Pharmaceutical Industry

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Posted by r2d2 04/15/2009 @ 09:09

Tags : pharmaceutical industry, health

News headlines
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RSVP only. To reserve a spot at the breakfast, please contact Len Prokopets at lprokopets@archstoneconsulting.com or call 203-233-9077 to confirm your attendance. Archstone Consulting is a leading Strategy and Change, Operations and CFO Advisory...
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Seize the momentum now building for comprehensive health care reform - Houston Chronicle
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Pharmaceutical industry

A promotional item given to a psychiatrist

The pharmaceutical industry develops, produces, and markets drugs licensed for use as medications. Pharmaceutical companies can deal in generic and/or brand medications. They are subject to a variety of laws and regulations regarding the patenting, testing and marketing of drugs.

The earliest drugstores date back to the Middle Ages. The first known drugstore was opened by Arabian pharmacists in Baghdad in 754, and many more soon began operating throughout the medieval Islamic world and eventually medieval Europe. By the 19th century, many of the drug stores in Europe and North America had eventually developed into larger pharmaceutical companies.

Most of today's major pharmaceutical companies were founded in the late 19th and early 20th centuries. Key discoveries of the 1920s and 1930s, such as insulin and penicillin, became mass-manufactured and distributed. Switzerland, Germany and Italy had particularly strong industries, with the UK, US, Belgium and the Netherlands following suit.

Legislation was enacted to test and approve drugs and to require appropriate labeling. Prescription and nonprescription drugs became legally distinguished from one another as the pharmaceutical industry matured. The industry got underway in earnest from the 1950s, due to the development of systematic scientific approaches, understanding of human biology (including DNA) and sophisticated manufacturing techniques.

Numerous new drugs were developed during the 1950s and mass-produced and marketed through the 1960s. These included the first oral contraceptive, "The Pill", Cortisone, blood-pressure drugs and other heart medications. MAO Inhibitors, chlorpromazine (Thorazine), Haldol (Haloperidol) and the tranquilizers ushered in the age of psychiatric medication. Valium (diazepam), discovered in 1960, was marketed from 1963 and rapidly became the most prescribed drug in history, prior to controversy over dependency and habituation.

Attempts were made to increase regulation and to limit financial links between companies and prescribing physicians, including by the relatively new US FDA. Such calls increased in the 1960s after the thalidomide tragedy came to light, in which the use of a new tranquilizer in pregnant women caused severe birth defects. In 1964, the World Medical Association issued its Declaration of Helsinki, which set standards for clinical research and demanded that subjects give their informed consent before enrolling in an experiment. Phamaceutical companies became required to prove efficacy in clinical trials before marketing drugs.

Cancer drugs were a feature of the 1970s. From 1978, India took over as the primary center of pharmaceutical production without patent protection.

The industry remained relatively small scale until the 1970s when it began to expand at a greater rate. Legislation allowing for strong patents, to cover both the process of manufacture and the specific products, came in to force in most countries. By the mid-1980s, small biotechnology firms were struggling for survival, which led to the formation of mutually beneficial partnerships with large pharmaceutical companies and a host of corporate buyouts of the smaller firms. Pharmaceutical manufacturing became concentrated, with a few large companies holding a dominant position throughout the world and with a few companies producing medicines within each country.

The pharmaceutical industry entered the 1980s pressured by economics and a host of new regulations, both safety and environmental, but also transformed by new DNA chemistries and new technologies for analysis and computation. Drugs for heart disease and for AIDS were a feature of the 1980s, involving challenges to regulatory bodies and a faster approval process.

Managed care and Health maintenance organizations (HMOs) spread during the 1980s as part of an effort to contain rising medical costs, and the development of preventative and maintenance medications became more important. A new business atmosphere became institutionalized in the 1990s, characterized by mergers and takeovers, and by a dramatic increase in the use of contract research organizations for clinical development and even for basic R&D. The pharmaceutical industry confronted a new business climate and new regulations, born in part from dealing with world market forces and protests by activists in developing countries. Animal Rights activism was also a problem.

Marketing changed dramatically in the 1990s, partly because of a new consumerism. The Internet made possible the direct purchase of medicines by drug consumers and of raw materials by drug producers, transforming the nature of business. In the US, Direct-to-consumer advertising proliferated on radio and TV because of new FDA regulations in 1997 that liberalized requirements for the presentation of risks. The new antidepressants, the SSRIs, notably Fluoxetine (Prozac), rapidly became bestsellers and marketed for additional disorders.

Drug development progressed from a hit-and-miss approach to rational drug discovery in both laboratory design and natural-product surveys. Demand for nutritional supplements and so-called alternative medicines created new opportunities and increased competition in the industry. Controversies emerged around adverse effects, notably regarding Vioxx in the US, and marketing tactics. Pharmaceutical companies became increasingly accused of disease mongering or over-medicalizing personal or social problems.

There are now more than 200 major pharmaceutical companies, jointly said to be more profitable than almost any other industry, and employing more political lobbyists than any other industry. Advances in biotechnology and the human genome project promise ever more sophisticated, and possibly more individualized, medications.

Drug discovery is the process by which potential drugs are discovered or designed. In the past most drugs have been discovered either by isolating the active ingredient from traditional remedies or by serendipitous discovery. Modern biotechnology often focuses on understanding the metabolic pathways related to a disease state or pathogen, and manipulating these pathways using molecular biology or Biochemistry. A great deal of early-stage drug discovery has traditionally been carried out by universities and research institutions.

Often, large multinational corporations exhibit vertical integration, participating in a broad range of drug discovery and development, manufacturing and quality control, marketing, sales, and distribution. Smaller organizations, on the other hand, often focus on a specific aspect such as discovering drug candidates or developing formulations. Often, collaborative agreements between research organizations and large pharmaceutical companies are formed to explore the potential of new drug substances.

Drug discovery and development is very expensive; of all compounds investigated for use in humans only a small fraction are eventually approved in most nations by government appointed medical institutions or boards, who have to approve new drugs before they can be marketed in those countries. Each year, only about 25 truly novel drugs (New chemical entities) are approved for marketing. This approval comes only after heavy investment in pre-clinical development and clinical trials, as well as a commitment to ongoing safety monitoring. Drugs which fail part-way through this process often incur large costs, while generating no revenue in return. If the cost of these failed drugs is taken into account, the cost of developing a successful new drug (New chemical entity or NCE), has been estimated at about 1 billion USD(not including marketing expenses). A study by the consulting firm Bain & Company reported that the cost for discovering, developing and launching (which factored in marketing and other business expenses) a new drug (along with the prospective drugs that fail) rose over a five year period to nearly $1.7 billion in 2003.

These estimates also take into account the opportunity cost of investing capital many years before revenues are realized (see Time-value of money). Because of the very long time needed for discovery, development, and approval of pharmaceuticals, these costs can accumulate to nearly half the total expense. Some approved drugs, such as those based on re-formulation of an existing active ingredient (also referred to as Line-extensions) are much less expensive to develop. The consumer advocacy group Public Citizen suggests on its web site that the actual cost is under $200 million, about 29% of which is spent on FDA-required clinical trials. For me-too-drugs and for generics, the cost are even less.

