Pharmaceuticals: China Wishes to Transform Into a Hub for Innovation – Is it Possible?

For a long time, China has appealed to global pharmaceutical companies due to rapidly rising internal demand and easy access to emerging markets in Asia-Pacific.

Yet, entering and operating in the Chinese market does not come without challenges, especially due to its focus on production and consumption of cheaper, lower quality drugs. However, the new five year plan and other government policies increasingly emphasise transition from a high volume economy towards value added innovation. So the question then arises: Can China be a new innovation power house or will it remain a market dominated by cheap generics? We have witnessed rising government funding into R&D and growing excitement among the companies operating in the Chinese pharmaceutical environment; from the strategic mergers and acquisitions, to global producers determined to advance their innovation activity in China. These positive developments lead us to believe that the business environment in China is indeed changing.

Measures are taken to foster innovation in the Chinese pharmaceutical industry

The new government policies and schemes left many pharmaceutical producers unconvinced that China could become a haven for pharmaceutical innovation, as there were many failed attempts to speed up the pharmaceutical registration process, facilitate innovation and to reform the CFDA (China Food and Drug Administration), in the recent past. The market is still dominated by generic pharmaceuticals, and the government puts pressures on drug prices to control ever-rising healthcare costs. Currently, the country’s pharmaceutical manufacturers allocate only 1% of total costs to research and development where in comparison, Japan, France, and Germany dedicate 25%, 12% and 3%, respectively. Also, as and when innovation happens, many new pharmaceuticals never reach the market, as companies are unable to secure national level reimbursement status. Bribery scandals, a copycat business environment, and doubtful integrity of published research also contribute to the scepticism about China’s innovation potential.

Pharmaceutical Industry expenditure r and d

Yet, it appears that the Chinese government is determined to change its high-volume, low-value approach. Central government and drug companies made substantial progress in enhancing competitiveness and innovation in the pharmaceutical industry. Just to name a few developments, the government increasingly acknowledges the importance of IP, and thus constantly updates and amends IP law to stimulate new innovation. In 2015, the price controls for 280 basic medicines manufactured by Western pharmaceutical companies were lifted. Also, starting in 2016, all pharmaceutical producers are expected to comply with Good Manufacturing Practises in order to receive new production licenses. In addition, the Chinese market proved an attractive alternative for pharmaceutical companies that still suffer from the aftershocks of expired patents, as equivalent Chinese produced generics are of substantially lower quality.

supply chain pharmaceuticals

China’s innovative pharmaceutical companies have relatively easy access to capital and receive growing direct investments from the government. The overall government spending on R&D has been rising at a CAGR of 14% over 2009-2015 – representing the highest growth among other major pharmaceutical producers.

government spending r and d

Signs of changing business environment are evident

As evidence of rising excitement about pharmaceutical innovation potential, we witness a rising number of strategic mergers and acquisitions, the rapid growth of Chinese innovation-oriented drug companies (like Zai Lab), and increased activity of Chinese drug developers in the stock market. For instance, up to 2012, most mergers and acquisitions in China were related to gaining market access, whereas the merger and acquisition activity in 2014-2015 was geared towards capacity expansion and innovation activities, such as deals between Eli Lilly and Innovent, and the expected partnership between AstraZeneca and WuXi AppTec later this year. Also, Chinese drug developers are raising money to introduce new innovative drugs that show major improvements in China’s research and development base. For instance, according to the Financial Times, BeiGene (drug developer), raised US$158.4 million in an initial public offering on NASDAQ in February this year. Similarly, Jiangsu Hansoh and Simcere are preparing for the Hong Kong IPOs.

To conclude, while the starting point is very low, China’s government is working hard to encourage innovation. The regulatory and business environment is rapidly improving, and we can already see the evidence of companies stepping up their investment into innovation and research and development. These positive developments lead us to believe that China’s business environment is rapidly changing and the innovation activities are expected to intensify in the near future, as it appears that steps are being taken in the right direction.