80 percent of blood products
m anufacturers w ill not be able to live up
to the new G M P standards.
99
The latest norm s contain num erous
requirem ents that are different from U S
and EU standards, and m ultinational drug
com panies need to com prehensively
review their m anufacturing practices
in C hina to ensure full com pliance w ith
G M P 2010. M oreover, foreign com panies
also need to ensure that acquisition
targets or joint venture partners com ply
w ith the new standards.

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Emerging trends in the pharmaceutical industry Quality
Q uest for Q uality:
The Industry and C om m erce Adm inistration D epartm ent w ill issue a business
licenseonly after the related pharm aceutical regulatory departm ent (SFD A or
its local branch) has approved the pharm aceutical m anufacturing licenseor
pharm aceutical distribution license.
Pharm aceutical m anufacturing or distribution enterprises m ust obtain an
industry com pliance certification.
- M anufacturing enterprises m ust obtain G M P (good m anufacturing
practices) certification.
- D istribution enterprises m ust obtain G SP (good supply practices)
certification.
In addition to the G M P and Pharm aceutical Production License m ust-haves,
a variety of accreditation and quality standard good-to-havesim pact future
dom estic license applications, custom er confidence and export licenses.
- These include: ISO 14001 for international exports, C O S for Europe, FD A
and C G M P for the U S etc.
97 C hinas new drug G M P significantly raises drug m anufacturing standards, 17 February 2011, G lobal Life Sciences
98 Q uality updates for drugm akers, 14 February 2011, G lobal Tim es
99 N ew version of G M P in C hina released, 14 February 2011, china.org.cn


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Compliance: Shaping future value
chain
The issue of quality has alw ays dogged
C hinas international reputation.
N ow , w ith the country becom ing an
outsourcing hub, there is pressure
to adhere to increasingly stringent
dom estic and international regulatory
and com pliance requirem ents.
C om pliance, especially for
m ultinationals operating in C hina, is
particularly challenging. D om estic
anti-bribery and anti-corruption law s in
particular are stringent and becom ing
m ore so every year. Just recently for
exam ple, the C hinese governm ent has
m oved to regulate gift cards w hich have
becom e a com m on substitute for cash
paym ents in illegal transactions
100
, and
in February 2011 issued its ow n version
of foreign anti-bribery legislation
101
.
Sim ilarly, at the end of last year the
C hinese governm ent released its first
ever W hite Paper on C hinas Efforts to
C om bat C orruption and B uild a C lean
G overnm ent.
102
B ut, w hat of foreign
bribery and corruption law s w ith
extraterritorial reach such as the U S
Foreign C orrupt Practices Act (FC PA )
and the recently enacted U K B ribery
Act (U KBA )? Both law s carry w ith them
severe consequences for corporations
and individuals if successfully
prosecuted for violating them .
D om estic com panies w ith global
am bitions are also taking note and
considering these law s as part of their
outbound investm ent and grow th
strategy.
Entities conducting business in
C hina need to keep com pliance w ith
dom estic and relevant foreign anti-
bribery and corruption law s on their
radar for a m ultitude of reasons.
U nder the FC PA com panies are
norm ally jointly prosecuted under
civil and crim inal regulations by the
U S D epartm ent of Justice (crim inal)
and the U S Securities and Exchange
C om m ission (civil). Individuals can
serve tim e in jail and receive fines w hile
corporations can be held accountable
for the actions of their em ployees
w hich can result in significant m onetary
fines and disgorgem ent of profits
earned as a result of the illegal activity.
If a com pany is publicly listed on a
U S exchange its shares can also be
suspended, or possibly delisted.
N otably, the FC PA only applies to
bribery of foreign governm ent officials
to gain or retain business and is
norm ally prosecuted not on actual
evidence of bribe paym ents but rather
on the lack of appropriate books and
records and proper accounting for the
illegal paym ents. This is particularly
relevant in C hina given the com m on
lack of transparency in business
transactions and less than com plete or
m eaningful business records to support
corporate paym ents. It becom es
even m ore m urky and am biguous in
the healthcare, m edical device, and
pharm aceutical sectors given the
significant use of distributors, agents,
and other third-parties that are view ed
as an extension of the com pany under
the law but typically do not have the
internal controls in place to adequately
m aintain their ow n books and records
to the standard required by the FC PA .
100 C hina regulates gift cards to prevent corruption, 25 M ay
2011, w w w . G ov.cn
101 A foreign corrupt Practices Act w ith C hinese
C haracteristics, 1 M ay 2011, w w w .chinasignpost.com
102 C hinas Efforts to com bat C orruption and B uild a C lean
G overnm ent, 29 D ecem ber 2010, w w w .chinadaily.com .cn