Calculations and claims in this area are controversial because of the implications for regulation and subsidization of the industry through federally funded research grants.

There have been increasing accusations and findings that clinical trials conducted or funded by pharmaceutical companies are much more likely to report positive results for the preferred medication.

In response to specific cases in which unfavorable data from pharmaceutical company-sponsored research was not published, the Pharmaceutical Research and Manufacturers of America have published new guidelines urging companies to report all findings and limit the financial involvement in drug companies of researchers. US congress signed into law a bill which requires phase II and phase III clinical trials to be registered by the sponsor on the clinicaltrials.gov website run by the NIH.

Drug researchers not directly employed by pharmaceutical companies often look to companies for grants, and companies often look to researchers for studies that will make their products look favorable. Sponsored researchers are rewarded by drug companies, for example with support for their conference/symposium costs. Lecture scripts and even journal articles presented by academic researchers may actually be 'ghost-written' by pharmaceutical companies. Some researchers who have tried to reveal ethical issues with clinical trials or who tried to publish papers that show harmful effects of new drugs or cheaper alternatives have been threatened by drug companies with lawsuits.

In the United States, new pharmaceutical products must be approved by the FDA as being both safe and effective. This process generally involves submission of an Investigational new drug filing with sufficient pre-clinical data to support proceeding with human trials. Following IND approval, three phases of progressively larger human clinical trials may be conducted. Phase I generally studies toxicity using healthy volunteers. Phase II can include Pharmacokinetics and Dosing in patients, and Phase III is a very large study of efficacy in the intended patient population.

A fourth phase of post-approval surveillance is also often required due to the fact that even the largest clinical trials cannot effectively predict the prevalence of rare side-effects. Post-marketing surveillance ensures that after marketing the safety of a drug is monitored closely. In certain instances, its indication may need to be limited to particular patient groups, and in others the substance is withdrawn from the market completely. Questions continue to be raised regarding the standard of both the initial approval process, and subsequent changes to product labeling (it may take many months for a change identified in post-approval surveillance to be reflected in product labeling) and this is an area where congress is active.

The FDA provides information about approved drugs at the Orange Book site.

There are special rules for certain rare diseases ("orphan diseases") involving fewer than 200,000 patients in the United States, or larger populations in certain circumstances. Because medical research and development of drugs to treat such diseases is financially disadvantageous, companies that do so are rewarded with tax reductions, fee waivers, and market exclusivity on that drug for a limited time (seven years), regardless of whether the drug is protected by patents.

Where pharmaceutics have been shown to cause side-effects, civil action has occurred, especially in countries where tort payouts are likely to be large. Due to high-profile cases leading to large compensations, most pharmaceutical companies endorse tort reform. Recent controversies have involved Vioxx and SSRI antidepressants.

In many non-US western countries a 'fourth hurdle' of cost effectiveness analysis has developed before new technologies can be provided. This focuses on the efficiciency (in terms of the cost per QALY) of the technologies in question rather than their efficacy. In England NICE approval is required before technologies can be adopted by the NHS, whilst similar arrangements exist with the Scottish Medical Consortium in Scotland and the Pharmaceutical Benefits Advisory Committee in Australia. A product must pass the threshold for cost-effectiveness if it is to be approved. Treatments must represent 'value for money' and a net benefit to society. There is much speculation that a NICE style framework may be implemented in the USA to ensure Medicare and Medicaid spending is focused to maximise benefit to patients and not excessive profits for the pharmaceutical industry.

In the UK, the British National Formulary is the core guide for pharmacists and clinicians.

For the first time ever, in 2006, global spending on prescription drugs topped $643 billion, even as growth slowed somewhat in Europe and North America. The United States accounts for almost half of the global pharmaceutical market, with $289 billion in annual sales followed by the EU and Japan.(pdf) Emerging markets such as China, Russia, South Korea and Mexico outpaced that market, growing a huge 81 percent.

Pfizer's cholesterol pill Lipitor remains the best-selling drug in the world for the fifth year in a row. Its annual sales were $12.9 billion, more than twice as much as its closest competitors: Plavix, the blood thinner from Bristol-Myers Squibb and Sanofi-Aventis; Nexium, the heartburn pill from AstraZeneca; and Advair, the asthma inhaler from GlaxoSmithKline.

IMS Health publishes an analysis of trends expected in the pharmaceutical industry in 2007, including increasing profits in most sectors despite loss of some patents, and new 'blockbuster' drugs on the horizon.

Teradata Magazine predicted that by 2007, $40 billion in U.S. sales could be lost at the top 10 pharmaceutical companies as a result of slowdown in R&D innovation and the expiry of patents on major products, with 19 blockbuster drugs losing patent.

The following is a list of the 20 largest pharmaceutical and biotech companies ranked by healthcare revenue. Some companies (eg, Bayer, Johnson and Johnson and Procter & Gamble) have additional revenue not included here. The phrase Big Pharma is often used to refer to companies with revenue in excess of $3 billion, and/or R&D expenditure in excess of $500 million.

Depending on a number of considerations, a company may apply for and be granted a patent for the drug, or the process of producing the drug, granting exclusivity rights typically for about 20 years. However, only after rigorous study and testing, which takes 10 to 15 years on average, will governmental authorities grant permission for the company to market and sell the drug. Patent protection enables the owner of the patent to recover the costs of research and development through high profit margins for the branded drug. When the patent protection for the drug expires, a generic drug is usually developed and sold by a competing company. The development and approval of generics is less expensive, allowing them to be sold at a lower price. Often the owner of the branded drug will introduce a generic version before the patent expires in order to get a head start in the generic market.

In 2003 the United States enacted the Medicare Prescription Drug, Improvement, and Modernization Act (MMA), a program to provide prescription drug benefits to the elderly and disabled. This program is a component of Medicare (United States) and is known as Medicare Part D. This program, set to begin in January 2006, will significantly alter the revenue models for pharmaceutical companies. Revenues from the program are expected to be $724 billion between 2006 and 2015.

Pharmaceuticals developed by biotechnological processes often must be injected in a physician's office rather than be delivered in the form of a capsule taken orally. Medicare payments for these drugs are usually made through Medicare Part B (physician office) rather than Part D (prescription drug plan).

A merger, acquisition, or co-marketing deal between pharmaceutical companies may occur as a result of complementary capabilities between them. A small biotechnology company might have a new drug but no sales or marketing capability. Conversely, a large pharmaceutical company might have unused capacity in a large sales force due to a gap in the company pipeline of new products. It may be in both companies' interest to enter into a deal to capitalize on the synergy between the companies.

In the U.S. , prescriptions have increased over the past decade to 3.4 billion annually, a 61 percent increase. Retail sales of prescription drugs jumped 250 percent from $72 billion to $250 billion, while the average price of prescriptions has more than doubled from $30 to $68.

The drug company Merck & Co. publishes the Merck Manual of Diagnosis and Therapy, the world's best-selling medical textbook, and the Merck Index, a collection of information about chemical compounds.

