Pharmaceutical Industry Lacks Force for Profit Growth

Although the pharmaceutical industry in China had quite rapid
growth in production, sales and export in the first half of 2006,
it failed to conduct an effective conversion into profit. Due
to the impact from a series of factors, the total profit gained
by the pharmaceutical industry in the first half of 2006 was only
7.65% higher than the same period of 2005, the growth being a
historical low.

Rapid growth in export

According to statistics from CCCMHPIE (China Chamber of Commerce
for Import & Export of Medicines & Health Products), the
pharmaceutical industry accomplished an industrial total output
value of RMB251.09 billion in the first half of 2006, an increase
of 19.47% over the same period of 2005.
   Four sectors including sanitary materials and medical
supplies, traditional Chinese herb slice, medical apparatuses,
equipment and machinery, and biological and biochemical
products maintained a rapid growth of over 20%. The sector of
chemical pharmaceutical technical increased by 19.29%, slightly
lower than the average level. The 2 sectors of chemical
pharmaceutical formulations and traditional Chinese medicines
accomplished an industrial total output value of RMB62.799
billion and RMB49.138 billion with a growth of only 15.20% and
15.75%, lower than the average level.
   The pharmaceutical industry accomplished an industrial sales
output value of RMB234.997 billion in the first half of 2006,
an increase of 19.84% over the same period of 2005. The two
sectors of chemical pharmaceutical formulations and traditional
Chinese medicines accomplished a sales output value of RMB67.591
billion and RMB51.669 billion respectively with a growth of
16.22% and 14.78%, lower than the average level.
   Besides, the export in the pharmaceutical industry also grew
rapidly. The total export value in the first half of 2006 was
RMB29.532 billion, an increase of 23.87% over the same period
of 2005. Chemical pharmaceutical technical and medical
apparatuses, equipment and machinery as two major export
categories maintained a rapid growth of 21.71% and 31.60%.

Growth slowdown in profit

The pharmaceutical industry accomplished a total profit of
RMB18.091 billion in the first half of 2006, an increase of 7.65%
over the same period of 2005, the growth being 10.6 percentage
points lower than that in the same period of 2005 and a historical
low. What should be noticed, however, was that the profit growth
in the second quarter displayed a rising trend and was 1.3
percentage points higher than that in the first quarter.
   The revenue was not matched to the profit growth in the first
half of 2006. In appearance, it is caused by profit growth
slowdown in the 2 sectors of chemical pharmaceutical
formulations and traditional Chinese medicines. Deep-seated
causes however include low operating rate, irrational product
portfolio and export barriers.
   First of all, the product portfolio is irrational. In 2006,
the output value and the total profit in the 3 sectors of chemical
pharmaceutical technical, sanitary materials and medical
supplies and traditional Chinese herb slice have grown rapidly.
The growth in chemical pharmaceutical formulations and
traditional Chinese medicines with high added value is however
lower than the average level. Their economic indexes, in
particular, remain stagnant or even have a negative growth. The
result is a drastic profit downslide in the entire
pharmaceutical industry.
   Secondly, the production cost is on the high side. Since the
end of 2003, the price of water, power, coal and steam has kept
at a high level and the production cost in the pharmaceutical
industry has also increased. The cost growth in the
pharmaceutical industry has always been higher than the revenue
growth. The cost of main businesses in the pharmaceutical
industry in the first half of 2006 increased by 22.68% compared
with the same period of 2005, being 3.05 percentage points higher
than the revenue growth.
   Thirdly, to contain the high price of pharmaceuticals, China
has conducted nationwide rectification on commercial bribery in
the purchase and sales sector and implemented a series of reform
policies such as price reduction, classification control and
name standardization. The issuance and implementation of these
policies has restrained the price rise of some pharmaceuticals
and also squeezed the profit space in pharmaceutical producers.
   Besides, after the WTO accession the low-cost advantage of
chemical pharmaceutical technical in China has become the main
method for the expansion of the international market.
Advantageous pharmaceutical technical is also faced with the
dual pressure of antidumping and antimonopoly. For example,
vitamin C that is one of the advantageous products with strong
international competitive edge met antimonopoly charge in the
United States in early 2005. Huge impacts will be produced on
the sales of vitamin C produced by China in other overseas
markets.