Guest column: Five drivers that will guarantee rapid growth of China's pharmaceutical industry
In this week's Interfax guest column, Jason Sha, a research analyst with leading Beijing-based investment advisory firm CEBM Group Ltd., discusses the outlook for China's pharmaceutical industry for the next several years and lists five key sources of growth in the domestic pharmaceutical industry. Translated from the original Chinese by Yu Chenxi.
By Jason Sha
Shanghai. January 19. INTERFAX-CHINA - China's pharmaceutical manufacturing and distribution sectors have met serious challenges since the early 2000s due to laggard health care policies and the non-standardized administration of the health care system. Between 2000 and 2006, the government implemented more than 20 instances of drug price cuts and clamped down on commercial bribery in drug production as well as distribution.
As a result, the profitability of a large number of pharmaceutical manufacturers and distributors was impacted by the developments in the industry, causing pharmaceutical sales revenue and net profit growth to dip well below the industrial average. In recent years, government efforts in guiding the development of the pharmaceutical industry coupled with the start of the health care reform has boosted the performance of the pharmaceutical industry to exceed the industrial average. We expect the pharmaceutical industry will continue to maintain rapid growth in the long term on the back of five growth sources.
Due to the differences in the structure of China's urban and rural economies, there is a wide gap in medical and health care expenses between the rural and urban population. In 2008, per capita health care expenditure in the urban areas stood at RMB 786.2 ($115.11) while in rural areas the figure was only RMB 246 ($36.02). Urbanization will drive more rural residents to the cities to seek better jobs which will allow them to afford better health care. The gradual reform of the household registration system will also enable these rural residents to have better access to health care in the cities. All in all, this will contribute towards a powerful driver in the rapid growth of China's pharmaceutical industry in the long term.
Per capita GDP close to high-income economies
China's annual per capita gross domestic product (GDP) has exceeded $3,000 and is maintaining a strong momentum on an upward trend. In Japan and Germany, the proportion of national medical and health care expenditure climbed strongly during a period of per capita GDP growth from $2,000 to $10,000, particularly from $3,000 to $8,000. This may mean that China is potentially on the brink of rocketing pharmaceutical growth. In the past few years, China's drug manufacturing industry has kept an average annual growth rate of around 20 percent, higher than the national economy's growth rate. We believe it is likely that pharmaceutical growth will exceed 20 percent over the next few years.
Aging society and changes in disease spectrum
The United Nations defines the aging society as one where the proportion of persons aged over 60 years old stands at 10 percent of the population or one where persons aged over 65 years old take up 7 percent of the total population. China was classified as a country with an aging population in 2000, with most of its elderly population living in poverty. Compared to other demographic types, the elderly population has a more substantial demand for health care services. China's economic growth and rising national pension investment will increase payment ability of the elderly population as such creating growth opportunities in the pharmaceutical production, distribution and health care sectors.
Lifestyle and diet changes over the past 30 years in China as well as environmental pollution as a result of rapid industrialization have raised morbidity and mortality rates of diseases such as cancer, cardiovascular and cerebrovascular diseases. Pharmaceutical industry growth will be on the back of the prevention and treatment of such diseases in the years to come.
Emergence of new products
At present, life science research has entered the post-genome era and we are witnessing the commercialization of new products from drug targeting, gene therapy and stem cell research outcomes. In developed countries, the biopharmaceuticals industry has achieved great success and in particular biopharmaceuticals even recorded more than $5 billion in annual sales revenue, almost equivalent to the size of China's biopharmaceuticals sector. There will be growth potential in China's biopharmaceuticals sector given that it has been developing fast in recent years.
Rising government investment
Government medical and health care-related investments has been steadily increasing following the issuance of the health care reform plan in 2009. In government-funded projects, the set up of a new rural cooperative medical infrastructure ranks as a key focus of the government. With government investment towards the health care reform estimated at RMB 850 billion ($124.45 billion) between 2009 and 2012, we believe that government spending in the public health sector will drive the societal level of health expenditures as a whole, leading to increased social and personal health expenditures.
The above is a personal opinion piece by the author. Its publication in no way implies that Interfax shares the views expressed in the article.