Pharmaceutical companies commonly spend a large amount on advertising, marketing and lobbying. In the US, drug companies spend $19 billion a year on promotions. Advertising is common in healthcare journals as well as through more mainstream media routes. In some countries, notably the US, they are allowed to advertise direct to the general public. Pharmaceutical companies generally employ sales people (often called 'drug reps' or, an older term, 'detail men') to market directly and personally to physicians and other healthcare providers. In some countries, notably the US, pharmaceutical companies also employ lobbyists to influence politicians. Marketing of prescription drugs in the US is regulated by the federal Prescription Drug Marketing Act of 1987.

Physicians, physician assistants, and nurse practitioners are perhaps the most important players in pharmaceutical sales because they write the prescriptions that determine which drugs will be used by the patient. Influencing the physician is often seen as the key to prescription pharmaceutical sales. A medium-sized pharmaceutical company might have a sales force of 1000 representatives. The largest companies have tens of thousands of representatives. Currently, there are approximately 100,000 pharmaceutical sales reps in the United States pursuing some 120,000 pharmaceutical prescribers. The number doubled in the four years from 1999 to 2003. Drug companies spend $5 billion annually sending representatives to physician offices. Pharmaceutical companies use the service of specialized healthcare marketing research companies to perform Marketing research among Physicians and other Healthcare professionals.

Private insurance or public health bodies (e.g. the NHS in the UK) decide which drugs to pay for, and restrict the drugs that can be prescribed through the use of formularies. Public and private insurers restrict the brands, types and number of drugs that they will cover. Not only can the insurer affect drug sales by including or excluding a particular drug from a formulary, they can affect sales by tiering or placing bureaucratic hurdles to prescribing certain drugs as well. In January 2006, the U.S. instituted a new public prescription drug plan through its Medicare program known as Medicare Part D. This program engages private insurers to negotiate with pharmaceutical companies for the placement of drugs on tiered formularies.

Commercial stores and pharmacies are a major target of non-prescription sales and marketing for pharmaceutical companies.

There has been increasing controversy surrounding pharmaceutical marketing and influence. There have been accusations and findings of influence on doctors and other health professionals through drug reps, including the constant provision of marketing 'gifts' and biased information to health professionals; highly prevalent advertising in journals and conferences; funding independent healthcare organizations and health promotion campaigns; lobbying physicians and politicians (more than any other industry in the US; sponsorship of medical schools or nurse training; sponsorship of continuing educational events, with influence on the curriculum; and hiring physicians as paid consultants on medical advisory boards.

To help ensure the status quo on U.S. drug regulation and pricing, the pharmaceutical industry has thousands of lobbyists in Washington, DC that lobby Congress and protect their interests. The pharmaceutical industry spent $855 million, more than any other industry, on lobbying activities from 1998 to 2006, according to the non-partisan Center for Public Integrity.

Some advocacy groups, such as No Free Lunch, have criticized the effect of drug marketing to physicians because they say it biases physicians to prescribe the marketed drugs even when others might be cheaper or better for the patient.

There have been related accusations of disease mongering (over-medicalising) to expand the market for medications. An inaugural conference on that subject took place in Australia in 2006.

A 2005 review by a special committee of the UK government came to all the above conclusions in a European Union context whilst also highlighting the contributions and needs of the industry.

There is also huge concern about the influence of the pharmaceutical industry on the scientific process. Meta-analyses have shown that studies sponsored by pharmaceutical companies are several times more likely to report positive results, and if a drug company employee is involved (as is often the case, often multiple employees as co-authors and helped by contracted marketing companies) the effect is even larger. Influence has also extended to the training of doctors and nurses in medical schools, which is being fought.

It has been argued that the design of the Diagnostic and Statistical Manual of Mental Disorders and the expansion of the criteria represents an increasing medicalization of human nature, or "disease mongering", driven by drug company influence on psychiatry. The potential for direct conflict of interest has been raised, partly because roughly half the authors who selected and defined the DSM-IV psychiatric disorders had or previously had financial relationships with the pharmaceutical industry. The president of the organisation that designs and publishes the DSM, the American Psychiatric Association, recently acknowledged that in general American psychiatry has "allowed the biopsychosocial model to become the bio-bio-bio model" and routinely accepted "kickbacks and bribes" from pharmaceutical companies.

The role of pharmaceutical companies in the developing world is a matter of some debate, ranging from those highlighting the aid provided to the developing world, to those critical of the use of the poorest in human clinical trials, often without adequate protections, particularly in states lacking a strong rule of law. Other criticisms include an alleged reluctance of the industry to invest in treatments of diseases in less economically advanced countries, such as malaria; Criticism for the price of patented AIDS medication, which could limit therapeutic options for patients in the Third World, where the most people have AIDS.

In September 2008 the Open Source Drug Discovery Network was launched in India to combat infectious diseases common to developing countries.

Under World Trade Organization rules, a developing country has options for obtaining needed medications under compulsory licensing or importation of cheaper versions of the drugs, even before patent expiration (WTO Press Release). Pharmaceutical companies often offer much needed medication at no or reduced cost to the developing countries. Proposals to allow the manufacture of generic AIDS drugs are not without controversy; it is sometimes claimed that this might cause pharmaceutical companies to move away from AIDS drug research and focus their research on other, more profitable areas). In March 2001, South Africa was sued by 41 pharmaceutical companies for their Medicines Act, which allowed the import and generic production of cheap AIDS drugs. The case was later dropped after protest around the world.

In 1996, a pediatric clinical trial conducted on behalf of Pfizer tested the antibiotic Trovan allegedly without first obtaining the informed consent of participants or their parents.

However, some NGOs such as Médecins Sans Frontières do not routinely accept corporate donations of medicines. More precisely, they do not become reliant on such supplies of medicines because the supply is dependent upon the fluid, profit-driven charities of said pharmaceutical companies, and thus may dry up during a critical or otherwise important time.

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Association of the British Pharmaceutical Industry

The Association of the British Pharmaceutical Industry (ABPI) is the trade association for companies in the UK producing prescription medicines for humans. This is the British equivalent of PhRMA, however the member companies research, develop, manufacture and supply medicines prescribed through the National Health Service. The head office is in London and there are two regional offices in Cardiff and Edinburgh.

The ABPI provides complimentary resources for schools in UK to promote links between school science subjects and their applications in industrial research . The association also sponsors booklets on a range of conditions, aimed at patients, carers and healthcare professionals. In addition, the association has lobbied for the UK government to adopt the European Union directive on biotechnology research.

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Pharmaceutical industry in China

The pharmaceutical industry is one of the leading industries in China, covering synthetic chemicals and drugs, prepared Chinese medicines, medical devices, apparatus and instruments, hygiene materials, packing materials, and pharmaceutical machinery.

The profile of the pharmaceutical industry in China remains very low. China accounts for 20% of the world’s population but only 1.5% of the global drug market. China's changing health-care environment is designed to extend basic health insurance to a larger portion of the population and give individuals greater access to products and services. Following this period of change, the pharmaceutical industry is expected to continue its expansion.

