(c) Hong Kong Institute of Certified Public Accountants. Contact HKICPA for permission to reproduce this article., Accounting Profession, Careers, Health

Pharmaceutical as a key growth engine for China

By Susan Lunt

Growing at an exceptional rate, China’s pharmaceutical market is poised to overtake Japan to become the world’s second largest. CPAs in the industry should be prepared to embrace change and boost their sector knowledge, writes Susie Lunt.

With an old-age ratio anticipated to reach 28.7 percent by 2035, China’s rising elderly population is widely seen as the catalyst for the nation’s rapidly expanding pharmaceutical market. The world’s third biggest drug market was worth US$105 billion in 2014, according to recent research. It is forecast to increase to US$200 billion by 2020, elevating its dominance as a leading player in Asia.

Developing at a pace that outstrips gross domestic product growth and is also expected to do so for years to come, the pharma industry, is offering a growing wave of opportunities.

For Tina Lai, Finance Director of Takeda, a global pharmaceutical company with its headquarters in Japan, China’s growth is down to a number of key factors.

“Changes in the living environment in recent years, the demand for high-quality living standards, an aging population and the change of one-child policy in China [lead me to] believe that the pharmaceutical market in China will keep its double digit growth in the next few years,” says Lai, who is also a member of the Hong Kong Institute of CPAs. “This will include both prescription drugs and over-the-counter products,” she says.

Historically, a very high percentage of Chinese citizens only had access to basic healthcare coverage. Their poor access to quality healthcare was coupled with the fact that Chinese hospitals received only a small percentage of funding from the state compared with other nations.

Determined to change, the Chinese government has taken up the gauntlet – both by providing massive funding to further develop the sector and by promoting decentralized services.

Launched in 2015, the National Plan for the Medical and Health Service System provides a five year road-map for reform of the country’s healthcare sector. The reform encompasses infrastructure development, reduction of costs, broader insurance coverage and new investment.

Opportunities on the rise

Felix Fei, Greater China Life Science Co-leader at EY says the country’s expansion into this sector is so fast that it would soon supersede Japan as the second largest pharmaceutical or healthcare market. “This will definitely be before 2020,” he says, “But it could be as early as 2017 or 2018.”

“Both market forces and government objectives will drive considerable mergers and acquisitions within the sector, as small companies grow to a certain size and become attractive to larger domestic players,” says Norbert Meyring, Head of Pharmaceuticals and Chemicals in China and Asia Pacific, KPMG China.

Last year was already a record year with major domestic deals such as Zibo Wanchang Science & Technology Co.’s US$2.4 billion acquisition of 99 percent of the shares of Xiamen Bioway Biotech Co.

“Mergers and acquisitions between big foreign pharmaceutical companies and small local drug manufacturers will be increasingly common,” says Yeung.

On the other hand, some insiders believe that small- and medium-sized enterprises are likely to continue to benefit from the Chinese government’s frequent modifications of tax legislation – including value added tax reforms – since 2013, which have impacted profit margins and also end-user prices. “They reduced the tax rate for manufacturers of biomedical products, for example reducing VAT from 17 percent to 3 percent,” says Yeung.

Other activities by the Chinese government include the promotion of research and development activities. “The government encouraged [organizations] to allocate more resources in this area, by means of grants and subsidies,” he says.

According to a 2015 report on the pharma industry in China by the global Research and Markets company, key sub-markets including generics, oncology, cardiovascular, diabetes and vaccines are likely to see both production and demand continue to grow over the coming decade.

Innovation is key

Pharma companies seeking to capitalize on this shifting of social dynamics and governmental influence should not rest on their laurels, however.

With the rapid growth of medical research and increasing demands on clinical care, information technology is considered the route to success. “Today, innovation is key if you want to outperform; for example, with innovative research and development, creating new drugs to treat and match healthcare needs, and innovation in the way in which you deliver healthcare solutions,” Fei at EY says.

“New business models are another aspect, where not only traditional pharma companies but also digital companies will be very important players and representatives of innovation,” he says. Future key players could include hospitals and medical equipment manufacturers, and also Chinese Internet companies such as Baidu or Alibaba.

“Digitalization and directto-patient product models are enablers accessible to pharmaceuticals large and small, which can increase coverage across large territories while managing sales and marketing costs,” says KPMG’s Meyring.

“Agile local companies are responding quickly to changes in the marketplace, either in the form of developing a niche in the development cycle, or by rapidly improving existing processes by partnering with domestic or multinational companies who are seeking strategic partnerships to access new geographies or portfolios,” he adds.

Embrace change

There’s no doubt that the China’s pharma market offers CPAs significant challenges and a world of opportunity, from start-ups all the way to large multinationals – provided that they come armed with a blend of experience and sector knowledge.

Institute member Esmond Yau, the former chief financial officer of a China-based pharmaceutical company listed in Hong Kong, says that CPAs working within this environment should expect to stand up and effectively explain the right way to conduct transactions to their management.

“The increasing compliance requirements which affect operations ranging from drug pricing, data privacy, and anti-corruption practices, will require diligence, judgment and integrity,” Meyring says.

“Significant regulatory understanding is required, [as well as] knowledge of the specific business unit they are engaged with, and also a high level of knowledge of end-toend operations for healthcare and life science companies,” he says.

An exploratory or business development mind-set is also crucial, given that there is always more to learn, and those who can maintain a network of opinion leaders and decision makers stand to succeed in their roles.

Within the ever-metamorphosing sector that is pharma, one way up the career ladder is to embrace change. “This is changing rapidly, so invest your time to be an industry sector expert and embrace new technology,” Fei at EY says. “Life science companies will be one of several industry sectors to heavily rely on big data in future, so ask yourself how to organize it.”

This article was originally published in the March 2016 edition of A Plus. You can read the digital edition here.