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New medical reform and the sustainable development of the pharmaceutical industry in China

ZHOU, Yi; LI, Lan-juan

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doi: 10.3760/cma.j.issn.0366-6999.20121814
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The national economy development and the demanding of the drugs request the pharmaceutical industry in China to keep sustainable development especially under the background of the new medical reform. According to the status of industry development and drug consumption in China, the trend and the driving factors for pharmaceutical industry in the future were estimated. Based on the analysis of the background and conditions for pharmaceutical industry sustainable development in China, the problems and challenges, the goal as well as the main measures for the sustainable development of pharmaceutical industry were put forward.

Sustainable development means to meet the needs of the present without compromising the ability of future generations to meet their own needs,1 which emphasized the relationships and coordinated development between economy, society, population, resources, and environment etc.2 It adheres to the principles of fair, sustainable, and cooperative, and requires long-term planning and solid basis for the development.3

The pharmaceutical industry in China, as the prospective, high technology, and international industry with the most rapid growth of foreign trade volume, should hold this connotation of sustainable development and pharmaceutical companies are recognizing that more stakeholders in more places are looking for businesses to bring value to their societies. This is being brought into sharper focus by the growing influence of industry economies, resources, environment, and society, which calls for a new way of operation in the global economy.

The pharmaceutical industry in China should keep sustainable development especially under the background of the new medical reform, which advocates for the harmonious relationship between people's welfare, natural environment, and industry development, requires not only to meet people's demand for health, but also to protect the ecological environment. However, the sustainable development of pharmaceutical industry in China is a complex activity, as it is a very long industry chain with multiple social and economic goals, with the natural and medical resources interdependent; furthermore, the pharmaceutical industry should mediate the countervailing forces including industry itself, economic factors, and scientific innovation.

There is little research on this topic yet. This paper aims to analyze the status and policy of China's pharmaceutical sector. We present an overview of the pharmaceutical industry as a whole — present situation, problems, and challenges, followed by the trend, and driving factors for the future pharmaceutical industry development. Based on the background of the new medical reform and conditions for the sustainable development of the pharmaceutical industry in China, we conclude with some recommendations for reform.


The pharmaceutical industry is one of the leading industries in China. It develops, produces, and markets drugs licensed for use as medications,4 with the upstream industry chain covering pharmaceutical raw materials and Chinese herb medicines, which are easily effected by the price fluctuation; the mid-stream industry includes synthetic chemicals and drugs, prepared Chinese medicines, medical devices, apparatus and instruments, hygiene materials, packing materials, and pharmaceutical machinery etc., which are mainly affected by government policies such as the price control, the new medical reform policy, and technology subsidies etc.; the downstream industry mainly consists of the commercial chains, which are mainly influenced by market and consumption. China's pharmaceutical industry has changed dramatically over these years. A huge market and tighter regulations are proving a huge drawing for the sustainable development of the pharmaceutical industry. The emphasis on the value of ecosystems within China is part of a broader, longer term plan for economic development, which has set China apart from the rest of the world's leading nations. However, China's pharmaceutical industry undergoing the new reform and rapid growth has not yet put much emphasis on the sustainable connotation yet.

The expanding scale and rapid growth

Sales of prescription drugs in emerging markets will grow rapidly over the next few years and China has reportedly become the third largest pharmaceutical market in the world by 2011.5 Chinese market and Chinese companies are of increasing importance for the global pharmaceutical industry, as pharmaceutical revenue in China is growing at a great pace, and the market there could double by 2013.6 The value-added output of China's pharmaceutical industry increased 14.9% year on year in 2009, according to statistics released by the Ministry of Industry and Information Technology. In comparison, US market grows at rates of 9%&10% and European market at 7%&8%, while Asian market growth rate usually exceeds 10%. As shown in Figure 1, the output of China's pharmaceutical industry increased by almost 4 times and the medicine sector's combined growth rate exceeds 20% year on year.7 Pharmaceutical companies continue to maintain strong growth trend, and sales of prescription drugs in China will grow by 40 billion US dollars through 2013. In addition, China accounts for 20% of the world's population but only 1.5% of the global drug market. As the pharmaceutical industry's nature is worldwide market, the Chinese pharmaceutical industry is expected to continue its rapid expansion (Figure 1).

