Rajesh Parekh and Franck Le Deu
February 25, 2008
Few people would dare call China the sick man of Asia. But a surge of "diseases of affluence"—including diabetes, breast cancer, and cardiovascular disease—is among the unfortunate side–effects of a booming economy. Demand for drugs treating these and other health problems, combined with rising incomes, is enlarging the domestic pharmaceutical market more than 20 per cent a year and creating attractive opportunities for global players at a time when growth is decelerating in key European and United States markets.
While some multinational pharmaceutical firms are projecting near–term revenue growth of more than 30 per cent a year in China, none has yet captured the market's full potential. Although almost all global industry majors have a presence in the country's largest and wealthiest cities, few have completely penetrated them.
What is more, few products have achieved critical mass: among the portfolios of leading pharmaceutical firms, only about 12 drugs made more than US$50 million in sales last year, and about 80 per cent of the multinationals' products generated less than US$10 million each in revenue.
Until recently, multinationals considered China a secondary market because of its relatively low commercial prospects and concerns over intellectual property rights. But as tougher patent laws are put in place—and with demand for innovative drugs soaring–opportunities beckon nonetheless.
Multinational players must think big. They should put more resources into tailoring and expanding their product portfolios to meet the country's growing needs and develop a distribution strategy that deepens and broadens their reach.
Any company that wants to take full advantage of the opportunity China offers should aim to cover three key categories: innovative and patented products, branded generics, and over–the–counter drugs. Most multinationals stress newer innovative products already in their global portfolios, for there is growing demand in the mainland for this segment. But they are only a small portion of the market dominated by branded generics addressing major diseases such as diabetes or hypertension. Chinese consumers prefer strong brands even if the products are generics.
One way to fill gaps in a portfolio is to inlicense products for China. Acquiring a local company with complementary capabilities may be an attractive way to expand, especially as local companies strengthen their marketing and sales operations. Acquisitions of firms that have enjoyed commercial success in niche OTC segments could be particularly appealing, as local consumers tend to self–medicate for minor ailments. Another option is to partner one of the growing number of local firms that have had commercial success in niche disease areas. Multinationals should also pursue opportunities to create entirely new OTC categories.
To meet growth ambitions, firms will find it imperative to build up their sales forces. Global pharmaceutical firms must add at least 11,500 sales representatives by 2011—on average, a more than 18 per cent increase a year. Sources of talent are limited, however: China's leading medical schools turned out 6,200 graduates in 2005, and specialised pharmaceutical colleges only 3,900. Firms should consider broadening the type and number of universities they tap for talent.
In less than a decade, China will be transformed from a secondary pharmaceutical market into the world's fifth–largest. Companies aiming to capture a chunk of it must build stronger capabilities to better identify and meet the country's changing health–care needs.
Rajesh Parekh is a principal in McKinsey's Shanghai office, where Franck Le Deu is an associate principal. This article is adapted from The McKinsey Quarterly.
