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Pharmaceutical Cluster

Pharmaceutical Cluster. International University of Monaco MBA 2011. Shanghai & China. Insight into China. International University of Monaco MBA 2011. Macroeconomic Indicators Size of population – 1.3 billion (2010)

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Pharmaceutical Cluster

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  1. Pharmaceutical Cluster InternationalUniversity of Monaco MBA 2011 Shanghai & China

  2. Insight into China InternationalUniversity of Monaco MBA 2011

  3. Macroeconomic Indicators • Size of population – 1.3 billion (2010) • GDP – $4627.7 billion • Inflation – 3.3% • Consumer price Index – 123.6 (3.3% growth) • Exchange Rate – 6.8409 ($/CNY) Economic performance of China InternationalUniversity of Monaco MBA 2011

  4. 11th November 2001 – Entry into World Trade Organization • Improved transparency & Intensifying of commercial legal procedures • Obligations include • Sharpening of rules on intellectual property • Tariff concessions • Market access of non-Chinese service dealers participating in the distribution of pharmaceuticals • Better patent system, medical insurance has become more widespread • Pharmaceutical-related regulations have been improved • To become the third largest pharmaceuticals market in the world by 2011 according to a report released by a market research firm know as IMS • China's pharmaceutical revenue is growing fast –Market may double by 2013. • Sales of prescription drugs in China will grow by US$40 billion through 2013 Activity Time Trend InternationalUniversity of Monaco MBA 2011

  5. Shanghai • 18 million Inhabitant – Tenth largest cities in the world • Located at the delta of the Yangtze River, longest and busiest in China • Largest and most important centre of Industry in China • China’s leading port and commercial city • Pudong • Flagship of China’s economic reform • Permanent Population – 4.12 Billion • Gross output value - RMB 400.139 billion Shanghai & Pudong InternationalUniversity of Monaco MBA 2011

  6. Government Support • Development of local physical infrastructure • Provision of funding for Shanghai research institutions and support of venture capital investment to facilitate technology commercialization • Foster favorable trade and tax environments • Provision of financial and insurance freedom and help to expand its capacity as a financial center • Improvement of the legal environment and protection of intellectual property Development of Pudong Area InternationalUniversity of Monaco MBA 2011

  7. DiamondAnalysis InternationalUniversity of Monaco MBA 2011

  8. A drug supervision and management body was formed in 1998. The goals for this body are to intensify supervision and control over medicines, and gradually set up a drug management system featuring legal management, unified law enforcement, standard codes of conduct, honest practice and high efficiency • Foreign Companies doing R&D in China • Subsequently China’s entry into the WTO, many strong pharmaceutical companies are transferring their research and development centers to China. For example, Roche of Switzerland opened its R&D center in Shanghai recently Input Conditions InternationalUniversity of Monaco MBA 2011 Supervision & FDI in China

  9. Governmental Policies • The main goal of the government is to improve manufacturing and distribution efficiencies, strengthen drug safety supervision, and separate hospitals from the drug retailing business To reach these goals the following provisions were required: • Requiring all pharmaceutical manufacturers to meet GMP standards • Diminishing drug sales through hospitals • Bidding publicly for drug purchase • Implementing a national healthcare insurance system and • Strengthening intellectual property protection and SFDA supervision Input Conditions InternationalUniversity of Monaco MBA 2011 Governmental Policies

  10. The pricing mechanism is based upon three reflections when setting the maximum retail price - production cost, a wholesaler spread set by the government and the prices of comparable products in the market. Any products priced above this level will be removed. • The central government has been playing a significant role in pharmaceutical price readjustment. Future price reductions will originate from hospital pharmaceutical retail shops. Input Conditions InternationalUniversity of Monaco MBA 2011 Government drug pricing policy

  11. Since 2002, China's pharmaceutical logistics industry has been expanding constantly. A great amount of capital is being injected into this industry. In 2007, China had 3 main pharmaceutical logistics centers put into operation and many more are yet to come. Input Conditions InternationalUniversity of Monaco MBA 2011 Pharmaceutical Logistics

  12. China’s over-the-counter market is growing fast and has become the fourth largest OTC market in the world. Foreign enterprises have been closely observing the growing OTC market • The central government has been playing a significant role in pharmaceutical price readjustment. Future price reductions will originate from hospital pharmaceutical retail shops. Input Conditions InternationalUniversity of Monaco MBA 2011 Over the Counter Market and Pricing

  13. Strategy & Rivalry -Buyer Power InternationalUniversity of Monaco MBA 2011 International University of Monaco MBA 2011

  14. InternationalUniversity of Monaco MBA 2011 Strategy & Rivalry -Supplier Power International University of Monaco MBA 2011

  15. InternationalUniversity of Monaco MBA 2011 Strategy & Rivalry -New Entrants International University of Monaco MBA 2011

  16. InternationalUniversity of Monaco MBA 2011 Strategy & Rivalry -Substitutes International University of Monaco MBA 2011

