Foreign-invested joint ventures have captured one third of the mainland's drugs market and the proportion is rising, with domestic firms unable to match them in developing and marketing new drugs.
Domestic firms are also handicapped by price controls not applied to foreign firms.
The China Economic Times presented a sombre analysis of the country's pharmaceutical industry and urged reforms to prevent the foreign firms taking an even bigger share of the market.
By the end of last year, the mainland had 6,391 drug companies, including 1,790 joint ventures, with total production of 163 billion yuan (about HK$152.19 billion), up 14 per cent over 1997.
The first joint venture was set up in 1980 and 20 of the world's 25 biggest producers have set up mainland factories.
Intense competition and weak consumer demand are making the business increasingly less attractive. Profits on sales last year averaged only 5.91 per cent and the industry's rate of profits to assets was 5.52 per cent, down from 20.38 per cent in 1991.
The domestic industry is ill-equipped to compete with the global giants. The mainland's biggest manufacturer, Hua Bei Pharmaceutical, had output last year of 3.54 billion yuan, just 2.4 per cent of the sales of United States giant Merck.
Most mainland firms are small or medium-sized, with hundreds making a single drug. There are only a handful of large firms.
Average spending on research and development is less than 1 per cent of sales, with the result that, between 1985 and last year, the mainland approved only 62 new national-level drugs.
The whole industry annually spends one billion yuan on research and development, while Merck alone last year spent US$2.4 billion on it or 7 per cent of sales.
The mainland is not even doing well in the world market for natural drugs, where it should have a built-in advantage because of its centuries of traditional medicine. This global market is worth $15 billion a year and double that if you include natural cosmetics, health foods and flavourings.
The mainland has only 5 per cent of this market, because its products cannot meet international standards and it lags leaders Japan, South Korea, Indonesia and Thailand.
The China Economic Times called for higher spending on research, more development of new medicines, better laws and regulations and a level playing field between domestic and foreign firms. State companies are subject to strict and irrational price controls which keep prices low, while joint ventures can set the prices they wish.