Figure 1.:
China's pharmaceutical industrial output and its growth rate. Sources: National Bureau of Statistics of China.

The multiple industry structure

First, the domestic pharmaceutical market is highly fragmented and is still on a small-scale with a scattered geographical layout, although the Chinese pharmaceutical industry has been growing at an average annual rate of 16.72% over the last few decades. Currently China has about 3500 drug companies, falling from more than 5000 in 2004 and the number is expected to drop further. Chinese pharmaceutical market can be said to be of small scale in term of output value, which only accounts for 7% of global output value, and is less than the scale of a multinational pharmaceutical company. Second, Chinese pharmaceutical industry also has a low market concentration, as domestic companies compete in the 10 billion US dollar market without a dominant leader.8 China's thousands of domestic companies account for 70% of the market, and the top 10 companies about 20 percent, according to Business China. In contrast, the top 10 companies in most developed countries control about half the market. Foreign players account for 10%&20% of overall sales, depending on the types of medicines and ventures included in the count. In addition, China's over-the-counter market is growing fast and has become the fourth largest over-the-counter (OTC) drug market in the world. Foreign enterprises have been closely monitoring the expanding OTC market. Pharmacy retail chains are a relatively new phenomenon in China. Most Chinese people still go to the hospital first for their healthcare needs. But the convenience and lower cost of self-medicating at drugstores is winning people over; and that is just one of the many changes that are reshaping the pharmaceutical industry in China.

The improved efficiency and the declining profits

The pharmaceutical industry is always known as a high-return and rapidly growing industry where profit rate and growth rate are much higher than that in other industries. After the Chinese market was reformed, China gradually makes space for a healthy, steady, and rapidly developing pharmaceutical industry. With the coming of a low margin age of international pharmaceutical enterprises, the order of global advanced companies and the global innovation environment have changed, which occupy the high-end domestic market. There are pharmaceutical enterprises “killing each other” at the low-end domestic market by means of reducing prices to address the fierce competition. As shown in Table 1, the sales and profits of the listed pharmaceutical companies are declining and they lack the competitiveness as well as international marketing experiences.

Table 1:
The sales and profits of the listed pharmaceutical companies in 2011

High risk process and innovation

As the pharmaceutical industry especially innovative bound and the development of the new medicine are usually a kind of high risk process, with the climax of patent expirations, many negative effects have appeared; and according to statistics, the patent expiration rate in the top-20 global pharmaceutical enterprises will be as high as 35%, which means that most of the popular drugs in developed countries will lose patient protections in the coming years. Although pharmaceutical magnates have sufficient funds, they are faced with a situation of lacking new products; they have to advance industry transfer to bring about momentum for the research and development (R&D) of new products. With the fierce competition among the generic drugs, all European governments have innovated the rules and regulations resolutely to speed up the process of the generic drugs to come into market and encourage the development of the well-known drugs within the generic drugs. The situation is even worse in China, since the pharmaceutical industry is featured with low R&D ability of new drugs, low technical contents, and low management ability and economic returns. With outdated equipments and backward technology, as well as the separation of production and research, the development of pharmaceutical enterprises in China has been separated with production and marketing, which restricts the industrialization process of pharmaceutical enterprises.


The pharmaceutical industry landscape is changing fast in China and there are main factors driving Chinese pharmaceutical industry development. Pharmaceutical industry in China should also follow green economy path in the context of sustainable development. For the issues of sustainable pharmaceutical industry, setting objectives in these areas would therefore provide a dynamic and inclusive framework for focusing on protecting and improving health across the country. As the guiding principle for long-term global development, sustainable development consists of three pillars: economic development, social development, and environmental protection. The analysis of environmental, social, and economic impacts was clearly defined and these three areas are not discrete but overlap with each other.


