Chinese Studies
2013. Vol.2, No.4, 169-177
Published Online November 2013 in SciRes (
Open Access 169
Big Pharma in China—The Driving Forces behind Their
Success—A Qualitative Analysis
Hind-Louiza Chitour
School of Management, Wuhan University of Tech no logy, Wuhan, China
Received October 12th, 2013; revised November 13th, 2013; accepted November 20th, 2013
Copyright © 2013 Hind-Louiza Chitour. This is an open access article distributed under the Creative Commons
Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the
original work is properly cited.
China has become a major player in the pharmaceutical industry within few years, leading the production
and export of API worldwide and representing a double digit growth sector in terms of healthcare services
needs in the next 5 to 10 years and predicted to be the largest Pharma market in 2020. To enter this mar-
ket, Big Pharma companies have adopted different strategies to tackle the challenges specific to the coun-
try in terms of size, specific needs sales channels and logistics adjustments. In this paper we will discuss
the market entry strategies adopted by big Pharma in China. Major Pharma players have opted for either
the aggressive M&A approach to penetrate the Chinese market, gaining local insight through the acquisi-
tion of local Pharma manufacturers and the production of generic drugs in China; or for some others an
innovation focused strategy through developing its R&D structure in the Mainland to capitalize on the lo-
cal talent pool and the cheaper operating costs the country offers. For this paper, we have applied a vari-
ous set of tools to gather data: personal observations used as primary data, reviewed secondary data:
Government reports, Pharma reports, studies and related scholarly articles, press releases and specialized
websites. We performed PEST analysis to demonstrate how the socio economic environment in the coun-
try and the other external factors characterizing the Mainland all contributed to the success of foreign
multinational pharmaceutical companies in China.
Keywords: Big Pharma; Outsourcing; China; PEST Analysis
Current Outlook of the Global
Pharmaceutical Industry
The pharmaceutical is a particular industry characterized by
the high-risk/high-profit industry that reached its paroxysm in
the 1990s with blockbuster drugs such as Plavix for Roche
generating billions over the course of a decade. The research
and development process that leads to a drug being available on
the market, generally takes 8 years on average. The active in-
gredient first needs to be isolated and identified, and then this
product needs to be tested for its chemical stability and toxicity
on animals or pre-clinical phase, after that the drug is adminis-
trated to sane volunteers and lastly to ill patients (clinical trials
phase I and II respectively). The final approval on whether or
not that new drug is authorized in the market is upon regulatory
bodies prerogatives such as FDA in the USA or SFDA in China
or AFSSAPS in France.
The cost of these R&D efforts has been on the rising trend
for the past years due to the increase in raw material products
prices, tightened regulations for R&D protocols and manufac-
turing standards, inflation and currency instabilities and lastly
to the rise in labor costs globally. Some experts qualified the
industry as overregulated and point it as one of the potential
major threats to the Pharma industry’s players’ competitive
advantage and would eventually affect the core of the R&D
model in the industry by failing to be flexible and reactive to
these recent changes.
These conditions have been aggravated by the patent expira-
tion wave that has hit several blockbuster drugs, these drugs
represented the cash cow for the Big Pharma companies who
produced using exclusive in-house expertise from drug screen-
ing up until its availability in the market. These “superstar”
drugs have been developed back when few multinational drug
manufacturers had the monopoly of drug developing and
manufacturing thus charging a premium price for these highly
innovative drugs, having unlimited access to virtually every
market on a global level and protecting their products with a
patent of 20 to 30 years during which every other Pharma
company was legally prohibited to manufacture a drug with a
similar active compound or using the same manufacturing
process (DiMasi, 1991). This era is at its dawn now with the
“patent cliff” looming ahead for the Big Pharma, which obliges
them to rethink their business model as a whole to find a more
suitable strategy that would ensure a more sustainable growth.
The need for a shift from the classic drug development & mar-
keting model is urgent. This business model on which Pharma
MNCs used to rely on to yield profits is no longer relevant,
especially with the emergence of new contenders in the indus-
try. With India and China leading the pack with huge market
growth potential, and also as new power houses for drug
manufacturing and innovation in the biotechnology & Pharma-
ceutical sectors (Calo-Fernandez, 2012).
Big Pharma has to reshape their organization structure to be
more flexible and reactive to the changes the industry is under-
going. The main industry players are now trying to palliate to
the losses incurred by patent loss of their premium drugs, there
is an urgent need for a new R&D model as the classical one
becomes riskier yielding lower benefits. The main measures
Big Pharma companies have applied so far include restructuring
of their R&D facilities inducing massive layoffs in their West-
ern plants: manufacturing facilities have been shut down in
France, Germany, UK and the US to be outsourced in countries
where labor costs are cheaper and in most cases the outsourcing
destinations constituted major producers for raw materials used
for the manufacture of these drugs, China being the first ex-
porter of Active Pharmaceutical Ingredients in the world repre-
sents an R&D outsourcing destination of choice. So far the
outsourcing strategy was reserved to the manufacturing of fin-
ished products, and where the major R&D efforts leading to the
final product that would eventually be manufactured were in
their majority performed in Western countries where the ade-
quate infrastructure and qualified labor were readily available.
