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China Prepares for Big Pharma

 
 

As part of its “Made in China 2025” industrial plan, China hopes to reinvent its pharmaceutical industry. President Xi Jinping has identified his country’s reliance on foreign drug imports as a critical concern. China’s enormous population, coupled with the rise of disease and illness, make the country a prime market for pharmaceutical companies, one in which U.S. and British pharma heavyweights are increasingly investing. Xi plans to improve the Chinese pharmaceutical industry to counter this reliance on foreign firms, to tap into the revenue generated by the Chinese market, the second largest pharmaceutical market behind the United States, and to create globally competitive firms.

The “Made in China 2025” plan seeks to upgrade China’s economy through mass government investment and policy reforms. It specifically targets high-technology fields, such the pharmaceutical industry, that are currently dominated by the developed economies in an attempt to move China’s economy up the value-added chain. China’s pharmaceutical industry is ripe for this kind of investment. It is a high-technology field that requires massive amounts of research and development, with such high investment costs that most Chinese companies are simply priced out. It is also a growing field in China. The Chinese population is aging and increasingly ill, two factors that have made China the world’s second largest pharmaceutical market. Being able to create national heavyweight companies that can dominate the Chinese market, compete and beat foreign competitors, and begin to take market share away from those foreign competitors’ home markets checks all the boxes of the “Made in China” plan.

Before this can happen, China needs pharmaceutical companies large enough to create economies of scale. The Chinese pharmaceutical market is notoriously fragmented, with most companies selling generic drugs or therapeutic medicines. This fragmentation keeps investment in research and development low, with R&D investment averaging 5 percent of sales for Chinese companies, compared with 20 percent for U.S. companies. To encourage industry consolidation and increase spending on R&D, the Chinese government has introduced new regulations that increase the stringency of safety and testing requirements. These increased standards are prohibitively expensive; the new trials could cost over $1.5 million, which many of the smaller companies simply cannot pay. Unable to meet these costs, they will be forced to sell themselves to the larger companies, which will consequently increase their market share. Increased market share will allow these larger companies to devote more resources to research and development.

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The government is also moving to more quickly approve new drugs for the market. Now data from trials conducted outside of China can be used to seek approval for drug distribution in China, whereas before companies would have needed to conduct additional tests in the country. Naturally, in the short term this will benefit foreign companies that conduct most of their tests overseas. Multinational pharmaceutical companies have been turning to China to drive growth, even though it currently only accounts for a small percentage of sales. Yet over time, local companies will become larger beneficiaries, as the Chinese government continues to use foreign-domestic partnerships as a requirement for access to the Chinese market. This will also further contribute to market consolidation under large Chinese pharma companies, as these companies already have a large amount of products in development and will be able to bring them to market more quickly. This reform is but one of many at the Chinese Food and Drug Administration that is streamlining and improving the Chinese pharmaceutical industry.

These reforms, and the steadily increasing size of the Chinese pharmaceutical market, have prompted increased investment in the market. Biopharma was the second largest investment market in China in 2017, behind only information technology. Increased investment is being driven by foreign money, which has started to view China as a “healthy investment” when it comes to healthcare and biopharmaceuticals. Cementing the industry’s internationalization, China joined the International Council for Harmonization (ICH) in mid-2017.  By doing so, China signaled that its standards meet global benchmarks and that its pharmaceutical market is both a good investment and a reliable partner.

As China enters the ranks of the high-technology pharmaceutical manufacturers, it will challenge the market dominance of U.S. and European pharmaceutical giants. The Chinese government has seen its aging and increasingly ill population as both a risk and an opportunity, and has responded in one of the only ways it knows how: attempting to upend a global market.

Zachary Torrey is an analyst working on Asian economics and security. He holds an MSc from the London School of Economics.

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