Bayer, Merck KGaA spend big bucks for market share in China

Multinational pharma companies have been targeting China for years with an eye on its aging population, expanding middle class and growing incidence of chronic maladies like diabetes. So how are Germany's leading pharmas, Bayer and Merck KGaA, carving out an edge for themselves? Reputation, tech-sharing and cold, hard cash.

By playing up their track record for quality manufacturing, bringing proprietary technology to China and plowing money into investments in the country, the German brand is securing "a good perception in China," Thomas Rudolph, head of McKinsey & Co.'s German pharma practice, told The Wall Street Journal. And the country's pharma leaders are showing no signs of slowing down.

Bayer, for one, in March announced a €100 million ($127 million) investment in its Beijing manufacturing plant to boost production of cardio and diabetes drugs--just a month after picking up Chinese OTC company Dihon Pharmaceutical Group. And in May, it agreed to buy Merck's ($MRK) consumer unit, which came with a new manufacturing site in Shanghai.

As for Merck, in September it started in on a new €80 million ($102 million) plant in Nantong--set to ultimately become its largest pharma plant outside of Europe--to make meds on China's Essential Drug List, including the diabetes therapy Glucophage and heart disease treatment Concor.

Merck Serono CEO Belén Garijo

With their manufacturing strongholds in the country, the pair of German pharmas will sidestep a big hurdle to competing in China: low-price local competition. Producing locally for the local market brings along regulatory advantages, Deloitte China partner Mike Braun told the WSJ, and Merck's biopharma chief exec, Belén Garijo, told the paper its Nantong plant would "allow us to grow faster by producing all of our major brands for China."

That's not to say there aren't a host of other significant challenges waiting to trip up foreign drugmakers as they move in with an eye on the country's rapidly expanding, $102 billion pharma market. Enforcing compliance standards, for one, has gotten pretty expensive in wake of a $489 million bribery scandal that first ensnared British pharma giant GlaxoSmithKline ($GSK) last summer. And where M&A is concerned, "integration of Chinese targets can be a huge issue," Braun said, citing differing financial compliance standards between China and the West.

But those factors won't stop Germany's top dogs from charging ahead. Bayer's set on staying in the "top three or four among multinationals" in the Chinese market, Alok Kanti, managing director for Bayer HealthCare in China, told the Journal, while Merck is looking for €1 billion in Chinese pharma sales by 2020, Garijo said.

- see the WSJ story (sub. req.)

Special Report: Top 10 Drugmakers in Emerging Markets - Bayer HealthCare - Merck KGaA