AstraZeneca Bullish on Low-end Market

The pharmaceutical giant AstraZeneca is going to have wonderful performance in the Chinese low-end drug market.

The pharmaceutical multinationals shoulder great risk of research and development (R&D) risks. Even AstraZeneca, one of the Top 5 companies in the London Stock Exchange, can not afford the failures in the R&D of four kinds of new drugs in one year.

In April this London-headquartered company suffered a serious blow: an anti-tumor drug which has been under development for 10 years proved to be less effective than the same kinds of drugs of its competitors. Ten years’ efforts and billions of US dollars proved to be fruitless.

This was not the company’s first failure. In 2004, four new kinds new drugs proved to be unsuccessful, nearly putting an end to AstraZeneca’s existence. “In 2004 and 2005, I was worried about whether our company could survive. We regained our power in 2008,” said Yin Xudong, head of AstraZeneca’s China operations.

According to the data from the China Association of Enterprises with Foreign Investment (CAEFI), the foreign pharmaceutical companies take 27.7% of the market share in China and most of their shares are controlled by the 25 large companies. The other 72.3% belong to the 8,000 domestic drug companies.

The data doesn’t demonstrate the fierce competition among the foreign drug companies. In truth, most of these foreign companies rely on the breakthrough drugs, which mean that they have to shoulder huge R&D risks. The war-flames among these drug companies don’t get burned in the battle-field but in the labs.

AstraZeneca always performs well in developing breakthrough drugs. Only four out of 21 kinds of drugs sold in China are the essential drugs. The others are high-end breakthrough drugs. According to the professional healthcare survey institution IMS Health, AstraZeneca is ranked No.2 in the sales volume in China it was ranked No.1 before Pfizer acquired Wyeth in 2009.

However, Yin Xudong is not satisfied with this ranking, because “only 10 million people of the 1.3-billion population in China are our consumers. We only take a tiny part of this huge market.”

The high prices of the breakthrough drugs are the major hurdles for AstraZeneca expanding their consumer population. Therefore, with the progress of China’s medical reform, AstraZeneca has worked out “Plan B” to expand its market share in China the essential drugs are established as the major item for development.

Hindering Factor for Foreign Drug Companies

The research institutions thought that the essential drug system in China somewhat depressed the foreign pharmaceutical companies.

For long, the pharmaceutical multinationals in China had the tertiary hospitals in the major and secondary cities as their major customers and they have already obtained the absolute advantages in the high-end market. However, a medical reform launched one year ago seems to run counter to this market.

The “Catalogue of Nation’s Essential Drugs” published in August 2009 includes 307 kinds of essential drugs, quite a few of which are reference listed drugs developed by the foreign companies. The aim of the medical reform is to maintain the rudimentary medical coverage.

In order to adapt to this change, many foreign companies chose to lower their products’ prices. Merck & Co., Inc. lowered the price of its knockout product Zocor by 50%, making it the first reference listed drug made by foreign companies having been listed in the catalogue of essential drugs.

According to the managerial staff of foreign drug company, to enter into the Catalogue is worth lowering the price by 20% to 30%. In addition, the research institutions conclude that the essential drug system is somewhat negative for the foreign drug companies.

Fortunately AstraZeneca prepared for this. Three years ago it founded a team of commercial innovation and alliance in China, which spent 10 or 20 million yuan (USD 1.46 or 2.93 million) in assuming and analyzing the market outlook. The issues include: what kinds of drugs do the countryside-based medical stations and community hospital need, where can the drugs with different prices sell well and how do the local governments operate the collective purchasing.

The three years’ exploration helped AstraZeneca find four essential drugs which are popular in the rural market as well as community hospitals. The cheapest product is the drug against polycardia and hypertension, which costs 0.5 yuan per pill. This is even cheaper than the same kinds of drugs made by domestic drug companies. Actually, AstraZeneca has already printed 20 out of its 21 drugs sold in China into the Catalogue.

What AstraZeneca needs to do mostly is to enlarge its production capacity in China if it wants to improve its performance.

Previously, AstraZeneca has not acquired any Chinese domestic drug companies. The reason is simple: the local companies possess no appeal for AstraZeneca both in research capability and production capacity.

However, things will turn around because of “Plan B”. “In the next one or two years, we are very likely to acquire local companies,” said Yin Xudong.

The Chinese Pattern

AstraZeneca is able to and ought to have essential drug companies. In 2009, the volume of China’s drug market increased from 8.4 billion US dollars six years ago to 25 billion US dollars. Germany-based Bayer Group forecasts that the volume will increase to 220 billion US dollars 10 years later.

The big market is like a beautiful maid who attracts a lot of wooers. The news that a foreign drug company increased its investment in China can be heard monthly in 2009.

In one year, Eli Lilly established a R&D center in Shanghai; Sanofi-Aventis built its fourth largest R&D center in Beijing; Bayer Group invested 100 million euros in setting a global R&D center in Beijing. AstraZeneca’s 100-million-USD R&D center in Shanghai saw its foundation stone laying ceremony in September 2009. Yin Xudong has fixed the annual growth rate of AstraZeneca in China at 22% in the next ten years.

By now, only Shanghai has already gathered more than 80 foreign-funded biomedical R&D center, taking 38% of all kinds of foreign-funded R&D centers in China. Nine out of 12 top pharmaceutical companies have already established their R&D centers in Shanghai.

“Previously the foreign companies were good at reference listed drugs, so their Chinese branches just sell these drugs,” said Yin Xudong. However, things have become different in these years. The business of essential drugs is almost exclusive in China, which is mainly attributed to the general environment of China’s drug market. According to Yin Xudong, the developed countries have strict regulations over the pharmaceutical companies. There are only 200 drug companies in the USA and they have different strong points. Therefore, the essential drug system doesn’t need the companies like AstraZeneca to be engaged in.

Things are different in China. “There are vicious competitions in China’s drug market. It is of great help if some big companies take part in this field to improve the drug quality and promote the industrial integration,” said Yin Xudong. If the experiment is successful in China, the essential drug system will be considered as the new pattern for AstraZeneca and will be spread to the other emerging markets.

“The improvement of drug quality and industrial integration are certain to happen,” said Yin Xudong. In his opinion, the Chinese drug industry will see the 8,000 small enterprises integrated into 15-20 large enterprises which can produce high-quality drugs. “I am sure that AstraZeneca will be one of the 15-20 enterprises at that time!”