The outsourcing destinations were not qualified to handle com-
plicated and comprehensive research and development efforts
within their soil (KPMG, 2011). This trend is set to change in a
country like China, where Big Pharma companies do not only
consider the opportunities arising from the huge market size
and the potential benefits from selling their drugs to cater for
the needs of the 1.5 billion people nation, where national
healthcare coverage is a priority to be achieved by 2020. But
also as a major R&D destination with consequent funds in-
jected to modernize, integrate the previously fragmented Phar-
ma & Biotech sector (Zhang, 2009). Foreign Pharma companies
could benefit from the availability of local talent whether
graduates from Chinese Universities (over 20,000 Science PhD
degree holders) or returnees trained abroad in Western univer-
sities and Research Institutes. This local talent is a blessing for
Foreign Pharma executives who can dispose of a local qualified
talent pool cheaper to hire and retain in comparison with their
Western counterparts even if the salary gap between the two is
narrowing quickly. In this paper, we will analyze the various
socio-economic, demographic, legal and political conditions
that are making China become a premium R&D outsourcing
destination compatible with new imperatives the Pharma MNCs
have to abide by to remain competitive and profitable.
PEST Analysis of the Pharmaceutical
Market in China
In this section, we are going to examine the different factors
that favored the rapid growth of the pharmaceutical industry in
China. The country represents now one of the most attractive
destinations for big Pharma, not only as a market for their pre-
mium drugs or the manufacture of generic drugs, but above all
as a major innovation hub that these enterprises are willing to
bet on in order to speed up the drug discovery process, and also
to be able to face the increasing global demand for better and
more personalized healthcare solutions with less adverse effects.
We will perform a scan of the different environmental factors
that we believe are in line with the Pharma MNCs growth
strategies in general to better understand the key drivers of the
Pharmaceutical industry in China.
Political Factors in Favor of R&D Oriented
Industries for an Innovative China
Chinese government is heavily involved in the Pharmaceuti-
cal industry that has been part of the 7 key industries in the
latest 5-year plan designed by the government. This could be
explained by two axes the government is trying to shift to-
Provide basic health coverage schemes for the entire Chi-
nese population by 2020.
Shift from low innovation products export driven economy
to an innovation driven economy
The new party leader Xi Jinping is likely to favor the conti-
nuity of what has been implemented by his predecessor and the
need for innovation is the main driver for the country and the
policies that will be introduced will most likely be designed to
favor the thrive of high technology industries and R&D ori-
ented enterprises that will hence receive further support. The
new communist party leader Xi Jinping emphasized the need to
carry on with the reforms and opening the country up to face
the various challenges already existing and the ones looming
ahead. The new government in Charge is advocating the de-
velopment of “Socialism with Chinese characteristics” through
5 Major axis, the following 3 are directly relevant to the Phar-
maceutical industry:
A sustainable Economic growth maintained with active
fiscal policies and prudent monetary policies, also by en-
hancing organic energy and incentives.
Strengthen the industrial sector by encouraging innovation
and R&D efforts and also by stabilizing the external de-
mand and expand the internal demand.
Great emphasis on safeguarding & improving people’s
From all these directives foreign Pharma MNCs will still
have a huge opportunity in China as the government supports
the opening up approach for this R&D focused industry. Coop-
eration schemes and incentives would be at foreign companies
hand especially the highly innovative enterprises. Healthcare
will constitute a major concern for a government keen on cut-
ting spending in the sector and improving the access to health-
care. This could be achieved through a strong emphasis on
prevention and education of the increasing number of urban
population, together with the isolated rural population that yet
has little or no access to healthcare services.
Legal Environment in China Driving Innovation
The Pharma industry has been part of the 7 key industries in
both the previous 11th and 12th five year plans of the Chinese
government in place. The government has different objectives
to achieve through a series of reform aimed to expand the
healthcare coverage to the entire population by 2020. In order
to achieve these goals a series of reforms have been reshaping
the healthcare sector in China. The most recent one taking place
in April 2009 called the: “Anhui model”.
The Anhui Model
This new set of laws and regulations compiled in the Anhui
model represents an aggressive tendering system enforced by
the Chinese government that resulted in the slash of drug prices
by at least 30% of key drugs (part of the essential drugs list).
The government enforced the broaden use of a new procure-
ment method which leads to price reductions in order to trim
the costs of caring for an aging population. Both Foreign
Pharma MNCs and Chinese Pharma manufacturers frown upon
this reform that threatens to cut their profit margins and they
Open Access
are lobbying against it. United laboratories lost 2.5% in terms
of value per share and so did Shineway Pharma by 5.8%.Both
foreign and local pharma companies raise the concern of the
government’s attempt to cut prices through tendering to com-
pete on prices and the resulting decrease in quality of the drugs
produced to cut on manufacturing costs. Although this reform
has resulted in the shrinkage of the profit margin of these com-
panies they are still profitable and this reform would eventually
be profitable in the long term for Foreign Pharma as it will
drive demand up resulting in growth through the increase of
sales volume.
Tax Law
In January 1st 2008 the new Company Income Tax Law and
other regulations provided tax incentives to boost R&D and
gave preferential income tax rates in addition to turnover tax
exemptions for R&D centers providing research services to
overseas companies. Pharma manufacturers eligible for reduced
income tax rate if these enterprises qualify as “Advanced &
new technology enterprise” which is in the same line as HNTE
incentive standing for High New Technology Enterprise being
taxed at the preferential rate of 15% instead of the standard
45%. These measure add up to the tax holidays of 2 years in the
5 special economic zones (SEZ: Shenzhen, Xiamen, Zhuhai,
Hainan and Shantou). In addition to Shanghai Zhangjiang High
Technology Park that favored the growth of Pharma and bio-
tech industry in the country and Zhongguancun life science
park in Beijing. Both are boosting the R&D sector and driving
an innovation oriented Pharma industry up with a combination
of local CROs, drug manufacturers and Multinational Pharma
R&D centers located within these parks.
Intellectual Proper t y Rights and P atent Protection
To many foreign companies, China remains attractive as the
world’s largest potential market for pharmaceutical products.
