Multinationals move in

    Although half of the top ten pharmaceutical companies in China are multinationals, none command more than 2.5% of the total market share, according to Sanofi. Last year, the 15 biggest drug makers in the world derived just 0.9% of their combined sales from China. Many of the most popular products in China are traditional Chinese medicines, says Arzt, and they are growing faster than prescribed drugs. "Multinationals are losing share -- they're growing nicely, but they're consistently losing share," he says.

    Western companies have recently made massive long-term investments in manufacturing facilities and partnerships with local players. Pfizer plans to attain a 6% market share in China in three years. Novartis (NVS) announced last November that it will spend $1.25 billion on R&D centers. Eli Lilly (LLY, Fortune 500) created a $100 million venture capital fund to invest in Chinese life sciences companies. Nearly all have boosted their sales forces.

    But it will take more than raw investment to make inroads in China, says Sati. Because the market is so fragmented, he says, drug makers must learn to embrace complexity. "The basis of success is: Who has the smartest execution?"

    Many companies are still calibrating their drug portfolios. Because the range of incomes in China is so varied, businesses must look for growth and both the high and low ends of the market. As a result, they must sell everything from high-end oncology treatments to rabies medicine, says Kelly. The epidemiological profile in China is also unique -- and changing.

    "Liver cancer, gastric cancer, esophageal cancer -- in the western world they're not every significant, but in China they're very major," he says. One predominant disease, he says, is Hepatitis B, which affects some 10% of the Chinese population but only a tiny number of people in the US.

    Drug makers are looking to expand in sectors other than pharmaceuticals, such as generics, vaccines, consumer products, and traditional Chinese medicine. For example, Novartis recently purchased a local vaccine maker, and Sanofi is awaiting approval of a deal with a local vitamins and supplements producer. After experiencing the pain of depending too much of blockbuster drugs, Big Pharma has learned the lesson of diversification.

    Sati says multinational companies are learning to cater to regional tastes. "They are adopting commercial execution depending on the local environment," he says. In southern China, for example, commercial activity still takes place in large hospitals; in the West, companies must form partnerships with tiny local distributors.

    Sanofi is divided into ten regional divisions, says Kelly, each with its own local human resources and government affairs teams. The company is working as fast as it can to staff up those units, but must compete with other companies for limited talent. It can be difficult, he says, to convince experienced employees who live in cities to move to rural areas. "Once you bring them to headquarters, people don't want to go back to a tier two market."