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China Pharmaceutical Industry Report (Merger & Reorganization), 2006 

Published: Aug/2006

Hard Copy  USD $ 2,200
Pages: 190 Electronic(PDF)  USD $ 2,300
Report Code: DY003 Enterprisewide  USD $ 3,450

1. Status quo of China's pharmaceutical enterprises

2006, as the first year of Eleventh Five Year Plan, maintains a good momentum of growth in, the production and distribution of China's medicine industry in the first quarter of 2006. With a better situation of export, the medicine production and export keeps on a rapid growth.
The medicine industry reaches a total production value of 113.4 billion RMB, with a YoY increase of 20.7%. The production-distribution rate is 93.6%, with a YoY decrease of 0.3%, 3.7% lower comparing with national industry average level. The production value of chemistry raw material medicine reaches 356,000 ton, increasing by 28.6%; 214,000 ton of Chinese patent medicine, increasing by 24.6%.

Among these, the total production value of Chemical raw material medicine and biological and biochemical pharmaceutical reaches 27.8 and 8.68 billion RMB separately, with a YoY increase of 23.4% and 27.8%, keeping a relatively rapid growth. However, that of the chemical pharmaceutical and Chinese patent medicine is 344 and 252 billion RBM separately, with a YoY increase of 15.6% and 16.9%, a relatively lower increase speed than the average level of the industry.

The medicine industry has completed an export delivery of 13.8 billion RMB, with a YoY increase of 29.5%, and the amplitude of increase raises 9.7% YoY.

Among these, Chinese patent medicine reaches an export delivery of 603 million RMB, with an increase of 82.8%, becoming the eye-catching in the industry recently. The export delivery of chemical raw material medicine is 6.97 billion RMB, with an increase of 24.3%; while that of biological and biochemical pharmaceutical and chemical pharmaceutical is 1.42 and 1.05 billion RMB separately, increasing by 37.8% and 10.3%; while that of the sliced Chinese herbal medicine is 170 million RMB, descending by 3%.

However, there still exist some problems in China's medicine enterprises currently.

Although the production and export of China's medicine keeps high speed growth, the profits increase speed falls dramatically. The medicine industry carries out a profit total amount of 7.89 billion RMB, with a YoY increase of only 6.3%, while increase speed falls to the bottom of history, less than 1/3 of national industry profit level, listing penultimate in the 12 greatest industries in the whole country. Among these, the profit total amount of the chemical raw material medicine reached 1.54 billion RMB, increasing by 14.8%;that of Chinese patent medicine and the biology and biochemical pharmaceutical was 1.84 and 0.72 billion RMB separately, increasing by 0.1% and 3.2%; While the chemical pharmaceutical 2.63 billion RMB, descending by 6.3%.

The reduction of profit of the China's chemical pharmaceutical, Chinese patent medicine and the biology and biochemical pharmaceutical is the main reason for the drop of profit of China's medicine industry. Enterprises under deficit reach 29.8%, rising by 10.3 percentages. Deficiency sum of these enterprises is 1.38 billion dollars, increasing by 30.8%. Enterprises under deficit are increasing and their deficiency sums are extending. There are some reasons for that. Our research center holds such an opinion that there are three main reasons:

Firstly, China's medicine enterprises pump too little capital in research and development. They invest only 2% of their income on research and development each year, much lower than foreign medicine enterprises, which pump 15% of their revenue in research and development.  As the budget of research development is so little, that obvious shortage comes out in the development of these enterprises. Therefore, 95% of western medicine in China's western medicine market is copied. And this situation also exists in China's patent medicine market. These result in supply exceeding demand in China's pharmaceutical market and the situation of repeating structuring in a low level.

Secondly, China's medicine enterprises have problems of small scale, large quantity and low productivity.  In 1998, there were totally 7500 medicine business enterprises in China. To the year 2002, there still existed 6600. In 2005, there were about 4000 medicine production enterprises in China. Most of them were small scaled, with low performance, not comparable to the big enterprises abroad. Large-scale, high-tech enterprises were less than 40.

Thirdly, pharmaceutical quality should be strictly controlled. The large quantity of pharmaceutical enterprises and the low productivity result in the poor quality of products, and make it hard to prohibit fake drug and inferior drug. In 2004, the national pharmaceutical supervision department proscribed that the drug factories that can not meet the standard of GMP is prohibited to produce drugs. But so far, the medicine harm still occurs occasionally. 

Currently China's pharmaceutical business enterprises fall into the following categories: large domestic pharmaceutical enterprises with strong fiscal background supported by government. The market quota is 30% or so. These companies are large business enterprise groups that have capital power and financing power with success experience of merger and reorganization. A second kind is foreign capital and joint venture pharmaceutical enterprises. They occupy the market quota of 60% or so. Most of these are some chemical pharmaceutical enterprises, depending on the OEM order to exist, and become the processing plant of the foreign capital, joint venture enterprises. Another kind is pharmaceutical enterprises with strong ability of research and development, not large scale, and flexible mechanism, occupying the market quota of 10% or so. They usually win the favor of risk investment companies because of the new pharmaceutical developed by them frequently. 