Economic growth

Pharmaceutical industry, known as “a rising industry which never declines”, always has close relations with national economy and people's livelihood. The development of the pharmaceutical industry in China is predominantly driven by economy factors.9 The nature of an industrial region can roughly fall into one of the following three types: natural resource-driven region, economy-driven region, and science and technology- driven region. The pharmaceutical industry in China grows well only in areas with a strong macroeconomic background rather than in regions with rich natural resources or advanced science and technology. Moreover, it is shown that the stronger the macro-economy is, the faster the pharmaceutical industry grows.

Industry restructuring

The pharmaceutical sector has been the front runner in consolidation. There are many companies conducting expansions via mergers, acquisitions, or strategic partnerships with other domestic peers and international players. Pharmaceutical sector remains the largest for M&A deals over medical devices and healthcare. Although the proportion of Chinese pharmaceutical sector in the world is lower than average, attractiveness of Chinese pharmaceutical sector to mergers and acquisitions includes several factors, such as the increasing demand for medicines and healthcare services as a result of the healthcare reform initiation on rural areas of 600 million in population. The 12th Five-Year plan encourages investment from both foreign and private investors to the state-dominated sector. Drug pricing policy has made some medium-small companies financially inadequate therefore vulnerable to mergers and acquisitions.10 Pharmaceutical multinationals continue to show great interest in China as the opportunities in the pharmaceutical industry in China stretch far and wide. Accordingly, a record number of mergers and acquisitions (M&A) deals were closed in 2007 (111 deals), representing nearly a 30% jump from the prior year (Figure 2). M&A activities in China's pharmaceutical industry reached record levels and the upward trend is expected to continue. Given the tremendous growth in this market along with continuing pressure to control costs, pharmaceutical multinationals have ample opportunities to expand by investing in China. On the other hand, by means of M&A, companies may enlarge economic scale and win more development opportunities.

Figure 2.:
The proportion of Chinese pharmaceutical sector compared with that other countries. Source: Wind, Research Department of Changjiang Securities Company.

International environment

The Chinese pharmaceutical industry has a weak international trading competitiveness and the international competition will place an intense impact on it. By offering financial and technical support and facilitating the entry of Chinese firms into international markets, the strategy aims to bolster Chinese exports of high-tech products while fostering domestic innovation in the pharmaceutical industry.11

Patent issues, the greatest weakness of Chinese producers

Although China has enjoyed the benefits of an expansive market, the industry is suffering from minimal innovation and investment in R&D and new product development, and the pharmaceutical industry features with outdated manufacturing technology with a lack of patented domestically-developed pharmaceuticals. From 1986 to 2006, Chinese firms have independently developed only forty kinds of chemical medicines, most of which are not patented.12 Most domestic manufacturers in the pharmaceutical industry lack the autonomic intellectual property and financial resources to develop their own brand products. For example, judging from the intellectual property, among the biotechnology patents, America accounts for 52.7%, Japan accounts for 10.1%; however, China merely accounts for 0.73%.13

Shortage of finance input and the pressure of the innovation

The current industrial structures combined with the regulatory environment encourage pharmaceutical manufacturers to focus on competing on price rather than quality and innovation. On average, R&D spending accounts for only 2% of sales revenue, which is far lower than the 14%-18% of leading global pharmaceutical companies. The Chinese pharmaceutical industry is at a pivotal point in its evolution, particularly in relation to R&D. The sector's economies of scale have yet to be achieved. Most domestic manufacturers in the pharmaceutical industry lack the autonomic intellectual property and financial resources to develop their own brand products. Most manufacturers rely on the repetitive production of low value added bulk pharmaceuticals and imitation of drugs.14

While government subsidies to fuel pharmaceutical development in China have remained strong, China has not yet created tax incentives or an incentive environment for approving new drugs and managing drug pricing, which can provide a platform for local pharmaceutical companies to nurture high technologies.15 Moreover, Chinese pharmaceutical industry still lacks independent and efficient R&D, with poor corporate support for new drug research. The sector is also challenged by lack of intellectual property rights to effectively protect domestic innovation, contributing to destructive competition in the field.16