H ow KPM G can help a business strategy
For pharm aceutical com panies,
im plem enting adequate m easures
to counter corruption and bribery
and eradicating costs associated
w ith such practices should be a
fundam ental norm . C orruption
charges can dam age a firm s
reputation, add significant ongoing
costs, im pair overseas expansion
plans and cripple staff m orale.
C om panies unable to dem onstrate a
track record of com pliance w ith anti-
bribery or anti-corruption legislative
and regulatory requirem ents m ay
have difficulty seeking audit or
regulatory approval necessary
for public listing and m ay lim it or
debar them from public contracts.
Adherence to anti-corruption
practices not only adds value to a
com panys reputation; it also extends
tangible and intangible benefits in
term s of cost efficiency and brand
leadership.
It is a business im perative for
com panies to develop strong anti-
bribery and anti-corruption policies
given the increasingly stringent
legislation either in place or being
developed by various governm ents
across the globe. The reach of such
legislation, too, m ay affect various
individuals and/or a com pany as a
w hole, irrespective of the country
in w hich the business is operating,
and the country of origin of such
legislation.
KPM G can help com panies navigate
the current regulatory environm ent
w hile m aintaining profitability and
adhering to their ethical standards
and value system s in three principal
w ays:
C om pliance: Providing practical and
cost effective advice to com panies
looking to develop com pliance
strategies that w ill allow them to
operating profitably and ethically
around the w orld.
D ue diligence: Providing targeted due
diligence in pre- and post-acquisition
phases of investm ents and in
support of organic grow th strategies
to enhance know ledge and com fort
relating to business partners and
operations, and to identify, m itigate,
and rem ediate regulatory com pliance
risks.
Investigations: Providing custom ized
approaches to understanding the
specific facts and circum stances
pertaining to issues or allegations
raised through internal or external
channel (e.g., w histleblow ers),
and w orking w ith the com pany
and its legal advisors to respond
to regulatorsand other third-
partiesrequest for inform ation
in adm inistrative, civil, or crim inal
proceedings.
A call for transparency
A s governm ents continue to
focus their efforts on reducing
corruption both at hom e and abroad,
a com panys level of com pliance
w ith anti-corruption or anti-bribery
legislation w ill inevitably be reflect in
its shareholder value.
C om panies that fail to im plem ent
such policies or m easures to m itigate
corruption and bribery, decline to
com ply w ith such legislation or
neglect to propagate a transparent
track record of such com pliance, do
so at their ow n peril.

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A lthough new ly enacted, w ith an
effective date of 1 July 2011, the U K
B ribery Act is already being touted
as even m ore stringent than m ost
countriesdom estic anti-bribery law s,
and has a scope that exceeds that of
the FC PA and extra-territorial reach
that w ill affect any corporation w ith
a close connectionto the U nited
Kingdom .
103
The U KBAs offenses
includes com m ercial bribery as w ell as
bribery of foreign officials; carries w ith
it severe crim inal consequences for
individuals and corporations including
potential debarm ent from all European
U nion public contracts; and has only
one corporate defense Adequate
Procedures. The U KBA has yet to be
tested but the U K governm ent has
persistently advised that it intends to
enforce the Act starting on its effective
date 1 July 2011.
M onetary penalties and potential
debarm ent aside, the negative publicity
and brand dam age associated w ith
non-com pliant activity, particularly
for publicly listed com panies, m akes
com pliance w ith dom estic and foreign
anti-bribery law s a business im perative.
In m any com panies w here a com pliance
culture is thriving the bottom line
im proves because the cash leakages are
plugged or significantly reduced through
adequate m onitoring, investigation, and
rem ediation of non-com pliant behavior.
Sample M&A transactions in China in 2010
B uyer Seller A m ount C om m ents
G SK N anjin M eirui
Pharm aceutical
com pany
U SD 70M G SK w ill enlarge the C hina
drug m arket through M & A
Sanofi M insheng Pharm a n/a O TC drug m arket
N ycom ed G uangdong Tianpu U SD 214M 51.34% stock for entering
pharm a the m arket in C hina and
set the relationship w ith
Shanghai Pharm a (the
stockholder of Tianpu)
Sanofi B M P U SD 520M O TC drug m arket
Shanghai C hina H ealth R M B 2.328 65.24% stock for m arket
Pharm a System Ltd consolidation
(U SD 339M )
Shanghai Xinya pharm a R M B 1.48B Expand production line and
Pharm a enhance distribution
(U SD 217M )
C om pliance provisions w ill go a
long w ay in redefining C hinas ow n
quality chain due to m ore on-the-spot
inspections. For instance, the B ulk
Pharm aceutical Task Force of the
Society for C hem ical M anufacturers
and A ffiliates (SO C M A ) and the
European Fine C hem icals G roup
(EFC G ) of the European C hem ical
Industry C ouncil (C EFIC ) are calling on
the U S Food & D rug Adm inistration
to m andate inspections of foreign
active pharm aceutical ingredient
m anufacturing sites.
The FD A has been unable to keep up
w ith globalization of the drug industry,
as a result, inspections in high-risk
regions like C hina and India are m uch
less stringent w hen com pared to the
U S and Europe. Both SO C M A and EFC G
have indicated a w illingness to pay fees
for these inspections w hen perform ed
on their m em ber-ow ned facilities that
are located outside the U nited States.
(SO C M A and EFC G urge for reform
in FD A inspections of foreign drug-
m anufacturing facilities, M ar 17, 2011,
InPharm a). Such inspections w ill com pel
C hinese com panies to m easure up to
international standards and stream line
their ow n m anufacturing.
3.3 Mergers & acquisitions, a winning
formula
A s pharm aceutical com panies struggle
w ith the pending loss of patent
protection on their popular drugs,
different business strategies have taken
shape to deal w ith the crisis. M ergers
and acquisitions and partnerships are
highw ays on an essential but tricky
roadm ap. C hina now ranks as one of
the m ost attractive M & A destinations
for foreign drug-m akers in A sia from the
perspectives of cost, risk and m arket
opportunity.
M ultinationals tend to team up w ith
dom estic m edicine producers to expand
scale. C om panies penetrating the C hina
m arket have tended to acquire local
m anufacturers and generics firm s that
provide a quick, cost-effective point
of entry from w hich to launch m ore
expensive, branded products. Since late
2009, there has been a strong recovery
in m ergers and acquisitions after the
global financial crisis eased in A sia.
Source: G iant C RO Ltd.
103 The new U K B ribery Act 2011, June 2011, w w w .british-legal-centre.com