The domestic pharmaceutical market is highly fragmented and inefficient. China, as of 2007, has around 3,000 to 6,000 domestic pharmaceutical manufacturers and around 14,000 domestic pharmaceutical distributors. Most often cited adverse factors include a lack of protection of intellectual property rights, a lack of visibility for drug approval procedures, a lack of effective governmental incentives, poor corporate support for drug research and differences in the treatment in China accorded to local and foreign firms.

Even so, the industry environment has been transformed for the better over the last 10 years. Entry to the WTO has brought a stronger patent system, medical insurance is now more widespread, and pharmaceutical-related regulations have been stiffened. China is reportedly expected to become the fifth largest pharmaceuticals market in the world by 2010.

Currently China has about 3,500 drug companies, falling from more than 5,000 in 2004, according to government figures. The number is expected to drop further. The domestic companies compete in the $10 billion market without a dominant leader. As of 2007, China is the world's ninth drug market, and in 2008 it will become the eighth largest market.

China's thousands of domestic companies account for 70% of the market, and the top 10 companies about 20%, according to Business China. In contrast, the top 10 companies in most developed countries control about half the market. Since June 30, 2004, the State Food and Drug Administration (SFDA) has been closing down manufacturers that do not meet the new GMP standards. Foreign players account for 10% to 20% of overall sales, depending on the types of medicines and ventures included in the count. But sales at the top-tier Chinese companies are growing faster than at Western ones.

Investment conditions in China have improved due to the vast consumer demand for pharmaceuticals, the lower labor costs and the changes resulting from economic reform. Changes to the patenting laws in full compliance with the requirement of the Agreement on Trade-Related Aspects of Intellectual Property Rights (or "TRIPS Agreement") and the lack of Chinese pharmaceutical R&D have also left gaps in the market.

The domestic pharmaceutical industry has been a key contributor to the country’s impressive economic growth. As one of the world's major producers of pharmaceuticals, the sector achieved an annual compound growth rate of 16.7% between 1978 and 2003. Both far outpaced other economies in the world, making China the world's fastest growing pharmaceutical market. Although China has enjoyed the benefits of an expansive market for pharmaceutical production and distribution, the industry is suffering from minimal innovation and investment in R&D and new product development. The sector's economies of scale have yet to be achieved. Most domestic manufacturers in the pharmaceutical industry lack the autonomic intellectual property and financial resources to develop their own brand name products. Most manufacturers rely on the repetitive production of low value added bulk pharmaceuticals and imitation drugs.

Currently China has about 3,500 drug companies, falling from more than 5,000 in 2004, according to government figures. The number is expected to drop further. The domestic companies compete in the $10 billion market without a dominant leader. As of 2007, China is the world’s ninth drug market, and in 2008 it will become the eighth largest market.

China’s thousands of domestic companies account for 70 percent of the market, and the top 10 companies about 20 percent, according to Business China. In contrast, the top 10 companies in most developed countries control about half the market. Since June 30, 2004, the State Food and Drug Administration (SFDA) has been closing down manufacturers that do not meet the new GMP standards. Foreign players account for 10% to 20% of overall sales, depending on the types of medicines and ventures included in the count. But sales at the top-tier Chinese companies are growing faster than at Western ones, according to IMS Health Inc.

Even the top selling companies just barely exceed sales of $100 million (hospital market). Most of the Chinese drug-makers fall below the 20th ranking, but 30 of the top 50 companies are local.

In addition, China’s over-the-counter market is growing fast and has become the fourth largest OTC market in the world. Foreign enterprises have been closely monitoring the expanding OTC market. Merck announced the launch of OTC program in China in September 2003. Roche listed China as one of its 10 core OTC markets, with the aim of growing its OTC drug sales by 50% in the next five years and reaching 1.3 billion in 2008. Novartis is expanding its OTC market share in China, and Wyeth has also entered OTC market.

The pharmaceutical market in China is dominated by its non-branded generic industry that operates with basic technology and simple production methods. Domestic pharmaceuticals are not as technologically advanced as western products, but nonetheless occupy approximately 70% of the market in China. Domestic companies are mainly government owned and fraught with overproduction and losses. The Chinese government has begun consolidating and upgrading the industry in an effort to compete with foreign corporations.

It is estimated that most hospitals derive 25-60% of their revenue from prescription sales, hospitals remain the main outlets for distributing pharmaceuticals in China. This will change with the separation of hospital pharmacies from healthcare services and with the growing numbers of retail pharmacy outlets. Retail pharmacy outlets are expected to grow in number once the government finally introduces its system to classify drugs as OTC. The government is now encouraging development of chain drug stores, but the full effect might not be seen for several years.

The price of pharmaceutical products will continue to decrease steadily. In June 2004, the price of 400 antibiotics in 24 categories, including penicillin, was reduced by, on average, 35%. The total value affected by this reduction was US$42 million. The central government has been playing a significant role in pharmaceutical price readjustment. Future price reductions will originate from hospital pharmaceutical retail shops.

The rural pharmaceutical market will shift significantly. 80% of counterfeit products are consumed in rural areas. This provides a huge opportunity for pharmaceutical companies to develop the market in rural areas. In 2005, Huanan Pharmaceutical Group, Guangzhou Ruobei Huale, Baiyunshan Pharmaceutical Group, and others, have stepped up efforts in targeting the rural market.

Bayer of Germany, the inventor of aspirin, began trade with China in as early as 1882. Hoechst AG, known as Aventis, sold its products through 128 distribution agents across China in 1887, becoming China's no. 1 Western medicine and dyeing provider. Eli Lilly and Company opened its first overseas representative office in Shanghai in 1918. ICI, the predecessor of the world's no. 3 pharmaceutical enterprise AstraZeneca, began trade with China in 1898, and still maintains its old-time office by the Huangpu River in Shanghai.

In the 9 months from January to September 2004, the total output of the country’s pharmaceutical industry reached $40 billion, 15.8% higher than the same period of 2003. In the same period, 23 major state-owned pharmaceutical companies had sales of $10 billion. A survey of 16 typical city hospitals, the usage of drugs increased by 32.23% in the first half of 2004 as compared with that of 2003.

Around 36% of all China’s pharmaceutical enterprises are state-owned. Another 35% are privately owned domestic enterprises and the remaining 29%, foreign-funded. Synthetic drug manufacturing remains the pharmaceutical industry’s largest business in China, constituting 65% of industry sales. Another 21% of industry sales come from traditional Chinese medicine. Biotech-related medical products and medical equipment make up the rest.

China's huge and gradually aging population and strong biopharmaceutical sector have almost guaranteed a large but varied pharmaceutical market profile. Zhejiang, Guangdong, Shanghai, Jiangsu and Hebei provinces have always been among the top five most productive provinces in China. Each of these provinces has grown steadily by an average of 20 per cent per annum from 1998 to 2003 (with the exception of Jiangsu in 1998 and 1999) and reflects an increasingly healthy developing trend in the Chinese pharmaceutical industry.