Push from new medical reform

China's changing health-care environment is designed to extend basic health insurance to a larger portion of the population and give individuals greater access to products and services. Following this period of change, it is estimated that most hospitals derive 25%&60% of their revenue from prescription sales, and hospitals remain the main outlets for distributing pharmaceuticals in China. This will change with the separation of hospital pharmacies from healthcare services and with the growing numbers of retail pharmacy outlets. Retail pharmacy outlets are expected to grow in number once the government finally introduces its system to classify drugs as OTC. The government is now encouraging development of chain drug stores. The price of pharmaceutical products will continue to decrease steadily. The central government has been playing a significant role in pharmaceutical price readjustment.17


Prior to the new health reform, the Chinese government, especially local governments promoted the pharmaceutical industry mainly for industrial development and job creation. These industrial policies did spur rapid development but also resulted in production facilities that were small-scale, duplicative, and greatly uneven in quality.18 As the public complains about problems such as high prices and difficult access to the hospital, the Chinese government launched the new health reform with the policy goals including controlling the growth of pharmaceutical spending and seeking low price to promote the access. But the pharmaceutical policy meets dilemma of promoting both static and dynamic efficiency, or balancing cost control with incentives for innovation.19

Empirical results indicate that before or after the reform of payment system, those countries and regions which adopted payment by types of diseases such as USA, Germany, Britain, Australia, and Taiwan area (China) did not experience big fluctuation in term of medical consumption, and medical consumption has been driving by the demand of patients at a high speed continually. For example in Taiwan area (China), payment by types of diseases has been carried out for 15 years, which indicates that the healthcare reform is complicated system engineering and cannot be successful overnight.


Health inequities are inequalities in health such as differences in health status, and differences in access to treatment and care, which are avoidable and unfair. China still has health inequities especially between the rural and urban areas and among different regions. A major reason for inequity is conditions related to socio-economic factors, lifestyles, and environmental conditions. Poverty, low levels of education, differences in gender, membership of some minority ethnic groups, and disability are some of the factors that are associated with poorer health. Inequalities will always exist within and between countries. The government has a role to address areas where changes can be made and where added value is achievable, for example by facilitating the sharing of best practices and taking actions.

Aging population

Population quantity and structure contribute mainly to the medical needs. Health care expenditures as a percent of GDP have grown in most countries, but that of prescription drugs are a small portion of medical expenditures; the real cost-drivers are hospitals and an aging population. Health care expenditures increase with age and then escalate more sharply at age 50H55, costing about $3500 a year per person at their peak. The United Nations maintains that a country with more than ten percent of its population over 60 is an aging society. The world population is aging, for example, in 2011, 40 million people in the United States are ages 65 and older, but this number is projected to more than double to 89 million by 2050.20 The industry has contributed to the worldwide increase in health and quality of life, including rising life expectancy and decreasing disability. China's aging population is growing rapidly. The latest projection is that in 2050 one out of three Chinese will be over 60 years old. China's huge and gradually aging population has almost guaranteed a large but varied pharmaceutical market profile. The ageing population is changing disease patterns and putting pressure on health systems, and new disease threats such as avian flu and the risk of bioterrorist attacks are emerging. Lifestyle related illness, particularly linked to obesity and smoking, is a major part of the disease burden. A new strategy will aim to maximize the ability to tackle these health challenges (Figure 3).

Figure 3.:
The growth of the population in China (2000-2020). Source: National Bureau of Statistics of China.

Urbanization process

Urbanization can mean the raise of the living level which also means the increase of the family healthcare consumption. By the end of 2011, the mainland of China had a total urban population of 691 million or 51.3% of the total population, rising from 26% in 1990,21 which is approaching the urbanization level of the medium developed country. In the long term, China faces increasing urbanization (Figure 4); according to predictions, there will be a total urban population of around 840 million by 2020 and nearly 70% of the population will live in urban areas by 2035.22

Figure 4.:
The volume and proportion of the urban and rural population in China (2000-2020). Source: National Bureau of Statistics of China.


