Chinese philosophers have contributed many words of wisdom to those wise enough to listen and heed them. As various geopolitical storylines continue to play out, it has become clear that the current government led by the CCP (Chinese Communist Party) is heeding one such quip, that is to not to be fearful of growing slowly, but rather only fearful of standing still. China (CHN) has captivated the world with its astounding economic growth and continued efforts to balance such growth with social and international pressures. With such unparalleled economic growth repeated year after year, we would be foolish to ignore this awakening pharmaceutical innovation dynamo.
However, the first step to achieving sustainable growth is to master one’s place in the marketplace. CHN has accomplished this twice during the past four years through pivots in political rhetoric and government-driven resourcing. These shifts have resulted in the long-anticipated life sciences vision of a CHN that innovates just as well as it manufacturers. With a bull-headed re-emergence onto the pharmaceutical innovation stage, the country’s government appears to be regaining its strategic acumen by taking stock of its position in the current marketplace and tightening the reins on the development of domestic manufacturers as they work their way up the value-chain of the industry.
Moving towards an Innovative Future
Decades ago, CHN ignited the life sciences community’s dreams ablaze with the possibility of a single-market. In CHN they saw the opportunity to combine immense capacity to first discover, then locally develop, domestically manufacture, and finally deliver the life-saving and improving therapies to the billion-plus patients. Indeed, from the perspective of generic drugs the country has arguable satisfied the latter two dimensions of this dream: developing a significant manufacturing capability for generics and active pharmaceutical ingredients (APIs), and becoming the second largest pharmaceutical market by consumption, leveraging its domestic population. However, from the branded perspective it is still struggling in all four dimensions with the first – discovery of NMEs (new molecular entities) for the treatment and prevention of disease – the key hurdle that has stymied the fulfilment of CHN’s role in the global life sciences community.
Ostensibly, the environment is beckoning to those innovators with NMEs at the ready: the country’s massive population logically leads a relatively sizeable universe of individuals from which to draw both healthy and unhealthy participants for local clinical trials. However, the successful marketing of therapeutics discovered and developed in CHN has been an especially weak aspect of the country’s economy, falling well-short of performance in other sectors including customer-focused (e.g, home appliances / internet services), efficiency-driven (e.g, solar energy / manufacturing machinery), and engineering-based (e.g, railroad and communications). The outlier is the performance of generic pharmaceutical manufacturers, which can be classified as a manufacturing-oriented, ‘efficiency-driven’ industry – but the country’s government desires to move further up the value-chain toward the manufacturing of innovative therapies.
The rationale for this short-coming within the innovative therapeutics segment of the life-sciences industry can be explained by several factors. First, the lingering concern over the intellectual property rights and their implementation that have kept even multinational corporations (MNCs) from diving into the market head-first cannot be ignored. Additionally, the ‘brain-drain’ of the national’s top scientists and business leaders continues to haunt the native economy. Another key is the failure of many clinical trials to adhere to international gold standards in terms of safety protocols and other infrastructure to maintain quality, which holds CHN back in the international rankings of clinical trial hosting. Many other factors exist, including the time and financial resource investment required for success – however those factors are consistent with environments around the world. In reality, CHN is mostly struggling with local challenges that manifest uniquely within their environment and will require an equally localised approach to solve them.
However, steps are being taken in quite a visible way – with the government’s policies and determination leading the way. The significant influence of the state over domestic manufacturers, including perseverance of state-owned-enterprises, could enable innovator-companies to weather one or multiple early failures in pursuit of longer-term success. This influence over domestic manufacturers and clear desire from the government to rebrands as an innovative powerhouse will build on the country’s precedential success in the industry. This unique combination of advantages will prepare CHN to hit its stride in the race for life sciences innovation.
CHN’s Life Sciences Pipeline
CHN’s government, with leadership from the CCP, has made no secret of its desire to advance its economy further up the value chain, with a specific focus on industries currently domestically influences by multinational corporations (MNCs). With proof-of-concept stemming from the CCP’s early success in the electronics industry over four decades earlier, CHN sharpened its focus on recreating that phenomenon in life sciences by returning to the directive of 自主创新 (‘Indigenous Innovation’). Theoretically, this would accomplish two goals simultaneously, decreasing the country’s dependence on MNCs’ innovation and technology, while also further propelling CHN’s economy to become more high-tech and services-oriented. Announced in 2006, the reform plan was named 国家中长期科学和技术发展规划纲要 (‘National Medium – and Long-Term Plan for the Development of Science and Technology (2006-2020)’) and served to prioritise the pharmaceuticals industry for the country’s evolution towards economic independence. Most crucially, further refinement of the government’s focus on the pharmaceutical industry was defined within 中国制造 2025 (Made in China 2025 initiative, or MIC2025).