Most pharmaceutical firms are located in the southeastern zone that includes two well-developed areas and three under-developed areas. The two most popular areas of well-developed pharmaceutical industry, called the growth poles, are the Eastern China zone of which Zhejiang province is located in the centre and the South China zone represented by the Guangdong province. The total output value of these two provinces accounted for 21 per cent of the total output value of pharmaceutical industry of China in 2003.

The three sub-developed areas of pharmaceutical industry, called the potential points, are also identified as the Middle China Zone, the Northeastern Zone and the Southwestern Zone, centralised in Hebei Province, Heilongjiang province and Sichuan province, respectively.

The development of the pharmaceutical industry in China was found to be predominantly driven by economic factors. The nature of an industrial region can roughly fall into one of the following three types: natural resource-driven region, economy-driven region and science and technology-driven region. The pharmaceutical industry in China grows well only in areas with a strong macroeconomic background rather than in regions with rich natural resources or advanced science and technology. Moreover, it is shown that the stronger the macro-economy, the faster the pharmaceutical industry grows. Therefore, the decision-making policy on pharmaceutical development in a region should be largely based on its macroeconomic situation.

Broadly speaking, it appears that the dynamic features of the pharmaceutical industry in China remain steady. According to the reform plan, China will conduct a regime of vertical management in drug supervision and management departments, intensify supervision and control over medicines, and gradually set up a drug management system featuring legal management, unified law enforcement, standard codes of conduct, honest practice and high efficiency. To meet the objective requirements of drug administration and the needs of the development of medical services, a drug supervision and management body was formed in 1998.

The pharmaceutical industry in China was found to be extensively fragmented. Excessive repetitive establishment of provincial pharmaceutical industries was found to be serious in comparison to other industries in China. It also demonstrates a low-level, repetitive development situation of the pharmaceutical industry in different regions of China.

The pharmaceutical industry is always known as a high-return and rapidly growing industry. After the Chinese market was reformed, China gradually makes space for a healthy, steady and rapidly developing pharmaceutical industry, where profit rate and growth rate are much higher than in other industries. In the view of high profit returns, regional governments often allow excessive development of regional medicine industries without careful analysis of regional competitiveness, actual advantages and development strategies to incentivise the regional development of the entire economy.

In China, drug administration departments are established at both central and regional governmental level. Every region has a regional drug administration department with some authority and power. Without good communication and cooperation between administration department, unnecessary competition between regions might occur. The number of drug companies under each administrative department is often wrongly recorded resulting in an inaccurate evaluation index of the regional economic development and governmental performance.

Complex regulatory processes induce excessive exploitation of regional administrative power. Before the revision of Chinese Pharmaceutical Law in 2001, the province drug administration was assigned with authority to streamline the process of registering a generic drug. Consequently, this regional authority power was exploited resulting in excessive duplication of the same drugs. For example, a fluoroquinolone type medicine was registered and manufactured by more than 1,000 enterprises. Fortunately, the Chinese government immediately realised the serious problem and withdrew the regional authority power to prevent overlapping of authorities. Duplication of drug is, however, not the only example. After the allocation of authority of approval right of opening drug companies was taken down to provincial level several years ago, a sharp increase in the number of drug companies was noted. It was reported that 70 new drug production enterprises were approved to open during the first half of 2003, while only 45 similar enterprises were approved to open during the three years from 1998 to 2001.

With their low budget for research and development, China’s pharmaceutical makers are in a different league from the multinationals, but they do enjoy certain advantages. Many Chinese companies not only produce the dosage forms (such as tablets) but also own the pharmacies where they are dispensed, as well as the distribution networks that deliver them to the hospitals, where nearly 80% of drugs are sold. In addition, Chinese companies can produce generic versions of branded drugs for a fraction of their price.

Of the 3,000 pharmaceuticals - not including traditional medicines - manufactured in China since the 1950s, 99 percent are copies of foreign products, as are almost 90 percent of China's biotech products. Most Chinese companies - even joint ventures - compete with each other for the same generics. Many are struggling for survival; more than 32 percent recorded losses in 1999, according to the Pharmaceutical Department of National Development and Reform Commission.

Moreover, compared with international pharma giants, Chinese companies are not only small, but are weak in technology and often lack capital. The total R&D expenditures for Chinese-owned pharma businesses amounted to less than that spent by a single major Western pharma company.

There are presently more than 5,000 research and development (R&D) institutions in China, but only a handful of them are able to compete internationally in certain areas.

The R&D system consists of specialized research institutes, major universities, biotechnology companies, and R&D divisions of large pharmaceutical enterprises. In recent years, mid- and small-size biotechnology companies are developing at a rapid pace. There are more than 1,000 such entities nationwide at present, and more than 30% of them are privately owned. Special governmental funds are available to promote this type of entrepreneurship.

During the past several years, some Chinese pharmaceutical companies began to establish R&D infrastructures largely due to internal growth needs, but their primary focus is directed toward improving existing technologies or developing generic version of new drugs.

A Western pharmaceutical company in China is basically controlled by its parent company. The subsidiary follows its parent company’s advanced management model, is highly influenced by the headquarters in decision making, finance, and research and development. But in pharmaceutical marketing, the subsidiary’s management team has more autonomy, mostly due to the different characteristics of Chinese market.

Most Western pharmaceutical companies’ subsidiaries in China are foreign citizens appointed directly by the parent companies. In a poll of 33 foreign pharma companies, 28 say their general managers are foreign citizens, accounting for 85% of the total; 15 say their vice general managers of productions are foreigners, accounting for 45%. Foreign VPs of finance and marketing account for 52% and 39% respectively.

The same poll shows mid level management positions such as department directors are held by Chinese. Chinese marketing directors account for 27%, foreign marketing directors account for 39%, and the rest, according to the author of this pharma China report, goes to repatriates. Five Western pharma companies have foreign R&D directors, and only three have foreign HR directors.

When the Chinese are developing an API they try patent searches via the internet, but are limited by the scope of the available services. Few factories yet have patent attorneys on staff, but for the larger pharma groups who are seeking partnerships with large Western firms, this may come soon.

The Chinese business environment is mainly relationship-based, and this is reflected in the pharmaceutical business. Establishing relationship with a pharma companies through personal connections is a common way to contact Chinese pharma companies. Attending pharmaceutical exhibitions, pharmaceutical conferences or seminars is another approach, as is holding a press conference attended by officials of related government agencies or associations and senior pharmaceutical executives.

From 2003 to 2004, the number of pharmacies climbed to 200,000 from 180,000, and the number of retailers owning chain stores rose from 1200 to 1349.

Before the 1980s, the distribution channel for China’s pharmacy products was vertically integrated, as there were few middlemen for medicine sales and the only wholesalers were the traditional pharmacy stores. However, after the 1980s, with the deepening of China’s reforms, the distribution of China’s pharmacy products have undergone profound changes that have to some extent changed this.

Under this distribution form, there is a sole authorized organization in the country that is responsible for the sale of one or more products of a pharmacy company. Such kind of distribution also can be called "the national agent mode." The pharmacy company is responsible for the manufacturing, research and development of the products, and the general agent for the nationwide sale of the products of the company. In most cases, the agents buy the pharmacy products with cash after weighing the costs and profits, and the market risks lie with the wholesalers.