Trend of the green market and the impact on the environment

China's pharmaceutical industry still has problems of high energy consumption, heavy pollution, resource waste, and unreasonable structure. According to statistics, the pharmaceutical industry accounts for 1.7% of the national industrial output value, while the discharge of waste water accounts for up to 2%. The ammonia has become a binding emission reduction targets during the “12th Five Years Plan” as pharmaceutical industry is the main source of generating ammonia. In order to realize the emissions targets, increase the environmental standards, and promote industry sustainable development. China's pharmaceutical industry should show their commitment to the clean production and reduction of the impact on environment.23 With the emergence of the debate on the climate change, in recent years cost of manufacturing and efficiency assumed a much higher strategic importance, as rising costs have increased the contribution of energy to overall manufacturing costs.24

Economic growth, sustainable development and, natural resources

In the course of the modernization of China's pharmaceutical industry, much attention should be paid to the relationship between the exploration and utilization of natural resources and eco-environmental protection, with both the need for development and the bearing capability of resources and the environment taken into consideration.25 Natural herbal pharmaceuticals have attracted worldwide attention and become the biggest potential market in the world, and outsourcing and sub-contract production have become new highlights. International pharmaceutical market has more demand and competition for the raw materials, and especially the herbs for traditional Chinese medicines is in shortage, as many herbs belonging to natural resources that should not be explored and used, are strictly protected, while the exploration and utilization of needed resources are done with clear objectives, to prevent any undesirable impact on ecological functions. Efforts should be made to develop pharmaceutical industry as an environmentally friendly industry, with high added value and scientific and technological contents, where medicine and pharmacology save resources and cause little pollution to the environment.

Pharmaceutical companies generating more pollutants

The pharmaceutical industry includes the manufacture, extraction, processing, purification, and packaging of chemical materials to be used as medications for humans or animals. Each of these production steps may generate air emissions, liquid effluents, and solid wastes.26 This industry generates many hazardous wastes, including conventional drug delivery waste solids, pharmaceutical tablets, powders and packaging, transdermal drug delivery wastes, pharmaceutical patches, liner and roll stock, pharmaceutical process wastes, nicotine containing wastes generated from processes, and off-specification pharmaceuticals.27 These wastes were only generated during pharmaceutical preparations. It is evident that the largest hazardous waste quantities generated by the pharmaceutical industry are solvents. The wastes generated from the medicine production and preparation, and even the prescription and nonprescription drugs will pollute the environment. This is even worse in China as many reports showed that environmental accidents occurred when many pharmaceutical companies' wastes contaminated the soil or waters.


Based on the quota status analysis and impact Assessment, the strategy of pharmaceutical industry sustainable development in China should aim to take a new approach to key challenges by putting in place a strategic framework with clear objectives. In terms of sustainable objectives, supporting sustainable health systems should be developed by an appropriate implementation mechanism to drive real changes. The sustainable development of pharmaceutical industry in China should put attention to some priorities in the areas of demographic change, climate & environment change, and new technologies. Technological progress, population, resources, and provision of adequate financing were all hailed as crucial elements for the implementation of sustainable development initiatives. In brief, it is difficult and complicated to balance the economics, social, and environmental aspects to develop the sustainable pharmaceutical industry in China.


Promote educational activities to encourage public awareness of laws and environmental issues in pharmaceutical factories and enterprises. The government should take an active role in promoting the concept of sustainable development with long term economic and environmental goals in mind. China's need for resources will continue as it seeks further economic development, but it is slowly changing its approach to development, which has caused significant damage to the natural environment. Production caps, export quotas, stricter emission standards, and higher resource taxes all tie in with the goal of building a green pharmaceutical economy and strengthening the institutional framework of sustainable development.

Education for Sustainable Development (ESD) is the term most used internationally and by the United Nations28 that identified education as an essential tool for achieving sustainable development and highlighted areas of action for education. The concerns with respect to healthy life styles, preventive medical approaches, safe environment, and early warning systems represent the sustainable development goals, all aiming to attain the sustainable global health system, which is possible only through collective multilevel efforts for the sake of human wellbeing, equity, livelihood, and worldwide sustainable development and stability. Health is a precondition for economic growth and sustainable development, and prevention plays a key role when addressing the global health challenges such as the pandemics' control, and the rising tide of non-communicable diseases. For these purposes, preventive strategies need to include promoting polices that foster a healthy environment, healthy life styles, and equitable access to health care and information, so it is necessary to meet the requests towards sustainable pharmaceutical economy.


