CHINA
The third largest economy in the world with more than one-fifth of the world’s population (1.2 billion people in 1995), China is also one of the fastest-growing economies, with an increase in gross domestic product (GDP) of 9.5% in 1995. Twenty-five years ago, China had a poor, agriculture-based economy, but today the country is becoming more and more industrialized. Experts predict that in another 25 years, China will be the world’s largest economy. The combination of China’s huge population and high economic growth rate is creating an enormous market that foreign companies are eager to tap.
Health Care Trends and Policies
Despite China’s booming economy and the growth of its middle and upper classes, the government is still the main provider of health care. As of 1993, China had 60,784 hospitals, none of them private; in 1995, the person-to-doctor ratio was 648:1, and the person-per-hospital-bed ratio was 382:1. The total public health expenditure (government and individual) was $1.4 billion in 1993, and in 1995, the per capita drug expenditure was $8-12. Because the government of China can no longer afford to provide universal free health care to all its citizens, it has changed to a system where only approximately 20-25% of the population receives state-supported health insurance. Thus, an estimated 75-80% of the population, or more than 900 million people, have no health insurance. Those covered under state-run insurance programs include retirees, students, government officials (at central, provincials, and local levels), military personnel, and employees of state-owned enterprises.
China is also experimenting with a more market-based health insurance system under which an insured employee contributes approximately 1% of his or her salary, and the employer contributes approximately 10% of the employees’ salary to pay for the insurance. The money is then split between a general insurance fund for employees and a personal insurance account.
Although it has reduced state-funded medical coverage, the Chinese government is still finding the burden of health care costs to be too heavy; thus, it has sought cost-containment strategies affecting the entire health care sector. One such strategy is a program called the National Essential Drug Bulletin (NEDB). Aimed at minimizing the cost of pharmaceuticals to the government, the NEDB publishes a select list of drugs and the prices at which the government will reimburse for them. The Chinese Medical Association, which produces the NEDB, decides whether to allow reimbursements for a drug based on its ability to meet the health care demands of the majority of the population, its safety and effectiveness, the cost for a full course of treatment, and the form the drug comes in as well as the dosage required. The Chinese government has also imposed price ceilings on prescriptions and has been slashing subsidies to hospitals to force them to cut their costs.
The Role of Foreign Medical Companies
Despite government cutback in health care spending, the growth of the Chinese economy and population has ensured high growth rates in the health care industry, including the pharmaceutical market. According to the State Pharmaceutical Administration of China (SPAC), the Chinese pharmaceutical industry had total sales of $10 billion in 1995 and continues to grow at a rate of approximately 15% a year. That same year, the 1,500 foreign companies investing in China contributed approximately 26% of the pharmaceutical market, split 50-50 between foreign drug imports and joint-venture production. In addition, the Chinese domestic pharmaceutical industry remains strong and from 1990 to 1995 grew at an average annual growth rate of 21%. China’s domestic industry produces mainly low-technology pharmaceuticals such as aspirin, antibiotics, and vitamins.
Whether a company’s drug is listed on the NEDB can have a significant effect on that company’s success in the Chinese market. One example of the NEDB’s impact is Amgen’s erythropoietin (Epogen) for treating chronic renal failure. When Epogen was removed from the NEDB, the company’s sales of this drug in China dropped between 70-80%; however, when the drug was reinstated on the list, sales increased by 60-70%. Despite cases like Amgen’s, a drug’s absence from the NEDB list does not mean that it will fail completely in the Chinese market. Increasingly, large numbers of wealthy consumers in China’s big cities can afford the more expensive unlisted drugs and are willing to pay for the health benefits they provide. And despite potential problems, such as lack of an NEDB listing, approximately 75% of the world’s top 20 pharmaceutical companies have invested in China, recognizing the unique market opportunities available in the country.
In July 1994, Hewlett-Packard’s Medical Products Group expanded its manufacturing operations in China by opening Hewlett- Packard Medical Equipment Products, in Qingdao. The Qingdao plant, which manufactures a variety of medical products (including patient monitors, cardiographs, ultrasound systems kits, and printed circuit assemblies), projected an output valued at $10 million for 1994 with a goal output of $33 million by 1997. It has apparently reached its first goal and is on its way to meeting the second. Testifying to the plant’s significant expansion, a Hewlett-Packard spokesperson stated, “In August 1994, the plant had 70 employees and 2,100 square meters of space. Now there are 120 employees, and the plant has been expanded to 3,800 square meters.” Of the products made at the plant, 40% are for the domestic Chinese market, and the remainder are exported, mostly for the Asian market. The spokesperson added, “There is absolutely no question that making this type of commitment to the Asian marketplace gives HP a competitive edge over companies that don’t manufacture in the region.”
Medtronic, a medical products manufacturer, has been in the Chinese market since the 1970s, building a network of relationships with the government, doctors, and others in the medical field. A February 7, 1996, company press release stated that Medtronic had been qualified as a Wholly Foreign Owned Enterprise (WFOE), meaning that it is subject to more lenient regulations than are usually faced by a joint venture. The company will soon open a new manufacturing facility for pacemakers in the Zhangjiang Hi-Tech Park near Shanghai. Michael J. Costello, vice president of Medtronic, said that the investment “demonstrates Medtronic’s continuing commitment to the building of long-term relationships and to leadership in the development of cardiovascular medicine in the People’s Republic.” Medtronic is the market leader in China for pacemakers and several other product lines and expects the Chinese markets for angioplasty catheters and coronary stents to develop rapidly, thus offering additional growth opportunities for the company.