Foreign enterprises such as A bbott,
Bayer H ealthC are, Roche, G SK, Sanofi,
Pfizer and N ovartis have greatly
expanded their businesses in C hina over
the years and aligning w ith localshas
turned out to be a w inning strategy for
them , as w ell as local drug-m akers.
104
Acquisitions have been taking place
in all kinds of com panies from
m anufacturers of generics to those
m aking extrem ely specialised drugs
to distribution firm s. The start of 2011
has seen som e significant deal activity
involving big pharm a in C hina.
Pfizer has signed three deals w ith
a C hina focus in 2011. The first w as
w ith Shanghai Pharm aceutical
for the distribution and m arketing
of Pfizer products in C hina. The
partnership is intended to leverage
both com paniesstrengths, m atching
Pfizers global capabilities in developing
innovative m edicines w ith Shanghai
Pharm aceuticals distribution netw ork
in the C hina m arket.
105
Pfizers second
deal w as w ith D aiichi Sankyo for the
co-prom otion of the latters olm ersartan
m edoxom il in the country.
106
O ther global com panies have been
busy, too. M erck KG aA acquired
Beijing Skyw ing Technology, a leading
provider of cell culture m edia products
and bioreactors for the C hinese
biopharm aceutical industry.The
acquisition allow s M erck to quickly
establish a presence in this m arket
segm ent in C hina. N ovartis acquired an
85 percent stake in Zhejiang Tianyuan
B io-Pharm aceutical a fast-grow ing
developer, producer and distributor of
bio-pharm aceutical products in C hina.
G laxoSm ithKline is taking over
N anjing M eiRui Pharm a for U SD 70
m illion. Sanofi bought B M P Sunstone
C orporation, a Beijing-based specialty
pharm aceutical com pany, for about
U SD 521 m illion, the largest M & A deal
in C hinas pharm aceutical industry.
107
In
M arch 2011, research-based Japanese
drug firm Takeda team ed up w ith
C hina M edical C ity in Taizhou to m ake
a significant investm ent to build R & D ,
m anufacturing, and m arketing facilities
in C hina.
M ore significantly, m ultinationals
are starting to trust local com panies
w ith production. In the niche sector,
N asdaq-listed SciC lone Pharm aceuticals
acquired N ovaM ed Pharm aceuticals, a
C hina-based specialty pharm aceutical
com pany in A pril 2011. N ovaM ed,
backed by foreign venture capital, has a
portfolio of 18 drug products spanning
m ajor therapeutic areas including
oncology, cardiovascular disease,
central nervous system disorders and
urology/infection. SciC lone stated the
acquisition w ould give it a form idable
sales and m arketing netw ork, nearly
20 com m ercial stage products and an
expanded Shanghai-based m anagem ent
team w ith significant pharm aceutical
industry experience.
108
Yet another trend is the practice of large
com panies to go in for unconventional
acquisitions. R ather than focus on
traditional m ergers that lift gross
m argins and cost savings, a num ber
of enterprises prefer to buy firm s that
have unique uses for drugs. The industry
now feels there is a better business
m odel in zeroing in on the end custom er
rather than on bulk m anufacturers of
generics.
109
M oreover, heavyw eight C hinese
com panies are also w ooing
m ultinationals w ith a vengeance.
Shanghai Pharm aceuticals announced
in A pril 2011 that it w ill ink m ore than
R M B 20 billion w orth of procurem ent
contracts w ith 69 m ultinational
pharm aceutical com panies in 2011. The
overseas drug m akers involved include
giants such as Pfizer, Sanofi, M erck
and N ovo N ordisk. Their contracts are
estim ated to account for about 60
percent of Shanghai Pharm aceuticals
total procurem ent of m edicines
and m edical devices in its dom estic
pharm aceutical distribution business.
110
Anti-monopoly hitch for foreign
firms: A lthough the C hinese
governm ent w elcom es W estern
investm ent in pharm aceuticals, the
road is not alw ays easy for aggressive

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104 M & A s in A sia Pacific rem ain steady: July 2010, B ioPharm a
105 Pfizer and Shanghai Pharm aceutical sign M oU for potential strategic partnership, 8 M ay 2011, 4-Traders
106 B ig pharm a increases activity in C hina, 2 M ay 2011, Partnering N ew s
107 C hina lures global drug m akers, 20 Septem ber 2010, Reuters
108 SciC lone acquires N ovaM ed Pharm aceuticals, 19 A pril 2011, M arketW ire
109 N ovel M & A paths gain acceptance, 4 A pril 2011, Reuters
110 SH Pharm a inks $20 bln in deals, 14 A pril 2011, G lobal Tim es