The MIC2025 builds on this momentum, the Chinese government recently passed several changes aimed at streamlining the country’s regulatory landscape. At the national level, the China Food and Drug Administration (CFDA) was renames the State Drug Administration (国家药品监督管理局), losing the “food” from its title and regulatory scope. This new organisation, under the leadership of former Deputy Director of the CFDA Hong Jiao, will increase the regulatory focus on pharmaceuticals.
In April, Premier Li Keqiang announced that tariffs will be dropped to zero on all imported cancer drugs, encouraging manufacturers to bring these innovations to CHN. Manufacturers that choose to launch concurrently in CHN and globally will now be entitled to a five-year patent term extension, to a 25-year total term. Additionally, more provinces may be looking to explore the “Hainan Model”, where certified FDA / EMA approved oncology drugs are imported to the island of Hainan ahead of regulatory approval to address high unmet needs. This would provide an additional access point to the Chinese market, far in advance of national access.
This plan has already spurred reforms that led to several game-changing reforms, including:
- An increase in the number of drug and trial approvals,
- An expansion of the regulatory workforce, and
- CHN’s joining of the International Council for Harmonisation of Technical Requirements by Pharmaceuticals for Human Use in August 2017.
Optimism for CHN’s life sciences industry is best exemplifies by the raising levels of investment, both by local and foreign entities. According to ChinaBio, a consulting company, Chinese venture capital and private equity funds raised USD 45 billion for investment in the life sciences sector between January 2015 and June 2017. Large MNCs have started to increasingly look East for growth, fuelling further investment in the industry. In addition to growth, CHN has been leading source to fill a pipeline vacuum at Western manufacturers. For example, Celgene recently invested USD 263 million in BeiGene, acquiring ex-Asia rights to their lead PDL-1 inhibitor candidate. Similar alliances, in the form of a mix of partnerships and joint ventures, have been announced by NOVARTIS, J&J and SANOFI.
As a result of this investment, Chinese drug companies have demonstrated promising progress in some of the most innovative therapeutic categories. Most recently, they have demonstrated that they have the potential to leapfrog Western MNCs:
- As a first case study, consider the rather hot field of cancer immunotherapy. While there are currently five marketed PD-1/PD-L1 checkpoint inhibitors in the US, four Chinese companies are expected to launch their own products in this class by 2019 and are likely to be followed by launches from 13 other Chinese companies.
- A second and arguably more fascinating case study is in the field of CAR-T therapies – which provide the promise of complete cure by re-engineering the body’s own immune system to increase its ability to identify and destroy disease. While there are currently 96 and 15 clinical trials testing the safety and efficacy of such therapies in the US and Europe respectively, the total is 116 in CHN.
Recent Regulatory Changes
Also, corporate taxes on domestic generic manufacturers were reduced from 25% to 15%, through expansion of the technical classification of “high-tech enterprises” to include these companies. This should free up profits for companies in this highly competitive space to think more about research and development of innovative products.
For multinationals, these changes are almost uniformly good news. Faster approvals with less stringent evidence packages that have longer IP protection periods should dramatically improve commercial outcomes. Additional changes across the healthcare sector, including consolidation of the State Medical Insurance Administration, will further expand the drug access potential for Chinese patients.
Like most industries, pharmaceuticals has been affected by the ongoing trade war between CHN and the US. When first announced, the Trump administration imposed a 25% tariff on 1,3000 products, including numerous pharmaceutical APIs. This would have had an immediate effect on both producers of these basic products in CHN, which together with India produces 80% of the US API supply, but also had an effect on the US generic manufacturers. Fortunately, these US companies successfully lobbied the administration to exempt APIs from the 25% tariff in order to ensure access to Chinese raw materials. From the Chinese side, they have left pharmaceutical products untouched by tariffs, likely due to the high sensitivity around drug pricing and access in the public sphere. However, the real danger that the trade war poses to the life sciences comes from the revitalised committee on Foreign Investments in the United States (CFIUS).
CFIUS is a body responsible for assessing the potential benefits and risk of foreign investment in US companies, including security or other national interest threats. In the context of the trade war, its role as a key safeguard of US IP and technological superiority will be expanded. In the recent revitalisation, biotechnology was identified as one of the key industries where investments into US companies must be heavily scrutinised. This will throw cold water on the recent flow of cash from Chinese investors into US biotech companies, not only hurting US manufacturers but also potentially slowing the development of Chinese know-how and understanding of the industry. Without exposure to and deals with experienced US companies, Chinese life sciences operations may have to look elsewhere to develop the expertise required to further their industry.
Key Questions & Preliminary Answers
For all the reasons outlines above and more, it is clear that CHN will be a player in the future of life sciences. We have identified several key questions that will determine what kind of role CHN will play – a disruptive new leader, or frustrated outsider?
- Will CHN respect international IP laws?
