Pharmaceutical Industry Develops Steadily

With the development of the economy, the growth of the total
population, the growing proportion of older citizens, and the
increasing awareness of people's health care, the
pharmaceutical market in China has seen a sustained and rapid
expansion. The on-going system reform and opening up has pushed
the pharmaceutical market into a rising stage with the constant
upgrading of production concentration. The momentum and the
vigor in the development of the pharmaceutical economy are also
constantly enhancing.

  Overall status of the pharmaceutical market in 2006

The pharmaceutical market in China continued its trend of stable
and relatively rapid growth in 2006. The total industrial output
value accomplished by the pharmaceutical industry in 2006 was
RMB501.721 billion, an increase of 18.91% over 2005. The product
sales revenue was RMB475.369 billion, the total asset value was
RMB603.141 billion and the total profit was RMB36.265 billion.
The growth rate of the pharmaceutical industry tended to be
stable, but still higher than the GDP growth in China and much
higher than the average growth of the pharmaceutical industry
in the world. The pharmaceutical industry's proportion of the
GDP also remained increased.

  Special features of the pharmaceutical market in 2006

The pharmaceutical market in China had stable overall growth
with the following special features in 2006:

    (1) Competition tended to be fierce

Along with the integration of the global economy and accession
to the WTO (World Trade Organization), China's pharmaceutical
market has become a competitive market in the world. According
to the timetable of commitments made by China upon WTO accession,
2006 is the final year of the transition period. Due to the coming
of foreign banks, external capital is extremely active. Eighty
percent of the world's top 500 pharmaceutical companies have set
up agencies of different types in China and entered the Chinese
market in different ways.
   Competition in the pharmaceutical market is just beginning,
because there are still many restrictions and barriers to
foreign capital. Foreign investment in China can be made only
in the form of equity joint venture or contractual joint venture.
The ratio of investments is also restricted. Due to the high
price caused by high tariff rates, medicines from foreign
countries have also lost some competitive edge in the Chinese
market. In the next few years, however, the huge pharmaceutical
market in China will absorb great quantities of capital from
foreign companies. China will become a major production base of
bulk medicines and formulations for the world. The import and
export trade volume of medicines will grow dramatically.

    (2) The Central Bank's interest rate increase affected
pharmaceutical companies

On August 19th, 2006 the Central Bank increased the benchmark
interest rate for Renminbi by 0.27 percentage points. On
February 25th, 2007 it increased the interest rate for deposit
reserves by 0.5 percentage points to 10%. On March 1st, 2007 it
issued 130 billion bills to recover currency from commercial
banks and restrict currency circulation. These signs clearly
indicate that retrenchment will be the main trend of the
near-future financial policy. Despite the expansion of
financing channels in pharmaceutical companies in recent years,
the fundamental mode of borrowing money from banks has not
changed. Over eighty percent of capital for Chinese
non-financial companies still comes from bank loans.
   Market entry requires a very big investment. For example, a
lot of money is required in the certification of GMP (good
manufacturing practice)/GSP (good supply practice). The
retrenchment policy will however increase the pressure on
companies with financial difficulties. Further, it will likely
cause a capital deficit in the circulation link, increase
receivables in pharmaceutical companies and reduce the turnover
rate of stocks. Needless to say, the retrenchment policy will
also produce indirect and far-reaching impacts on the
pharmaceutical market.
   The Central Bank intended to curb the return on investment
and the overheated fixed-asset investment in the pharmaceutical
market of recent years was cooled down.

  Projection for the pharmaceutical market in 2007

The total output value of the pharmaceutical industry in China
will be more than RMB600 billion in 2007, an increase of 15%-16%
over 2006. The product sales revenue will reach around RMB270
billion, an increase of 8%-9%.
    The pharmaceutical market in 2007 will have the following
special features:

    (1) The OTC market will continue its rapid development and
growth in medical consumables will be astonishing
It is expected that the OTC (over the counter) market will
maintain a growth of 14%-15% in the future. Advantageous
companies such as Beijing Tongrentang Group and Yunnan Baiyao
Group will continue to hold a leading position. The market volume
of medical consumables is only RMB2.0 billion today. It is
expected to increase more than 10-fold and reach more than
RMB20.0 billion in the next 5 years.

    (2) China's society is aging
Data show that the average expenditure of medical and health care
for aged people is 6-7 times the expenditure for other population
groups. The proportion of aged people of over 65 in China will
reach 8.1% in 2007. A great impetus will therefore be given to
the development of the overall pharmaceutical market in China.

    (3) A group of large pharmaceutical companies with
international competitive edge will appear through merging and
reform
There will be more merging and reform of state-owned
pharmaceutical companies by foreign capital and private capital.
The focus for reform in the pharmaceutical market by foreign
capital will be on pharmaceutical circulation and bulk medicines.
Many companies regard the control of marketing networks and end
users to be critical success factors. Companies engaged in
pharmaceutical circulation and retail sales will become main
targets of reform in the pharmaceutical market. A group of large
pharmaceutical companies will appear through merging and
reform.

    (4) The rapid development of the macro economy will promote
a further demand growth in the pharmaceutical market
The scope of the urban basic health insurance system keeps
expanding in China. According to data published by the National
Bureau of Statistics of China in February 2006, the number of
people covered by the urban basic health insurance system was
137 million, an increase of 10.52% over the same period of 2005.

    (5) Urbanization will further promote the development of
pharmaceutical consumption market in rural areas
The average expenditure of medical and health care for urban
population is four times the expenditure for rural population.
The status in 2006 was basically similar to that in 2005 only
with a slight increase.

  Development trends of the pharmaceutical market in 2007

Development trends of the medicine market

    (1) The bubble in the prescription medicine market will be
gradually squeezed in 2007. The fight against commercial bribes
will become a long-standing policy. The di