As such products rely heavily on the protection of intellectual
property rights, it is essential for foreign companies in this field
to adopt a combination of IP protection methods to formulate a
strategy for their products in China. To this end, China has
established a relatively comprehensive legal system in relation to
IPR protection where intellectual assets are protected by way of
patents, trademarks, copyrights, and trade secrets (see Table 1).
Initially, as seen by the rampant counterfeiting and piracy of
copyrights and trademarks, many Chinese businesses recognized
only the value of intellectual property that belonged to foreign
investors (Liu et al., 2009). Increasingly, however, Chinese
businesses recognize the benefit to their own economic interest
that can be gained through the use of inte lle ct ual property laws.
To see the effect of this trend, consider China’s pharmaceu-
tical industry. Price Waterhouse Coopers estimated that in 2000,
China’s pharmaceutical industry was worth $28.2 billion (ap-
proximately 2.8 percent of GDP). In 2002, China’s pharmaceu-
tical industry experienced a 15.5 percent rate of growth, with a
22 percent growth in profits. The central government is cur-
rently putting money into the pharmaceutical industry, specifi-
cally to encourage domestic research and development. With
increasing profits and opportunity at stake, the Chinese drug
companies that once built businesses around pirating foreign
owned Pharmaceutical companies are now beginning to use
intellectual property laws as a strategic tool. This shift in busi-
ness practice is significant because it demonstrates that the
enforcement of IPRs can provide a profitable business envi-
Table 1.
Evolution of China’s intellectual property protection for drugs (source:
Phase Patent law amendment
date IP protection for drugs
Pure imitation
(1949-1985) N/A N/A
Innovative imitation
(1984-1993) March 12, 1984
Protection of the
synthesis and
dosage form
processes of
pharmaceuticals only
Imitative innovation
(1992-2008) September 4, 1992 Patent protection of
innovation (2008- ) December 27, 2008
Patent exemption for
drugs trail
compulsory licensing
and parallel
import of patent drugs
ronment for Chinese businesses. A recent example of this shift
is the well-publicized invalidation of Pfizer’s Chinese patent on
Viagra by SIPO. While criticized extensively by US businesses
and the US trade officials as a sign that China lacks the interest
in enforcing intellectual property laws and in complying with
TRIPS, the case really provides an important example of the
growing acceptance of IPRs in Chinese business culture.
Labor Law
China has been and still is a very attractive outsourcing
country mainly due to cheap labor costs compared to the West.
Foreign companies can still benefit from the affordable labor
force available in the country since the liberalization of the
labor market in 1994 that resulted in the creation of the biggest
manufacturing center in the world in Guangdong province due
to massive capital influx from Chinese and Hong Kong entre-
preneurs. The minimum wage varies with the geographical
location, in Shanghai it is 1.120 RMB while it reaches 870
RMB/month in Chongqing. As for factory workers, the same
pattern applies for skilled factory worker the average salary
would be around 500 USD per month which is 3 times more
than what he could earn working in Jiangxi province. However,
the current trend is the rise of labor costs all over China espe-
cially since the 2010 labor strikes following the Foxcon scandal
and it resulted in 20% increase in the minimum wage in
Shenzhen starting from March 2011 and doubled the amount of
the minimum wage in Beijing within a 6 months period. Over-
all, the wages are increasing fast in the country where enter-
prises struggle now to retain their employees. Multinational
Pharma companies have started a fierce battle to attract and
retain the growing yet still insufficient talent pool in China
where highly skilled employees in the field are still lacking but
cheaper to hire than their Western counterpart due to the costs
of living in China being still lower than in Europe or the US for
Economic Environment—The Domestic Market’s
Crucial Role
The 2nd world’s largest economy is set to have a rather op-
timistic 2013 economic outlook. Analysts project the growth
Open Access 171
rate to be around 7.7% for the year 2013 or even reaching 8.2%
in the case of a good management of the fiscal cliff risk in the
US and its consequences on the global market and also the
recovery pace in the Euro zone dealing with the financial crisis.
The emphasis would likely to be put on economic reforms and
the optimization of China’s economic structure and growth
pattern. Another main axis for the year 2013 is to intensify the
proactive fiscal policy next year by “appropriately” expanding
the fiscal deficit and cut taxes to stimulate local consumption.
The government is also keen on allowing more market-deter-
mined pricing of resource products and expanding Value added
taxes reforms. The Chinese government will maintain control
of the important real estate sector to avoid the real estate bubble
from bursting along with allowing reforms with state firms. The
Chinese economy will show the first signs of recovery after
enduring a slowdown 7 quarters in a row. One of the most en-
couraging sign is the pace at which the manufacturing sector
constituting the backbone of the country’s economy has dis-
played an accelerating growth pace in the last quarter of 2012
and despite of an inflation rate of 3% predicted for the upcom-
ing year the Chinese government remains cautiously optimistic
for the year 2013. It is likely to be rejuvenated by a stronger
local demand, the acceleration of the reform pace especially for
taxes such as the trial tax reform in Shanghai that has been
successfully applied through the replacement of business tax
with Value added tax for the transportation and services indus-
tries Since then the reform has been successfully applied in
several other provinces across the middle kingdom. As China
joins the World Trade Organization (WTO), it will need to
integrate more completely into the global economy. The inter-
national competition will place an intense pressure on the Chi-
nese pharmaceutical industry. Accession to the WTO will bind
China by fundamental WTO principles, such as improved
transparency and the strengthening of commercial legal proce-
dures. China’s WTO commitments include the tightening of
rules on intellectual property, tariff concessions, and market
access of non-Chinese service suppliers engaging in the distri-
bution of pharmaceuticals. 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. These gaps are currently filled by Foreign Pharma
companies, where the local demand stimulation drives Pharma
growth as China still suffers from an important shortage in
healthcare facilities and solutions for an ageing population that
requires a better al location of healthcare resources.