In an industry where intellectual property plays such a dominant role, CHN’s record on respecting international IP rules may see a new chapter. While there are many cases of Chinese companies extracting IP from multinationals as condition for market access, the development of local innovative treasures could lead to role reversal. If Chinese innovations are reproduced in other markets, how aggressively would CHN pursue rulebreakers? This topic was recently brought into the fore in CHN by the film “Dying to Survive”, which is based on the true story of a leukaemia patient who smuggled cheap Indian-made GLEEVEC™ (imatinib mesylate, $NVS) into CHN. The public response to the film amplified its critique of high drug prices, and also highlighted the difficult position of the government.
Allowing prices that are too high will incentivise smuggling and a black market that violates patents, but prices that are too low may disincentivise innovation.One example can be seen in the case of REMICADE™ (infliximab, $J&J). While US pricing strength and contracting dynamics have let REMICADE™ effectively forestall biosimilar competition, despite FDA approved competitors, in CHN, REMICADE™ pricing pressures forced the original to withdraw from the market. While all markets face this fundamental challenge, CHN’s explicit commitment to building its innovative capacity and incentivising breakthrough therapies puts an additional pressure on this debate. We have seen early signs of progress, with the publication of new punishments for IP fraud, including an implementation plan for the National Medical Products Administration. Companies which abuse IP could see a loss of government funding in addition to other restrictions. This is a promising first step towards a more international harmonious stance on IP protection.
- Will CHN respect international IP laws?
- How much of an investment is CHN going to make in their innovative industry, especially if manufacturers see early failures?
State owned enterprises play an outsized role in most Chinese industries, as do state-funded loans. The life sciences everywhere are superlative in their mismatch between expenditure and revenue flows, with products potentially requiring upwards of a billion dollars in investment before they see revenues come in. CHN is clearly not afraid of investing in the long run, but if early investments don’t pay off, how will they adapt their funding support system? Will they employ a centralising force to make pipeline decisions, or decentralise the difficult culling process to individual manufacturers? In a field with such dramatic opportunities and risks, these questions are on a scale unmatched in CHN’s other, more conventional, industries. It will be important to monitor the early failures in innovation assets to see how the government responds, and what signals that sends to entrepreneurs and capital in the space.
- How much of an investment is CHN going to make in their innovative industry, especially if manufacturers see early failures?
- How will CHN’s willingness-to-pay grow?
While CHN has made great progress in liberalising their life sciences industry, one key aspect that remains an outlier internationally is their low willingness-to-pay. The CHN population is primarily recovered by the public insurance schemes, with only 5.9% of expenditure coming from the private healthcare market. CHN’s large population creates positive business cases for companies even at low prices (that 5.9% id still about USD 70 billion) but offering low prices in CHN that are unsustainable in other markets could create pressure from national payers who feel they’ve gotten a worse deal. If this dynamic persists, it could drive caution from manufacturers in their negotiations with CHN, possibly delaying access compared to the West. Unless there is an increase in willingness-to-pay from national, international manufacturers could remain hesitant to rush in.
While 2018 did see a significant advance in the number of products that made it through negotiations, and an expansion of access, the prices achieves were all still staggeringly low compared to the West. It’s possible that in 10-15 years, there could be a similar evolution to some emerging markets, such as Brazil, where manufacturers enter for market authorisation, then cater primarily to the private market where willingness-to-pay is higher, to avoid public pricing. Domestically, negotiations over drug prices could also take on dynamics not common in other markets, such as a consideration of the role of government research support of complication financing schemes. The state’s strong hand provides an additional layer of leverage in these negotiations, meaning Chinese manufacturers could face an uphill battle at home when it comes to securing commercial success.A final factor to consider is how domestic Chinese manufacturers would fair in markets that are well within the Chinese sphere of influence. As One Belt One Road endeavour expands, is there any potential for a One Pill strategy? Preference for Chinese pharmaceuticals, especially in areas facing commoditisation, could offer an additional advantage to ascendant Chinese manufacturers.
Domestically and internationally, CHN’s role in the world is evolving at a rare rate. Few countries are able to mobilise their capacity as swiftly and stably, but the industries CHN has become know for (construction infrastructure, solid goods manufacturing, etc.) are entirely different animals from the life sciences. While they have advantages in their massive resources, population, and regulatory agility, they face risks as well. International competition is fierce, legacy players are deeply entrenched, and billion-dollar failures are a strong possibility – all on top of the looming risk that a bad actor could hamstring trust of the domestic offerings. CBPartners’ team of specialists on the CHN market has significant experience advising clients on the evolving landscape in this ever-changing country. Here we have consistently advised clients not only with confidential engagements, but also through publicly-available through leadership, such as Evolving Reimbursement Dynamics in CHN. CBPartners will continue to monitor the evolving life sciences industry in CHN, as they strive to make a national ambition into reality: innovation therapeutics bearing the proud logo, “Made in China”.