Domestic Competition in the Chinese Pharmaceutical Industry
Main Contributor: Erica Berry
Team Leader: Marissa Vaillant
6/03/2017
The pharmaceutical industry in China is driven by the low price and high popularity of generic drugs. Generic drugs are identical to brand name drugs in all categories such as: dosage form, safety, strength, route of administration, quality, performance characteristics, and intended use. Due to the nature of the race-to-the-bottom for economically priced drugs in China, the Chinese pharmaceutical market is a highly competitive environment for branded companies to participate in. This article will address foreseeable limitations and discuss mitigation strategies that will facilitate North American pharmaceutical companies successful entrance into the competitive Chinese market.
Background on the Generic Drug Industry
Generic pharmaceutical drugs command a large swath of the Chinese pharmaceutical market and are expected to continue dominating the market in the near future. An estimated 64% of drug sales in China are generic medications, representing a total value of $68 billion. In contrast, branded pharmaceutical drugs represent 22% of total sales ($23 billion). The popularity of generic drugs suggests that Chinese consumers prefer drugs with the lowest cost. Many generic companies operating in China realize this, as they tend to bring generic drugs to market as quickly as possible. Within the first year of a patent on a branded drug expiring, 50% of that patented drug’s market will have been lost to generic drugs. In the second year, generic drugs may grow to represent 70% to 80% of the patented drug’s market.
Issues that Make the Chinese Pharmaceutical Industry Difficult to Enter
China’s robust generic drug market means that foreign pharmaceutical companies entering China may find it difficult to create sales based on brand loyalty or even brand recognition.
Consumers, it seems, favour the lowest available price over brand loyalty. Thus, North American pharmaceutical companies should embrace an operational and promotional strategy that keeps their drug prices low in order to directly compete with generic Chinese brands. Low prices will be more important than creating a recognizable brand or marketing strategy. Competitive prices against generic brands will be a benchmark for success if entering this market.
The Chinese government is acutely tuned to the cost of pharmaceuticals. The government controls the price of generic medications by setting the maximum price that generic producers can charge. The price is based on a percentage of the off-patent (branded) product’s price. Moreover, the socialized healthcare system in China strengthens the market for generic drugs because physicians tend to prescribe the cheaper generic drugs to maintain low overall health care costs. This will only become more of a focus for physicians in the near future as strains on the Chinese public healthcare system deepen in response to an aging population. Again, North American companies would benefit from keeping their prices low, and within a competitive range with generic Chinese drugs. An alternative strategy would be for North American pharmaceutical executives to engage directly with Chinese physicians by convincing them of the high quality of their branded drugs. If physicians believe that the patented product is superior to the generic alternative they will be willing to pay a slightly higher (although still competitive) price. Purchase incentive schemes that promote quantity savings through volume of branded drugs could prove a viable solution.
The generic drug market is highly competitive and makes it difficult for branded pharmaceutical companies to enter China. Since generic drugs are identical (in terms of effectiveness) to their branded counterparts, the main differentiating factor between generic and branded drugs is the price. In this regard, competition amongst pharmaceutical companies is fierce, as they try to undercut one another while consumers and the government benefit from lower prices. To escape this intense cycle of competition, branded drug companies must differentiate their patented products from the generic counterparts. This differentiation could be based on proving that the patented drug is more effective or of higher quality than the generic drug. Chinese consumers will respond favourably to a product that is said to be of higher value.
For these reasons, the Chinese pharmaceutical market continues to be a challenging arena for foreign pharmaceutical companies to successfully enter. A two pronged approach that first and foremost addresses pricing barriers for physicians and the public health care system coupled with a strategy that demonstrates higher quality in branded drugs, is necessary for success in this environment.
Although the current situation is one in which generic drugs form the bulk of the Chinese pharmaceutical market, there is hope for branded drugs. The Chinese government has prioritized the diversification of the pharmaceutical sector away from generic medications and toward a model based around patented products. This could represent a major shift in the pharmaceutical market, potentially resulting in the lessening of competition from generic drugs. This would, in turn, make China a more attractive market for foreign pharmaceutical companies hoping to enter the Chinese market with patented products.