Social Environment-The Consequences of
Urbanization on the Chinese Population
The demographic component in China will play a crucial role
in determining the market size for Pharmaceutical firms, the
combination of rapid urbanization with the fast pace at which
the Chinese population is ageing also helps driving the growth
of Pharmaceutical companies in the Mainland. These two fac-
tors generate a number of healthcare issues such as the increas-
ing burden of diabetes, cardio-vascular diseases related to obe-
sity and sedentary lifestyles of a rising number of Urban Chi-
nese population. In addition, the ageing population also means
a rise in degenerative diseases such as dementia, Alzheimer …
etc. China will also have to deal with the consequences of their
astonishing growth rate in the last two decades by dealing with
the effects of this development on the environment and its dev-
astating consequences on public health, most prominently the
appearance of “Cancer villages” throughout the mainland with
an alarming rate of cancer incidence where heavy polluting
industries are concentrated.
One Child Policy Aftermath
The one child policy implemented in the 1970 to control the
population’s growth and now will have disastrous effects on the
country’s demographics.
China’s demographic transition will create opportunities as
well as challenges. Population aging and the growing pile of
pension funds are already forcing changes in the capital market
and financial services sector. An aging society will require a
more sophisticated investment sector, thereby presenting new
opportunities for financial managers and investment services.
Anothe r big growth a rea will be health care. Establishing better
long-term insurance plans will be critical in a country with few
young family members to care and provide for the old. Cur-
rently over 40% of all middle-aged Chinese couples have only
one child, a figure that rises to two-thirds in cities. A sound
social safety net needs to be put in place before the economy
feels the full force of deteriorating demographics. That means
extending and improving the fledgling national pension scheme,
and creating a universal medical insurance program that is
portable across regions. Reforming the health care system is a
daunting challenge. Over the past decade China made important
strides to extend health care coverage across the population—
yet serious challenges remain. For individuals, the two big is-
sues are lack of access to decent treatment and paying for its
often exorbitant cost. For the government, the major challenge
is creating a fiscally sustainable public health care system.
Funding remains a significant issue, but the system also suffers
from the inefficiencies of bureaucratic control and price distor-
tions, which set the cost of labor artificially low. As a conse-
quence, hospitals routinely attempt to profit by over-prescribing
medicine. Since elderly people account for the largest share of
health care costs, getting these reforms right has important
economic implications. An increasingly aging population is
creating a heavy burden on the government’s health expenses
as the society itself is transforming whist used to assign the
responsibility of taking care of the elders by their offspring to a
more modern and individualistic society where children no
longer are assigned with this duty but rather make it become a
governmental one. Another important factor playing in favor of
Pharma companies such as Novo Nordisk is that the type II
diabetes is widespread amongst the elderly and not the young
overweight generations like in other developing countries
where the diabetes pandemic is present. The combination of
this ageing population and the widespread of diabetes among
this fringe of the population make China one of the most prom-
ising market for diabetes drugs and other diseases affecting the
elder generations such as neurodegenerative diseases: Alz-
heimer, dementia, etc. The demand for these drugs is going to
know a steady increase in the next 5 - 10 years as part of the
government’s efforts to widen the access for healthcare services
to their population whether in urban or in remote rural areas
and it made it a national priority within their 13th 5-year plan.
Open Access
Urbanization in China and Its Consequenc e s
The Chinese territory has witnessed a drastic urbanization
plan since the 1990’s where it witnessed construction frenzy
especially in the Yangtze River delta in provinces like Hubei,
Chongqing and Jiangsu. In addition to the expansion in Zheji-
ang province and Shanghai municipality in the Eastern part of
China, the urban population is now estimated to not less than
47% of the total population and expanding at a rate of 2.3% per
year (Wang et al., 2012). The urbanization of China has trans-
formed its population lifestyle in a radical manner, urban popu-
lation tend to work in offices, thus working in less physically
constringent environment with a wider and richer choice for
food and easier access to it. Urbanization also transforms how
people eat, as the study shows urban people have less time per
meal on average than in rural areas and tend to have a highly
carbohydrate diets combined with a sedentary lifestyle due to
the abundance of services and urban transportation (buses, sub-
ways, taxis) that decrease the physical activity of the urban
population. the introduction of the American fast food giants
such as Mc Donald’s, Yum! Brand’s KFC and others in the
1990s have greatly impacted the Chinese population’s food
habits by offering more affordable “Western” food options
affecting especially the younger generation with a profusion of
calories in their meals. Conveniently located in malls, railway
stations, around campuses and schools this helped them become
the favorite dining option for these young consumers (Gu et al.,
2013). Add to that the explosion of the local food industry
manufacturing attractive food items conveniently packaged
designed for that fringe of the population who can now afford a
wide range of products due to a rising buying power. Indeed,
the rapid development of the middle-kingdom resulted in the
rise of a middle-class that is transforming the whole country’s
structure. This middle-class is usually urban, well-educated
individuals with full-time jobs within both local and interna-
tional companies at different levels. This class has witnessed an
increasing buying power through the gradual wages increase in
the country. It had transformed China from an export-oriented
economy that manufactures low-end products to the world to a
domestically focused economy that manufactures products for
this middle-class that has now a sufficient economy to sustain
the growth of the Chinese and International companies doing
business in China. One of the major indicators of this trend is a
rising number of multinational companies who have changed
their strategy from enforcing Western products to China to a
more “Glocal” approach (Go global but act local) and one of
the most striking examples is KFC’s strategy in China who
adapted their product line and tailored it to the Chinese taste by
introducing Congee and Youtiao two typical Chinese food
items for their breakfast menus in the mainland and Rice beef
meals for lunch. It is now reaping a great success from this
winning strategy. This middle-class is now increasingly aware
of the health risks them and their children are exposed to, that is
why research has shown that for health products this population
tends to spend more and more on internationally recognized
brands especially after the numerous food scandals of contami-
nated baby milk powder in 2008. This creates a major opportu-
nity for multinational companies such as Pharma companies
who entered the Chinese market as they are known for the
safety and high-quality of their products. Therefore, this class
tries to select carefully the products they consume and are
quickly reactive to the health problems they are facing and are
ready to take the necessary measures to counteract the disease.