  17. InternationalUniversity of Monaco MBA 2011 Strategy & Rivalry -Degree of Rivalry International University of Monaco MBA 2011

  18. Longer Life-span • The average lifespan for Shanghai people reached 81.08 in 2010 - the first time it has passed 81 • China: 75 years • Infant mortality Shanghai: 3 per 1,000 China: 6 per 1,000 • The pre and post-natal mortality rate for women was 6.68 in 100,000 • Age Structure: Larger older population • Com-pared with the 5th national census in 2000, the proportion of those aged 0-14 in the city population dropped 3.4 % • Aged 65 and above rose by 0.5 % Demand Conditions InternationalUniversity of Monaco MBA 2011 BuyersLocal Consumers

  19. Employment • Employs 9.4607 million people • 4.2 % unemployment rate • Local labor markets -sub regional chemical fields • Middle Class Expansion/China • Present estimates of middle class in China range from 100 million to 247 million • An income of about $9,000 is necessary to be considered middle class • China could have over 600 million middle class citizens by 2015 • Per Capita Income • China is on track to create a 700% growth in per capita income in just 20 years • Shanghai: $18, 400 “Sophisticated demanding buyers pressure companies to meet high standards, to innovate and to move forward more developed segments.” Michael Porter Demand Conditions InternationalUniversity of Monaco MBA 2011

  20. Total: 5,898,415 • Type A and Type B infectious diseases (3,499,582) • Plague, Cholera, HIV, Viral, Tuberculosis • Type C infectious diseases (2,398,833) • Leprosy, Camp Fever Demand Conditions InternationalUniversity of Monaco MBA 2011 Health Conditions

  21. Hospitals • 67,000 in China; 759 in Shanghai • Managed Care Organizations (MCOs) • Medical facilities provided 132.17 million out-patient and emergency services and 647,000 surgical procedures for hospitalized patients, both increasing by about 13 % • Medical services at the 228 involved 1,190 teams of general practitioners and a health database covering 1.7 million families • Health supervision agencies shut 3,369 illegal clinics, withdrawing the licenses of four facilities and collecting 16.91 million yuan • Government Agencies • International Companies • Large range and product differentiation reduces buyer power • Overall, buyer power is moderate Demand Conditions InternationalUniversity of Monaco MBA 2011 Key Buyers

  22. Pharmaceutical market is growing more than 20% a year • Demand is projected to increase 13.6 % annually to 375 billion yuan in 2011 • Growth decline from 2011-2015 to $48.8 billion by 2015 • Aggressive government spending , economic boom, rapidly aging population • The trend toward unhealthy lifestyles and an increasing demand for drugs to treat chronic disease Demand Conditions InternationalUniversity of Monaco MBA 2011 Local Demand

  23. Market Segmentation InternationalUniversity of Monaco MBA 2011

  24. InternationalUniversity of Monaco MBA 2011 International University of Monaco MBA 2011

  25. InternationalUniversity of Monaco MBA 2011 International University of Monaco MBA 2011

  26. Market Share InternationalUniversity of Monaco MBA 2011 International University of Monaco MBA 2011

  27. AstraZeneca PLC • GlaxoSmithKline Plc • Northeast Pharmaceutical Group Company Limited • Pfizer Inc. • Yangtze River Pharmaceutical Group Leading Companies InternationalUniversity of Monaco MBA 2011

  28. The ultimate size and forecast exponential growth in future demand for pharmaceuticals, coupled with the inherent low-cost structure of Chinese manufacturing offer huge opportunities for pharmaceutical enterprises. • Global pharmaceutical sales will rise 5% -7% in 2011 to $880 billion • The 2011 projection compares with 2010’s 4% to 5 % growth in drug sales to $840 billion • It is expected for drug spending in China to increase at least 25% in 2011 • China is expected to expand by as much as 17% to $180 billion worldwide while growth in the United States market slows Demand Conditions InternationalUniversity of Monaco MBA 2011 Global Demand

  29. “arguably ranking as the best pharmaceutical outsourcing destination among all Asian territories when looking at the multiple factors of cost, risks and market opportunities” PriceWaterhouseCooper • Patent Protection • Over the next five years, multinational corporations will lose patent protection of products worth US$140 billion in annual sales • Example: • Novartis, $1.25 billion in R&D • Bayer, $5 billion sales increase by 2015 Demand Conditions InternationalUniversity of Monaco MBA 2011 Global Demand

  30. Related and Supporting Industries The Shanghai Pharmaceutical cluster benefits from internationally competitive related and supporting industries, able to • deliver cost-effective inputs (materials, machinery, services) in an efficient and preferential way thank to the geographical proximity • provide advantages in innovation and upgrading through close cooperation and sharing of information with pharmaceutical firms Pharmaceutical Value Chain InternationalUniversity of Monaco MBA 2011 Biotechnology Industry Hospital and Medical Services Chemical Industry Engineering Industry Other Services Packaging Industry

