OTC pharmaceutical market in China

 OTC pharmaceutical market in China

Summary

• The OTC pharmaceutical market in China reached around $11.3bn in 2009, at a Y-o-Y growth of 7.8%. In 2009, the traditional medicine category led the market with 30% market share.
• Leading players in the Chinese OTC pharmaceutical market include J&J, GSK, Novartis, Bayer, Chengdu Rosun and Huangshan Tianmu. The traditional medicine category was led by a local player Nin Jiom, with over a 14% market share in 2009 while multinational company, J&J led the analgesics and digestive remedies with an 8% and 6% market share respectively.
• The State Food and Drug Administration (SFDA), the regulatory body for formulating the guidelines for prescription and OTC medicines has created a prototype manual featuring the detailed content and the unique logo for OTC medicines for 4,610 identified types of OTC medicines category.
• The key drivers of China's OTC market include its booming economy, ageing population, growing population of smokers, increasing levels of obesity, and growing consumer awareness and confidence in self medication.
• China's economy has experienced strong growth over the years and the growth rate is reported to be higher than the growth experienced by the major world economies such as the US, EU5 and Japan. In 2009, the GDP growth rate for China was 8.7% and is expected to increase in 2010 to reach 9.5%.

China

Overview

Prior to the one child policy in 1979, China experienced a huge population boom and as a result is the most populated country in the world, with an estimated 1.3 billion citizens. As a consequence of the one child policy, however, the proportion of elderly people in the population of China has also started to increase. In China, like in other nations, life expectancy is on the rise due to increased healthcare spending by the government. In 2005, over 36% of the Chinese population was aged over 40 years. This has since increased to 40% in 2009 and is expected to further increase to 45% by 2014. Moreover, it is estimated that by 2050, around 25% of the population in China will be over the age of 65.

China has experienced a complete transformation since joining the WTO in 2001 from being a country with a restricted view on international trade to becoming a major player in the global economy. The Chinese government is making amendments in its policies to drive economic growth. The Chinese currency was closely linked to the US dollar until 2005, when China revalued its currency by 2.1% against the dollar and shifted to an exchange rate system with references from multiple currencies. The restructuring of the economy in 2005 also served to boost the country's GDP. China is the second largest economy having surpassed Japan in Q2 2009. In 2008, during the global financial crisis, China's central government issued multiple stimulus policies to boost the weakening economy, including increased spending on healthcare.

The gross disposable income per household has also increased significantly and is expected to rise further in the near future, having reached $6,498 in 2009 after growth of 5% over 2008. By 2015, the gross disposable income per household is expected to reach $11,856, witnessing year-on-year growth of over 10%. With the self-medication trend becoming ever more popular in China, increasing disposable income will empower consumers to seek out OTC healthcare products.

China's OTC pharmaceutical market

The OTC pharmaceutical market in China was valued at $11.3bn in 2009, witnessing growth of 7.8% over 2008. In 2009, the traditional medicine category led the OTC pharmaceutical market with a market share of over 30% by value, followed by the analgesics and digestive remedies categories with 9% and 6% market shares, respectively. However, the digestive remedies category reported the highest year-on-year growth of 10%, whereas traditional medicine reported growth of 7%.

The market for traditional medicine is expected to marginally decline going forward, due to the growing urban population in China. The consumption of traditional medicines is more prevalent in rural areas, where the population is declining and there has been a shift in OTC drug consumption patterns. Indeed, due to accessibility and the availability of OTC products, rural dwellers are in general gradually shifting from traditional products to other OTC products.

China's OTC market is highly fragmented with the presence of large number of local players, as well as multinational companies. Leading players in the market include Johnson & Johnson (J&J), GlaxoSmithKline (GSK), Novartis, Bayer, Chengdu Rosun Antiseptic Pharmaceutical and Huangshan Tianmu Pharmaceuticals. In 2009, pharmacies and drugstores accounted for over 65% of OTC pharmaceutical sales in China, followed by independent/specialist retail stores and supermarkets with around 20% and 5% sales, respectively. Pharmacies and drugstores will continue to lead the distribution of OTC products in the future, although other channels such as supermarkets and convenience stores are likely to increase their share in the OTC segment.

The growing economy has been the key driver for the growth of the OTC pharmaceutical market in China. The country's real GDP growth rate was around 8.7% in 2009, ahead of even the developed nations such as the US and Japan. The Chinese government is easing the regulatory regime for OTC products to encourage more development in the market. As part of this, in 1999, the State Food and Drug Administration (SFDA) introduced a classification system for prescription and OTC medicines. The government is also promoting Rx-to-OTC switches and encouraging companies to launch OTC medicines to allow easy access for all consumers. Demand for OTC products is also expected to be high as the medicines help to curb the nation's medical costs.

China's OTC pharmaceuticals market is expected to reach $15bn by 2013, witnessing year-on-year growth of 8%. Indigestion remedies, analgesics and cold, cough and allergy treatments are expected to show major growth in the coming years as Chinese consumers move to prefer OTC products over other treatments for these conditions.