H ow KPM G can help: Focus on integration

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Its been a busy decade for pharm a
deal-m aking. In the 10 years up
to 31 D ecem ber 2009, a total of
1,345 m ergers and acquisitions
of pharm aceutical assets and
com panies w ere announced.
D isclosed prices totalled m ore
than U SD 694 billion, according to
D ealSearchO nline.com .
111
M any of the leading global R & D
pharm aceutical com panies have
established a significant footprint
in C hina and are constantly on the
lookout for solid M & A targets to
increase revenue/grow th rates,
enhance product portfolio and to
expand routes to m arket.
W hile in general m ultinational
com panies have increasingly com e to
appreciate the im portance of sound
integration planning and strong
im plem entation of an integration plan
to help capture value in a transaction
the pharm aceutical industry
presents a unique set of challenges,
including, but not lim ited to:
sustaining the target com panys
revenue grow th
leveraging and/or augm enting
the target com panys current and
pipeline drugs
ensuring com pliance w ith anti-
corruption legislation FC PA in
the U S, the B ribery Act in the U K
etc.
In order to m anage the above
com plexities, KPM G recom m ends
com panies consider:
perform ing an issue-driven
com m ercial and operational due
diligence on the target com pany
before closing the deal to identify
the issues as early as possible
developing an integration
program m e that focuses on risk
m itigation, synergy identification
and realisation, and value
creation.
players. There is a risk of m ultinationals
running into the 2008 PRC A nti-
M onopoly Law that regulates all M & A s
dom estic, as w ell as cross-border.
U nder this law , Pfizer had to sell its
C hinese sw ine-vaccine business to a
subsidiary of a H arbin Pharm aceutical
G roup in 2010. The transaction w as done
to com ply w ith a M inistry of C om m erce
(M ofC om ) anti-m onopoly review of
Pfizers m erger w ith W yeth. The m inistry
determ ined that the com bination of
the tw o U S pharm aceutical m akers
w ould leave the m erged firm in control
of nearly half the C hinese m arket for
certain sw ine vaccines, a lucrative niche
in a country w ith m any pig breeders.
112
The Pfizer deal is believed to be the first
in w hich C hina required divestm ent of a
local business.
Authorities have m ade it clear that
the A nti-M onopoly Law of 2008 is not
intended to excessively interfere in
international M & A transactions. The
trend in fact has been for C hina to align
its approach w ith international practices
and rem ain open to foreign investm ent.
H ow ever, the fundam ental principle is
that foreign investm ent is expected to
contribute som ething new . If nothing
new is to be contributed, that is, if the
investm ent is purely for speculative
purposes, then the investm ent m ay not
be approved.
3.4 Innovation gains industry
attention
A lthough C hina has enjoyed the
benefits of an expansive m arket
for pharm aceutical production,
the industry suffers from m inim al
innovation and investm ent in research
and developm ent. The 2009 health
reform plan aim s to correct this w ith
the governm ent encouraging foreign
com panies to bring in capital, state-
of-the-art research and training of
personnel.
O f late, C hina has been at the centre of
a trend for the globalisation of research,
a slow shifting aw ay from countries
like the U S that have dom inated the
research scene for the past 40 years.
111 quoted from http://w w w .fiercepharm a.com /story/pharm a-m -10-years-1-345-deals-694b/2010-03-26
112 Pfizer deal highlights C hinas clout, 29 M ay 2010, W all Street Journal

C hinas overall R & D investm ents are
grow ing at a rate that closely m atches
the countrys 9 percent to 10 percent
annual econom ic grow th. This m eans
that in dollar term s the grow th in
C hina is roughly the sam e as that in
the U S about U SD 10 billion per
year.
113
The 2008-2009 recession helped level
the distribution of global research.
Em erging nations like C hina w ere
less affected by the recession and
could continue to invest in their R & D
infrastructures at relatively high
levels. M any m ultinational com panies
opted for basing som e of their
operations here.
In June 2010, C hinas State Food
and D rug Adm inistration asked
dom estic pharm aceutical com panies
to increase their investm ent in R & D
in order to rem ain com petitive. The
governm ent, for its part, plans to
invest U SD 1.5 billion in new drug
developm ent betw een 2011 and
2016.
114
Holistic strategies: A nother
approach adopted by m ultinationals
is the research and sale of drugs that
tackle entire lifestyle issues rather
than sim ply m arketing m edication for
specific diseases.
N ovo N ordisk has displayed
rem arkable success w ith its strategy
to m arket insulin. Its plan w as to enter
the diabetes m arket in C hina not just
w ith products but w ith a long-term ,
com prehensive approach to patient
care and education of physicians and
patients that focused on m anaging
diabetes effectively.
N ovo recognised that it could only
achieve this level of change and
strengthen C hinas healthcare system
by w orking together w ith a w ide
variety of stakeholders, including the
C hinese governm ent and physicians.
They built diabetes clinics, invested
in com m unity diabetes prevention
program m es, and launched several
public-private initiatives in partnership
w ith the C hinese M inistry of H ealth to
develop diabetes guidelines, training,
and health system s integration.
Today, C hina is the third biggest
m arket in N ovo N ordisks business
and the second largest insulin m arket.
In 2010, N ovo N ordisk had 63 percent
of the insulin m arket in C hina.
115
Partnership approach: D rug
com panies are exploring every
resource in C hina to strengthen
and increase the relevancy of their
research. C ollaborations betw een
m ultinationals and local universities
are on the rise, signifying a
partnership approach to drug R & D .
Johnson & Johnson has collaborated
w ith Tsinghua U niversity to tackle
diseases like hepatitis B, tuberculosis
and bird flu and this has paved the
w ay for new therapies.
116
Scientists from the U niversity
of B radford in the U K, and Jilin
U niversity and the Shanghai Institute
of M ateria M edica in C hina are
w orking w ith C hinese scientists
to carry out innovative research
and deliver a new product w ith a
potentially huge health benefit to
m illions of people.
A t least 3.3 billion people half of
the w orlds population are at risk of
m alaria, w ith about 250 m illion new
cases each year and nearly one m illion
deaths, m ostly in the developing
w orld.
117
A rtem isinin, based on
TM C , is the leading treatm ent on the
m arket to com bat m alaria, but a m ore
effective form of the drug is urgently
needed.
In another instance, the N ational
C enter for D rug Screening, affiliated
w ith the Shanghai Institute of M ateria
M edica, is opting for an innovative
drug discovery m odel that involves
scientists and partners in developing
and developed countries. According
to the scientists, this is a new
process, collaboration not only at the
m ultinational level but w ith different
partners.
The C enter provides a w ide-
range of drug screening services
and technical consultation to
universities, research institutions
and pharm aceutical com panies
across C hina. U sing a donated

