Report From: China

The forecast that the Chinese pharmaceutical equipment market will be "big and promising," should come as no surprise to industry players considering its brisk developments over the years, according to Wang YaJun, vice-secretary-general of the expert committee for the China Association for Pharmaceutical Equipment (CAPE).

A planning and management system was consolidated after setting up the China National Medicine Supervision Bureau at the end of 1978. Realizing the growth potential of the sector, the Chinese government established CAPE in 1991 to set standards and oversee the sector's developments. By the end of 2006, it had drafted 123 standards at both the state and industry level, and with its market regulation, had cultivated a competitive environment among manufacturers. CAPE has participated in quality certification discussions and publicly recognized scientific and technological achievements.

China's "Open Door and Reformation" policy also helped to pave the way for the pharmaceutical equipment sector to rapidly transform and progress. The sector was able to develop alongside Chinese traditional medicine and the country's pharmaceutical drug industry.

Today, the country has more than 900 pharmaceutical machinery manufacturers armed with capabilities to fulfill 90% of domestic needs with an annual output of 200,000 units valued at RMB 8 billion ($1.2 billion). The sector experienced a 30% increase between 2007 and 2008.

Even though China is the biggest importer in Asia, its domestic products have reached the shores of some 80 foreign countries, including India, Indonesia, France, and the United States. Leading Chinese equipment manufacturers such as Canaan Pharmaceutical Machinery (Wenzhou City, Zhejiang Province) and Zhejiang Hualian Pharmaceutical Machinery (Rui'an City, Zheijiang Province) have jumped on the bandwagon, establishing a presence in overseas markets such as Pakistan, Russia, and the US.

Nevertheless, the progress of the Chinese pharmaceutical equipment industry is marred by problems. Weak innovation, lagging production, and low exports are just a few of the challenges the industry faces.

For example, China's analytical instruments market is stranded between high-end and low-end products with no products available in between, according to German-based industry association Spectaris. As a result, foreign firms have moved into the Chinese market to meet unfulfilled market demand.

One reason multinational companies are moving in has to do with their business focus and clientele base. Jamie Davies, head of pharmaceuticals of Business Monitor International (BMI), explains, "Sector maturation has enabled local producers such as Jiangsu Mechanical Equipment (Changzhou City, Jiangsu Province), to cater to compatriot firms. The high-value end of the market will continue to be dominated by foreign firms including Italian-based IMA and US-based Edward Mendell due to their long-term commitment in research and development (R&D) investment."

He adds: "Currently, Chinese pharmaceutical companies export their products to developed markets looking for lower costs and to emerging markets such as Egypt and Pakistan that do not have the necessary industrial capabilities. However, the country's export sector is tainted by a string of product scandals, and it is only with rigorous implementation of production standards that its image will improve."

For example, it has been confirmed that the contaminant of the product in Baxter's (Deerfield, IL) heparin was produced at Changzhou SPL (Scientific Protein Laboratories) in China. In response to the situation, the country's State Food and Drug Administration (SFDA) issued an immediate directive that heparin manufacturers should only purchase supplies from authorized suppliers and has stepped up efforts, including working with the US Food and Drug Administration, to strengthen quality control standards.

Another challenge: intellectual property (IP). IP rights remain a thorny issue for foreign companies trying to do business in China. CAPE initiated an IP-strategy training program to educate industry players on various aspects of IP rights last year. But what remains to be seen is the level of confidence that investors have in China, which depends largely on the provisions that the government is willing to initiate in the future.

Given the current state of development, some experts are urging the government to consider consolidating options in a move to overcome current challenges. Shanghai-based marketing program manager of Agilent Technologies China, Chen-Jie Zhuang, is optimistic that this move would be beneficial to the pharmaceutical equipment industry and would accelerate growth in a more competitive and healthy way. "Merger and acquisition activities will increase as foreign investment increases," he says. "Contract research and contract manufacturing organizations are booming. Global companies will continue to invest heavily in China R&D, manufacturing, clinical research, over-the-counter marketing and distribution channels. This cross-culture development will generate a win–win situation for the industry."

BMI, on the other hand, believes mergers and acquisitions, along with the closure of inefficient operations will result in lower revenues as the number of drug manufacturers decreases. This can be mitigated, however, by the gradual introduction of high-tech machines that command higher prices, according to BMI.

On the positive side, China's WTO (World Trade Organization) status benefits foreign firms in the form of reduced custom fees. In 2005, custom fees fell to 3.9%, which gave countries such as Germany the opportunity to export approximately €267.4 million ($378.2 million) worth of analytical and laboratory equipment, making it China's third largest importer after Japan and the US.

To boost the sector's growth in China, CAPE has been encouraging cooperative exchanges and alliances. To date, many foreign firms have set foot on Chinese soil. The Italian-based IMG Group teamed up with Zibo IMA Xinhua Pharmatech (Zibo City, Shandong Province) to penetrate the machine- assembly market in 2003. Earlier this year, Tokyo-based Eisai established the subsidiary Eisai Machinery Shanghai to increase its sales and manufacturing support presence in China.

As the market demonstrates, today's business environment clearly favors international firms. But does that mean that local companies in China will lose their market position in the face of competition?

According to Zhuang, foreign firms are not even close to dominating the Chinese sector. "Over 700 foreign-invested companies serve only 20–30% of the China [pharmaceutical] market today although they manufacture 20 of the 50 most popular local brands. The top 10 pharmaceutical companies take a 20% share of the China market compared to 50% in Western countries," he says.

So, all is not lost for local pharmaceutical equipment manufacturers. The introduction of good manufacturing practice (GMP) in China in 1998 was a turning point for the sector as it contributed to good standards and quality products. In fact, more than 3200 companies out of more than 5000 in the country passed the first round of GMP certification before the July 1, 2004, deadline. After July 2004, firms stepped up their game by ensuring that their equipment was upgraded to meet higher CGMP standards for exports.

GMP certification of pharmaceutical machinery also brought about several market advantages for local firms in the areas of processing techniques and drug quality. The emergence of more enterprises and product varieties, according to Shi Qing, vice-president and secretary-general of CAPE, helped as well.

For example, Hualian Pharmaceutical Machinery (Rui'an City, Zheijiang Province) received several accolades, including State Gold Medals and a State Star Plan for its research and design of packaging machines, and its traditional Chinese medicine extraction and concentrating equipment. It was also the first company to pass the ISO 9001 International Quality Certification.

One important step may be for the government to establish a regulatory system to enforce market credibility. Says Zhuang, "Ideally, the system should be designed to minimize administrative burdens for both agencies and manufacturers. There is not a one-size-fits-all solution; it should be designed in a way that allows pharmaceutical experts to carry out their functions efficiently."

Jane Wan is a freelance writer based in Singapore.