There is no secret that China’s role in the current and future global pharmaceutical market is and will be substantial, but the mindset for Western pharmaceutical companies has largely focused on the opportunity in that country. In looking at recent investment trends, however, perhaps the bio/pharmaceutical industry needs to more fully consider the potential competition from domestic Chinese pharmaceutical companies.
A recent Wall Street Journal article reported that in the last 10 months, 23 pharmaceutical and healthcare-related companies have gone public in mainland China and Hong Kong, according to data from Dealogic, a research and investment analytics firm. These deals collectively raised $5.37 billion although most of the deals were small: 17 deals raised less than $200 million and eight deals were for $100 million or less, but one deal stands out in particular. In September 2009, Sinopharm Group, China’s largest pharmaceutical company, raised $1.3 billion in an initial public offering (IPO) on the Hong Kong exchange.
To put that $5.37 billion in pharmaceutical and healthcare IPO funding into context, the US biotechnology sector raised only $547 million through IPOs in the first and second quarters of 2010 and $1.1 billion for all of 2009, giving the US biopharmaceutical sector only $1.7 billion in IPO funding during the past 18 months, according to data from Burrill and Company, a South San Francisco private merchant bank. When total financing into public companies (i.e., IPOs, follow-on public offerings, private investment in public equity, and debt) and funding into private companies (venture capital and other private funding) are taken into consideration, funding for the US biotechnology sector is substantially higher, increasing to $8.1 billion in the first two quarters of 2010 and to nearly $19 billion for all of 2009.
So what does this tell us? Although the aggregate size and financing into the US biopharmaceutical sector is certainly substantial, the sector should not take for granted investor interest in China’s domestic pharmaceutical companies. Why is this important? For the large Western pharmaceutical companies, a better financed Chinese domestic pharmaceutical sector poses competition, perhaps not directly for innovator drugs and higher-valued products, but for access to China’s market, particularly given the preference that would be given in China to domestic products and companies. Moreover, the emerging US-based biopharmaceutical sector also should take notice as China’s domestic bio/pharmaceutical players compete for the all-important IPO dollar and potentially other forms of financing.
According to recent data released by Sinopharm from the China Association of Pharmaceutical Commerce, eight China-based pharmaceutical companies had 2009 sales in excess of 10 billion yuan ($1.47 billion). Ranking these top companies in descending order are: Sinopharm, Shanghai Pharmaceutical Co. Ltd., Jointown Pharmaceutical Group Co., Ltd., Nanjing Pharmaceutical Co., Ltd., Guangzhou Pharmaceuticals Corporation, Anhui Worldbest Pharmaceutical Co., Ltd., Beijing Pharmaceutical Co., Ltd., and Chongqing Medicines Co., Ltd. Among the top 100 enterprises, 18 companies had sales revenues of more than 500 million yuan ($74 million).
With China’s pharmaceutical market valued at $76–$86 billion (based on 2008–2013 IMS Health estimates), the key question is how much of the market will be supplied domestically and to what extent will the projected 23–26% compounded annual growth rate (2008–2013) for China’s pharmaceutical market be an engine for growth for China’s domestic pharmaceutical companies.
The bottom line. Don’t discount the potential competition from China’s domestic bio/pharmaceutical companies.