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113 2011 G lobal R & D Funding Forecast: The G lobalization of R & D , 15 D ecem ber 2010, R & D
114 C hina readies $1.5B plan to bolster biotech, 10 August 2010, Pharm a N ew s
115 N ovo N ordisks B lueprint for C hanging D iabetes in C hina, 13 A pril 2011, The B usiness of a Better W orld
116 C om panies face accusations of exploiting rare disease price structures, D ecem ber 2010, Reuters H ealth e-line
117 G rass looking greener for m alaria patients in U K-C hina joint research, 5 O ctober 2010, ScienceD aily


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library of chem ical com pounds and
the associated database from N ovo
N ordisks C openhagen base, the
C enter is tackling diseases prevalent
in A frica, such as m alaria, tuberculosis,
A frican sleeping sickness, dengue
fever, C hagas disease, leishm aniasis,
schistosom iasis and filariasis.
118
Bio-medical clusters: W ith m ost
m ultinationals now aw are of the
advantages of investing in research
in C hina, the top 10 foreign drug
com panies are either building R & D
centres or renting space for research
operations. Research facilities have
received governm ent support in the
form of dedicated parks.
Emerging trends in the pharmaceutical industry Innovation
Innovation:
2010-2015: C N Y10 billion in investm ent is earm arked for the biopharm a sector.
IPR protection is im proving but enforcem ent rem ains an issue
C hina ranked num ber one in patent- filing in 2010.
Innovation:
Policy driven such as num erous tax incentives to attract m ultinationals.
Talent pool 5 m illion new graduates available in C hina.
Industrial park and bio-tech clusters set up by local governm ents.
R&D centers on the rise in China
Company R&D location Details
Pfizer Southern Set up in an industrial park
Roche Eastern Focuses on cancer
N ovartis Eastern Focuses on bio-tech
Bayer N orthern R & D center covers four big m ain
businesses: heart disease, w om ens
diseases, diagnostic im aging and cancer
G SK N orthern & Eastern Shanghai has a R & D focus
A straZeneca Eastern & Southern Both R & D centers focuses on clinical
m edicine
Sanofi N orthern & Eastern Positioned Shanghai as the ASPAC R & D
center, setting up co-study center w ith
universities in Beijing
Johnson & Eastern C ooperates w ith local com panies
Johnson
Park features ranging from proxim ity
to suppliers and custom ers to tax and
rental incentives can help businesses
grow along w ith C hinas m edical
industry. M ost of the bio-m edical
parks have m ade large investm ents
in infrastructure, including first-rate
buildings and advanced equipm ent and
instrum ents.
119
U S and European drug m akers have
invested m ore than a billion dollars
since 2009 in building R & D and
m anufacturing capabilities tailored to
local needs.
C om panies like Bayer and M erck see
C hina as a com bination of a grow ing
and increasingly affluent m arket and an
ideal research facility for the vast array
of health problem s.
G SK and Johnson & Johnson have also
been operating dom estic drug research
facilities, w ith Shanghai em erging as
an im portant destination for long-term
investm ents by foreign players.
Pudong Zhangjiang H i-Tech Park in
Shanghai has attracted Roche, G SK
Beecham , Boehringer Ingelheim ,
M edtronic, N ycom ed and other
m ultinational pharm aceutical
com panies. G SK has unveiled a 10-
year plan to establish one of its largest
research centres in Shanghai. W hile
G SK intends to draw upon local talent,
it also plans to recruit betw een 50 and
100 top international scientists and
em ploy m ore than a 1,000 researchers
at the new facility by 2017.
U S-based G enzym e is the latest
biopharm aceutical com pany to increase
its presence in C hina. The firm has a
U SD 100 m illion R & D facility in Beijing
w hich w ill house 350 researchers
specialising in chem istry, biology and
pharm acology. The com pany w ill recruit
local scientists recruited and strive
to develop therapies tailored to the
regional population. C om pletion of the
plant is expected by 2012.
M erck Eastern, Southern C ooperates w ith local com panies and
& N orthern hospitals
Eli Lily Eastern Founded an R & D center in Shanghai
and also cooperates w ith other local
com panies
Source: G iant C RO Ltd.
118 TD R and C hina initiate new drug discovery research training, 27 July 2010, TD R enew s
119 B io-M edical Parks in C hina Reach O ut to Pharm aceutical Investors, 6 August 2010, R ightSite.A sia