For diabetes for example, this urban middle-class is more re-
ceptive to preventive measures and more likely to be diagnosed
at earlier stages to be able to manage the disease and the treat-
ment in an optimal manner.
Technological Environment
Local Talent Pool
China’s current leadership views talent, along with science
and education, as the key to building a harmonious and com-
prehensive well-off society, to solving the nation’s emerging
problems in environment, energy, urban-rural and regional
development gap, social inequality, aging population, and na-
tional security. For the Chinese leadership, the effective train-
ing, development and utilization of talent is the key to trans-
forming China into an innovative society by 2020. In proposing
to leapfrog stages in their own S&T development and become a
so-called “innovative nation,” the final plan suggested that
China should focus on the structural adjustment of its talent
pool, raising talent’s innovative capabilities, and achieving
better utilization of the existing talent ranks, while at the same
time maintaining a suitable quantitative growth rate. In 2004,
China turned out 2.4 million undergraduate students and
151,000 graduate students (masters and PhDs). The graduates
are the chief source of talent supply to support China’s eco-
nomic and social development as well as scientific and educa-
tional enterprises. China awarded 23,500 doctorates in 2004, of
which some 70% went to students in science, engineering, ag-
riculture, and medicine. These students are largely deployed in
universities as well as think tanks such as the Chinese Academy
of Sciences. Still, the investment in the upgrading of Chinese
universities has been substantial by domestic standards, with
universities now becoming a more central player in the R&D
system instead just being primarily teaching institutions. New
facilities have been built throughout the country, many with
advanced equipment and research space to spur the growth of
innovative technologies in an in-house setting.
In addition, the Chinese Diaspora is a potential source of
“brain gain,” a reverse migration or return of overseas Chinese.
China’s efforts to lure their native sons and daughters back
home after they have been trained overseas, including various
programs targeting overseas Chinese mentioned above, has had
some success. For example, the sitting number of university
presidents and professors in Chinese universities are over-
whelmingly returnees, though they are most likely to have been
short-term visiting scholars rather than degree-holders (Li,
2009). An increase in the number of returnees would counteract,
to some extent, the tendency for Chinese “high fliers” in re-
search and other professions to go and remain overseas. But, it
still remains to be seen whether more high-level talent will
make a permanent move back to China. In summary, China’s
indigenous S&T initiatives as measured by increasing spending
on S&T, R&D, and education will drive the growing demand
for S&Es and innovation, while the structural changes in FDI
will “super-charge” the thrust of demand. The growing connec-
tivity of the Chinese society and the growth of the domestic
high-end market mainly will serve as the key intervening fac-
tors—fostered and shaped by the changing face of FDI and
indigenous innovation efforts. The domestic market also will
become a more important force underlying the growth in de-
mand, especially when the supply-demand gap becomes nar-
rower. All these factors point towards a heavy makeover of the
Open Access 173
R&D landscape for Pharma companies, as China is increasingly
present on the innovation front thanks to government support
through investment in enterprises supporting technologies and
innovation and substantial funds allocated to attract & retain
local and overseas talents within their academic institutions
(Simon et al., 2011).
R&D Capabilities of China Pharmaceutical Industry
China’s pharmaceutical industry has witnessed core changes
in its structure, from a traditionally orientated industry it is set
to become one of the key players in Asia alongside India. It
already is the world’s leading API (Active Pharmaceutical In-
gredients) Manufacturer supplying the main Pharma companies
around the world with high quality ingredients. It has since
modernized its infrastructures by building Pharma incubators
for young Chinese biotech and Pharma companies such as
Zhangjiang Park in Shanghai and Zhongguancun Park in Bei-
jing to help these enterprises in their innovation endeavors by
being in contact with major Pharma companies such as Eli Lily
and Novo Nordisk who also established their R&D headquar-
ters in Mainland in these cities. The growing interest of Big
Pharma shows in the R&D investments they are making and the
partnerships they are forming with promising local firms to
help offset the consequences of their own pipelines drought.
The Chinese government has classified the Pharma industry as
a key industry to be developed and nurtured in the 13th 5-year
plan as it represents an innovation driven industry, has a great
growth potential and would benefit the nation’s growing needs
in terms of healthcare services (Eggelston et al., 2008). Another
major card the Chinese Pharma industry can play is the mod-
ernization of its world-famous traditional medicine. In the re-
cent years, there has been a constant flow of investments to
modernize the TCM practices and use them to speed up drug
discovery process whether by local or International Pharma
manufacturers who acknowledge the tremendous amount of
resources and research areas the TCM could offer combined
with Western techniques and was called Integrative medicine.
China’s growing market for traditional drugs estimated by
McKinsey at $13 billion in 2011 and expected to grow at 14%
yearly increase for the next five years, is attracting the world’s
largest drug makers. GlaxoSmithKline is testing a cure for im-
mune disorders from botanical extract compounds, Sanofi is
searching for alternative diabetes and cancer therapies from
traditional Chinese medicines and Nestle in partnership with
billionaire Li Ka-Shing plans to develop a drug for inflamma-
tory bowel disease from old Chinese remedies. The growth for
this market would be leveraged by the Big Pharma’s abilities to
capture the value of traditional and/or herbal medicine to ad-
dress unmet medicinal needs for patients who, especially in
Asia, believe in the power of traditional Medicine, which would
be combined with the Big Pharma’s drugs reputation in terms
of safety and efficacy to create innovative treatment solutions.
