China: Demographic Factors Among Drivers of the Growth of the Chinese Pharmaceutical Market

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The life sciences sector in China is seeing dramatic changes due to changes in governmental policies, shifting consumer habits, and growing competition. While China is already one of the top 12 bio-tech destinations in the world, ranking first in the Asia-Pacific region, the combination of economic growth, an aging population, urbanization, and health system reforms have lead to a dramatic increase in the demand and consumption of pharmaceuticals.

China is currently the world’s third-largest pharmaceutical market as determined by sales, and it is predicted to become the second market by 2020, behind the United States. The market grew by 17 percent in 2010, reaching the USD equivalent of $25.7 billion, accounting for 18.6 percent of the Asia-Pacific pharmaceutical market.

In terms of demand, demographic factors are among the most relevant drivers of the growth of the Chinese pharmaceutical market. Not only is China the most populous country in the world, but as a consequence of their one-child policy, the majority of the population is aging. This policy, combined with high longevity and environmental and pollution problems, has resulted in an increase in chronic diseases among the Chinese population. These diseases, like respiratory illness, cancer, diabetes, and obesity, often benefit from long-term pharmaceutical intervention.

From a supply perspective, two main trends include an increase in foreign investment, and a heightened interest on behalf of Chinese pharmaceutical firms to compete in the national market. The key R&D hubs for the industry continue to be Shanghai and Beijing which are close to China’s top five universities. Additional small clusters of pharmaceutical hubs are located in Tianjin and Guangzhou as well as in the provinces of Hebei, Shandong, and Zhejiang.

Cost, while once the most important factor in investing in China’s life science sector, is no longer the only reason to invest. While historically, Western pharmaceutical companies enjoyed 30-50 percent cost-savings by relocating the manufacturing of intermediaries, APIs, starting materials, and some finished drugs to China, this cost savings has been eroded due to inflation, rising wages, currency appreciation and challenges to the many tax reductions and rebates that the Chinese government traditionally offered to its own exporters. Instead, current talent availability, an improved funding environment, and an increase in quality facilities have continued to make China a good place to invest for reasons not solely based on cost.

Of particular interest to companies in the life sciences sector are the number of professionals with STEM skills available within China, and the number is vast. Approximately 41.6 percent of China’s 2011 graduates earned degrees in the science and engineering disciplines. The challenge remains to provide enough adequately trained highly-skilled talent within the country. Previously, a lack of qualified postgraduate supervisors led to an inability to train highly-skilled talent in the industry. However, this number is increasing, and China has implemented strategies to enhance their R&D capabilities in the fields of biotechnology, information technology, mobile communication, and genetic research. This has boosted focus on STEM subjects within the country. This, coupled with the vast talent available within the country, has had a profound impact on the life sciences industry – for both national and international organizations alike.