Sanofi-aventis Group

May 2010


A.Introduction

Pharmaceutical industry is a high-tech industry group converging of multi-disciplines and advanced technology. It not only provides necessary condition to safeguard people's lives and health but also constitutes an important part of national economy. With the development of economy and improvement of people's health, governments, international organizations and the public attach increasing importance to pharmaceutical industry, which is honored as the sunrise industry.

Being an important constitution of the national economy, the pharmaceutical industry has made outstanding contributions to the total growth of the national economy. The average annual growth of global pharmaceutical market sales is 9.83% during year 2000-2008, which is far out-weights the world's economic growth of the same period. As the leading emerging market of pharmaceutical products, gross output value of China’s pharmaceutical industry reached 1.0382 trillion Yuan in 2009, a breakthrough of 1 trillion Yuan mark, increase of 21.1%. By 2020, China is expected to be the second largest pharmaceutical market only after U.S.

In terms of industrial gross output value, Beijing occupies a small market share in the whole nation, but its profit level is very impressive. Since 2003, sales profit ratio of Beijing pharmaceutical industry has ranked top for consecutively 7 years in China. Its industrial gross output value was 39.51 billion Yuan with a profit at 6.65 billion Yuan, an increase of 45.6%; thanks to the excellent performance of pharmaceutical industry, in 2009，Beijing industry growth ranked second in China.

Being the congregation city of medical technology in China, Beijing should play a greater role in the development of pharmaceutical industry. Beijing pharmaceutical industry also has many opportunities and development scope. The study of relevant policy development for Beijing pharmaceutical industry not only can contribute to economic boost of Beijing, but also can play a leading role in the development of China's pharmaceutical industry and attract more outstanding foreign enterprises to invest in China. Beijing pharmaceutical industry should assume greater responsibility to propel economic and social development of the capital city and becomes vital force better life and security of the public.

This study report is structured as follows: the first part describes the important role and outstanding contributions of the pharmaceutical industry in the national economy and healthcare sector; the second part describes the history and current status of Beijing pharmaceutical industry; the third part analyzes the opportunities and challenges of Beijing pharmaceutical industry under the new medical reform; the fourth part calls for government’s policy support and provide insightful recommendations for the development of Beijing pharmaceutical industry

B.Current Development of Beijing Pharmaceutical Industry

1.Analysis of the Industrial Operation Status

    (1)Analysis of the Production Status of Pharmaceutical Industry in Beijing

By the end of 2008, a total of 218 pharmaceutical manufacturing enterprises have been established in Beijing, accounting for 3.34% of the national pharmaceutical manufacturing enterprises (see Figure 1). Among them, there were 30 large and medium-sized pharmaceutical manufacturers, accounting for 13.76% of all pharmaceutical manufacturing enterprises in Beijing. Based on the economic modality, there are currently 50 state-owned pharmaceutical manufacturing enterprises, 100 joint-stock pharmaceutical manufacturing enterprises and 43 foreign funded (inclusive of Hong Kong, Macao and Taiwan) pharmaceutical manufacturing enterprises in Beijing.



Figure 1. Number and Proportion of Pharmaceutical Manufacturers in Beijing

From 2004 to 2008, the pharmaceutical manufacturing gross output value in Beijing has increased steadily. In 2008, the pharmaceutical manufacturing gross output value in Beijing was 26.392 billion Yuan (at the current price of Year 2008), accounting for 3.42% of the national pharmaceutical manufacturing gross output value at the current price of Year 2008, the main business income was 25.326 billion Yuan, actualizing a profit of 3.18 billion Yuan and sales profit of 12.56%, far above the national level of 10.71%.

