BAI Jian, DAI Juan, LI Ye

(1.School of Business Administration, Shenyang Pharmaceutical University, Shenyang 110016, China; 2.Shenhe Maternity and Child Health Care Center, Shenyang 110847, China)

Diagnostic Reagent Industry in China: SWOT Analysis and Countermeasures

BAI Jian1,2, DAI Juan2, LI Ye1

(1.School of Business Administration, Shenyang Pharmaceutical University, Shenyang 110016, China; 2.Shenhe Maternity and Child Health Care Center, Shenyang 110847, China)

Objective To analyze the current situation of diagnostic reagent industry in China and look for a feasible path for the healthy development of diagnostic reagent industry. Methods Literature review was applied and SWOT analysis was conducted to analyze both internal and external factors that influence diagnostic reagent industry development. Accordingly, suggestions were raised. Results and Conclusion Diagnostic reagent industry in China reaps a high profit with fast development and low price advantage; the disadvantages lie in less investment in research and development and lack of funding; opportunities include good policies, improvement of people’s health awareness and optimization of the industrial structure; the impact of foreign business competition, patent protection and a relative increase in costs are the threats. Therefore, China’s enterprises can solve the problems with talents training, brand building and social financing.

diagnostic reagent; SWOT analysis; biotechnology

Diagnostic reagents refer to reagents which are used alone or combined with instruments, equipment and systems to prevent, diagnose, treat, monitor, prognose, observe, evaluate and predict the health status and course of genetic diseases. Meanwhile, they can be made into in vitro detection reagents, kits, calibrators, quality control materials to detect human tissue samples (various body fluids, cells, tissue samples, etc). After 20 years of development, China’s diagnostic reagent industry has become one of the fastest growing and the most dynamic fields. This paper analyzes diagnostic reagent industry by using SWOT method, and offers countermeasures to respond to opportunities and challenges for diagnostic reagent industry.

1 SWOT analysis of domestic diagnostic reagent industry

1.1 Analysis of strengths

1.1.1 The characteristics with high profits and low costs in China

Diagnostic reagent industry is a knowledge-intensive industry. The research and development process requires high-tech, and the produce steps of one product can not be applied for another one. Take the genetic diagnostic reagents for example: the upstream steps involve the synthesis of the gene, purification, analysis, sequencing, expression, etc; the downstream steps involve protein purification, quality inspection, etc. Due to the addition of high-tech, the value of the products increases and the average gross margin of the industry is approximately 55%[1]. In addition, diagnostic reagent industry has the characteristics of scale economies, which means that large companies benefit more from scale economies and vice versa. This trend leads to the fact that low-tech and small- scale enterprises have to withdraw from the market gradually, which will be beneficial to the formation of industry concentration. As shown in Table 1, gross profits were listed from 2008 to 2010[2], which showed that the more technical innovation ability a large enterprise had, the more market share and gross profits it could obtain.

1.1.2 Biotechnology shortens the period of research and development, and new products have a much longer life period

Due to the constant development of geneticengineering, recombinant monoclonal antibodies and modern biotechnology, diagnostic reagents can enter the clinical phase from research stage quickly, which will shorten the produce cycle effectively. For instance, the hem agglutination method which has been used for more than a decade to detect hepatitis B was taken place of by the advanced EIA method within just less than five years. Furthermore, the life period of new product is generally up to several decades after the product is put into use. During this period, companies only need to upgrade or improve the quality of products constantly to meet the requirements of detection accuracy.

Table 1 Companies’ gross profits in the diagnostic reagent industry from 2008 to 2010

1.1.3 The price of domestic products is pretty lower than import products

Compared with foreign enterprises, domestic enterprises which produce low-end reagents take low price strategy. As for the low-end biochemical diagnostic reagents and standard immunodiagnostic products, the quality is similar to the imported ones, but the price is much lower than them. Therefore, domestic diagnostic reagent manufacturers can take up more market share in the diagnostic reagent field.

1.2 Analysis of weaknesses

1.2.1 Investment in research and development is low, and the capability of innovation is weak

At present, China’s diagnostic reagent manufacturers invest less in research field. Generally, investment of research and development accounts for 2%-5% of its total sales, and most of domestic products come from imitating related import products. However, the proportion of foreign companies’ investment in research occupies 10%-15% of their annual income. For instance, in 2010, 2011 and 2012, investment of research and development of Sigma-Aldrich company was 660 million US dollars, 760 million US dollars and 690 million US dollars respectively, which almost accounted for more than 10%-12% of the its gross margin[3]. In addition, many domestic enterprises blindly choose biological reagent products, and the phenomenon of repetitive produce is also serious. According to the 2005 Chinese Diagnostic Reagent Industry Report, the number of hepatitis diagnostic reagent manufacturers in China was 45, while the number of foreign manufacturers was only 22[4].