This would most likely help foster the growth of TCM utiliza-
tion and integration and thus increase its share in the global
drug market over the next 5 to 10 years. GlaxoSmithKline is
cheaper than Sanofi based on its lower price-to-earnings ratio
and its lower price-to-sales ratio. It also has a higher estimated
earnings growth according to analysts. Future earnings might
benefit from their ventures into traditional Eastern medicines.
Based on these price multiples, GlaxoSmithKline is a better
investment candidate. Its pipeline could be bolstered by these
new medicines and it trades at attractive price multiples. Hence
the growth opportunities, there are currently various projects in
the Mainla nd aiming at the utilization of TCM potential to find
new therapeutic approaches for a given affection such as the
research efforts carried out for the eradication of Tuberculosis
in Shanghai Research Center jointly with the British giant GSK.
The new R&D model in the Pharma industry has helped seal a
great deal of strategic partnerships between academia and pri-
vate Pharma companies. In an effort to combine efforts in drug
research using local talent whether educated in China or re-
turning from overseas Chinese who are in charge of R&D in
Pharma laboratories across the country. This helps nurture the
local talent pool, by having access to the latest technologies that
multinational Pharma companies offer, along with the biotech
incubators across the country in biotech parks in Shanghai,
Beijing or more recently in Tianjin. In addition, Chinese gov-
ernment in a effort to modernize the sector has introduced a
series of strict reforms for the local firms to comply with Inter-
national GMP and GLP standards worldwide which has led to
the disappearance of small Pharma firms that couldn’t afford
the upgrade. These drastic upgrade measures enforced by the
Chinese government, have reshaped the industry’s structure in
the country with: the emergence of high technology reliant
Pharma manufacturers with state of the art facilities to manu-
facture high-end Pharma products rather than small, local
fragmented manufacturers of low end pharmaceutical products.
This is how China has become one of the biggest players in the
API ingredients worldwide such as Heparin and an increasing
number of big Pharma is moving its API production or pur-
chase to Mainland. In 2009, Astra Zenneca the UK Pharma
giant has relocated its API production to China as it sees it now
as a favorable destination for these activities in terms of tech-
nology advancement and production facilities compliance with
the global standards applied to the industry. According to
Deloitte’s latest report China M&A scale records largest over 6
years in 2012. And one of the hot test sector for these activities is
represented by Pharma with a series of buyouts, consolidation
through merger and a restructuration of the fragmented market
which characterized the Pharma industry’s landscape in China
until these recent years (Zhang, 2009). For instance, Sinopharm
(China National Pharmaceutical Group) and China Develop-
ment Bank recently signed a 40 billion RMB ($6.4 billion)
agreement that will help Sinopharm—and China’s pharma in-
dustry as a whole—develop on several fronts. CDB will supply
the investment in a combination of investment, loans, debt, rent
and other financial services (Deloitte, 2013). With the new
capital, Sinopharm will seek to advance its R&D and manufac-
turing, while it also aims at the internationalization of the firm
to seek growth opportunities outside the Mainland.
Environmental Factors
China’s rapid economic growth and its early and heavy focus
on manufacturing have led to the deterioration of the environ-
ment within the mainland. Air and water pollution have been
recognized as a clear threat to China’s future prosperity, Street-
level anger over the air pollution that blanketed many northern
cities this winter has spilled over into online appeals for Beijing
to clean water supplies as well (Li et al., 2012). The Chinese
Prime Minister Li Keqiang has publicly expressed his concern
about the pollution and the threat it poses to the country and its
population, he encouraged increased public participation in
cleaning China’s water, soil and air. The rapid economic de-
velopment of the middle kingdom in addition to urbanization
Open Access
and industrialization all had a boomerang effect on the envi-
ronment and affected durably the quality of the air, soil and
water constituting a serious to the Chinese population health
state and became now a heavier load for the government in
terms of loss of productivity and increased healthcare costs. In
China today approximately 700 million people—over half the
population—consume drinking water contaminated with levels
of animal and human excreta that exceed maximum permissible
levels by as much as 86% in rural areas and 28% in urban areas.
By the year 2000, the volume of wastewater produced could
double from 1990 levels to almost 78 billion tons (Harada,
1996). These are alarming trends with potentially serious con-
sequences for human health. First, the critical deficits in basic
water supply and sewage treatment infrastructure have increased
the risk of exposure to infectious and parasitic disease and to a
growing volume of industrial chemicals, heavy metals, and
algal toxins. Second, the lack of coordination between envi-
ronmental and public health objectives, a complex and frag-
mented system to manage water resources, and the general
treatment of water as a common property resource mean that
the water quality and quantity problems observed as well as the
health threats identified are likely to become more acute (Wu et
al., 1999).
Environmental risk factors
Air and water pollution, are a major source of morbidity and
mortality in China. Biomass fuel and coal are burned for cook-
ing and heating in almost all rural and many urban households,
resulting in severe indoor air pollution that contributes greatly
to the burden of disease. Many communities lack access to safe
drinking water and sanitation, and thus the risk of waterborne
disease in many regions is high (Zhang, 2007). At the same
time, China is rapidly industrializing with associated increases
in energy use and industrial waste. Although economic growth
from industrialization has improved health and quality of life
indicators, it has also increased the release of chemical toxins
into the environment and the rate of environmental disasters,
with severe effects on health. Although its ambient air quality
has improved substantially, China is still facing the worst air
pollution problem in the world. Outdoor air pollution has be-
come a major concern for public health. It has been estimated
that the total health cost associated with outdoor air pollution in
urban areas of China in 2003 was between 157 and 520 billion
Chinese Yuan, accounting for 1.2% - 3.3% of China’s gross
domestic product. Health end points studied in China in asso-
ciation with air pollution include all-cause mortality, mortality
and morbidity due to cardiopulmonary disease, and numbers of
outpatient and emergency department visits (Chen et al., 2004).