  (2)Analysis of the Concentration degree of Beijing Pharmaceutical Industry

For Beijing pharmaceutical industry, the ratio of the number of large and medium-sized enterprises in comparison with all the pharmaceutical manufacturing enterprises is 13.76%, but the proportion of industrial gross output value reaches 72.38%, of which the gross output value of new products of large and medium-sized enterprises accounted for 67.53% of the total value of all new products. The industrial added value of large and medium-sized enterprises accounted for 76.66% of the total industrial added value of the pharmaceutical industry, the industrial sales gross output value accounts for 72.42% in comparison with the pharmaceutical industry sale output in the city. All of these show that Beijing pharmaceutical industry is more dependent on the large-sized enterprises, but from the several perspectives of the pharmaceutical manufacturing enterprise, there are many small enterprises within the pharmaceutical industry of Beijing, the industry concentration ratio has further room for improvement.

    (3)Analysis of the Different Ownership Nature of Beijing Pharmaceutical Enterprises

In 2008, among the different ownership groups of enterprises in Beijing pharmaceutical industry, the Hong Kong, Macao and Taiwan group had the lowest share of foreign investment assets (see Table 1), but its realization of the industrial gross output value and added value is close to or higher than the state-owned enterprises and joint-stock enterprises. Meanwhile, the average industrial gross output value and industrial sales output of Hong Kong, Macao, Taiwan and foreign funded enterprises were higher than the other two categories. Although the number and asset of joint-stock enterprises accounted the majority of the proportion, the gross output value and sales output were not dominant. Although the gross output value of state-owned enterprises were not dominant, but the average value of individual enterprises had a higher new product output value.

Table 1 Operation Status of Beijing Pharmaceutical Enterprises of Different Ownership
 (Unit: 100 million Yuan)

Subject	Number of Enterprise	Industrial Gross Output Value	Industrial Added Value	Industrial Sales Output Value	Total Assets	Total Current Assets	Total Fixed Assets
State-owned pharmaceutical manufacturing industry	50	95	46	89	166	98	40
Joint-stock pharmaceutical manufacturing industry	100	110	54	99	201	114	52
Hong Kong, Macao, Taiwan and foreign funded pharmaceutical manufacturing industry	43	116	53	107	90	55	21

Source: 2009 Beijing statistics yearbook

2.Status of Production Factors

    (1)R & D Capability

In 2008, the full-time equivalent of the R & D personnel activities of pharmaceutical manufacturing industry in Beijing was 1367 personnel-year, higher than the value of the same period in Shanghai. The full-time equivalent of the R & D in Beijing has increased dramatically in 2007 and 2008. This is closely related to the policy support and devoted input of high-tech industry of the bio-pharmaceuticals manufacturing in Beijing in recent years.

Table 2 Full-time Equivalent of the R & D Personnel Activities in Pharmaceutical Manufacturing Industry （Unit：personnel-year）

Region	2000	2004	2005	2006	2007	2008
Nation	12136	13931	19584	25391	30778	40192
Beijing	576	366	507	612	1090	1367
Shanghai	1022	562	693	1596	1497	1229

Source of information: 2009 Beijing Statistics Yearbook

In addition, from the perspective of the R & D gross output value of Beijing, the status of the Beijing's New Drug Application is: 203  applications1 for drug registration in 2009, categorization according to the types of drug: 19 applications for registration of Chinese medicine, 165 applications for registration of chemicals, 19 applications for registration of biological products; categorization according to the types of registration: 153 new drug applications (account for 72.5%), 50 generic drug applications (account for 27.5%).

    (2)Human Capital

Human capital is one of the factors for industry development. Since 2000, the pharmaceutical manufacturing industry in Beijing had rose steadily, the average number of employees had reached 45,579 people (see Figure 2) dated 2008. In light of current development trends of pharmaceutical industry, there will be growing demand for medical professionals in the next few years. The employment in Beijing pharmaceutical industry maintains about 3% of the nation in recent years.

