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DOING BUSINESS in Asia
Lilly scouts hot Chinese market
Drug maker urges country to crack down on fake pills


By Ted Evanoff and J.K. Wall
ted.evanoff@indystar.com
August 14, 2005


BEIJING -- Whether they're bought in a hospital or on a street corner, pharmaceuticals are hot in China.

Surging drug sales here have some saying the world's most populous nation is about to become a pharmaceutical superpower.

But the world's biggest drug makers -- including Eli Lilly and Co. -- have been cautious so far about investing in China. They fear any profits will be wiped out by counterfeiting and patent fraud.

So Sidney Taurel, chairman and chief executive officer of Indianapolis-based Lilly, made sure he discussed those issues with Chinese government health and patent officials during his annual trip to Asia. In a meeting in Beijing, he urged them to step up efforts to stop production of fake pills, and then he chatted about the speech over breakfast in the Horizon Club at the lavish China World Hotel.

"We expect China to become one of our top 10 markets by 2010," said Taurel, during Wednesday's breakfast with a reporter.

Lilly wants to boost sales in China to $600 million a year by 2015, he said. But so far, China accounts for only $100 million in Lilly's nearly $14 billion in annual sales.

That's despite Lilly's long history in the country. Its first sales presence began in 1918, and its first branch office opened in 1928. Lilly pulled out during the Communist Revolution of 1949 and returned in 1993, the same year the Communist government first allowed patents on drug compounds.

Those nascent patent laws, however, still invite disaster for U.S. companies, whose pricing is designed to recover the huge research costs in launching new drugs.

Just as fake Rolex watches are openly sold on city streets throughout Asia, chemists freely copy drug recipes and sell the counterfeit merchandise, often on the Internet, Taurel said. Sometimes, they work through organized crime rings or through terrorist cells trying to raise cash. Chinese chemists and drug companies sometimes reverse-engineer foreign firms' patented drugs or brew up their own concoctions at a fraction of the cost.

When a foreign firm protests, the Chinese companies insist the foreign drug is a copy of their own. In disputes, Chinese officials tend to side with homegrown firms.

Hong Kong attorney Neil McDonald, quoted in the South China Morning Post newspaper, suggested that outside the top rungs of government, bribery and collusion are rampant in China among patent enforcement officers.

Viagra is a case in point. Six months after Pfizer Inc. introduced the blockbuster impotence pill in China in 2000, the state news agency reported that 90 percent of Viagra pills sold in Shanghai, the country's largest city, were copycats. In 2004, China's government, responding to a petition from Chinese drug makers, dismissed Pfizer's patent on Viagra. Pfizer promised to appeal.

For Taurel, and Lilly's 14,000 Indianapolis-area workers, such problems, though improving, still represent an obstacle to their Asian ambitions.

"Counterfeiting is pretty widespread not only in China but in several countries in Asia," said Taurel. He is encouraged by the Chinese government's cooperation, but he also knows the environment needs to improve if Lilly is to achieve its goals.

Wang Weijia, vice commercial consul at the Chinese Consulate General in Chicago, acknowledged that China's laws are young and developing. And he said a widespread awareness of intellectual property rights is limited among the Chinese people.

But he noted that China's government makes improvements to its laws and regulations every year. And in the past three years, the government has hosted annual Intellectual Property Rights days and weeks to educate the public.

"The Chinese government is doing what it can," Weijia said. "On the other side, it would like suggestions."

Suggestions were part of Taurel's mission. Lilly and other companies say China has made significant progress since it joined the World Trade Organization in December 2001, which required stronger intellectual property laws and reductions in pharmaceutical tariffs.

But changes in law and awareness need to be matched by enforcement, said Heather Clark, assistant vice president for Asia and Japan at the Pharmaceutical Research and Manufacturers of America. "Lilly is right to be cautious," Clark said.

Clark acknowledges that China is improving its rules. "But it kind of becomes an unfunded mandate," she said. Chinese police departments need more resources to investigate corporate crimes, she said.

Private companies, including Lilly, employ security staffs to conduct investigations into counterfeit products. They try to compile product labeling and photographs of counterfeiting factories to present to police and then ask them to conduct raids. Lilly has done such investigations in Taiwan and Mexico.

"It's natural sometimes that we have bad boys," Weijia said. "And sometimes it's not easy for the good boys to catch the bad boys."

But pressure from the United States and visits like Taurel's seem to be paying off. Taurel noted that Chinese police recently raided one illegal medicine plant. "We are getting quite a bit of cooperation from the government," he said.

He also said Lilly has had great success in China's judicial system protecting its patents from challenges by Chinese firms. Lilly has won or expects it will win all six of the challenges made so far.

Such victories hold promise for Lilly, Indianapolis' largest private employer. China is already the world's ninth-largest pharmaceutical market, according to IMS Health. Sales here grew 28 percent last year to $9.5 billion. They're expected to grow as much as 16 percent annually during the next four years and make China the eighth-largest market, with $17 billion in sales.

Yet foreign drug makers have just one-third of the Chinese market, according to IMS Health, a Connecticut-based market research firm, even though nearly all of the largest firms have sales offices here.

The Communist Party wants foreign companies to bring their modern medicines to the country, where 30 percent to 40 percent of the 1.3 billion people rely on traditional herbal remedies.

Chinese leaders are willing to make changes because they understand foreign drug makers are actively keeping sound medicines off the Chinese market or delaying their introductions for years, said Taurel.

Lilly put its Alimta anti-cancer drug in the United States in 2003, allowing it to generate profits to help cover the development cost. It's scheduled to reach China this year.

Meanwhile, demand for drugs is rising as China's economic boom drives up incomes along its eastern coast. The Boston Consulting Group, in a 2002 report, forecast growing demand for medicines that treat chronic ailments, such as heart disease, diabetes and even depression.

Though Lilly's 2015 sales goals of $600 million may seem paltry, Lilly regards its growth plans as aggressive.

Company spokesman Ed Sagebiel said Lilly is selling and marketing to 55 cities that are home to 350 million. That's all the company thinks it can effectively reach through distribution and marketing, which are severely constrained in China.

"Today, return for an investment in China is closer at hand and looms larger than ever," wrote IMS Health in an April report on the worldwide pharmaceutical market. "The companies that invest most heavily now and are willing to accept inferior returns while they scale up and work through the complexities of the market will win in the end."

China's fast-growing economy offers one of the best alternatives to the mature U.S. market for growing profits.