  31. Biotechnology Industry The field shows immense importance in augmenting existing technologies in the pharmaceutical industry (i.e. research of simple molecules through trial-and-error to treat symptoms of diseases) • In Shanghai-Pudong the establishment of the Zhangjiang Hi-Tech park fostered the development of biotech industry • 1996 - Agreement of National Shanghai Biotechnology and Pharmaceutical Industry Base • Many biotech firms raised as spin-offs from local universities with proven record in the field • Shanghai Fudan-Zhangjiang Bio-Pharmaceutical, founded by six teachers from FudanUniversity • Local Government is accommodating in the proactive search for new park residents, with regard to research-intensive activities InternationalUniversity of Monaco MBA 2011

  32. Chemical Industry • Provides bulk drugs and raw materials for the production of all pharma’s product categories • Tablet/Capsules, Oral liquid, External Preparation • As average,raw materials account for 33% of the drug’s MRP - Maximum Retail Price • (i.e. bulk drugs, dyes, preservatives, glycerin, lactose, solvents) • The growth of the chemical industry in Shanghai-Pudong specialized in areas such as pharmaceuticals, biotechnology and specialty chemicals • Gross production value of the Yangtze Delta chemical industry increased from 333.18bn Yuan (41.6bn USD) to 1,304.90bn Yuan (163.1bn USD) between 1998 and 2005 InternationalUniversity of Monaco MBA 2011

  33. Engineering Industry Pharmaceutical industry is highly capital intensive requiring consistent investments in custom design machinery, in accordance with stringent regulations • As average, Pharmaceutical’s processing expenditure accounts for 25% of the drug’s MRP - Maximum Retail Price • Machinery for mixing and granulating, tablet coating, capsule manufacturing, autoclaves, drying chambers, etc. • In Shanghai-Pudong, the Jinqiao Export Processing Zone achieved great development in the machinery industry, attracting multinational corporations to produce and sell quality machinery worldwide • As of July 2005, the development zone absorbed investment totaling USD14.159 billion, of which USD12.721 billion made by foreign enterprises InternationalUniversity of Monaco MBA 2011

  34. Packaging Industry The pharmaceutical packaging industry encompasses all activities including package testing and validation, package designing and development, package prototyping of pharmaceutical products • High cooperation with pharmaceutical firms • Products can be subdivided into different packaging segments: blisters, blow-molded plastics, ampules, caps and closures, tubes and glass, bottles, strip packs • Pharmaceutical packaging materials industry’s contribution rate in China is lower than other developed countries (10% compared to average 30%) • Over the next five years predicted a rapid development of the local pharmaceutical packaging industry • Actual packaging industry’s annual output can only meet 80% of the domestic pharmaceutical demand InternationalUniversity of Monaco MBA 2011

  35. Hospitals and OTC Pharma Industry • China has a large and fast-growing over the counter (OTC) pharmaceuticals industry • Retail sales value of OTC drugs expanded by 102% between 2003 and 2009 • Total OTC pharmaceuticals retail market increased to 72.02bn Yuan in 2009, and the market is expected to surpass 100bn Yuan by 2013 • Growth in the OTC pharmaceutical market propelled by increasing public awareness about health care, rapid rise in urban living standard & growing disposable income levels • China’s 124bn USD healthcare reform(April 2009) boosts demand for pharmaceutical products ranging from generic drugs to medical equipment. • As part of the reform essential drugs are to be sold at government hospitals at wholesale prices • 40-60% decline in traffic in some of the drugstores located where implemented the healthcare reform InternationalUniversity of Monaco MBA 2011

  36. Major Challenges • Current operation mode of most distributors is not in line with the requirements of modern distribution, especially with regard to scale and automation. • Many distributors lack logistics management knowledge and talented managerial professionals • Macro regulation and control from the government is limited. • Profits today are at very low levels. The existence of a large number of undersized distributors has caused malignant competition and chaotic growth, which has resulted in higher costs, lower profits, and conflicts over limited market shares • Many distributors have limited market development and service capabilities. InternationalUniversity of Monaco MBA 2011

  37. Future Trends & Recommendations • Scale-up to achieve economies of scale required for economic performance • Merging with domestic and foreign-owned companies • Narrowing their focus to specific geographicmarket or healthcare areas • Enhancing modern logistics management • China's domestic pharmaceutical industry growth is exploding. With 17% growth, the future looks bright. However, systemic planning will be required. InternationalUniversity of Monaco MBA 2011

  38. InternationalUniversity of Monaco MBA 2011 Thank You ! Q&A Contact Us Gabriele Cavargna Bontosi gcavargna@monaco.edu Ola Farahat ofarahat@monaco.edu Rajesh Namagiri rnamagiri@monaco.edu Camilla Sorina csorina@monaco.edu Elena Vertlib evertlib@monaco.edu KseniyaTT ktchoubarova@monaco.edu

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