Changes in respiratory and other clinical symptoms, lung func-
tion, and immune function are also studied.
Cancer villages in China—a national concern
The incidence of esophageal squamous cell carcinoma
(ESCC), which is the eighth most common malignancy world-
wide, is highest in China. The incidence of ESCC is high in
Shexian county, China and environmental factors, particularly
nitrogen-contaminated drinking water, are the main suspected
risk factors. Another recent study on the association between
pollution and cancer incidence in Guangdong province have
demonstrated the correlation between long-term environmental
exposure to both cadmium and lead and an increased risk of
mortality from all cancer, as well as from stomach, esophageal
and lung-cancers. This is only one of many studies showing the
clear association between water, soil or air contamination with
pollutants such as heavy metals toxins or bacteria pose a serious
threat in the long-term by considerably increasing the cancer
exposure for the population in addition to genetic malforma-
tions for new born and other pollution related affections such as
The government estimates to roughly 400 cancer villages
throughout the Chinese territory and has recently acknowledged
the need for an urgent and effective strategy to control the phe-
nomenon. China’s toll from pollution was the loss of 25 million
healthy years of life from the population. The data on which the
analysis is based was first presented in the ambitious 2010
Global Burden of Disease Study, which was published in De-
cember 2012 in The Lancet Journal. What the researchers
called “ambient particulate matter pollution” was the fourth-
leading risk factor for deaths in China in 2010, behind dietary
risks, high blood pressure and smoking. Air pollution ranked
seventh on the worldwide list of risk factors, contributing to 3.2
million deaths in 2010 (World Bank, 2011). The environment
deterioration is likely to create new opportunities for the
Pharma industry and the most profitable sectors would be the
research & development, manufacturing and marketing for
drugs set to cure or alleviate pollution related diseases symp-
toms. Sectors such as Oncology drugs already represent one of
the most promising market segments in China. The Chinese
gastric cancer drug market will grow from $250 million in 2010
to $469 million in 2015. According to the Emerging Markets
report, Gastric Cancer in China, market growth will be driven
by expansion of the diagnosed and drug treated population,
greater access to chemotherapy agents used to treat gastric
cancer, increased use of targeted therapies and improved patient
spending power. Also, China’s demand for lung cancer treat-
ment drugs has grown at a fast pace in the past decade. In the
next five years, both production and demand will continue to
grow. This shows the clear correlation between pollution and
increased market share for Pharma MNCs producing drugs set
to cure or limit the consequences this pollution has on human
Taking into account the current global Pharmaceutical indus-
try situation and the macro environment in China, we can easily
demonstrate how the latter influences the growth of Big Pharma
in the country.
From Figure 1, we can see that a set of prerequisites for the
growth of the Pharmaceutical companies in China is made
available thanks to various conditions. The 12th five-year plan
heavily emphasized the need for healthcare coverage for the
Chinese population, close the gap between urban and rural
healthcare services and also take action against the diseases
threatening the population and impacting China’s sustainable
growth plans such as air & Water related pollution which costs
an estimated 4.8% f the country’s GDP of which 4.3% incurred
health related costs. This will boost health related industries
such as insurance services, according to a report by Swiss Re,
health insurance was the fastest-growing sector in China’s life
insurance sector last year, and the trend will continue this year.
According to the experts, the current Chinese macro environ-
ment is favorable for foreign investment in healthcare including
Insurance and Pharmaceutical& Biotech sectors. By setting the
goal of national healthcare coverage of the Chinese population
by 2020, this positions the Pharmaceutical industry as a major
Open Access 175
Growth of Big
In China
driven growth
strategy Affordable &
Qualified talent
Rise of
with high
buying power
Figure 1.
The key drivers of Big Pharma growth in China (so u rce: author).
player in order to achieve this goal by making readily available
the drugs for the different health conditions the Chinese popu-
lation is and will face in the future. The core changes the Chi-
nese society witnessed in that last two decades in terms of diet
habits and physical activity patterns in urban zones caused by
the rise of middle-class consumers and the boom of the food
industry have resulted in the spread of metabolic diseases such
as diabetes, cardiovascular diseases Hypertension and other
lifestyle-related affections. In addition, Pharmaceutical industry
will benefit from various tax incentives when entering the Chi-
nese Market to cater for the country’s needs in OTC and pre-
scribed drugs. Being a highly innovative oriented industry and
one of the 7 key industries mentioned in the 5-year governmen-
tal plan, Pharma industry players are highly encouraged to not
only set their manufacturing facilities in the mainland but also
use it as major R&D hub in the Asia Pacific region and on a
global level. This is being achieved by the creation of several
biotech parks throughout the Chinese territory in Beijing, Tian-
jin and Shanghai to encourage the thrive of research in the
Pharmaceutical industry and facilitate the collaboration and
technology transfer with local manufacturers and CROs in a
low tax environment designed to attract the Pharma MNCs to
the Mainland. The establishment of R&D headquarters for an
increasing number of Pharmaceutical companies is taking ad-
vantage of the favorable tax environment offered by the Chi-
nese government. Unlike India, China benefits from a relatively
favorable legal environment that ensures the patent protection
for the different research initiatives performed in the Chinese
soil. The government has indeed, introduced a series of meas-
ures to secure a healthy R&D development by ratifying the
WTO and abiding by its regulations for IPR and Patent protec-
tion. Nevertheless, there is a dark cloud looming ahead of the
Big Pharma’s blue sky in China as the Chinese government has
officially amended its patent laws to allow drug companies to
reproduce generic, low-cost versions of expensive, patented
drugs, a daring move that is sure to shake up the pharmaceutical
industry. Yet, China still stand ahead in terms of patent protec-
tion and IPR preservation in comparison with its Indian coun-
terparts and it has been proven by the number of Big Pharma
opting for China instead of India when setting up their R&D
headquarters in Asia. In addition, they fully benefit from the
skilled talent pool found in the country composed by locally
trained scientists benefiting from highly technological facilities
instituted by the government in the universities across the
country and in partnership with private Pharma firms, and by
Chinese returnees from prestigious institutions in the US, Can-
ada and Europe attracted by the dynamism of research and
growth the industry is witnessing in the APAC region in gen-
eral and China in particular. The tax incentives and local af-
fordable talent pool in comparison with their Western counter-
parts account for the main drivers of Pharma industry in China.