Figure 2. Average Employment Number and Proportion of Beijing Pharmaceutical Industry
3.Policy Environment Status

In November 2009, Beijing Municipal Commission of Economic and Information Technology and Beijing Municipal Commission of Development and Reform jointly compiled the Adjustment to the Implementation Plan for Promoting the Biological and Pharmaceutical Industry in Beijing, issued by the municipal government documented as [2009] No. 36. It is the programmatic document for the development of biological and pharmaceutical industry for Beijing in 2009-2011. The revitalization plan proposed capacity-building around innovation, mechanism innovation, project introduction and market development and other major works, the implementation of six key projects and seven safeguard measures to promote major projects, nurture major enterprises, develop products of highly importance and enhance the support to industrial development. The Beijing bio-pharmaceutical industry development projects ("G20 Project") has been launched a few day ago with the first batch of 23 enterprises already been nominated. These enterprises will enjoy a full range of policy support, including public financing, mergers and acquisitions as well as credit access.

    (3)Impact of the New Medical Reform on Development of Beijing Pharmaceutical Industry: Opportunities and Challenges

It has been over a year since the new round of national healthcare system reform (referred to as the "new medical reform") was announced in April 2009. In the past year, as the new medical reform rolls out, many healthcare reform policies were introduced in all aspects, including establishment of essential drug system, basic medical insurance system, basic medical service system and public hospitals pilot reform. Related supplementary measures were also established, such as expansion of government pricing drug list, the improved drug bidding and procurement system, etc.. So many systems and corresponding supplementary measures will have great impact on pharmaceutical industry.

Such medical reform measure also brings various opportunities and challenges to all aspects of the future development of Beijing pharmaceutical industry. It is meaningful to analyze pros and cons of the policy, related effects on Beijing pharmaceutical industry, provide response strategy to restructure and upgrade Beijing pharmaceutical industry and make corresponding readjustment.

To answer the above questions, this part explains new medical reform policy from the point of demand and supply. The opportunities and challenges for Beijing pharmaceutical industry mainly include essential drug system (essential drug list), medical insurance system (reimbursement drug list), drug price management methods (pricing of essential drugs), centralized procurement system as well as drug catalog, pricing and bidding linkage effects.
From the perspective of the recent major implementation plan of the new medical reform, the “Four in One” key reform measures have far-reaching impact on the pharmaceutical industry (see Figure 3). However, as implementation of public hospital pilot reform has just been announced, the uncertainty of the impact on Beijing pharmaceutical industry is also larger.

Therefore this report will not analyze this issue but will only analyze the impact on the development of Beijing pharmaceutical industry from essential drugs, drug price management methods, centralized bidding and procurement policies, and new medical insurance system.



Figure 3. Main Policy of the New Medical Reform Affecting Pharmaceutical Industry

1.Changes in the Pharmaceutical Market Demand: Opportunities and Challenges
Opportunities:

    (1)Increasing Drug Demand

The direct impact of new medical reform on the pharmaceutical market is the significant increase of drug demand. From the perspective of the current pharmaceutical market status in China, the main reasons for the increase in the total drug demand are as follows:

  a. The economic development and growing health awareness directly lead to increase of drug demand. In general, as the income levels and utilization of medical services increased, the demand for drugs thereby increases steadily (see Figure 4). This natural growth is the initial driving force promoting R & D in the pharmaceutical industry.

  b.In the context of the new medical reform, the continuous improvement of the basic medical insurance system and the increasing financing amount per capita promote the increase of the absolute drug demand. In the new round of the medical reform, China’s newly added medical insurance of urban residents and the New Cooperative Medical Scheme cover a population of more than 62 million people in 2009. The national New Cooperative Medical Scheme fund-raising reached 82.09 billion Yuan this year.
 

