Big pharma is aggressively expanding into central and western China after having seen unparalleled growth in China’s big coastal cities.

While Shanghai, Beijing, and Guangzhou still have their share of opportunities (and challenges), the next growth phase in pharmaceutical multinationals will come from the constellation of China’s second and third tier cities, cities with populations in the millions that would be major urban centers in other countries.

Big pharma’s aggressive expansion into these cities will rank among the biggest growth eras in the history of the industry. To get some sense of how pharmaceuticals giants are dealing with the rapid growth, Heidrick & Struggles conducted wide-ranging interviews with the China CEOs of leading pharmaceutical companies.

Speaking on condition of anonymity, they revealed a good deal about the race underway to stake a claim on China’s emerging cities.

“If you want short term, quick wins, stay in the coastal cities,” says one CEO. “Focus on the big hospitals where you see thousands queuing up. But if you want to grow strategically over the next decade, you’ve got to look west to the second and third tier cities. The big pharma players tend to be in 100 to 150 cities, but these represent just 15 to 20 per cent of China’s population; there are over 600 cities with growth potential.”

Launching a company in uncharted territory is expensive. China’s frontier regions are staggering in scale, and every year a firm can easily touch 30 million people, roughly half the population of France or the United Kingdom. “The problem is an absence of accurate data and information, which is characteristic of China,” the CEO continues. “But if you wait five years to enter these new markets the job then will be much bigger – and much more expensive.”

Balanced market leadership is only possible with broad market penetration across the country. Achieving this penetration is not easy, mainly because market access is a slow process for innovative firms. Getting onto reimbursement lists, building relationships with key stakeholders and educating the physicians is a priority before moving aggressively into more remote areas. In his view, success in a new market is contingent on carefully selecting the right market based on GDP per capita and whether his firm’s products are on the all important reimbursement lists. “If your drugs aren’t on the shelves and on the lists, then there is no point sending in your sales and marketing teams. Set up the infrastructure first, and then move in.”

The tyranny of talent
And, of course, there is the tyranny of talent. The talent gap is particularly acute in second and third tier cities. CEOs feel that by expanding as fast as possible they are buying time to find and develop talent locally, particularly managers. Says one CEO,

“This is perhaps the biggest advantage of being an early bird.”

China’s limited pharma talent pool creates other problems. Owing to rampant poaching and high turnover among the big pharma players, with the same people moving around between companies, most firms are operating on the same assumptions. “The big pharma firms chase each other,” says one CEO.

“If four big players are doing something, and the fifth isn’t, then the fifth firm can probably jump in at the last minute and still do fine. It’s not uncommon for rivals to follow us into a new market only to try the same things and make exactly the same mistakes we have.”

Offering the right product portfolio is essential, but this does not necessarily mean offering the latest product range. In China’s new markets, it is best to lead with solid, stable performers that have good brand awareness and which can be sold at a reasonable price – unsurprisingly, affordability is a more acute issue in second and third tier cities.

“Given that second and third tier cities are also a bit less sophisticated, your sales force does not need to be as specialized, but can rather sell a range of different products,” says a CEO. “At first the returns will not be so great, however, success takes time and commitment.”

Finally, there is the question of the model that is used for growth. China’s vast size and broad array of ethnic groups make decentralization inevitable, creating a requirement for strong regional general managers who can act autonomously, yet at the same time drive the correct corporate culture. Ideally sales, marketing, and some finance roles should report to this individual. Core disciplines such as human resources, brand marketing, talent development, and the majority of finance roles should have a direct line to headquarters in Beijing or Shanghai.

“There are principles we apply everywhere such as ethics, high values, and nonbribery,” says a CEO. “We are more careful in emerging cities because we are starting with new people. To ensure better business practices and success, the first line managers in these cities are extremely important. Many companies bring in people from other cities who they trust, helping to establish the right culture. You also need to impose more controls around things like business practices and ethics. You have to control things very tightly – a blind rush for quick success is a recipe for disaster.”