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An Unconventional Take on Traditional Chinese Medicine

Under the leadership of Wang Minghui (CKGSB Alumnus, CEO Class, second intake), Yunnan Baiyao, one of China’s most venerable pharmaceutical companies, has introduced medicine in innovative formats like bandages and toothpaste.

 

By Wang Wenjuan

 

Founded in 1902, Yunnan Baiyao is one of China’s oldest and most respected brands of traditional Chinese medicine. Yet in the past few years, this storied pharmaceutical company has embarked on a radical makeover of its business model. It has launched a series of highly innovative products based on traditional Chinese medicine – and in the process, has opened up entirely new markets and dramatically expanded its customer base.

 

Yunnan Baiyao’s bold and ambitious idea: to adapt traditional Chinese medicine to suit the needs of modern life.

 

From its earliest days, Yunnan Baiyao earned a strong reputation for medicines that effectively staunched bleeding, most notably for its signature “white medicine” (bai yao). For years, the company focused on this relatively small segment of the drug market. Yet while it developed a strong reputation for its specialty medicines, the company lagged behind faster-moving and more ambitious competitors. Sales faltered, and by the late 1990s it was clear that Yunnan Baiyao was in trouble. Change had to come soon.

 

In 1999, new leadership at Yunnan Baiyao made an important decision. The company needed to transform product development. In particular, it had to branch out beyond its narrow concentration on hematological drugs. Management puzzled over how to integrate the company’s signature white medicine into daily life. Then came the “ah-ha!” moment: Why not market the medication through ready-to-apply bandages?

 

As Yin Pinyao, Yunnan Baiyao CEO, explains: “A Band-Aid is just a small strip of adhesive that can stop bleeding. But the Band-Aid brand enjoys substantial brand recognition and a high approval rating in the market. If we at Yunnan Baiyao had competed with Band-Aid head-on, there was no way we could win.”

 

“But by offering medicated bandages, we not only bypassed a direct conflict, but we also played to our own strengths,” Yin says. “We established a new category of bandages. We opened up a new market frontier and broke Band-Aid’s monopoly on bandages, which allowed us to reclaim market share.”

 

In the wake of its success with medicated bandages, Yunnan Baiyao took another big conceptual leap when it invented “white medicine” toothpaste. The move was more proof that the venerated pharmaceutical firm was reinventing itself as a large healthcare company.

 

Management now boasts a two-pronged growth strategy, consisting of one product line of medicated bandages and a separate new line of daily use items, represented by medicated toothpaste. This approach has significant advantages. First, it leverages Baiyao’s competitive strengths. Second, the market for so-called daily use products such as toothpaste offers tremendous growth potential, encompassing everything from makeup and beauty to hygiene to first aid products. Demand for these items is expected to climb rapidly in tandem with rising Chinese incomes.

 

In line with the more innovative approach, Yunnan Baiyao has seen a big jump in its patent applications. In 2009 it licensed 55 patents, including 11 patents for inventions, bringing the company’s total number of licensed patents to 246.

 

Besides white medicine, Yunnan Baiyao plans to explore possible innovative uses of other herbal medicines, according to Chairman of the Board and President Wang Minghui (CEO Class, second intake). The subtropical southern province of Yunnan in which the company is headquartered has abundant botanical resources that may yield medicinal uses. The company is well-positioned to take advantage of these resources, given its own extensive botanical research and advanced technology. As a major technological player in its home province, it has also gained the strong backing of the Yunnan government.

 

As part of a more aggressive growth strategy, Yunnan Baiyao has said it will consider expansion through M&A. In December 2008, it bolstered its financial standing by securing an equity investment of 50 million shares from Ping An Insurance, increasing its total capital to 1.39 billion yuan.

 

Recent health care reforms have opened up another major potential opportunity. In 2009, the Ministry of Health issued a national catalogue of 307 different kinds of basic medicines that were to be made available at heavily subsidized prices in China’s health care facilities. The list featured 66 products from Yunnan Baiyao, including five medicines for which it is the exclusive manufacturer.

 

Wang casts the reforms as a major development for the pharmaceutical industry. Changes in health care policy are reshaping the market from one in which individual consumers bear the burden of health care costs to one in which governments shoulder a much bigger portion of expenditures.

 

For pharmaceutical firms that understand how to take advantage of the shift, the rewards will be substantial. By the first half of 2010, China’s pharmaceutical industry had already rebounded to pre-financial crisis levels, and its annual sales growth rate is estimated at 20 percent.

 

The degree to which Yunnan Baiyao can profit from the reforms will depend in part on how governments choose to implement them. At the same time, in such a rapidly-changing industry, the company will need to be more innovative than ever to adapt to new conditions and take full advantage of the potential for growth.

 

This article has been translated from the original Chinese version and edited for length