Under this mode, the pharmacy enterprise search for its national or regional general agent and use the agent’s market network to sell its products. Such kind of distribution mode can be called "the regional general agent mode." The pharmacy enterprise usually entrusts its general agent with the sale of its products through a bidding process or forming alliance with the agent, providing it products at a bottom price. The agent, after buying a certain amount of products, win the authorization from the pharmacy company to sell in a specific region and becomes its sole authorized agent in the region. The regional general agent can be the general wholesaler in a big region, provincial wholesaler, district wholesaler or municipal wholesaler, etc. In a big region or in a province, regional general agents provide patients with their products through sub-wholesalers and retailers. In a small place such as a county, products can go directly from the regional general agent to retailers and then to patients, without the involvement of sub wholesalers.

Before taking such a distribution channel, the pharmacy enterprise should first register an independent licensed marketing company, and then set up offices in major cities which are responsible for monitoring sales and distribution of its products in their respective regions. Such a distribution mode, which requires large amount of capital and high-level management for the pharmacy enterprise, is mostly used by large-sized pharmacy enterprises.

In the above-mentioned modes, pharmacy enterprises, middlemen and patients are three basic components. Middlemen can also be classified under the categories of wholesalers and retailers. Retailers include those with shops, without shops and retail groups. What needs to be pointed out is that in China, the biggest pharmacy retailer is the hospital, due to the country’s medicare and social security mechanisms. In the retail market, 85% of pharmacy products go to patient through hospitals.

The first two modes are the leading ones in China.

In recent years, China’s pharmacy enterprises have entered two new fields: e-business and the setting up of pharmacy retailing chain stores. At present, the development of the B to C mode of pharmacy business in China is limited.

B2B is the main development trend of China’s e-pharmacy commerce. Though the trade volume of B2B e-pharmacy business only makes up a percentage of the total pharmacy sales, it still has large development potential. In China’s case, the B2B e-pharmacy commerce has grown by 300 percent yearly. In 2003, the trade volume of internet pharmacy sales was estimated to be 10 percent of the total.

In addition, more and more IT and other industry lead companies have been shifting their investments into the pharmaceutical industry. One example is Fang Zheng Group, an IT company that had invested a total of US$363 million into pharmaceuticals and healthcare. Guangzhou Bai Yun Shan Pharmaceutical Manufactory earmarked US$12 million to start an external-use medicine project, which was in addition to its US$48 million antibiotics project.

To date, the Chinese domestic pharmaceutical industry has invested very little in the research and development of new drugs, though the central government is encouraging R&D through investment and other incentives in an effort to build a world-class pharmaceutical industry.

Most Chinese pharma companies with foreign distribution export traditional Chinese medicine mainly to Asian countries or regions. Their foreign distribution, therefore, is not as significant as their western counterparts.

The Chinese government legalized foreign ownership of retail pharmacies in 2003. On March 14, 2005, AXM Pharma Inc. (AMEX: AXJ) entered into a distribution agreement with Sinopharm Holding Guangzhou Co., Ltd. for an expected purchase amount through December 2005 of RMB 54 million ($6.56 million) for the Company's line of Elegance products, formerly known as Whisper.

Additional products, including Anti-Fatigue and Asarone, are expected to be sold in upcoming quarters. The sales territory includes Guangdong, Guangxi, Yunnan, Guizhou, Fujian, Sichuan, Chongqing, Hainan, Hubei and Hunan.

Sinopharm Holding Guangzhou Co., Ltd., an affiliate of China National Pharmaceutical Group Corp. is actively engaged in the research and development, capital investment, manufacture and trade of pharmaceuticals and medical instruments. Sinopharm has achieved an annual sales volume of 10 billion RMB (over 1.2 billion U.S. Dollars) and a total import and export volume of 200 million U.S. Dollars.

In recent years, more and more western pharmaceutical corporations, such as GSK, Roche, Novo Nordisk, and others, have come to China and set up R&D centers. Many world leading pharmaceutical companies have established joint venture manufactories in China. Some have even set up sole propriety manufactories. As of 2004, amongst the largest 500 overseas enterprises, 14 of them are pharmaceutical companies.

As of 2004 (three years after China's WTO entry), nearly all global pharmaceutical companies have already completed their accession into the Chinese market and will gradually shift their focus to research development. The main reasons for overseas companies coming to China have been to save costs by using the extensive science and technology research bases currently in place in China, the abundant human resources, and less expensive medical and clinical trials.

The involvement of many foreign pharmacy enterprises operating in China can be dated back to a century ago. Bayer of Germany, the inventor of aspirin, began trade with China in as early as 1882. Hoechst AG, known as Aventis, sold its products through 128 distribution agents across China in 1887, becoming China’s No.1 Western medicine and dyeing provider. The US Eli Lilly & Co. opened its first overseas representative office in China’s Shanghai in 1918. ICI, the predecessor of the world’s No 3 pharmacy enterprise AstraZeneca, began trade with China in 1898, and still maintained its old-time office by the Huangpu River in Shanghai.

As of 2007, there were already 1,800 foreign-funded pharmaceutical enterprises in China . Currently, all the top 20 pharmaceutical companies in the world have set up joint ventures or wholly owned facilities in China. This suggests that market conditions have never been more challenging, with competition at an all-time high.

After China’s entry into the WTO, many leading pharmaceutical companies are transferring their research and development centers to China. For instance, Roche of Switzerland opened its R&D center in Shanghai recently, GSK has established its OTC research and development center in Tianjin, China, and Pfizer and Janssen Pharmaceutica (Johnson & Johnson) will carry out similar plans in the near future. AstraZeneca, Bayer, Eli Lili, and Hoffman-La Roche, have also set up R&D or clinical trial centers in China.

A poll on 33 foreign pharmaceutical enterprises in China shows that seven out of the 33 companies have their R&D centers in China, accounting for 22% of the surveyed. The remaining 26 pharmaceutical enterprises have no R&D centers in China, accounting for 78 of the surveyed.

Among the seven foreign pharmaceutical enterprises with R&D centers in China, three have their R&D centers in Beijing, two in Shanghai, one in Guangzhou and one in Changzhou of Jiangsu Province. The maximum number of researchers at those centers is 40, with a majority of R&D centers having around 10 researchers. The researchers of most R&D centers are mainly Chinese, and only one R&D center has an all-foreign research team. All the R&D centers were founded after 1999, mainly in 2000 and 2001. The capital investment of these centers is not available.

In January 2004, Roche of Switzerland opened its research and development center, the fifth R&D center of the pharmaceutical giant, and the first to be established in China. Roche planned to hire 40 to 50 scientists in the first year and focus their research on pharmaceutical chemistry study. The center aims to step into traditional Chinese medicine research.

China's pharmaceutical industry has been a major industry that was completely directed by the state and subject to central planning, upon which transition-era reforms since the 1980s to this day have had a major impact. The pharmaceutical industry has been shaken up following the implementation of several government-initiated structural reforms.

