Following sales growth well into double-digits last year, Eli Lilly is looking to double its growth in China, where it intends to be the fastest-growing pharmaceutical company. “We are increasing our investments in every aspect of our business,” with the goal of doubling from 2% to 4% the percentage of total revenues Lilly generates from China, CEO John Lechleiter said in comments delivered at a briefing for reporters and reported by Bloomberg.
How much of a sales leap did Lilly enjoy in China? While Lechleiter is quoted by Bloomberg as saying it reached 25%, Lilly’s 2011 annual report delivers even better news: “Though growth has moderated a bit in our emerging markets, China was a standout with 31 percent revenue growth.” During the fourth quarter alone, Lilly sales grew 43% from Q4 2010.
Lechleiter highlighted one factor in that growth: Lilly doubled its sales force in the Asian country over a three-year period. And in mid-2011, according to Lilly’s annual report, Lilly’s 2,500 field reps in China began using Veeva in one of the pharma industry’s largest-ever deployments of the cloud-based customer relationship management tool. By the end of this year, all Lilly field personnel worldwide will have access to Veeva via their PC, iPad, or BlackBerry.
Going forward, Lechleiter said, Lilly will grow in China through sales of drugs for “unmet needs.” Lilly has in recent months pinpointed two drug categories as holding promise in China: diabetes and cancer drugs. Demand in China as well as Japan helped boost year-over-year sales of the insulin product Humalog by 11% in 2011, for example, to $831.8 million, or 40% of the drug’s more than $2 billion in total sales.
“We're seeing us move or increase our competitive positioning in the area of diabetes as well as oncology. And those were two key drivers of [China sales] growth. And we'd anticipate seeing continued strong volume growth in 2012 as well,” Derica W. Rice, president of Lilly Research Laboratories, told analysts during the January 31 conference call that followed the release of fourth-quarter and full-year 2011 results, according to a transcript by Seeking Alpha.
Another driver of China growth is Lilly’s erectile dysfunction drug Cialis. It entered the Chinese market in 2009 and will soon surpass Pfizer’s Viagra as the top-selling drug for the condition, Eric Baclet, president of Lilly China, said at the briefing: “In our quest for leadership in some of these China cities, we feel very confident.”
In addition to drug sales, Lilly is also pinning its growth hopes on becoming the first international drug company to penetrate China’s drug distribution sector. Lechleiter said Lilly intends to form commercial partnerships with Chinese companies that work in distribution and emerging technologies “when the time is right,” according to China Daily.
Frank Guo, research director of the market-research company Ipsos Healthcare China, told China Daily that having its own distribution channels will allow Lilly to cut costs by increasing efficiency. He noted China's pharmaceutical distribution network has been dominated to date by large domestic companies such as Shanghai Pharmaceuticals and China National Pharmaceutical Group. Their profit margins exceed 10%, 10 times what distributors can make in developed markets, such as the U.S. and Europe.
Lilly is one of numerous multinational pharma giants expanding operations in China in recent years, attracted by lower manufacturing costs and faster review-to-market timeframes than in the West. Additionally, the country's growing life sciences workforce capable of carrying out R&D is also a point of attraction. Roche CEO Severin Schwan, whose company saw China sales grow 35% last year, earlier this month declared the country “well equipped to be an innovator in any number of sectors including the research-based pharmaceutical industry.”
Chinese law bars drug-distribution companies wholly funded from foreign sources from establishing themselves but has allowed some companies in other industries to expand into China through joint ventures with Chinese counterparts. No drug company has done so to date, however.
Even if Lilly surmounts that hurdle, it faces another that will be increasingly common to drug makers going forward: China has promised to maintain low drug prices as its population ages, increasing demand for treatments. “While we understand the need of the government to save money and moderate the cost of providing healthcare, we also believe that other factors need to be taken into account,” Lechleiter said, according to Bloomberg, adding that drug quality and the reliability of supply should be considered.
China’s price containment adds pressure on profit margins at a time when Lilly and other drug companies are scrambling to recoup revenues lost as patents expire on older blockbuster drugs. Lilly is particularly vulnerable to the “patent cliff.” The company faces patent expirations affecting more than half its 2010 sales by 2020, Bernstein Research analyst Tim Anderson estimated last summer. During this decade, absent approval of any new drugs, he estimated Lilly sales could sink from $21.7 billion in 2010 to $9.7 billion in 2020, the sharpest drop among nine companies studied.
When non-prescription drug revenues are included, the estimate falls by less, going from $23 billion to $14 billion, leaving Lilly with the second-worst decline behind AstraZeneca. Faring best, according to Bernstein Research, is GlaxoSmithKline, with a roughly 10% prescription drug sales decline but also a nearly 20% gain when total revenues are projected, neck-and-neck with Novartis.
To read the story from Bloomberg, click here.
To read the story from China Daily, click here.