Beijing Med-Pharm Chief Financial Officer Fred Powell: An Interview With PharmAsia News (Part 2 of 2)

Powell sat down recently with PharmAsia News to discuss the challenges that Western pharmaceuticals companies face when entering the Chinese market, the opportunities presented by China's recent economic boom, and the ways pharmaceutical companies can best navigate the evolving Chinese landscape. [Editor's note: Part 1 of this interview ran June 12.]

Powell sat down recently with PharmAsia News to discuss the challenges that Western pharmaceuticals companies face when entering the Chinese market, the opportunities presented by China's recent economic boom, and the ways pharmaceutical companies can best navigate the evolving Chinese landscape. [Editor's note: (Also see "Beijing Med-Pharm Chief Financial Officer Fred Powell: An Interview With PharmAsia News (Part 1 of 2)" - Scrip, 12 Jun, 2007.) of this interview ran June 12 .]

PharmAsia News: What are some key differences in how products are sold in China versus other countries?

Fred Powell: In China, the pharmaceutical distributor plays a more significant role than elsewhere in the world in the sale of pharmaceutical products. In the United States, a distributor is primarily used as a delivery service to move product from the warehouse to the hospital. In China distributors play a central role in negotiations with hospitals; they negotiate the price to get products sold in the hospital. So, while you may have a very good sales force in China, unless you have a well-established distributor that has been doing business with the hospitals and has built up relationships over the years, it may be difficult to get your product sold.

The converse is also true. For Propess , Cytokine had used a billion-dollar distributor in Beijing, thinking that because the company was the largest distributor in Beijing, it would be a good choice as their partner in China. However, there were no sales and marketing teams in place to move the product and create demand with doctors. When we took over the sales and marketing for Propess, we approached opinion leaders, held seminars, and created demand in the hospitals with the doctors who would prescribe the product.

PharmAsia News: So, the sales/marketing piece and the distribution piece really can't operate without the other in place, correct?

Powell: They really have to complement each other. Companies such as Pfizer, GlaxoSmithKline and Merck are in China with substantial sales forces. They frequently work with a single or a few key distributors to blanket China's east coast, where 70 percent of Western products are sold.

We frequently have business relationships with companies that don't have operations in China, such as mid-size pharma, or with large companies that don't have a dedicated sales force for a particular product.

PharmAsia News: Which services are the most challenging to provide and what makes it difficult for companies not based in China to take care of these tasks themselves?

Powell: The most challenging service is licensing. First you have to convince a Western pharmaceutical company not doing business in China that its product is not going to be copied by a domestic Chinese company and wind up back in the United States at a cheaper price. It is well reported that China has intellectual property concerns. Recently the former head of the [State Food and Drug Administration (SFDA)] was removed from office and is on trial for fraud. He supposedly took in applications for approval from Western companies and provided them to local Chinese companies so the Chinese companies, for a price, were able to have their products on the market more quickly.

That is being corrected. As an example, there were a dozen copycat versions of Pfizer's Viagra on the market. The SFDA investigated and took copycat products off the market. It's improving, but that's probably the main concern that Western companies have.

[Editor's note: Zheng Xiaoyu, the former head of the SFDA, was sentenced to death on May 29 for accepting bribes to approve faulty medicines.]

The second major issue is correcting misconceptions regarding market size. When many Western companies consider marketing in China they look at a population of 1.5 billion people and assume that even though they may have to discount a product's price in China, the population will make up for the difference. In fact, Western pharma sales in China approximate between 5 percent and 10 percent of total sales of the U.S. market. Only 10 percent to 15 percent of all Chinese people can afford to pay for Western pharmaceuticals. Annual pharmaceutical growth is averaging 20 percent each year and is expected to continue. China is expected to be a leading or the leading pharmaceutical market in the future, however it is still a small market at the current time.

PharmAsia News: You mentioned that China's pharmaceuticals market, currently ranked as the seventh largest market globally, is growing. What factors have led to this growth?

Powell: An economic expansion in China is creating higher standards of living and higher standards of medical care, concentrated on the country's east coast. This has led to a very rapidly growing middle- and upper-class in China, which wants access to Western medicines. They see Western products and the clinical literature, they search the Internet, and they are interested in leading brands.

PharmAsia News: The distribution channels in China differ significantly from those in the United States, with hospitals representing the majority of pharmaceutical sales (80 percent) in China, compared to only 15 percent of sales from hospitals in the United States. How does this different paradigm affect how a pharmaceutical product is successfully marketed in China?

Powell: Unlike the United States, where people generally see doctors in their offices, the Chinese go to the hospital if they are sick. The hospitals are frequently overcrowded with patients trying to get an appointment to be seen by a doctor. If the doctor writes a prescription, patients go to the hospital pharmacy, instead of to a stand-alone pharmacy, like CVS or another chain drug store, to have it filled.