5. Strengthening intellectual property protection and SFDA supervision.

The overall goal has been to improve manufacturing and distribution efficiencies, strengthen drug safety supervision, and separate hospitals from the drug retailing business.

With the increasing growth of the Chinese pharmaceutical market, the government realised the importance of supervision of pharmaceutical market. They put forward several regulations and reform measures over the past couple of years, especially in the recent period of healthcare reform. The most influential issues for foreign companies are the decree of Administration Method of Import Pharmaceuticals recently promulgated by the State Drug Administration, and the launch of a new version of registration certificate for import pharmaceuticals.

Other former functions of the ministry have been assigned to different government bodies. The most important of these was the transfer of medical insurance responsibilities to the new Ministry of Labor and Social Security. Nonetheless, the Ministry of Health retains its other main functions-regulatory development and oversight, healthcare resource allocation, and medical research and education. The Chinese government's establishment of a single drug regulatory authority was an important step toward foreign access, because it eliminated the conflicting standards that prevailed among provincial government agencies, centralized the Chinese healthcare regulatory system, and made it more transparent. SFDA now oversees all medications-both Western and TCM-as well as advertising. Its new regulations follow FDA's model. In July 1999, as part of medical insurance reform, SFDA released its first list of over-the-counter (OTC) medications, and in 2000, the state began to regulate OTC and prescription drugs separately. SFDA did so to encourage patients to purchase OTC medicines for less serious diseases, thereby reducing government medication expenditures and hospital visits. The SFDA plans to cut the number of manufacturers down to around 2,000 over the next two years by attrition and by requiring remaining firms to meet the new GMP standards. In fact, SFDA required all pharmaceutical companies in China to obtain GMP certificates from SFDA by June 30, 2004 to be licensed to sell their drug products in China. About 3000 of the companies met the deadline; companies in the process of obtaining certification may subcontract secondary production to a certified company until June 30, 2005.

In 2005, SFDA launched a regulation on drug research and supervision management aimed at enforcing GLP to investigative drugs, traditional Chinese medicine injections and biotechnology products. The regulation aims to help China’s drug research and development gain international recognition.

China quickly advanced its pharmaceutical-related regulations around the time of its December 2001 entry into the World Trade Organization (WTO). China has strengthened patent protection: In conformity with the WTO/TRIPS agreement, the patent protection structure adopted by China approaches that of Japan, Europe, and the US. Since the end of the 1990s, the government has been striving to develop a healthcare insurance system that covers 200 million Chinese. Already, 90% of the population in major cities like Shanghai, Beijing, and Guangzhou are covered, for a total of over 80 million. The Pharmaceutical Management Law was overhauled in December 2001 and various regulations were enacted from 2002-2003. Transparency in the approval process is gradually improving.

In accordance with WTO regulations, China has committed itself to cutting tariffs, liberalizing its domestic distribution practices, and restructuring its regulatory environment. China has allowed foreign enterprises to import products and engage in distribution services. Furthermore, China has also implemented new drug administration laws designed to streamline product registration and protect Intellectual Property Rights (IPR). China has agreed to six years of "data exclusivity" and has committed itself to implementing a patent linkage system. The SFDA has worked to crack down on counterfeiters but without greater resources and stricter legal consequences these actions alone have yet to be enough to curb this rampant problem.

Since 1998, the government has raised bar for entering the pharmaceutical business by passing laws including Drug Management Law and Regulations on Pharmaceutical Manufacturing. They involve following aspects of pharmaceutical manufacturing, drug distribution and selling, drug registration, requirements for manufacturing traditional Chinese medicines, medical packaging manufacturing requirements, and medical device manufacturing requirement.

The new laws will likely have a negative effect on market growth and profitability during the transitional period, but over the next 5-10 years this market should be able to provide the returns it is capable of.

In order to alleviate the burden of medical expenses on the society and ensure the implementation of the medical insurance scheme, retail prices of pharmaceutical products qualified for the program and included in the National Basic Medical Insurance Scheme Drug Catalogue will be regulated. The pricing mechanism is based upon three considerations when setting the maximum retail price - production cost, a wholesaler spread set by the government and the prices of comparable products in the market. Any products priced above this level will be cut.

The centralized tendering procurement system operates in two ways. First, several hospitals and medical institutions join together to invite tenders. Then, they appoint qualified agents to handle tenders. These agents are prohibited from having ties with the industry regulatory or administrative bodies.

In 2002, 70% of public hospitals at county or above level implemented this tendering system. This system has successfully passed the pilot phase and proven effective. Both the number of participating hospitals and variety of drugs expanded substantially.

More power to hospitals and medical institutions. In a market economy, hospitals and medical institutions do their own drug procurement. They source drugs from manufacturers at market prices and dispense them to patients. The centralized tendering drug procurement system, however, gives more power to hospitals in drug procurement. As a result, some unfair, unjustified and unreasonable practices surface as decision makers of some hospitals abused their power in order to get economic benefits.

GMP is a system to ensure products are consistently produced and controlled according to quality standards. It is designed to minimize the risks involved in any pharmaceutical production that cannot be eliminated through testing the final product. A directive circular issued by the Ministry of Health in Jul 95 marked the official launch of GMP certification in China. The China Certification Committee for Drugs (CCCD) was established in the same year. A subsidiary organization was also set up to manage the certification program.

Currently nine government agencies are the key agencies responsible for regulation. They are the State Food and Pharmaceutical Administration (SFDA), the State Development and Reform Committee, the Commerce Ministry, the State Traditional Chinese Medicine Administration, the Ministry of Labor and Social Security, the Ministry of Health, the State Population and Family Planning Committee, the Ministry of Science and Technology, and the State Quality and Technology Supervision Administration.

In addition, more than 10 industrial associations also regulate the industry.

There should be no big differences between rules of China and those of the U.S. Pharmaceutical, partly because China is following and copying U.S. rules. Chinese regulations affect nearly every aspect of drug manufacturing, from the design and construction of manufacturing facilities to the development of procedures and the training of operations personnel performing them.

There is only federal regulation on new drug application, but there are both local regulation and national regulation regarding pharma expenditures of hospitals, reimbursable drug lists, and other issues. National regulation is implemented by SFDA and other state agencies, while local regulation is implemented by provincial agencies.

Through related laws, China has established a physician licensing system, which requires physicians to pass a national exam to be eligible for applying for licenses. After passing the exam, physicians will be eligible for applying for certificates for the practice of medicine. Licensed physicians can open their own clinics five years after getting licenses, during which they must work as physicians.

There is a mechanism for approving new drugs (from NDA filing to approval). A full three-phase research trial takes three to five years, similar to the U.S., while requirements to start a trial are onerous by foreign standards, according to Western drug-company executives.

Although the approval time is being shortened, there still remain many aspects where transparency is lacking.

Western pharmaceutical companies have applied for numerous patents in China. About 10,000 patents for traditional Chinese medicines belong to Western companies. However, some Western observers say China lacks administrative protection for patents.

