The U.S. economic slowdown and the Eurozone debt crisis have created pressure in the pharma industry that shows no signs of relenting. Yet, with the global pharma market forecasted to languish in single digit growth, emerging markets such as Brazil, China, India, Mexico, Russia and Turkey anticipate double digit growth nearing 14 percent through to 2014. 1
It is clear that China and other emerging markets are set to occupy an expanding share of pharma’s geographical portfolio. Of these, China has emerged as central to many U.S. pharma strategies. According to a recent market analysis by IMS, the compound annual growth rate of the Chinese pharmaceutical market over the next five years will be 23.2 percent. Growth has been rapid: China is on course to become the world’s third-largest prescription medicines market, after the U.S. and Japan. 2
We see the accelerating global demand for cheap, effective medicines as fueling China’s pharmaceutical output, and the country has risen to the occasion. China, along with India, already supplies more than 40 percent of the active pharmaceutical ingredients (APIs) used to make U.S. pharmaceuticals, a figure that IMS expects will double in the next ten years. The growing middle class, increasing disposable income and the rollout of health insurance are key factors favoring investments. As China moves into its twelfth 5-year plan, the emphasis will be on rebalancing its economy in market sectors that are less dependent on exports. Market sectors expected to benefit from this include pharmaceutical/biotech, infotech, aerospace and energy markets.3
Several factors will have a profound impact on any pharmaceutical growth strategy that includes China.
The first to examine is API manufacturing, as many U.S. drug manufacturers look to China for access to cheap API. It is important to note that the FDA has placed greater emphasis on identifying critical material properties as part of the process validation paradigm, and this is being fairly evenly enforced by CDER. With the current U.S. market dominated by generic drugs, will the Office of Generic Drugs follow suit? A priori, defining the critical attributes necessary for process and product predictability has not been a great emphasis in the generic industry. The looming EU Falsified Drug Directive is another consideration. Historically, quality auditors have evaluated API manufacturers against the requirements defined in Eudralex Volume 4, Part II (ICHQ7A), titled Good Manufacturing Guide for Active Pharmaceutical Ingredients. The Falsified Medicines Directive 2001/62/EC is attempting to extend the scope of the existing EU GMP directive 2003/94/EC to include APIs. This would in effect make no difference between the quality requirements for a drug substance and an API. More importantly it would require the designated QP to certify that the API manufacturer manufactured its product in compliance with EU directives for GMP drug manufacturing. The impact of this directive, slated to become law in 2013, is profound for those wishing to export API and drug products from China for U.S. and European consumption.
Supply Chain Transparency
A second area concerns the supply chain. The post-mortem analysis of the Baxter Heparin disaster in 2007 shared culpability on all fronts and highlighted the complexity of doing business in another country. With this new emphasis on API quality compliance, the linkage between supply agreements, quality agreements and audit programs will have to be very specific, including upstream workshops, integrators and supplier qualification as necessary. Complicating matters is the Chinese FDA’s (sFDA) reticence to include these upstream components as part of a supplier’s quality program.
Price Controls in China’s Market
With the growth of China’s middle class, China represents one of the fastest growing markets in the world. Even so, with rising healthcare costs, China is facing the same challenges as other fast growing markets. As China ensures that medicines are more accessible and affordable to their population, they also want to control the costs of healthcare. In parallel to rolling out healthcare coverage, China has also introduced several cost containment initiatives. Key steps include mandating similar pricing for brands of a molecule, and the development of a type of Diagnosis Related Group (DRG) system, similar to what is used in Europe today for reimbursement.
Complicating matters is the lack of coordination among key regulatory bodies resulting in a fragmented decision-making process. To lower drug prices, China brought in the Centralized Tender for Drug Purchase System in 2000 and only the drugs that win the bidding can be sold in a specific region.
In 2010, the Chinese government launched a plan to establish one or two leading national drug distribution companies and 20 regional distributors in an attempt to consolidate the fragmented drug distribution industry.
China’s Quality Sensibility
Quality awareness and understanding is on the rise and the quality paradigm between the U.S., Europe and China is narrowing. Historically, there has been a reluctance to invest in equipment and facilities designated and fabricated to western standards because of the cost of equipment compared to Chinese-manufactured equipment. Today, most new facilities include equipment from Europe and the U.S. with many Chinese manufacturers purchasing the qualification documentation provided by the equipment manufacturer. The GMP10 issued in 2010 and implemented in 2011 has advocated a clear commitment to U.S. and EU GMPs. As the sophistication of the Chinese market grows, the public is less willing to take medication that meets a lesser standard of quality.
Opportunity for U.S. CMOs
As the Chinese drug development market matures, the desire and ability to finance activities required to access the U.S. marketplace is growing. Rather than make the large capital investment in the U.S. for commercial manufacturing many Chinese firms are now adopting a business strategy which includes the selection of an approved U.S. CMO to take responsibility for product scale-up, tech transfer, and commercial manufacturing. CMOs with expertise in product development, packaging development and a track record of strong compliance with FDA will find that demand for their services is rapidly growing.
Cultural Understanding and the Rule of Law
For companies contemplating licensing, partnerships or M&A activities, it is important to remember that many of the pharmaceutical and biotech companies had their genesis as government entities. It is likely the government still has a role in these operations. Under the leadership of Hu Jintao the Chinese economy prospered, but his successor Xi Jinping represents an unknown in terms of promoting economic growth while maintaining the primary role of the Communist party.
There has also been much written about the role of guanxi in doing business in China. Guanxi is the concept of personalized networks of influence and is a central component of Chinese society. The reality today is that the most effective government affairs professionals place greater emphasis on interpersonal communication, analytical and critical thinking skills than on personal relationships or contacts. Lastly, China has been very vocal in its admonition that it is moving toward a rule-of-law based society. Initiatives to strengthen IP protection and enforcement are often presented as evidence of this evolution. However, in reality the gap between Chinese law and governance remains wide. This should be a central consideration to any business decision and risk assessment when contemplating business in China.
The growth of the pharmaceutical market in China has added complexity and provided opportunity in nearly every facet of pharmaceutical business strategy. We expect China and the emerging markets to remain a key component of any growth strategy for U.S. pharmaceutical companies. However, any strategy that looks to capitalize on the growing middle class demand for western medicines will find the same concerns that stem from escalating healthcare costs and access to affordable medicines. Understanding the legislation around Chinese regulations for pricing and distribution is essential to gaining a foothold in the market. The maturation of China’s quality sensibility will present opportunities for U.S. CMOs that have the ability to enter the U.S. market. It remains unclear how the U.S. and Europe’s growing regulation on API quality and control will play out. Much will depend upon the sFDA’s willingness to increase the transparency of the API supplier and sub-supplier supply chain. Any strategy to enter the Chinese market should be undertaken with the understanding that the government will be involved and can get involved either directly or indirectly at any time. While change will be constant in the Chinese pharmaceutical market, what is certain is that having a firm grasp of the cultural and business mores will be important in assessing true business opportunity and risk correctly.
1. IMS Market Prognosis, 2011
2. Boehringer-Ingelheim Healthcare System 2012
3. China’s 12th Five Year Plan: How it actually works, APCO Worldwide, Dec 2010