Urumqi
Xining
Yinchuan
Hohhot
Taiyuan
Shijiazhuang
Zhengzhou
Xian
Lanzhou
Beijing
Tianjin
Jinan
Harbin
Changchun
Shenyang
Dalian
Qingdao
Shanghai
Ningbo Hangzhou
Nanjing
Wuhan
Nanchang
Hefei
Fuzhou
Xiamen
Hong Kong
Shenzhen
Guangzhou
Nanning
Citieswithpopulation>10million
Chengdu
Kunming
Guiyang
Chongqing
Changsha
3.5 Funding options and fiscal
incentives
C hina offers a com bination of
cheaper labour and laboratory
set-up costs, as w ell as strong
governm ent incentive program m es
to support and foster the dom estic
pharm aceutical and biotechnology
industry.These incentives include
tax relief as w ell as direct funding
opportunities.
C hinas last incentive plan w as
offered and im plem ented in 2008.
120
Effective January 1, 2008, the new
C orporate Incom e Tax (C IT) Law
and other regulations provided tax
incentives/schem es to encourage
R & D activities in C hina. R & D
centres w hich provide research
services to overseas com panies
can enjoy preferential incom e tax
rates and turnover tax exem ptions.
Top8pharmaceuticalindustryparksinChina
M anufacturers of pharm aceutical
products are also eligible for a
reduced incom e tax rate if they
qualify as an Advanced and N ew
Technology Enterprise.The key
120 C an an R & D tax credit expand investm ent in product developm ent for global health? 28 February 2011, C enter
for G lobal H ealth R & D Policy A ssessm ent

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incom e tax incentives available to
pharm aceutical com panies carrying out
research in C hina are included the H igh/
N ew Technology Enterprise (H N TE)
incentive.
The criteria for qualifying as an H N TE
include ow nership of core proprietary
intellectual property rights and having
products/ services w hich fall under
the scope of encourageddom ains.
Enterprises that qualified as H N TEs
are entitled to a reduced C IT rate of 15
percent com pared w ith the standard
C IT rate of 25 percent. In addition to
the reduced tax rate, new ly established
H N TEs in the Five Special Econom ic
Zones (Shenzhen, H ainan, Zhuhai,
Xiam en, and Shantou) and the Pudong
N ew A rea w ithin Shanghai can enjoy a
tax holiday of tw o yearsfull exem ption
follow ed by three years of a 50 percent
reduction in C IT.
U nder the C IT super-deduction,
com panies are also allow ed an extra
50 percent expense deduction for
eligible R & D costs, including expenses
incurred through the developm ent of
new technology and products, salary
expenses for R & D personnel, and
the depreciation of instrum ents and
equipm ent used for research purposes.
C om panies can also avail them selves of
an incom e tax exem ption for the transfer
of technology. The portion of incom e
derived from the transfer of technology
during a tax year not exceeding R M B
5 m illion can be exem pt from C IT.The
portion exceeding R M B 5 m illion is
eligible for a 50 percent reduction in
C IT.
121
Venture capital and IPO options :
Spurred by prospects of m assive grow th
in the pharm aceutical sector, healthcare
com panies are increasingly attractive
to dom estic and foreign venture capital
(VC ). D espite their size, the go-it-alone
pow er of dom estic com panies is lim ited.
If they are to be globally com petitive, as
m any of them aspire to be, access to
funding is im perative.
C hinas pharm aceutical sector can be
broadly classified into three categories:
firm s that are backed by the governm ent
w ith strong financial support, form ing
30 percent of the m arket; joint ventures
and foreign com panies w ith 60 percent
of the m arket; and relatively sm all
com panies that have been spearheading
R & D and have attracted venture
capital.
122
D espite the potential, healthcare venture
capital investm ent has rem ained m odest
until now . Investm ents to date have
focused on relatively low er risk areas,
such as clinical research, m anufacturing
and distribution com panies. In 2009, 47
transactions took place in the healthcare
sector; aggregating U SD 416 m illion,
or contributing 11 percent m ore than in
2008.
123
Venture capital ow ners are optim istic
about C hinas pharm aceutical
prospects but the industry should
look to vigorously im plem ent strategic
restructuring of its enterprises. Such
enterprises should becom e w holly
ow ned listed com panies and shut dow n
units to elim inate losses.
D om ain A ssociates, one of the m ost
active U S healthcare venture firm s, is
scouting opportunities in C hina. Its first
investm ent w as m ade in Eddingpharm ,
121 Investing in C hinas pharm aceutical industry, 2nd Edition,
Pw C
122 M & A A nalysis and Research Report on Pharm aceutical
Industry of C hina in 2010, A sia C onsulting
123 C hina Boom s: The N ew Superpow er, Septem ber 2010,
B ioSpectrum