Figure 4. Amount and Proportion of Drug Expenses in Overall China’s Health Expenses

As of end September 2009, the medical insurance of urban residents, the number of medical insurance for urban workers and urban residents has reached 363 million people in the nation. The government financial subsidies to the residents are increasing, coupled with the increasing compensation level of the government-led medical insurance for urban residents directly led to the rising demand for drugs.

  c.The announcement of the essential drug list will directly lead to increased drug demand and expansion of EDL market (urban communities and rural primary healthcare institutions are mandatory to use low priced and effective EDL). At present, 31 provinces in China have identified the regions implementing essential drugs system.

  d.National Reimbursement Drug List

Compared with the 2004 NRDL, the 2009 edition NRDL has added 260 drugs, including an increase of 53 A-list drugs. Western medicines were expanded from 1031 to 1164; TCM product expanded from 823 to 987; the total number of Chinese and Western drugs increased from 1854 to 2151. However, majority of these newly added drugs are special drugs which will not bring the expansion of the entire market, but only extends market for the relevant enterprises, especially the exclusive varieties manufacturers.

    (2)Changes in the Drug Demand Structure

The announcement of NEDL and PEDL will make reasonably-price good quality drugs become the first choice for patient and will increase demand for this kind of drugs; while those high prices, poor safety drugs will be eliminated, making the structure of demand for drugs in China moving towards a more reasonable trend. In addition, the suppression of infectious and common epidemiological drugs will be the focus of future medical care. With the continual emergence of new viruses, the therapeutic medical model will change from treatment to prevention model; therefore the development of biopharmaceuticals will boom. The demand for treatment and prevention of new infectious diseases will have a substantial increase in the future.

    (3)New Medical Reform Policy to Favor the Basic Level, Transfer of Development Priority of the Pharmaceutical Industry

The data from Center of the Statistic and Information, Ministry of Health has indicated that our government had arranged to establish the funding of 20 billion Yuan to support the establishment of primary healthcare system, urban communities, and rural community healthcare service system in 2009. Due to the 21.73 billion capital injection, the improvement and perfection of the primary healthcare service system will greatly increase the drug demand from the primary healthcare institutions, which will lead pharmaceutical enterprises to place more priority on primary market.

The challenge:

  a.The market demand for medium and small pharmaceutical companies has significantly reduced.

In future, small and medium-sized pharmaceutical enterprises will face more adverse environment, and market resources will be more owned by large pharmaceutical enterprises. Compared with other regions, Beijing pharmaceutical industry has higher percentage of small and medium-sized enterprises and has no scale advantages. The current policy and market environment poses big challenges for small and medium-sized pharmaceutical enterprises in Beijing.

  b.The demand of non-essential generic drugs in the primary healthcare institutions will significantly be reduced.

While the essential drug list is announced, the Ministry of Health has tentatively identified the proportion of essential drugs used by primary healthcare institutions and stipulated that the governmental healthcare institutions should be fully equipped to use essential drugs and the sales of essential drug not less than 70% of the total drug sales. So for those pharmaceutical enterprises that are not included in the essential drug list, this is undoubtedly a serious challenge.

  c.Local additional Edition of Essential Drugs Creates the Warming Trend of Local Protectionism.

307 NEDL drugs can not meet the provincial demand for drugs, so every province can make addition based on the financial capability of the local governments. As provincial fiscal provides government subsidies to promote the essential drugs system, local protectionism is inevitable and become the constraint for foreign pharmaceutical enterprises to win bid. One way is to make addition to NRDL, another way is to set reserve and usage rate. But foreign pharmaceutical enterprises face more stringent selection criteria than the local enterprises. In addition to the Beijing market, Beijing pharmaceutical industry also need deal with the centralized bidding and procurement policy in other 30 provinces and cities, and face more difficulty in entering their local PEDL 

2.Impact on the Supply of Pharmaceutical Enterprises: Opportunities and Challenges.
Opportunities:

    (1)Drug Pricing Reform

  a.The enthusiasm of scientific and technological innovation of pharmaceutical enterprises will increase.