In 1992, the United States and China signed a memorandum of understanding (MOU) to allow administrative protection (AP) in China for US pharmaceutical patents granted between 1986 and 1992. The MOU provided seven-and-a-half years of market exclusivity, or AP rights, in China for pharma patents that were: not protected by exclusive rights before the amendment of current Chinese laws; patent protected after 1 January 1986 and before 1 January 1993 in an MOU signatory country; not previously marketed in China. Several Chinese government policies have prevented US industry from realizing the intended MOU benefits. According to Article 42 of the Patent Law, the duration of patent right for inventions is twenty years, and the duration for utility models and patent right for designs is ten years, counted from the date of filing.

The State Intellectual Property Office is responsible for enforcing patents. The intellectual property system in China was originated from and developed as a result of the policy of reform and opening-up. The State Council, the Patent Office of China, the predecessor of SIPO, was founded in 1980 to protect intellectual property, encourage invention and creation, help popularize inventions and their exploitation, and promote the progress and innovation in science and technology.

In 1998, with the restructuring of the government agencies, the Patent Office of China was renamed SIPO and became a government institution under the direct under control of the State Council. The office is in charge of patent affairs and deals with foreign-related intellectual property issues.

As a member of the World Intellectual Property Organization, China is active in protecting international patents. The SIPO has signed IP protection memorandums with countries including Russia and Thailand on the protection of intellectual properties. Such agreements are necessary to protect international patents in China.

On July 14, 2005, China and U.S. reached an agreement on intellectual property protection. According to western pharmaceutical business journals, most discouraging to US pharma companies has been the rampant theft of their intellectual property through patent infringement and counterfeiting. All those factors undermined the competitive advantage that innovative pharma companies stood to gain from marketing investments. As a result, US companies accounted for less than 10 percent of China's total pharma imports between 1998 and 2000.

China has more recently agreed to implement the Trade Related Intellectual Property Agreement of the Uruguay Round. To comply, Chinese companies will have to change their long-time practice of relying on counterfeit products. According to China's Securities Times, foreign companies will be able to file compensation claims ranging from $400 million to $1 billion against companies that copy patented medicines.

Chinese patent law addresses foreign companies in articles 18 and 19. Under Article 18, where any foreigner, foreign enterprise or other foreign organization having no habitual residence or business office in China files an application for a patent in China, the application is treated in accordance with any agreement between the organization's host country and China, or any international treaty to which both countries are party, or on the basis of the principle of reciprocity.

Under Article 19, where such an organization applies for a patent, or has other patent matters to attend to in China, it must appoint a patent agency designated by the patent administration department under the State Council to act as his or its agent.

The patent agency is mandated to comply with the laws and administrative regulations, and to handle patent applications and other patent matters according to the instructions of its clients. The agency bears the responsibility of keeping the contents of its clients' inventions-creations confidential. The administrative regulations governing the patent agency are formulated by the State Council.

The Chinese pharmaceutical distribution sector is very fragmented with about 10,000+ state-owned pharmaceutical wholesalers. Direct marketing to doctors (detailing), which is the basic marketing activity in developed countries, complemented by advertising, is not developed in China. Chinese hospitals generate 60 percent of their revenues from the sale of prescription drugs. Hospital pharmacies are still the main retail outlets for pharmaceuticals, accounting for 80 percent of total drug sales. This situation is changing because the government is encouraging the establishment of retail pharmacies that are not associated with hospitals.

Drugs are distributed in China through the Chinese-style channels. China has a three tiered distribution system. At the top of the ladder are national level-1 stations in Beijing, Shanghai, Shenyang, Guangzhou, and Tianjin. These allocate products to provincial level-2 distributors, who in turn sell to county and city level-3 wholesaler-drug stores. At the bottom of the distribution chain are China's vast numbers of small retail stores are difficult to reach individually.

At present, China's pharmaceutical logistics industry is featured as small-scale, scattered investment and fierce competition. China's pharmaceutical logistics industry is mainly composed of pharmaceutical manufacturers and pharmaceutical distributors. China has 16,500 wholesalers, 120,000 retailers and more than 6,300 producers. In terms of sales, China's top three companies: Sinopharm Group, Shanghai Pharmaceutical Co. and Jiuzhoutong Group Corp., are all shared less than 5% of the national market.

Since 2002, China's pharmaceutical logistics industry has been expanding constantly. A great amount of capital is being poured into the industry. In year of 2007, China had three pharmaceutical logistics centers put into operation, namely, Jiangsu Yabang Medicine Logistics Center, Quanzhou Medicine & Food Logistics Port and Chongqing Medicine Heping Logistics Center.

Large pharmaceutical logistics projects that initiated the construction in 2007 include the China-ASEAN (Tongji) Medicine Logistics Center invested by Guangxi Tongji Medicine Group with CNY145 million, the Nantong Suzhong Pharmaceutical Logistics Center with a total investment of CNY280 million, and the Chongqing Modern Medicine Logistics Center Project jointly invested by Shenzhen Neptunus Bioengineering Co., Jinguan Group and Chongqing Huabo Medicine Co.

Based on the statistics from the China Association of Pharmaceutical Commerce and China's Medicine and Healthcare Product Import and Export Association, in view of the features of China's pharmaceutical logistics industry, China demands urgently to create a group of large trans-region, trans-industry and trans-ownership Pharmaceutical logistics conglomerates through restructuring the industry and forming an alliance. As for the construction of logistics centers, it is better to build them jointly. In this way, it will help carry out management on the entire logistics operation to speed up the flow of drugs, improve circulation efficiency and reduce logistics cost.

There are two types of end users for in China: hospitals and retail pharmaceutical franchising stores. According to a 2004 sample investigation of hospitals in 16 cities, it was estimated that Chinese hospitals purchased a combined total of U$2.5 billion in drugs, an increase of 27% over 2003. The total revenue from pharmaceutical franchising stores was US$5.6 billion in 2004, an increase of 36% over 2003.

Due to China's former planned economy system, hospitals are still the main distributors of pharmaceuticals. In 2003, only 15.1% of total drug expeditures were incurred at pharmacy stores.(Meng 2005) The Chinese government legalized foreign ownership of retail pharmacies in 2003. Corporations such as Alliance Boots have formed retail and distribution joint ventures in China, mainly focused on Guangdong province.

Many companies have said that the drug distribution system in China is inefficient and adds considerably to the retail costs of medicine. Also there have been complaints of unclear regulations, low profitability, complex licensing procedure, hospital bidding, and reimbursement schemes.

The dietary supplements sub-sector has doubled from $3 billion in 1998 to a total sales volume of $6 billion in 2001. Experts estimate that the industry will reach $10 billion in annual sales by 2010, and will continue as consumers seek products with curative weight loss and other health enhancing effects. Over 3,000 domestic manufacturers of dietary supplements produce more than 4,000 different types of products. Domestic manufacturers fail to develop product branding and credibility and rely heavily on advertising to generate sales. As such, most domestic products, due to loss of credibility amongst consumers, tend to have short life cycles. High quality imported products only account for 10% of total sales. Companies say that complicated product registration, expensive and time-consuming certification requirements, and inexperienced and inefficient distributors are common obstacles.

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Source : Wikipedia