1.2.2 Many manufacturers face financial difficulties, and the financial system is not perfect

Currently, the number of diagnostic reagent manufacturers is about 300 to 400 in China, but the vast majority of the enterprises are small-scale and uncompetitive. The number of large scale enterprises is no more than 10 in general. Even though government funding and the traditional bank loans may relieve financial burdens for some enterprises, most of the enterprises are still plagued with financial problem. In fact, most of companies can not get enough funds from government or bank. Meanwhile, most banks do not accept the government’s guarantee, so it is hard for manufacturers to apply for loans from the bank. The government also encourages small and medium-sized enterprises which meet qualification requirements of capital market to issue shares, but the threshold of stock market is so high that none of those can meet the qualification requirements to come into the market[5]. All in all, the lack of funds has a negative influence on the development of small and medium-sized enterprises, and it also becomes a constraint to the development of diagnostic reagent enterprises.

1.3 Analysis of opportunities

1.3.1 Government attaches importance to diagnostics industry and improves the relevant legislation

The Twelfth Five Years Plan for the development of the national bio-industry pointed out clearly that thebiotechnology industry would play a vital role in the development of the domestic industry. The State Council Development and Reform Commission have carried out a series of policies to promote the development of the biotechnology industry. Meanwhile, the government has also enacted laws to develop diagnostic reagent industry. In 2001, the State Food and Drug Administration issued “on Standardizing Diagnostic Reagents Management Advice”. In 2007, State Food and Drug Administration formally implemented “Diagnostic Reagents Registration Regulation in vitro” (trial), which clearly defined the classification in vitro diagnostic reagents, registration, processes, management practices and inspection requirements of diagnostic reagents. With strong support from the government, diagnostic reagent market will maintain more than 16% growth rate in the future, and market sales will reach 20.8 billion Chinese Yuan in 2015[2].

1.3.2 The improvement of people’s health awareness provides more opportunities for diagnostic reagent industry

With the constant development of national economy, more and more people want to improve their life quality. The idea that treatment and prevention of diseases should be early has been popular for a long time. For the same reason, preventive medicine has also aroused people’s interest, and the demand for diagnostic reagents to prevent diseases grows. By the end of 2010, sales of diagnostic reagents have been about 60 billion Chinese Yuan, which almost accounted for 0.5% of the total medical expenses in China. The domestic growth rate of diagnostic reagents was about 15%, and it was higher than the average global growth rate of 5.5%-7%[6]. The Government also fully took people’s need into account, and the medical insurance reimbursement covered clinical detection fees at outpatient. Meanwhile, Government had special fund which was used to foster medical institutions to provide appropriate health services. In 2009, the Ministry of Health had 6 public health projects which allocated 25.3 billion Chinese Yuan from the central government.

1.3.3 Optimization of industry chain structure

At present, the structure of China’s diagnostic reagent industry chain is reasonable. The upstream market may provide many opportunities for the supply of raw materials and the demand of downstream market is big, which can offer more opportunities for the development of diagnostic reagent industry. The upstream of diagnostic reagent industry mainly contains some related chemical and biological materials, such as antigens, antibodies, and enzymes. The technology has been relatively mature and many companies can produce diagnostic reagents. Effective competition leads to adequate supplies of the products and the price is relatively low. The downstream market of diagnostic reagents mainly faces hospitals, blood banks and epidemic prevention stations. According to “China Health Statistics Yearbook 2010”[7], published by the Chinese Health Ministry, in 2009 the total number of health institutions was 916,571, and the number of hospitals, the main users of diagnostic reagents, were 20291. The number of hospitals would directly determine the prospects of diagnostic reagents. Therefore, the market demand for diagnostic reagents is persistent.

1.4 Analysis of threats

1.4.1 Foreign manufacturers of diagnostic reagents invested in Chinese diagnostic reagents market and the high-end market was almost monopolized by multinationals

In 2001, after formally joining the WTO, China fully integrated into economic globalization. As for the biological reagent industry, the import of diagnostic reagents has been on the rise, especially for high-end reagents. Biochemical diagnostic reagents are divided into three categories including biochemical diagnostic reagents, immunological diagnostic reagents and nucleic acid diagnostic reagents. McEvoy & Farmer released “Chinese clinical diagnostics market (2011)”, which pointed out that two-thirds of lowend biochemical diagnostic reagent market was occupied by domestic brands, such as Leadman Company, Zhong Sheng Bei Kong Company and Beijing Jing Jiu Company. However, in the high-end market, immune diagnostic reagents and nucleic acid diagnostic reagents has been monopolized by foreign brands, such as Roche and Siemens. According to recent survey, the proportion of import nucleic acid diagnostic reagents was more than 90%. Currently, China’s competitive diagnostic reagent market is dominated by foreign companies. China’s diagnostic reagent companies do not have strong competitiveness.