The main reason for the practice of having hospital pharmacies is that most hospitals are state-owned. It is estimated that hospitals in China receive more than 60 percent of their profits from prescription sales. Therefore, hospital pharmacies are significant profit centers By having this information, we can pinpoint who to target our sales efforts to, i.e., we can visit physicians at the teaching and academic hospitals and have the distributors negotiate with the hospitals instead of going to the roughly 200,000 retail pharmacies.

Over time, local pharmacies will increase their percentage of pharmaceutical sales, and that's starting right now, but the question remains, will that switch take five or 10 or 15 years? No one is really sure of that right now, especially given the hospital profitability depending on pharmacy revenues.

PharmAsia News: It sounds like Chinese pharmacy operations are fragmented, which must make marketing outreach difficult. How can pharmaceutical companies overcome this obstacle?

Powell: It is fragmented. A lot of the fragmentation is tax-driven, because each province wants to control the business done there to capture tax revenues from that business. A distributor is normally only licensed to operate in one province, because the tax dollars stay there. In fact, local-only business licenses are prevalent across many industries. The result is that you don't see the large pharmacy chains that are in the Western countries now.

Because the retail pharmacy business is extremely fragmented, pharma companies are focusing on hospitals, where operations are more centralized and most prescriptions are filled.

PharmAsia News: Reimbursement is another area where the Chinese and U.S. markets differ. How difficult is it to obtain reimbursement in China?

Powell: When considering full medical benefits - similar to what most Americans consider medical benefits - only about 10 percent of the population in China has medical insurance. For the most part, the employee is paying for his or her own medical health care. Often when people are admitted into a hospital - to deliver a baby, for example - they must make an upfront deposit which the hospital draws down during the hospital stay. That's very different from what we are accustomed to.

However, there is a national reimbursement list, on which a number of products are listed.

PharmAsia News: Are you referring to the "Information Catalogue"?

Powell: Exactly. If a patient is sick and receives products listed there, they are paid for. Otherwise, medical care is paid for by the individual.

PharmAsia News: From a marketing standpoint, what are the reimbursement considerations? Are lower-cost products more popular because people are paying for drugs themselves?

Powell: We approach it by looking for unique, differentiated products. We are not looking to be the third or fourth product in the market.

PharmAsia News: What are the challenges of working with the SFDA?

Powell: While we are a U.S. NASDAQ-listed company, the advantage that we have is that we are also a Chinese company, with all of our operations in China. Therefore, when dealing with the SFDA, the Beijing office, which has a business license granted by the Chinese government, is actually dealing with the SFDA.

However, Western companies that are looking for assistance in China find it reassuring that we need to follow U.S. laws, such as Sarbanes-Oxley, and have the same internal control environment as they do. At the same time, we have the advantage of actually doing business in China, based out of China, so we are not considered a foreign company when we are dealing with the SFDA.

PharmAsia News: We often hear that following standard procedure is not necessarily how things get accomplished in China. Considering the culture of how business is done there, is it impossible for a U.S. company to figure things out on its own?

Powell: It's not impossible for companies to figure it out for themselves, but it is extremely difficult. Our CEO, David Gao, who was born in China, is a tremendous asset to the company.

David's perspective is that you can't know everyone in China, but what you can do is know the process and know how to get to the right people. His experience has given us a tremendous leg up on a number of companies in negotiations.

For our transaction with Alliance Boots, you might wonder why one of the world's leading pharmaceutical distributors was interested in Beijing Med-Pharm. Alliance Boots has been very successful around the globe in expanding into Portugal, Italy, Russia, etc., but they did not have a person like David in China. David had the respect of Westerners in the United Kingdom and the respect of the Chinese in Guangzhou, so that whenever there was a meeting that took place, he was actually negotiating for both sides of the transaction to get the transaction to work.

It's really that type of knowledge that makes it easier for us than other companies in negotiating and getting deals done in China.

PharmAsia News: Your recent 10-K filing mentions that the Chinese government exerts a great deal of control over industrial development. Does that control help or hinder growth in the pharmaceuticals sector?

Powell: When it comes to mergers, acquisitions and similar transactions, it can take many months to get a deal approved by the central government. In other parts of the world, transactions move much more quickly. What occurs in China is that various groups are involved, which is probably a detriment. To receive approval a transaction must go through the employee, the regional, and the provincial level and then it will it be sent to the central government for approval.

Everyone has to say yes, but only one person has to say no to stop a deal. That is the hurdle that many companies face.

PharmAsia News: Any predictions about the future of the pharma business in China?

Powell: We consider proprietary products in China, while very small right now, to be a leading pharmaceutical market in the not-too-distant future. It's not there now, but it's a region that companies will need to pay a tremendous amount of attention to. However, it's not going to happen overnight - the government controls will slow down the process.

- Gretchen Parisi ([email protected])