H ow KPM G can help: C hallenges of the tax
environm ent
Tax considerations are an im portant
aspect for m ultinationals extending
their footprint into C hina. Various
incentive policies have been provided
to the pharm aceutical industry,
m uch of it geared to encourage
m ultinationals to shift m ore of their
business functions into C hina.
D espite the attractiveness of
various favourable tax treatm ents,
m ultinationals should address the
challenges posed by tax authorities
on transfer pricing arrangem ents
betw een related parties on cross-
border transactions. The new transfer
pricing docum entation rules require a
com panys m anagem ent to develop
and m aintain detailed inform ation
on the transfer pricing strategy and
justify the reasonableness of the
transfer price.
W ith tax and custom s officials
becom ing increasingly aw are of
transfer pricing risks, foreign-invested
pharm aceutical com panies in C hina
should be w ell prepared for audit by
the authorities.
Tax authorities have identified the
pharm aceutical industry as a m ajor
target for audit exercises. Their audit
focus w ould cover different sectors
w ithin the industry, such as R & D ,
m anufacturing, distribution and
logistics.
In order to elim inate potential
exposure, com panies should
docum ent their com pliance w ith the
requirem ents in C hina. In particular,
supporting vouchers and accounting
records should be consistent and
w ell docum ented to substantiate the
validity of the business transactions.
Sales rebates, com m issions, m eeting
and conferences, and advertising and
prom otional expenses, are som e of
the key areas w hich are m ost likely to
be review ed under a tax audit.
a Shanghai-based com pany focused on
m edical-nutrition products and cancer
therapies. It team ed up w ith O rbiM ed
Advisors and Sequoia C apital to provide
U SD 24 m illion in Series B financing to
Eddingpharm (C aym an) Inc. The firm
intends to use its connections to help
Eddingpharm forge deals w ith U S drug
com panies looking to enter the C hinese
m arket.
124
Pharm a retailer and distributor C hina
B C T Pharm acy secured a U SD 30
m illion investm ent from M ilestone
Longcheng, a private equity firm , to fund
drugstore acquisitions in the G uangxi
Zhuang Autonom ous Region and
neighbouring provinces.
125
The Influx
of foreign venture capital is expected
to play a positive role in im proving the
technical level, m anagem ent, products,
corporate ow nership structure and
industrial structure.
126
Funding future lies in IPO: The local
pharm a industry should now create a
virtuous circle for raising capital. The
industry should expand its channels for
financing operations including venturing
into the capital m arkets m ore often.
C hinese com panies are increasingly
looking at IPO s for funding. Shanghai
Fosun Pharm aceutical, already listed
in Shanghai, plans to float shares on
the H ong Kong Stock Exchange. This is
intended to m ake the com pany globally
com petitive and increase the com panys
financing channels.
127
Fosun Pharm as H ong Kong IPO
reflects the dom estic industrys trend
tow ard m aking strategic adjustm ents
in order to becom e m ore internationally
com petitive. In D ecem ber 2010, it
announced the form ation of a joint
venture to explore the dom estic
m edical-device m arket w ith C hindex
International, a leading independent U S-
based provider of W estern healthcare
products in C hina. Fosun w ill hold a 51
percent stake.
Shanghai Pharm aceuticals, now listed
on the Shanghai exchange, plans to
raise funds from H ong Kong, too, in
order to extend its capital base for
its M & A plans.
128
C hinas securities
regulator has approved a plan by
Shanghai Pharm aceuticals H olding to
issue up to 763.8 m illion H shares in an
initial public offering in H ong Kong.
C hina N T Pharm a G roup, a m ajor
vaccine and pharm aceutical product
distributor in C hina, launched an IPO
in H ong Kong in A pril 2011. A bout
25 percent of the IPO proceeds w ill
be used to expand the distribution
netw ork through organic grow th and
also by acquiring other vaccine supply
chain service providers. Since 2008,
the com panys revenue has grow n
at a com pound annual grow th rate
of 37.4 percent.
129
The com pany w ill
spur grow th along tw o tracks: netw ork
expansion and product diversification.

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124 D om ain A ssociates Tiptoes Into C hina, 22 Septem ber 2010, Venture C apital D ispatch, W all Street Journal
125 B C T Pharm a clinches $30 m illion private equity investm ent, 19 January 2011, Interfax
126 Foreign venture capital bullish on C hinas pharm aceutical industry, B usiness Standard, 16 D ecem ber
127 Fosun Pharm a to float shares in Shanghai, 2 M arch 2011, C hina D aily
128 Regulator C lears Shanghai Pharm a IPO Plan, 13 A pril 2011, W all Street Journal
129 C hina N T Pharm a G roup seeks H K$2.14b from IPO , 4 A pril 2011, C hina D aily


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H ow KPM G can help: the IPO process opens funding
options
From H ong Kong to N ew York,
C hinese drug com panies are
venturing out to get them selves
listed. Local enterprises now w ant
to buy up dom estic and foreign drug
producers and expand their sales
netw orks as w idely as possible. IPO s
are becom ing an increasingly popular
instrum ent to raise funds to expand
operations.
Benefits of launching an IPO
Access to capital for grow th -
O pportunity to raise funds both
at the tim e of listing and at later
stages
B roader shareholder base -
Potential to tap into a m ore liquid
m arket by trading a com panys
shares
Em ployee incentives and
com m itm ent - G ranting options
to the com panys key staff can
prevent attrition
G reater visibility and profile - A n
IPO has the potential to generate
confidence am ong the com panys
custom ers and suppliers
Increased corporate transparency
- Possibility of getting m ore credit
at com petitive term s from the
com panys bankers
G reater efficiency and
transparency - R igorous
disclosure standards that are
required of listed com panies
should lead to m ore efficient
inform ation system s and to
im provem ent in the inform ation
m anagem ent and operating
system s of com panies
KPMGs role in initiating an IPO
Senior m anagem ent should
focus on the strategic elem ents
of the IPO process w here its
input is critical. They should not
underestim ate the tim e required
of senior m anagem ent, especially
w hile m arketing the IPO w ith the
help of roadshow s to institutions.
KPM G offers m ulti-disciplinary
team s w ith extensive experience
in capital m arket requirem ents,
accounting and financial
reporting. O ur team can help w ith
a coordinated, global approach to
an IPO .

