Absolute Sales Figure Downgraded, Growth Forecast Maintained
BMI View: We maintain that the large, ageing and increasingly affluent population in China will continue to drive pharmaceutical growth. There are plenty of commercial opportunities, with many segments of society becoming able to afford to modern medicine - especially as the government remains committed to providing affordable healthcare. BMI believes that drug price containment will be a key theme for the duration of our forecast period, thereby bringing downside risks to pharmaceutical investors.
BMI has downgraded its forecast for the Chinese pharmaceutical market following reassessment of historic data. In 2012, BMI calculated that pharmaceutical sales in Chinese reached CNY453bn (US$71.8bn) instead of the previous calculation of CNY517bn (US$82.1bn) previously. By 2022, BMI forecasts that pharmaceutical sales will reach CNY1,309.7bn (US$198.5bn) rather than the previously projected CNY1,493.7bn (US$226.3bn). Despite the downgrade in absolute sales figure, we maintain our growth forecast for the sector. BMI projects that China's pharmaceutical market will grow at local compound annual growth rates of 13.8% and 11.2% in 2012-2017 and 2012-2022 respectively (12.8% and 10.7% in US dollar terms).
|China Pharmaceutical Sales (CNYbn)|
A key driver of pharmaceutical sales in China is its large 1.3bn population, which offers firms high volume sales. This large population, coupled with its ageing demographics and increasing affluence, means increased demand for healthcare and pharmaceuticals. Between 1995 and 2011, the average annual wage increased from CNY5,348 (US$861) to CNY41,799 (US$6,729), equating to almost a 10-fold increase . This has translated into greater ability to afford pharmaceuticals.
In addition, the government's 12th Five-Year Plan seeks to enhance healthcare services. Among other initiatives, it seeks to boost healthcare services in the lower tier cities and grassroots areas and increase reimbursements under the new rural cooperative medical insurance. Consequently, higher overall spending on health will lead to increased use of pharmaceuticals.
At the same time as its quest to expand healthcare access, the Chinese government is seeking to lower the financial burden of health provision. Healthcare remains a key concern for the population, given the high prices of drugs. In response to calls for better affordability, the government has announced several rounds of drug price cuts. The latest round of price cuts was put into effect in February 2013, when the prices of 400 varieties of drugs in more than 700 formulations classed under 20 different categories were cut by 15% on average .
Nevertheless, the recent corruption/bribery allegations concerning GlaxoSmithKline (GSK) has highlighted the ineffectiveness of these price controls. In July 2013, four GSK executives were detained. One of the executives, Liang Hong (GSK China's vice president and operation manager), stated that the amount spent on bribery accounted for 20-30% of the company's drug prices . Subsequently, in August 2013, a report from local media outlet People's Daily revealed that some drugs are approximately 30% cheaper by in Hong Kong than in China, despite the fact that annual per capita GDP in Hong Kong is US$37,000, while it is just US$5,900 in China. 
As a result of this, BMI expects the government to enact more price-containment policies, in part to rein in corruption while at the same lowering pharmaceutical cost to the population. This therefore provides a downside risk to pharmaceutical sales in the country.
Nevertheless, from a global perspective, China remains a highly attractive market for pharmaceutical companies and their investors. Compared to the key developed countries, China's pharmaceutical market value has overtaken Germany's since 2011 and we expect its pharmaceutical sales to exceed Japan's by 2016. We maintain, however, that it is unlikely China will surpass US pharmaceutical sales.
In comparison to the BRIC nations, China's pharmaceutical market is ranked second out of the four countries, coming behind Brazil. This is largely due to the Brazilian's government commitment to healthcare. Latest data from the World Health Organization (WHO) showed that health expenditure as a percentage of GDP reached 8.9% in 2011 in Brazil, while the figure was 5.2% for China. Highlighting the importance of governments' support of healthcare to ensure a market's attractiveness, we note that India is lagging behind all the other three countries in terms of pharmaceutical sales due to poor health expenditure. In 2011, the country spent only 4% of its GDP on healthcare, with the government contributing a mere 1.2%.
|China Still Lagging Behind The US|
|Pharmaceutical Sales In Selected Countries (US$bn)|
 Business Monitor Online - Industry Trend Analysis - Increasing Wealth Boots Pharmaceutical Spending - March 26 2013.
 Business Monitor Online - Industry Trend Analysis - Drug Prices Reduced Again - January 10 2013.
 Business Monitor Online - Industry Trend Analysis - Corruption Hits Pharmaceutical Sector Again - July 25 2013.
 Business Monitor Online - Industry Trend Analysis - Counter-Intuitive Disparity In Drug Prices - August 15 2013.