China Pharmaceutical Industry Report (Merger and Reorganization), 2006-2007

During the Tenth Five-Year Plan period (2001 to 2005), each indicator of the whole pharmaceutical industry greatly exceeded the scheduled; and the industrial output value, industrial added value and total profits more than doubled those of the Ninth Five-Year Plan. 

In 2005, the gross output value of China's pharmaceutical industry increased by RMB 263.7 billion over 2000 to RMB 450.8 billion, an average annual growth of 19.2% from 2000 to 2005; the industrial added value rose by RMB 93.4 billion to RMB 160.6 billion, an average annual growth of 19.0%; the sales revenue rose by RMB 251 billion to RMB 427.1 billion, an average annual growth of 19.4%; the profits summed up to RMB 36.1 billion, up RMB 21.8 billion with an average annual growth of 20.4%. In the first half of 2006, the whole pharmaceutical industry kept growing at a higher rate. By the end of July, the accumulated sales revenue amounted to RMB 256.98 billion, a year-on-year increase of 18.91%.

Up to now, the economic structure of China pharmaceutical industry has been further improved and regional economy is developing well. Pharmaceutical enterprises are accelerating the organization structure adjustment and enlarging their scales via recombination and shareholding reform, and nearly 130 have now been listed in Shanghai and Shenzhen stock exchanges. The proportion of production value of shareholding economy accounted for 47.4% in 2005, rising from 35.6% in 2000; the state-owned economy declined from 29% to 7.48% and the three forms of foreign-funded economy ascended to 27.2%. In 2004, 9 large-scaled domestic pharmaceutical enterprises achieved the sales revenue of over RMB 5 billion; 2 large-scaled medical device enterprises achieved the sales revenue of over RMB 1 billion. In addition, 3 nationwide medicine retail chain enterprises has established more than one thousand outlets and 27 retail chain enterprises have owned hundreds of outlets.

A large amount of small and medium-sized enterprises still exist in China, along with low R&D cost, shortage of self-developed intellectual property rights and inferior technology. Most importantly, this situation will not last for a long period, which is determined by the industrial inborn high demands in technology, capital and R & D. Pharmaceutical industry is destined to be full of fierce competition due to its demanding technology, high capital intension and profitability. Recently, batch of domestic non-medicine listed companies stepped into pharmaceutical industry, and meanwhile, foreign-funded enterprises also surged into China. There are now more than 1800 joint-ventured pharmaceutical enterprises, and over 20 of world top 25 pharmaceutical multinationals entered into China. China's high-end pharmaceutical markets are mostly occupied by multinationals or their invested enterprises in China, which forces the domestic pharmaceutical enterprises to perform constant reform and integration so as to improve the concentration degree and competitive ability. Therefore, inner-industry or cross-industry merger and reorganization will come out successively, and most small & medium-sized enterprises will be washed out finally. Along with the constant rapid growth of GDP and ever-improving living standards, the pharmaceutical consumption will increase accordingly, so there is a huge potential in China pharmaceutical industry. However, the consumption of Chinese people in healthcare is not that high, which indicates the market potential instead. Foreign-funded enterprises mainly orient at metropolis due to the restrictions in product, market strategy and resources, while domestic enterprises are dominant in small and middle-sized cities and rural areas. China may become the 5th largest pharmaceutical market in the world for the future.

There are currently more than 4000 pharmaceutical companies in China, but lack of group/scale enterprises, and even more, they are far less competitive than large-scale counterparts in developed countries. Besides, a wide gap exists in China urban and rural pharmaceutical markets, and moreover, along with the further penetration of rural cooperative medical system, the rural market will be more expansive. The status quo of China's pharmaceutical market paved the way for foreign-owned enterprises to enter China; many international pharmaceutical enterprises take an optimistic attitude at the opportunity to exploit the market at low cost in China. With the growing foreign-capital investment and rapid rising of reform and reorganization among domestic enterprises, it is a short cut for domestic pharmaceutical enterprises to establish a sound competitive cooperation in order to get rid of competitive crisis and enhance competitiveness.

After a few years of merger and reorganization, especially the recent compulsive implementation of GMP and GSP certifications, the number of Chinese pharmaceutical enterprises reduced dramatically from 6700 to current 3600. However, such problems as smaller scales and repetitive construction are still quite serious. As a result, it is inevitable to establish several large-scale groups in this area via M & A so as to compete with foreign pharmaceutical giants. For instance, Taiji Industry (Group) Co., Ltd. acquired Chongqing Traditional Chinese Medicine Co., Ltd (Tongjunge), Shanghai Pharmaceutical (Group) Co., Ltd purchased Shandong Xinhua Pharmaceutical Co., Ltd, and Topsun Group acquired Hubei Qianjiang Pharmaceutical Co., Ltd. According to related procedures of Chinese government, the domestic medicine distribution service has been open to foreign wholesalers and retailers since January 2003.

Aiming at the market expansion, enhancement of strength and rapid entry into biopharmaceutical industry, merger and reorganization among bio-tech companies or large-scale pharmaceutical enterprises, or between bio-tech companies and large pharmaceutical enterprises are continuously carried out around the globe. And the features are as follows: international large pharmaceutical companies perform constant combination, merger and reorganization, which results in an ever-enlarging enterprise scale and trade value; traditional medical companies or biopharmaceutical companies acquire bio-tech companies. But the multinationals mainly targets at obtaining new technology by merger, and the M&A made a large sum of capital flow into R&D and industrialization in biopharmaceutical. Strategic alliance has become the development mode of pharmaceutical industry.