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C onclusion: Incubating
a healthy future
C om bining m arket-driven policies
w ith state control, C hina has
im proved the health status
of its population low ering
m ortality rates and increasing life
expectancy over the years. M uch,
how ever, rem ains to be done
as health services still rem ain
inaccessible to large sections of
society.
The radical healthcare reform
of 2009 and the 12th Five Year
Plan gave a final push to the
m odernisation of C hinas health
structure, w ith a focus on hospital
reform , an essential m edicines
system and basic insurance
coverage.
This am bitious quest for universal
healthcare by 2020 requires vast
m obilisation and upgrade of the
pharm aceutical industry and
provides im m ense opportunities
for dom estic and foreign
com panies to fill in the quality and
quantity gaps along the entire
value chain.
The C hinese governm ent
rem ains determ ined to
transform the industry from a
generic drug-focused sector
to an innovation-driven drug
developm ent pow erhouse.
Securing pharm aceutical supply
lines, funding research, elim inating
bottlenecks in distribution and
m aking drug quality com patible
w ith global standards rem ain
essential targets for C hina.
Sensing significant grow th
opportunities, m ost m ultinationals
are in the process of extending
their footprint in C hina,
concentrating on prescription and
high end m edicines, research
and better distribution netw orks.
D om estic com panies, on the other
hand, are building on their generic
strength and extensive distribution
netw orks to cater to a grow ing
and m ore affluent m arket. C hinese
outsourcing com panies, too, have
carved a niche for them selves,
becom ing essential extensions for
big pharm a.
A long w ith quality, innovation
and affordability, the focus
on biotechnology and the
m odernisation of traditional
C hinese m edicine are key drivers
of grow th, creating virtually
endless possibilities from the
com bination of the best of the
East and the W est.
O ver the next few decades, C hina
has the potential to becom e
as one of the leaders of the
pharm aceutical w orld. W ith
every big com pany in the sector
focusing on this region as a
source of grow th, the country
is likely to play an increasingly
significant role in the w ay drugs
are invented, tested and perhaps
even regulated.

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KPMGs Global Pharmaceuticals Practice
Ed Giniat
G lobal C hair,
Pharm aceuticals Practice
T: + 1 312 665 2073
E: eginiat@ kpm g.com
David Blumberg
G lobal Advisory Leader,
T: + 1 267 256 3270
E: dblum berg@ kpm g.com
Frank Mattei
G lobal Tax Leader,
T: + 1 267 256 1910
E: fm attei@ kpm g.com
Chris Stirling
European C hair,
T: + 44 20 7311 8512
E: christopher.stirling@ kpm g.co.uk
Norbert Meyring
A sia Pacific C hair,
T: + 86 (21) 2212 2707
E: norbert.m eyring@ kpm g.com
Merry Newman
G lobal Executive
T: + 1 201 505 3599
E: m new m an@ kpm g.com
kpmg.com/cn
Peter Fung
Partner in C harge
Industrial M arkets
KPM G in C hina
T: + 86 (10) 8508 7017
E: peter.fung@ kpm g.com
Andrew Weir
A sia Pacific C hair
Infrastructure, G overnm ent &
H ealthcare
T: + 852 2826 7243
E: andrew .w eir@ kpm g.com
Khoonming Ho
Partner in C harge, Tax
KPM G in C hina
T: + 86 (10) 8508 7082
E: khoonm ing.ho@ kpm g.com
Ning Wright
Partner, Advisory
KPM G in C hina
T: + 86 (21) 2212 3602
E: ning.w right@ kpm g.com
Mark Bowra
Partner, Advisory
KPM G in C hina
T: + 86 (21) 2212 3883
E: m ark.bow ra@ kpm g.com
Ricky Wong
Partner, Advisory
KPM G in C hina
T: + 86 (20) 3813 8833
E: ricky.w ong@ kpm g.com
The inform ation contained herein is of a general nature and is not intended to address the circum stances of any particular individual or entity. A lthough w e endeavour to provide accurate
and tim ely inform ation, there can be no guarantee that such inform ation is accurate as of the date it is received or that it w ill continue to be accurate in the future. N o one should act upon
such inform ation w ithout appropriate professional advice after a thorough exam ination of the particular situation.
2011 KPM G Advisory (C hina) Lim ited, a w holly foreign ow ned enterprise in C hina and a m em ber firm of the KPM G netw ork of independent m em ber firm s affiliated w ith KPM G
International C ooperative (KPM G International), a Sw iss entity. A ll rights reserved. Printed in C hina.
The KPM G nam e, logo and cutting through com plexityare registered tradem arks of KPM G International.
Publication num ber: C N -IM 11-0001
Publication date: M ay 2011

KPMG China Pharmaceutical 201106

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