2.The elements effecting pharmaceutical enterprises and the motive of merger and reorganization

Firstly, the recall of drugs. The National Food Drug Administration declares that, the drug recall system in China has entered the stage of investigate and survey. Officers in the National Drug Adverse Reaction Test Center denote that, the drug recall system, drug harm compensation system, drug adverse reaction anti-emergency processing mechanism etc., are all in the charge of supervision system after come into the market. The establishment and implement of the drug recall system is an irresistible general trend. On one hand, it will increase the development risk and the management costs of the medicine business enterprise consumedly, thus urges the drugs production business enterprise to set up the brand concept.  On the other hand, the earnest and responsible recall by the enterprises also shows the social sense of responsibility. In the long run, the drug recall will effectively reduce the happening of complicated drug indemnity dispute, and will also win the trust of the consumers.  However, for the pharmaceutical enterprises, the recall of drug may impact the selling and brand effects. When a kind of drug which an enterprise rely for existence is recalled, this brand will suffer the boycott from consumers. It may affect the existence and development of the enterprise, so the medicine enterprise may head for the integration and reorganization.

Secondly, reduction of the drug price. On September 28th, 2005,the nation develop and reform committee declared to reduce the highest retail price of 22 kinds of drugs since October 10th, 2005, with an average reduction of 40% or so, with a highest reduction of 63%, reducing 4 billion RMB. This is for the 17th time, that China reduces the drug price, and is of the largest scope. The drug price reduce policy inhibits the earning space of pharmaceutical enterprises, especially the chemical pharmaceutical. For some small companies that exist on a few products, price reduce threaten them in regard to the profits support, and will threaten their existence and development. So they have to withdraw or look for the cooperation of other companies, or to be purchased. This helps realize integration of enterprises, and results in elimination of some small enterprises.

Thirdly, in view of extending the market, strengthening the power and quickly entering the medicine industry etc., enterprise merger reorganization in global scope carries on continuously among biological technique companies, or among large scale pharmaceutical companies, or between biological technique companies and large scale pharmaceutical companies, to strengthen the competitiveness of the enterprises. The traditional pharmaceutical company or the biological medicine company can merge biological technique Company. Obtaining the new technique is the main motive of the multinational companies to merge each other, and the strategic allies become the industry development mode.

3.The trend of merger and reorganization in pharmaceutical industry

The high request of the medicine industry for technique, capital, development...etc. determines the current situation of China's medicine enterprises. The small scale enterprises with low expenses of development, lack of independent intelligent property and technique are impossibly to exist over a long period of time under this situation. The high demand of medicine technique, the high capital-intensive degree and the high profits determine that this is a competitive industry. For a period of time, the domestic non- medicine listed company sets foot in the medicine realm in great quantities, only in1998 a year there was more than 40 non- medicine listed company setting foot in the medicine realm; Foreign capital companion also wears into China since its entry into WTO. China has more than 1800 joint ventures currently. In the ex-25 world rank multinational pharmaceutical companies, more than 20 entered China. China's high level market of medicine is basically occupied by transnational corporations and the enterprises of their investment. Therefore, China's medicine enterprises have to carry on reforms and integrate continuously to raise their concentration degree, in order to be more competitive and fight the market quota with the foreign enterprises. Therefore, our research center analyzes that, in the next few years, merger and reorganization will take place continuously in the industry or across industries. Most small and meddle scale enterprises will eliminate at last. China's pharmaceutical industry has a huge potential. With China's GDP grows in speed, people's life standard is rising, and people's medicine consume also will correspondingly increase.  But, the investment of China's health care consume is not high, and this is just where the market potential exists. At the same time, the foreign funded enterprises and Chinese enterprises will compete even more dramatically from 2006 to 2010. Foreign capital enterprises develop in big cities because of their limit in product and market strategy and resources, while Chinese enterprise will prevail in small and middle sized cities and the vast villages. In the next five years, China may become the fifth medicine market in world.

China has more than 4,000 medicine companies currently, few of which are large group enterprises. Compared with some large scale medicine companies in developed countries, they are lack of market competition.  Moreover, there is a large gap between China's city medicine market and rural medicine market. With the popularization of China's rural medicine cooperation system, the rural market will become broader and broader.

The status quo of Chinese medicine market creates the condition for the foreign-funded enterprises. Many international pharmaceutical enterprises are attracted by the low cost opportunity to expand the market in China. With the gradually enlargement of foreign investment in China, the reform and reorganization of China's domestic enterprise is booming. Facing a new round of competition, to build up a good competition cooperative relation is a shortcut for domestic pharmaceutical enterprises to get away from the competition crisis and strengthen their competitiveness.

In merger and integration, enterprises are all rationally looking for a perfect platform to realize their development. In the cases of merger in 2005, there is not only foreign fund merger like Bausch US merging Freda in Shandong China, but also actions of braveness like Holly share holding, a domestic non-medicine enterprise entering medicine industry.   Lukang cooperating with Huayuan, Huarun holding share of Dongeejiao, Shineway being listed and trading in Hongkong, and seek foreign fund support, all these show the reorganization of China's pharmaceutical enterprise is booming.
Our research center believes that the activeness of merger in China's medicine market reflects a good tendency of development of the industry, and on the other hand puts forward larger challenge for rational investment and enterprise management. 

Currently, the method of merger is too still simplex. Although a variety of dealing method has continuously come forth in the medicine merger market, like open market procure, displacement of share ownership, borrow the band to come into the market, MBO etc.  However, cash agreements procure still acts as the main procure way. This also became the certain obstacle for the progress of merger development, causing the slow-moving of the progress.

Merger has a tremendous impact on the development of medicine industry. Through merger, the funds, talented person, technique can meet together and form resultant force quickly, and can raise the competitiveness of enterprises in the industry; The promoting of concentration would help solve the predicament of the medicine industry currently.
There is no denying that merger has the strong motivation to the whole medicine industry. Under current circumstance, it is urgent for China medicine enterprises to find out how to produce the real big and strong native enterprise through merger, and how to face to the fierce competition of globalization in China's pharmaceutical industry and that of foreign pharmaceutical enterprises.



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