China offers growth for pharma brands

04 October 2012

BEIJING: Foreign and domestic consumer healthcare companies are set to witness a substantial increase in revenues in China, where the market should be worth $60bn by 2020, McKinsey has predicted.

The consultancy argued that sales of over-the-counter Western and traditional medicines will hit $22bn in 2017, versus $11bn in 2010. Health supplements will also generate $22bn by this date, up from $9bn.

Looking further ahead, the organisation suggested that these two industries could yield a combined $60bn in sales at the end of the decade, fuelled by rising affluence, changing shopper attitudes and urbanisation.

"In addition, the market growth is supported by growing investments in advertising, promotions, and innovations (including new formulations and packaging) by leading local companies and some multinationals," the study said.

More specifically, per capita spending on healthcare is expected to increase from $600 in 2010 to $1,400 in 2020. As a result, the sector's share of total consumer expenditure should expand from 8.9% to 10.5%.

McKinsey revealed that Western medicines are seen as "more effective" and used as illnesses become advanced, whereas traditional products are thought to have fewer side effects and are used at earlier stages.

The top ten companies in the over-the-counter and supplement segments take between 30% and 40% of sales at present. For prescription drugs, the ten largest operators command just 20% of the market.

Up to 20 different brands can also compete in a given category. Despite this, over 20 foreign and local lines – like Daktarin, Caltrate, Si Da Shy and Nin Jiom – now deliver sales surpassing $100m a year.

The rapid evolution of the market still offers chances for new players, though. By-Health, for example, entered the supplements sector in 2002, and its sales grew from $9m in 2007 to roughly $86m in 2011.

Smaller firms generally derive margins of around 10%, reaching 20% for bigger rivals. The "high levels of investment" needed in ads, marketing and brand building often limit such figures, McKinsey said.

Today, retail pharmacies yield 50–60% of over-the-counter sales for Western medicines, rising to 80% for traditional equivalents. Modern trade stores like supermarkets, however, are yet to make a mark here.

By contrast, when discussing health supplements, retail pharmacies only take a 25% share, a score matched by the organised retail sector. Direct sales remain the number one channel here, on 45%.

Data sourced from McKinsey; additional content by Warc staff