There are about 2,900 varieties subject to the existing drug pricing management, and these drugs are included in RDL and special drugs of exclusivity. Innovative drug are usually priced 30% -35% higher than generics. The next stage of pharmaceutical pricing reform will gradually implement the pharmaco-economic evaluation system. This means that new drugs and patent drugs will be priced higher than the ordinary drugs. This will not only protect the interests of the pharmaceutical industry, but also encourage the enthusiasm and initiative for drug development, which is a good opportunity for the sustainable development of Beijing pharmaceutical industry.

    (2) Centralized Bidding and Procurement System

  a.Industry concentration increases, triggering the reorganization and integration of pharmaceutical industry.

The centralized bidding and procurement system for EDL and RDL drugs will affect pharmaceutical industry concentration mainly in two aspects: concentration of pharmaceutical manufacturing industry and distribution industry .

The pharmaceutical manufacturing industry is still relatively scattered at the present stage, the realistic problem of China is that enterprises are plentiful, small, disorganized and scattered. The announcement of essential drug list will enhance the concentration of pharmaceutical industry ensuring that quality, cheap and effective enterprises will stay in the market. The improvement of industrial concentration is conducive to the economic development throughout the region and increases competitiveness.

The plentiful, small, disorganized and scattered phenomenon is more prominent in the pharmaceutical distribution industry. At present, the total sales of the top 10 pharmaceutical wholesale distribution enterprises in China account for about only 20% of the total market. As the centralized bidding and procurement system will directly select the distribution enterprises of the essential drugs, more administrative interventions will lead to significant concentration of pharmaceutical distribution industry.



Figure 5. Competition Structure of Pharmaceutical Distribution in Beijing, Shanghai and Guangdong.

Source: Research dept. CITIC Securities

  b. Promoting standardized pharmaceutical distribution will expedite new purchasing model.

For the centralized bidding and purchasing, distribution of essential drugs, etc., every province will certainly make a selection among the best pharmaceutical distribution enterprises, which will eliminate the small-sized distribution enterprises, bring a new round of reshuffling, establish standards and improve performance of pharmaceutical distribution sector.

  c.Encouraging drug manufacturing enterprises to bid directly is conducive to seize the market initiative.

In order to reduce the intermediate links in pharmaceutical distribution, the drug centralized bidding and procurement policy encourages drug manufacturing enterprises to bid directly.
Tender offer provisions require wholesale enterprises to have the legal authority of the manufacturing enterprises or explain the legitimate sources of drug bidding. After 2005, the adjusted drug bidding and procurement policies had encouraged a growing number of provinces to request direct tender offer by drug manufacturing enterprises. Wholesale enterprises can only accept the commission of the manufacturer to distribute tendered drugs to medical institutions.
In this way, it breaks the long term pattern that large-size contractor controls drug distribution terminal market and enables the pharmaceutical manufacturing enterprises to seize initiative in terminal markets. With market changes, distribution enterprises will be redeployed in necessity. It will end in reshuffling of China's pharmaceutical distribution sector and contribute to better development of the pharmaceutical industry.

  d.It is a good opportunity for the development of exclusive pharmaceutical enterprises.

The “exclusive” drugs have always been the beneficiaries of policies, without exception in the centralized bidding and procurement of essential drug. A number of exclusive drug manufacturing enterprises that has already been selected in the essential drug list will enjoy full privileges of EDL bidding and procurement in the various provinces. The pharmaceutical enterprises in Beijing have some exclusive varieties or products made by only two manufacturers, such as Beijing Double-crane Pharmaceutical Co., Ltd's Oral Bacteria Zhi Huang, Beijing Kang Er Fu Pharmaceutical Co., Ltd's Niuhuangjiedu Soft Capsule, Beijing Tong Ren Tang's Wujibaifeng Capsule and so on. For the list of selected essential drugs, the main task ahead is to further improve drug quality while seizing market share. Therefore, in the context of centralized bidding and procurement policy of essential drugs, this is a good opportunity for nurturing and promoting the exclusive varieties of Beijing pharmaceutical industry.

