China heading for post WTO turmoil

This is the conclusion of an analysis of the Chinese market published by Dechema​, the organisers of the AchemAsia 2004 meeting that is due to be held 11 to 15 May in Beijing.

The total value of the Chinese pharmaceutical market was 330 billion renminbi (€32.7bn) in 2002, a 19 per cent increase on the 277 billion renminbi achieved in 2001. For comparison, the average growth of the pharmaceutical industry worldwide is 13 per cent. And in the first three quarters of 2003, pharmaceutical production increased by 20.0 per cent and sales increased by 17.2 per cent.

The API sector - accounting for 4,000 of China's 5,000 or so manufacturers - grew at 21 per cent, above the global average. However, the sector is expected to be hit particularly hard by WTO accession, as membership will mean that import duties are cut from 20 per cent to 5.5-6.0 per cent, leading to a reduction in the price of imported drugs.

Domestic companies will be unable to fight back, notes the report, because only around 10 per cent of them have the Good Manufacturing Practice accreditation necessary to produce drugs for export.

"In general, Chinese manufacturers of active ingredients suffer from a lack of technology and innovation,"​ according to Dechema, the German Society for Chemical Engineering and Biotechnology.

Even those products that are direct copies of Western drugs lag a long way behind the originals, and Chinese companies produce only around 4,000 APIs, compared to 150,000 in the US.

GMP attrition​Membership of the WTO is bringing in a more stringent intellectual property regime and an upgrade of the domestic regulatory system to bring it more into line with international standards. And one key element of this is the adoption of GMP and GSP (Good Supply Practice) in all pharmaceutical plants by 30 June.

Dechema notes that forcible GMP compliance will reduce the number of pharmaceutical players dramatically. The cost of converting a standard production line to GMP status costs an estimated 40-200 million renminbi, which will be beyond the reach of many small Chinese companies.

However, those that can comply appear to be doing so. Dechema notes that of China's 5,000 pharmaceutical companies, just over half (2,585) had at least one GMP approval by October 2003, and nearly 30 per cent of those clearances occurred between June and October last year.

Aside from APIs, China's other big sector is basic medicines; for example, the country is the world's largest supplier of penicillin. The manufacture of these drugs depends greatly on imported raw materials, so WTO membership will reduce production costs by lowering import duties.

This will boost exports, says Dechema, particularly as Chinese supply of basic medicines currently exceeds domestic demand and prices are falling.

Chinese output of basic pharmaceuticals reached 562,000 tonnes in 2002, an annual rise of 11 per cent, and made up 22 per cent of global sales. Exports in this sector increased by 28 per cent to $2.99 billion (€2.46bn), and accounted for 52 per cent of China's total pharmaceutical exports.

However, exports of basic medicines are at present limited by competition from India and other low-cost producers, with the former a particular threat because of its advanced position in GMP certification.

In addition, the sector is characterised by low added value, so large companies tend to perform better, yet most Chinese manufacturers are small.

Patent fall-out​

The past development of China's pharmaceutical industry has depended to a great extent on copying Western drugs, and WTO membership will have an important effect on this.

Low investment in R&D means that around 97 per cent of the pharmaceuticals manufactured in China are copies of products developed abroad. Of the 1,500 new medicines developed during the 8th Five-Year Plan (1990-1995), only two have truly innovative molecular structures.

This is bad news for Chinese manufacturers, says Dechema, because WTO accession commits China to protecting the patent rights of foreign pharmaceutical companies. Anyone infringing a pharmaceutical patent will be liable to fines of $400 million - $1 billion, and a product licence for a patented medicine will cost $5 million - $6 million.

China has offered full patent protection to foreign companies since January 1993, and more limited protection since 1986. However, many companies did not take advantage of this earlier legislation, and there is a legal loophole that allows Chinese companies to copy many products without a licence.

The law in question is the Medicine Administrative Protection Statute of 1992, which says that holders of foreign pharmaceutical patents taken out between January 1986 and January 1993 could apply to the Chinese government for protection. As long as these products had not yet been sold in China, the government would grant a period of seven-and-a-half years during which Chinese companies were not allowed to copy them.

Many biological, including erythropoietin, recombinant insulin, recombinant granulocyte colony stimulating factor (G-CSF), granulocyte/macrophage colony stimulating factor (GM-CSF), interleukin-2 and interferon, were developed before 1993 and were not registered under the Medicine Administrative Protection Statute. This means that Chinese companies may legally carry on making them without a licence.

The report concludes that WTO membership will make relatively little difference to the current and previous generations of drugs, but that new products are a different matter. In the future, Chinese manufacturers will only be allowed to develop their own new products, which will be expensive, or to make old drugs that are out of patent, which will mean fierce competition and low profits.