1.4.2 Strengthened patent protection system limits the development of domestic diagnostic reagent industry

China’s diagnostic reagent industry does not have thekey technology for innovation and there are few invention patents. As a result, most of the products of diagnostic reagent are imitations. Many international companies monopolize the diagnostic reagents market to some extent. After making an agreement with WTO on TRIPS (Traderelated Aspects of Intellectual Property Right), China must carry out the implementation of protecting patented drugs to all members. Take Ai Kang Company as an example, it had to pay 500 million US dollars for the infringement of intellectual property patents.

1.4.3 The increase of exchange rate of Chinese Yuan leads to export reduction

China’s diagnostic reagent products annual exports are on the rise. From 2004 to 2007, the average annual export growth rate was more than 50 % each year and in 2007 the amount of export was up to $ 17 million. Since July 21, 2005 Bank of China announced that China began to implement floating exchange rate based on market supply and demand, Chinese Yuan has been in a slow appreciation trend. From 2005 to 2013, especially after the Asian financial crisis, Chinese Yuan did not depreciate, which led to the increase of Chinese Yuan against the U.S. dollar by more than 20%. This trend severely reduced competitiveness of our diagnostic reagent products in the international market.

2 Countermeasures for China’s diagnostic reagent enterprises

It can be seen from Table 2 that with more than 20 years of development, China’s diagnostic reagent industry has made certain achievements, but the domestic diagnostic reagent enterprises are still in the initial mass production. It is clear that they have some problems to be solved.

Table 2 SWOT analysis of diagnostic reagents enterprises

2.1 Enhance market competitiveness through mergers, acquisitions and strategic alliances

Now, the number of China’s diagnostic reagent enterprises is about 300 to 400, and the vast majority of producers are small and medium-sized enterprises. Some biotech companies with excellent technical expertise invest in technical development and innovation greatly and some large pharmaceutical companies form strategic alliance to realize industrialization of technology. Take the immunodiagnostic reagent manufacturer Ke Hua for example; it reached an agreement with the French company named BioMérieux. They cooperated with each other so that they could enlarge market share and strengthen market sales effectively.

2.2 Develop an international division of global outsourcing market

More and more international pharmaceutical groups fully take the advantages of external and internal resources, then they reposition themselves to develop outsourcing model. In order to save research and development costs, improve efficiency, reduce risk and promote the development of product localization, these international companies expand the networks in some developing countries to explore extensive clinical resources and reduce the price of raw material, which may provide moreopportunities for diagnostic reagents in China.

2.3 Emphasize basic research, new product development and brand value

Nowadays, there are some problems for the structure of China’s diagnostic reagent enterprises. For example, the diagnostic reagents and related diagnostic instruments can not come in line with each other. Most of products are less innovative. Besides, some companies lack the key technology, and need to improve their capabilities to produce new reagents. It is difficult for them to have a healthy development. Therefore, the development of the diagnostic reagent business is limited. Companies should invest in research and development of new products. Meanwhile, they can cooperate with research institutions and universities or establish their own research departments in universities to realize resource complementary.

In addition, the vast majority of diagnostic reagent enterprises have low level management, poor marketing strategies and weak brand value. As a result, those enterprises almost could not gain a good reputation for their brands in the near future. Therefore, they should build and improve their brands value as soon as possible.

2.4 Lack of high-level talents in the related field

Although many employees working in diagnostic reagent enterprises have related background skills, highquality talents are still in great need. Those companies are in great need of management experts and complex talents with practical experience and theoretical knowledge. There are still many problems in research and development. For instance, the equipment of research and scientific information management system are outdated, and the shortage of relevant biological materials is anther serious issue.

2.5 Broaden the financing channels and encourage various types of investment

According to China’s actual conditions, the government should increase investment in research and development in the diagnostic industry. It also needs to encourage social capital to set up venture capital firms that may help the diagnostic enterprises to handle the financial problems. Meanwhile, the government also needs to relieve the financial burden by reducing tax.

China’s diagnostic reagent industry has been supported by the government’s policy and developed rapidly. When facing intense internal and external competition, China’s enterprises should increase investment in R&D, focusing on innovation and improving their capabilities. By doing so, domestic diagnostic reagent industry can play a vital role in the international market.

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[3] Annual Report Pursuant Section 13 [EB/OL]. http://www. sigmaaldrich.com/content/dam/sigma-aldrich/docs/Sigma-Aldrich/ General_Information/1/sigma-aldrich-2012-annual-report-10k.pdf.

[4] China’s Diagnostic Reagents Research Analysis Report 2008 [EB/ OL]. http://www.docin.com/p-112311372.html.

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[7] People’s Republic of China Ministry of Health. China’s Health Statistics Yearbook of 2010 [M]. First Edition, Beijing: China Union Medical University Press, 2010: 86-114.

Author’s information: BAI Jian, Lecturer. Major research area: Social pharmacy. Tel: 024-31207435, E-mail: baijian988@hotmail.com