The country highly encourages the sector as part of long-term
strategy aiming at the transition from a cheap manufacturing
destination into an innovation driven economy highly invested
in high-technology and sciences to ensure a sustainable growth
and manufacture high-end products with a greater added-value.
There will be an increased emphasis on the R&D sectors and an
involvement of Chinese enterprises at an earlier stage in the
value chain for a wide range of products. As the country pos-
sesses now a more adequate infrastructure to achieve such ef-
forts. Even though the country has witnessed a slow-down in its
growth in 2012 for the first time since 2008, China’s growth is
set to continue to surpass the 6% in the next 5 years with a shift
from the manufacturing sector focus to the high end products in
Pharma, Biothech, electronics, ... etc. The 1.5 billion population
makes a huge untapped domestic market, with increasing buy-
ing power and needs in healthcare and various services consti-
tute the promise land the Foreign enterprises such as the Big
Pharma which were looking for to leverage its growth capabili-
ties and face the various challenges it is put up against with a
drying pipeline, patent cliff consequences and rising of R&D
costs and increasing difficulties to attract and retain talents. The
scan of these various macro environment conditions that the
Middle Kingdom is offering shows that innovation driven in-
dustries such as Pharma are poised for the giant leap in China
and will find in the country all the conditions necessary to en-
sure sustainable growth.
Conclusion and Future Research
The Pharmaceutical sector is undergoing changes to its core,
the patent cliff underway for many of the Pharmaceutical big
players illustrates the end of the “blockbuster drug” golden era
for the industry. The need for a new sustainable growth strategy
is crucial for many Big Pharma companies. This resulted in a
series of restructuring, outsourcing, M&A in addition to new
cost-efficient R&D models and finally the search for new
growth territories. Big Pharma has set her eyes on China, first
as a colossal market for its blockbuster drugs and also licensed
generic drugs manufactured locally. The healthcare reform
enforced in 2009, in addition to the government’s commitment
to offer a better healthcare service to both its urban and rural
population all will positively affect Big Pharma sales growth in
the Mainland through an increase in their sales volume which
offset the possible price adjustments introduced by the govern-
ment such as the Anhui model. The outlook is positive for Big
Pharma in China, especially for the ones willing to set up R&D
activities in China. The government has clearly indicated his
intention of transforming China into an innovative nation with
support for high-tech and R&D oriented industries. The Phar-
maceutical industry is likely to reap the benefits of this gov-
ernmental policy that favors innovation driven enterprises with
tax incentives and government support through the creation of
biotech hubs spread across the Mainland. Pharmaceutical Mul-
tinationals then could rely on a growing talent pool of scientists
Open Access
Open Access 177
and researchers. The government has made consequent invest-
ments to spur the development of local expertise. According to
the ministry, in 2011, central and local governments at all levels
budgeted 1.68 trillion Yuan in education, up 24.57 percent from
2010. That represents 3.69% of the country’s GDP in 2011.
This considerably lowers the Big Pharma spending in talent
attraction and retention in China, by hiring local talent in the
Mainland where the labor costs are still lower than their West-
ern counterparts even though this gap is quickly narrowing due
to the inflation and increase in salary rates for Chinese em-
ployees in the last 5 years. Socio-demographic factors are also
in favor of the rapid development of Big Pharma in China with
the ageing population and its related diseases: Neuro degenera-
tive diseases such as Dementia or Parkinson, in addition to
environment related affections: pollution related such as cancer,
asthma, infections or to the rapid urbanization and change in
lifestyle and food consumption patterns of a population who is
now under the threat of “developed countries illnesses”: diabe-
tes and metabolic disorders, cardio-vascular diseases, … etc.
Throughout this paper, we have identified the key drivers that
Big Pharma could take advantage of in order to expand its
presence in China and generally in Asia to ensure a sustainable
growth in the upcoming years. A change in one or many of
these political, economic, social, technological or environ-
mental factors will definitely affect Big Pharma strategy in the
country and on a global level, which is why a close monitoring
of these factors could reveal itself essential when deciding for a
growth plan in the Mainland. For Pharma MNCs there will be a
growing need to keep up with the fast pace at which this coun-
try is constantly changing; offering growth opportunities for
some and threatening the survival of others in the industry who
would fail to fully comprehend the complexity of the Chinese
environment and its implication for their global growth strat-
I would like to express my gratitude to my supervisor pro-
fessor Qing for his guidance and support and also Mr Mackerell
for his valuable contribution in the data gathering process.
Lastly, I would like to thank Erika Zoeller for her support and
valuable comments.
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