Geo-Politico-Economic Background for China and Cinkate 

The pace and breadth of growth of an economy the size of China in the past fifteen years has no parallel in recorded history. A conservative voice in the Chinese government, Chinese Vice Premier Huang, at Davos in 2005, predicted that China's per capita income will triple over the next 15 years, continuing a blistering expansion that is turning China into an economic powerhouse. This economic development appears to be even more rapid in the major costal cities, and is seen is all phases of the culture.

The pharmaceutical industry in China is a composite of a large number of mainly small, local companies, and a few larger companies engaged almost exclusively in generic drug production with a growing presence of the large multinational companies. Currently there are about 3,500 drug companies, falling from more than 5,000 in 2004, according to government figures. This large number of domestic companies accounts for approximately 70% of the of the 10 billion dollar generic market, and the top 10 companies account for only about 20 percent of sales. In contrast, the top 10 companies in most developed countries control about half the market. Even the top selling companies just barely exceed sales of $100 million (hospital market).

Despite these limitations, pharmaceutical sales in China increased 28% year over year in 2004, to reach a total of $9.5 billion (IMS data). This is small compared with the North America market of $248 billion, approximately 45% of the global total, but with global growth in the next decade anticipated to be approximately 5% annually, the growth rate in China is expected to be 4-5 times as great. Because of the domestic companies’ lack of adequate pipeline and capital for basic research, it has been estimated that by 2010 that more than one half of drug sales in China will be controlled by foreign companies, increasing their individual revenues in China from less than 1% to more than 6%.

Recognizing that the emerging domestic industry has been disadvantaged under an unproductive system for over forty years, the Chinese leadership was convinced that the main and inescapable ingredient of a successful pharmaceutical industry is respect for intellectual property and began to revise the IP ground rules starting in the early 1990’s. How they would integrate this realization into their economy and sustain the painful period when modern drug prices would no longer be set at generic levels, was unknowable at that time and still is not completely resolved. However, it was reasonably clear that the integration will occur over the ensuing years and in a manner undoubtedly unique to China.

The evolution of the domestic pharmaceutical industry is a work in progress and these domestic companies are currently under considerable pressure from lack of pricing power, stricter enforcement of GMP production requirements, Governmental imposed pricing and reformed marketing practices.

Against the backdrop of a rapidly expanding manufacturing, export and import boom, Cinkate expects the market for advanced, state of the art therapeutics to grow annually by 20% -25% for the next decade and the market for state of the art IP protected products to potentially grow even faster. However, this growth is not expected to reflect business principles familiar to western pharmaceutical companies. This latter concept is often misunderstood by Westerners. For a number of reasons, this environment favors the company structured like Cinkate.

China gained entry into the WTO in 2003 with the agreement to modernize its business practices. Cinkate's view on this issue is reflected in the comments of Allan Zhang, senior Asian economist in PriceWaterhouseCoopers' Macroeconomics Unit in London. Zhang has noted that, " China's pharmaceutical industry was opened to outside markets earlier than many of its other industrial sectors. As a result, entry into the WTO may have less of an impact than in other more protected areas of the Chinese economy. And, with the post-WTO reduction of tariffs, many more advanced new medicines can be imported into China, and many small-and medium-sized foreign companies with independent patents will also enter the Market--making market competition even tougher."

Foreign drug companies will reap the benefits from China's WTO accession in four major ways:

• First, they will be able to acquire a larger share of the Chinese market than they already have. In fact, China's State Drug Administration estimates that foreign companies will control 70% of the Chinese pharmaceutical market after WTO accession. (Foreign companies now control about 15% of drug sales)
  
  
• Second, these foreign owned companies may be able to gain total control over their distribution networks and not have to rely on the complex-and costly-Chinese supply network (existing distribution companies).
  
  
• Third, freer competition as part of the WTO package will give them a better chance of having their products included on China's provincial and municipal lists of drugs that are subject to state reimbursement. This part of the Chinese market may be more complicated to access due to local political issues but this is now open to foreign owned companies.
  
  
• Fourth, their intellectual property rights will be better protected. However, given China's mixed past performance in enforcing the bilateral agreement with the US on IPR protection, this will be a challenging task. But, so far, the Chinese government seems to be moving in the right direction.

Cinkate leadership thinks this assessment is spot on. Among the challenges facing western pharmaceutical companies seeking business in China is the ability to price their products to maximize revenue and market share yet not jeopardize global pricing strategies through re-importation activities. While this is less of a concern for large multinationals with in-country control of manufacturing and distribution, the mid-sized and smaller companies will be totally dependent on collaborative agreements for product sales and distribution. Thus the many midsized companies with viable products, either in the market or in trial, will tend to minimize the Chinese market and cede these potential lucrative opportunities to large pharma for a fraction of potential sales through a more direct approach. Through our ability to work with these companies in an open and controlled manner, Cinkate can participate in this evolving market to benefit the Chinese consumer, the western company and of course Cinkate.

An additional feature of the Chinese pharmaceutical landscape is the rich opportunity for biomedical research and development. Cinkate can offer the benefits of its expertise in preclinical contracting and in all phases of clinical trials to companies pursuing human data. The opportunity to “outsource” clinical trial expense benefits both the Chinese and Western consumers.

Thus the future Cinkate sees in China includes both market and developmental opportunities. Cinkate will contribute to this growth by allowing more than just big pharma to participate in this market.

Foreign players account for 10% to 20% of overall sales, depending on the types of medicines and ventures included in the count. But sales at the top-tier Chinese companies are growing faster than are Western ones, according to IMS Health Inc.

In addition, China’s OTC market is growing fast and has become the fourth largest OTC market in the world. Merck announced the launch of OTC program in China in September 2003. Roche listed China as one of its 10 core OTC markets, with the aim of growing its OTC drug sales by 50% in the next five years and reaching 1.3 billion in 2008. Novartis is expanding its OTC market share in China, and Wyeth has also entered OTC market.

© 2006 Cinkate Corporation.