Up for grabs is a fast-growing €80 billion ($102 billion) pharmaceutical market that will soon rank second in the world behind the U.S.
Merck broke ground in September on a new €80 million plant in Nantong and late last year expanded its partnership with BeiGene, a Chinese biopharmaceutical research firm focused on cancer drugs.
Bigger rival Bayer in March unveiled a €100 million investment in its Beijing production plant. A month earlier it announced its purchase for an undisclosed sum of China’s Dihon Pharmaceutical Group Ltd. The deal is Bayer’s second major acquisition of a Chinese pharmaceutical company and remains one of the few by foreign firms.
Bayer and Merck are part of a wave of Western drug companies responding to Chinese government efforts to expand access to health care and medicines for an aging population beset with a growing list of ailments.
But cracking the market can be tricky—the result of slow drug certification, strict regulatory standards and increasing international competition. German firms are seeking an edge by playing up their reputation for quality manufacturing and a record of sharing know-how.
“Brand Germany has a good perception in China,” said Thomas Rudolph, head of McKinsey & Co.’s German pharmaceutical practice. German drug makers have been more willing than U.S. counterparts to bring proprietary technology to China alongside cash investments, Mr. Rudolph said.
China’s pharmaceutical market, growing roughly 15% annually according to Deloitte Touche Tohmatsu Ltd., is large enough that Western entrants haven’t really locked horns yet, said Mr. Rudolph. U.S.-based Pfizer Inc., for example, is a leader in oncology, while Bayer has been a leader in diabetes treatments, he said.
China accounted for roughly 10% of Bayer’s €11.2 billion pharmaceutical sales last year. Analysts expect overall pharmaceutical sales and those in China to rise on Thursday when the company announces its results for the quarter through Sept. 30.
Bayer aims to remain in the “top three or four among multinationals” in the Chinese market, said Alok Kanti, managing director for Bayer’s health care division in China.
Despite promise, China’s drug market poses big challenges. Regulatory hurdles mean launching a drug in China generally takes up to four years longer than introducing the same product in the U.S., Mr. Kanti said.
Enforcing compliance standards has gotten costly, particularly following a bribery scandal involving GlaxoSmithKline PLC. China last month fined the U.K. firm $490 million after finding it guilty of paying doctors and hospitals to push its products. GSK declined to comment directly, but cited a statement of apology from September that said it “fully accepts the facts and evidence of the investigation.”
Western companies also face competition from low-price local firms. To combat this, companies like Bayer and Merck “need to produce locally for the local market” to gain regulatory advantages, said Mike Braun, a partner at Deloitte’s China division.
Bayer is expanding its Beijing plant—one of five pharmaceutical manufacturing sites throughout the country—to boost production of cardiovascular and anti-diabetes drugs, including adalat, aspirin and glucobay.
Bayer is targeting China as part of a renewed focus on health care. The group earlier this month completed a $14.2 billion acquisition of U.S.-based Merck & Co., Inc.’s over-the-counter business—providing Bayer with a new Chinese manufacturing site, in Shanghai—and in September announced plans to spin off its $10 billion plastics and chemicals business through a stock listing. Merck & Co. isn’t related to the German Merck.
The acquisition of Dihon will help Bayer expand the consumer side of its health business. The Chinese firm, which last year posted sales of €123 million, specializes in nonprescription products such as dandruff shampoos and traditional Chinese herbal medicines.
Bayer’s first Chinese acquisition—the first such major deal by a Western pharmaceutical company—was in 2006 with its approximately €103 million purchase of Topsun Science and Technology Co. Ltd.’s cough and cold portfolio.
Analysts expect Merck and others also to explore local deals. But foreign buyers face “major risks,” said Mr. Braun at Deloitte. “Integration of Chinese targets can be a huge issue,” he said, suggesting some Chinese firms follow less rigorous financial and compliance standards than Western counterparts and have an ingrained “cut corner” mentality.
Merck isn’t seeking any Chinese acquisitions “in the short term” but “would not close the door” to the right opportunity, said Belén Garijo, chief executive of Merck’s biopharmaceutical division, Merck Serono.
The unit aims for €1 billion in Chinese pharmaceutical sales by 2020 and is building up capacity to meet demand for diabetes, cardiovascular and cancer treatments, Ms. Garijo said. The division, Merck’s largest, posted €6.33 billion in sales last year, of which roughly €300 million came from China.
Merck’s new Nantong facility will be the company’s largest pharmaceutical plant outside Europe. The facility is being designed specifically to make drugs on China’s Essential Drug List, including Glucophage for diabetes, Concor for heart disease and Euthyrox for thyroid disorders. The official government document includes more than 500 medicines that officials say China needs to fight a wave of new diseases stemming from accelerated urbanization and worsening dietary and exercise habits.
“Nantong will allow us to grow faster by producing all of our major brands for China,” Ms. Garijo said. She said the plant had the “potential to become a global manufacturing site” for a wider range of Merck pharmaceutical products.
Merck is simultaneously moving to broaden its portfolio and lessen its dependence on discovering blockbuster drugs. The company announced last month plans to expand its life-sciences unit through a $17 billion acquisition of Sigma-Aldrich Corp. , a U.S. supplier of laboratory testing materials.