However, due to the intensified competition in the OTC pharmaceutical market, companies will have to introduce innovative products to increase their market share. Brand loyalty is extremely low in the Chinese OTC market, and as such an effective marketing and advertising strategy will be key to ensuring a higher brand recall. To drive growth in the OTC market, companies will have to identify new ways to reach their potential consumers; in the OTC market, trust is the most important factor behind repeat purchases so the first mover will always have an advantage.

Market segmentation

In 2009, the traditional medicine category led the OTC pharmaceutical market with a market share of over 30% by value, followed by the analgesics and digestive remedies categories with 9% and 6% market shares, respectively. Around 57% of the population in China resides in rural areas and has only limited access to other OTC pharmaceutical medicines, and as such has better knowledge and acceptance of traditional medicine. While much of the rural population is migrating to urban areas, rural areas will remain a potential market for OTC pharmaceutical companies as the government is boosting its spending on healthcare in these areas.

The leading players in the Chinese OTC pharmaceutical market include J&J, GSK, Novartis, Bayer, Chengdu Rosun and Huangshan Tianmu. In the traditional medicines category, Nin Jiom led the market with a share of 13% in 2009. J&J led the analgesics and digestive remedies categories with shares of 8% and 6%, respectively. Elsewhere, Tong Ren Tang led the cough, cold and allergy category with a 10% market share while Bayer led the vitamins and minerals category with a share of 14%.

Table 1: Market share of leading players in major categories in China
Market share (%)
	2007	2008	2009
Analgesics
Johnson & Johnson (J&J)	8	8	8
GlaxoSmithKline (GSK)	3	3	3
Anhui Anke Yuliangqing Pharmaceutical	2	3	2
Gansu Zhongyou Pharmaceutical Gannan Tibetan Medicine	2	3	2
Kangyuan Pharmaceutical	1	2	2
Cough, cold and allergy
Tong Ren Tang	10	10	10
Huangshan Tianmu Pharmaceuticals	10	9	10
Handan pharmaceuticals	6	6	7
Shaanxi scidoor hitech biology	5	6	6
Boehringer Ingelheim	3	3	3
Digestive remedies
Johnson & Johnson (J&J)	6	6	6
Procter & Gamble (P&G)	5	5	5
Chendgu kangquan	3	3	3
GlaxoSmithKline (GSK)	2	2	2
Traditional medicines
Nin Jiom Medicine Manufactory Ltd	13	13	13
Huangshan tianmu pharmaceuticals	11	11	12
Tsi jing chemical	4	4	4
Jiangxi Medicines And Health Products	3	3	3
Vitamins and minerals
Bayer AG	14	14	15
Boehringer Ingelheim	8	8	8
Wyeth	7	7	7
Bristol-Myers Squibb	5	5	6
Yangshengtang	4	5	5

Source: Business Insights

Regulatory framework

In 1999, the SFDA introduced a classification system for prescription and OTC medicines. As part of the initiative, the regulator identified 4,610 types of OTC medicines categories and created a prototype manual featuring each of the categories. Since then, the SFDA has been propagating the new classification system to spread awareness, educate consumers and assist them in the identification of an OTC product.

SFDA has also set up guidelines for the advertising, labeling and displaying of OTC products on the shelves. For example, OTC products and prescription products are not permitted to be displayed on the same shelves, while in supermarkets, prescription products are not allowed to be displayed on the self-service shelf. Mass advertising for prescription products is also banned.

Growth drivers

Booming economy

China's economy has experienced strong growth over the years, outstripping that seen in major world economies such as the US. China's GDP grew by 8.7% in 2009 and this is expected to rise in 2010 to 9.5%. Gross disposable income per household is expected to witness growth of over 60% in the coming years. The booming economy, increased disposable income, and growing awareness about preventive healthcare management provides a huge opportunity for companies looking to penetrate the Chinese OTC market. However, due to intensified competition in the Chinese OTC pharmaceuticals market, companies will need an effective marketing and advertising plan to carve themselves a niche in the market.

Growing obese and smoking population

In 2009, around 38% of China's total population smoked, and this is expected to increase to around 38.7% of the total population by 2014. The growing smoking population has led to the launch of various smoking cessation products in the country. Notably, in 2008, Pfizer introduced Champix, a smoking cessation product, while Novartis entered the market with the introduction of its anti-smoking patch Nicotinell. J&J is also contemplating to launch its smoking cessation gum in China.

While the obese population may not be as large as the smoking population it continues to grow steadily. Changing eating habits, reduced levels of physical activity and a widespread sedentary lifestyle all contribute to the increasing obesity levels in China. This population is expected to even increase further which will result in opportunities for new OTC weight loss products.

Aging population

The population of China is aging rapidly after the government's introduction of the one child policy. In 2005, the percentage of China's population aged more than 40 years was 36%, which increased to 40% in 2009 and is expected to reach 45% by 2014. As a result, it is estimated that by 2050, around 23% of the population in China will be over the age of 65. The elderly population is more prone to diseases such as gastrointestinal, insomnia, osteoporosis and diabetes, and this combined with the growing awareness of self-medication will boost the sales of OTC products in China.

Growing consumer awareness and confidence in self-medication

As around 57% of China's population resides in rural areas, traditional medicines have been popular. However, with more people migrating to urban areas, there is increased emphasis on consumer education and increased disposable income has resulted in a favorable market for self-medication.