China should improve and standardize existing environmental protection laws, regulations, and rules regarding prevention, assessment, and punishment in pharmaceutical industry. Many developed countries such as US have made a comprehensive legal and regulatory system applying to the pharmaceutical industry. Besides the acts, America made the Hazardous Waste Source Reduction and Management Review Act of 1989 (SB 14) to develop an assessment procedure to reduce hazardous waste. SB 14 requires that source reduction planning assessment is done every two years. Selection of industry is based on the consideration of several factors including amount of waste generated, opportunity for source reduction measures, and organizational interests focused on emerging issues. Rules and regulations should take the notion of pollution prevention of the pharmaceutical industry and gradually phase out those enterprises with high energy-consumption and serious pollution, which failed to meet the authentication criterions.


The overall level of industrial development in China is very low. The structure of industry is not completely rational, resource allocation is quite poor, and product quality still has much room for improvement. Even more importantly, the overall level of industrial technology in China is very low, resulting in the waste of resources, pollution of the environment, and a weak capacity for sustainable development. Overall consideration should be given to human survival, development, and environment; and rational planning, distribution, and construction should be carried out. Guide enterprises actively to participate in the development of pharmaceutical markets in rural areas, gradually solve the medicine problems in rural areas, and further open up the domestic medicine market. Enlarge marketing region, strengthen international cooperation from local to nationwide and then to the world, so as to realize the global marketing strategy.

According to the statistics of Data monitor, from 2002 to 2011, 40% of new product varieties in top-50 pharmaceutical enterprises have experienced secondary development, which explained that management is the key to the life circle of products. The general objectives for sustainable development of industry are to reform the industrial management system, in keeping with the requirements of social and economic sustainable development strategies, to adjust and optimize the structure of industry and distribution, and to update traditional industries with the most advanced technologies and automation systems. All these will modernize production technologies and equipment in traditional sectors of industry, cultivate the leading pharmaceutical enterprises, and boost industrial concentration, so as to construct innovation modes and realize the industrialization, standardization, and modernization of pharmaceutical production and management.


The rapid development of knowledge, the potential for innovation, and technological progress allowed for hope in working towards sustainable development. Innovation propels the quality leap of industry by using technology progress which put a solid foundation for the industry sustainable development. By strengthening and supporting innovation, such as starting with Chinese medicine synthesis and gene engineering technology to develop product varieties and product scale, R&D of innovated medicines and global best-selling drugs can be promoted. Financing and capital are important to promote the innovation of the industry. It is necessary to set up the technological assessment platform of medicine projects to create conditions for the entering and quitting of risk capitals, encourage private capitals and investment funds to enter into the medicine industry, perfect the credit policy of technology innovation, encourage pharmaceutical enterprises to seek financing by listing on the stock market etc., and speed up the industrialization of medical technology.


China's medical and health development will “follow a path with Chinese characteristics”29 and it is the first time that the government has put forward this notion. The new healthcare reform aims to provide safe, effective, convenient, and low-cost public health and basic Medicare service to both rural and urban citizens. Sustainable pharmaceutical industry aims to maintain social equality and justice by providing qualified and affordable health services, which is important to speed up the process of New Healthcare Reform and the three medical related reforms: medical insurance systems, medical and health system, and drug distribution system.

Speed up the reform of payment system, strengthen the medical aid, explore the setting up of serious illness guarantee mechanism, boost the management level of basic medical insurance, and develop commercial health insurance. Actively propel capitation system, payment by type of disease, per-diem payment, and methods of payment reform such as global budget; strengthen the control of scale payment and set up the restricting mechanism of medical insurance for the growth of medical expense within comprehensively planed regions. Work out the overall control target of medical insurance fund expenditures and carry it out in designated medical institutions to hook with payment standards; perfect different payment mechanisms, further provide more payment preferential policies to basic medical institutions, encourage patients to use Chinese medicine services, guide patients to go to basic medical institutions for their initial diagnosis, and integrate the eligible private clinics and retail pharmacies into the range of the designated medical insurance institutions.


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sustainable development; pharmaceutical industry; new medical reform; policy; environment

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