The challenges:

    (1)Management Method of Essential Drug Pricing.

    a.The maximum prices of essential drugs are not conducive to the R & D of drugs.
Pharmaceutical R & D activity requires huge capital investment, but the drug pricing policy does not create and even eliminate motif of pharmaceutical enterprises to develop new drugs. For those new drugs listed as essential drugs, the maximum pricing policy definitely is a fatal blow. No price premium for better quality drugs means loss of profit as well as innovation momentum of pharmaceutical enterprises.

    b.The uniform pricing of essential drugs, regardless of quality, is not favorable to stimulate pharmaceutical enterprises to improve the quality of drugs.

It is clearly stated in the Guiding Retail Price for National Essential Drugs that the price is set in the name of molecules, regardless of specific manufacturing enterprises. As a result, drug quality is not distinguished drug quality and higher-quality drugs are not well-recognized. The centralized bidding policy in Beijing also does not set quality levels, which is not favorable for the development of those enterprises having products listed the bidding and procurement catalog.

    (2)Centralized Bidding and Procurement System

    a.High-value premium-quality products of large pharmaceutical enterprises have lower possibility to win bidding.

The current implementation process of the bidding and procurement policies only considers   drugs price. Many large pharmaceutical enterprises can not win the tender in the centralized bidding of EDL drugs. Instead, drugs with ordinary effects made by small and medium pharmaceutical enterprises can win the bid because of low price. Due to lack of drug quality assessment mechanism, price becomes the only factor to decide bidding-winners. The pharmaceutical enterprises in Beijing are mostly large high-tech bio-pharmaceutical manufacturers with strict supervision on drug quality. Their prices are relatively higher and are easily expelled from the unhealthy centralized bidding markets.

    b.Provincial centralized bidding system imposes higher bidding requirement for foreign pharmaceutical enterprises.

The current centralized bidding and procurement of essential drugs are carried out with provinces (autonomous regions and municipalities) acting as the units, and the provinces deliberately favor their local enterprises in the bidding and procurement process of essential drugs and raised higher bid requirements for foreign pharmaceutical enterprises. The pharmaceutical enterprises in Beijing not only face the local demand, but also drug demand in whole country and even the world, so they need make strategies to tackle challenges in the context of provincial centralized bidding system.

    c.The practice of specifying the distribution company for EDL distribution is not conducive to the sustainable development of the pharmaceutical distribution market.

The policy, Provincial Tender and Unified Distribution, for essential drugs will inevitably result in resource concentration among large-scale regional leading distributors. The industrial concentration of pharmaceutical distribution enterprises in Beijing is much lower than Shanghai and Guangzhou, and EDL centralized bidding system will greatly contribute to the concentration level. Although the higher industrial concentration can better standardize the transaction market, the industry should not be consolidated by administrative means but through natural development of market.

    d.Diversification of bidding model increases pharmaceutical industry's bidding costs and tender period.

In recent years, state government encouraged online centralized bidding and procurement at provincial level. However, the relevant ministries do not provide enough explanation document and sample model to guide local implementation. Each province carried out bidding process in accordance with their own understanding, which leads to inconsistency in bidding standard, quality and pricing, procedures and tender cost. Consequently, pharmaceutical enterprises have to prepare different versions of bidding documents and bidding materials for various provinces, which are labor-intensive, cost and resources consuming. As a result, a number of pharmaceutical companies simply give up the tender.

D.Future Development of New Medical Reform and Beijing Pharmaceutical Industry:
Some perspectives:

The new medical reform not only provides 850 billion Yuan of new investment, and more importantly, it also promotes changes of pharmaceutical market structure and sustainable development of pharmaceutical industry. This report serves to answer how Beijing pharmaceutical industry shall respond to the opportunities and challenge as well as relevant policies to support the development of Beijing pharmaceutical industry.

