SHANGHAI – In what could be called a surprising about-face, Eisai Co. Ltd. has bought itself a small piece of China's generic market with the acquisition of Liaoning Tianyi Biological Pharmaceutical Co. Ltd., for $78.2 million. Eisai's execs said they are hoping to take advantage of a segment they believe will see robust growth in the coming years in China: high-quality generic drugs.

China is just a few years away from surpassing the U.S. to become the world's largest market for generics, a shift that BMI Research calls highly significant.

In 2014, China's generics market was valued at $62.6 billion – which dominates as the biggest chunk of the overall market accounting for 63.3 percent of all drug sales. BMI values China's overall drug market at $98.8 billion in 2014.

This puts China just behind the US: In 2014 the generics market was valued at $66.9 billion.

Predicting a U.S. slowdown and China's continued steady pharma market growth, that gap will widen considerably by 2024. BMI predicts the market for generics in China will be worth $148.3 billion while the U.S. will be $101.2 billion. Japan will be far outstripped as well, with a market valued at $20.6 billion, up from $12.2 billion last year.

Going after the China generics market is little tread path for makers of patented drugs who shy away from the low margins and steep competition.

Moreover, China's recent regulatory reforms emphasize innovation and look set to make life much harder for generics makers, putting added pressure on them to improve quality and reduce the number of applications made to the CFDA that have been clogging up the system.

One example is the increased technical review standards. Under the new rules, if the originator drug is marketed in China then the generic must prove quality and efficacy consistency with the originator. If the originator is not on the market, then generic drugs must pass a quality consistency review within three years or risk having the marketing license revoked.

Meeting requirements such as these are expected to be expensive and hurt the small margins that generics markets operate with. If higher costs are passed to the payer, it may also serve to the close the gap between the originator drug price and generic, making it harder to compete.

CONSOLIDATION ON THE HORIZON

Many in the industry are expecting massive consolidation that will weed out of the bad apples and cut down the thousands of pharmaceutical companies to more manageable group of players focused on quality.

Tokyo-based Eisai is positioning itself to be in the final group.

According to the company, execs want to meet the strong government demand for high-quality pharmaceuticals that are on par with branded pharmaceuticals. In particular, they will seek to supply mid-sized hospitals in China's interior cities (referred to as tier 2, 3 and 4 cities) where affordability of new medicines is an issue.

Similar in message to Glaxosmithkline plc's recent announcement to cut prices and focus on affordability in China, Eisai is communicating a China-savvy strategy – perhaps learned after 25 years of operating here – that clearly aligns their company objectives with the Chinese government's stated aims.

Last year, Eisai set up a China-holding company with an autonomous management structure that, by putting key decision-makers in the market, has facilitated a faster decision-making process.

Yet with the acquisition of Tianyi, the plan is not to turn away from new medicines – many of which have gone off patent such as their Alzheimer's drug donepezil (Aricept, developed with Pfizer Inc.) but rather diversify their portfolio with generics.

Tianyi, to be renamed Eisai (Lioaning) Pharmaceutical Ltd., after the deal is approved, is located in the Benxi High-Tech Industrial Park, in China's Northeastern province of Liaoning. The facility is surrounded by six universities, including the highly regarded Shenyang Pharmaceutical University. Eisai plans to take advantage of this proximity to do more academic outreach.

The Tianyi manufacturing facility is cGMP compliant with a portfolio of 90 drugs treating a gamut of conditions from immune modulators with traditional Chinese medicine treatments for anti-inflammation, dementia, gastritis, diabetes and chronic arterial obstruction.

In the first half of 2015, Tianyi had ¥34 million in sales with ¥3 million profit (US$468,000). Their annual production capacity is 1 billion tablets, 400 million capsules, 50 million granule packs, 50 million powder packs, as well as 300 tons of API.