1.With regard to the Drug Pricing System

Perspective 1: Implementation of differential pricing policy for different innovation level

The existing national drug pricing system does not consider different innovation levels, which will not help motivate drug innovation and development. Therefore, it is necessary to implement differential pricing for various innovation levels. Assessment criteria should be based on production costs, development costs, future market demand and clinical effect.

Perspective 2: Implementation of pricing-by-category policy for essential drugs.

For those exclusive drugs and high-value premium-quality drugs in RDL, if listed as national essential drugs, they need reduce price. In order to promote fair competition among enterprises, it is recommended to set up scientific pricing assessment mechanism for innovative drugs and generics in EDL, with more consideration for quality. Protection policies for exclusive drugs and high-value premium-quality drugs should respect R&D and quality and allow the outstanding pharmaceutical enterprises and their related excellent products to gain deserved market and status.

2.With regard to the Addition of Essential Drug List and the Centralized Bidding and Procurement system.

Perspective 3: EDL addition should consider local economic condition and demographic structure.

Considering the special economic position and demographic structure in Beijing, exploration should be made to introduce many high-quality drugs into Beijing PEDL.

Perspective 4: Early introduction of quality assessment standards to establish EDL centralized bidding system based on “reasonable price, good quality”

The current centralized bidding and procurement system mainly considers drug price disregarding standards of drug quality. Therefore, some high-value drugs with good quality and clinical effect failed the bidding due to relatively higher price, which have adverse effect on desirable development of the entire pharmaceutical market. Therefore, it is recommended to set quality evaluation standard for EDL and RDL, adopting differential bidding measures for patent drugs, original drug and generics.

3.With regard to the Medical Insurance System

Perspective 5: Good connection between national and provincial reimbursement drug list
The national and provincial reimbursement drug list should be well linked. Drugs that are already in the 2009 National Reimbursement Drug List should establish green channel to expedite the entry into PRDL and start claims process as soon as possible, allowing the public to quickly benefit from lower medical cost brought by the new RDL.

4.With regard to Policy Support for Pharmaceutical Industry

Perspective 6: Provide relevant policy support to the pharmaceutical enterprises with higher developmental potential to enhance the overall competitiveness of Beijing pharmaceutical industry.

Currently, Beijing pharmaceutical enterprises have common problem of weakness in leveraging advantageous resources in Beijing, which results in relatively slow development. In order to accelerate the development, it is necessary to provide policy support for the pharmaceutical enterprises with the most developmental potentials in Beijing. Regardless domestic enterprises, joint ventures, or foreign funded enterprises, as long as the production plant is based in Beijing, it is recommended to make favorable policies for them, which will drive development of entire Beijing pharmaceutical industry.

Perspective 7: Utilize the R & D resources in Beijing to enhance the international influence of Beijing pharmaceutical industry.

At present, China's pharmaceutical R & D still mainly constitute of scientific research institutes and universities. Most enterprises are not strong enough in terms of drug development. As a result, some key technology industries have no breakthrough for a long time, which impedes their development in the high value-added in-depth field. Beijing has unmatched R & D resources as compared to other provinces. New medical reform provides a golden opportunity to leverage Beijing’s high-quality R & D resources and increase influence of Beijing’s pharmaceutical industry in China even in the world. With the acceleration of new medical reform, to build industry group with strong technical advantage is development trend and ultimate goal of Beijing pharmaceutical industry

Beijing should use this opportunity of new medical reform to expand and strengthen Beijing's pharmaceutical industry. In terms of pharmaceutical distribution, Beijing pharmaceutical industry has lower industrial concentration (see Figure 5). Since the centralized bidding system also requires collective distribution, Beijing pharmaceutical distribution industry will correspondingly become more concentrated. Therefore, Beijing's large pharmaceutical industry is also facing a good opportunity to merge small and medium-sized distribution enterprises.