Four Key Areas Shaping the Chinese Pharma Industry

For the majority of traditional pharma companies, 2017 was a tough year. A round of new policies repeatedly challenged and changed the industry status quo. For innovative pharmas, however, it was a different story – a year full of hopes and opportunities.   Thanks to the steady increase in healthcare need, the introduction of policies favorable to innovation, and capital injections, the Chinese pharma industry could be entering a golden age of innovation and development. In this ever-changing market, where will the industry go now?  

1. Innovation

•  Supportive and favorable policies

  From May to October 2017, CFDA (spell) issued a series of supportive policies to encourage innovation in medicines and medical devices. They included Encouraging and Accelerating the Listing and Approval of Innovative Medical Devices and Medicines, Encouraging Medical Device and Medicine’s Innovation and Reform of Their Clinical Trail Management, Encouraging Medical Device and Medicine’s Innovation and the Implementation of Medical Device and Medicine’s Life-cycle Management, Encouraging Medical Device and Medicine’s Innovation and the Patent Protection of Innovators, and Deepening the Reform of the Examination and Approval System to Encourage the Innovation of Medical Devices and Medicines.   In the past, long approval times were always prominent on the mind of industry experts. This series of initiatives is aimed at carrying out a comprehensive reform of six major aspects: clinical trial management of medicines and medical devices, examination and approval of the listing, drug innovation and development of generic drugs, life cycle management, technical support, and leadership. They are expected to greatly accelerate the approval process and enhance the efficiency of innovative transformation.
Speaking of innovation, intellectual property is another important area. China has long been criticized by the international community for its lack of intellectual property rights and protection; as a result, the development of China's innovative pharmaceutical industry was heavily restricted. However, things are changing. China made clear improvements regarding this issue in 2017, establishing three anchor points linking drug and patent, patent period compensation, and data protection. Through this round of moves, China is slated to build a scientific and systematic protection mechanism to effectively protect the patentee's legitimate rights and interests, effectively driving the wave of innovation.   

• The soaring investment market

  Thanks to the new innovative drug support policies, the pharmaceutical investment market has also become increasingly hot. At the Healthcare Capital Summit 2017, Werner Cautreels, CEO of Selecta Biosciences, said: "China is no longer an emerging market. Instead, to any pharmaceutical companies which are committed to taking the leadership position in the fierce global competition, China is an important strategic priority.” After 10 years of domestic medical development, China’s pharma industry reached $571 billion by 2016 and is expected to grow into a $1 trillion behemoth by 2020. Its huge market potential can no longer be ignored. An increasing number of local and international investment firms have begun to march into this field, setting up China-focused medical and pharmaceutical funds, in an attempt to ride on this upward trend.    According to the Annual Report on China's Equity Investment in 2017, there was a total of 9120 investment cases in China, of which 1008 were related to the biotech and pharmaceutical industry. In terms of investment number, biopharma is second only to the internet and IT sector; in terms of investment volume, it is ranked fifth in all industries, with a total of $11 billion. Among the investment firms, C-Bridge Capital, Tasly, Temasek Holdings, Shenzhen Capitol Group are the most active.   Thanks to the supportive new policies and the favorable pharma environment, an increasingly large number of overseas talent moved back to China, starting new businesses. With the surge of international and domestic capital, a string of new and innovative biopharmas, such as Beigene and Zai Lab, have emerged.  

2: Medical AI

As artificial intelligence (AI) has become increasingly accepted and applied in various fields, the pharma industry is playing catch-up, but there are positive things emerging in China. Currently, AI has been applied in all three phases of the medical treatment in China.  

• Pre-clinical treatment stage

  The application of AI in the pre-clinical treatment phase is very broad. It includes a range of services, such as auxiliary diagnosis, medical imaging, virtual assistant, etc. At present, it is the most mature business sector in terms of medical AI application in China and it has achieved great success in the past year. For example, if combining with pathology analysis, the accuracy of medical imaging diagnosis has already reached 99.5%.  

• Clinical treatment stage

  In the face of long R&D cycles, large investment, and the high failure rate of new drug development, the pharma industry has long been demanding a more efficient approach to research new medications. The emergence of AI has filled this void. It has been increasingly used to discover novel medications or explore new implications of older drugs. It is predicted that the application of AI in this sector will grow even stronger in China, potentially reaching a market value of hundreds of billions in the coming years.  

• Post-treatment and recovery stage

  AI can also be widely applied after medical treatment, in area such as health management, wearable devices, risk prediction, and information and data management. A range of biotech companies has already joined this field. This sector is likely to become the main force in driving AI’s application in the Chinese healthcare and pharma industry.   In China, the aging population, the rapid growth of chronic diseases, the serious imbalance between supply and demand, and uneven geographical distribution of medical resources have forged a great market need for AI. On the other side of the coin, China’s large population base, rich business combinations, and a huge reserve of talents have also provided fertile soil for AI to grow and flourish. Moreover, CFDA has published over 80 national policies and medical AI focused guidelines to support and drive its research and development.   As of August 15, 2017, total AI investment in China exceeded $2.6 billion, with 104 companies securing funding in the past year. The most active investors include Sequoia Capital, Zhen Fund, North Light Venture Capital, Matrix Partners China, and SB China Capital.   To sum up, the application of AI will improve China’s healthcare service quality, increase medical efficiency, and better serve the patient population.  

Medical reform

2017 was a major year for medical reform in China. In an attempt to alleviate the expensive medical treatment and burden from both patients and the public healthcare system, the Chinese government introduced a round of policies and measures, including drug control, adjuvant drug monitoring, two-votes system, drug price negotiation, pay by diseases, etc. The reform has already brought significant improvements.   

• Healthcare fee control

  The rising healthcare fee and how to control it has always been one of the core issues of the current Chinese healthcare and pharma system. In 2017, the battle was further intensified. How to solve this problem? First, expand the sources of medical funds through the introduction of commercial healthcare insurance. Second, optimize the payment structure to meet the new medical needs.   In China, commercial health insurance is still in its early stage. It is difficult to meet the shortage of medical insurance needs right now and this probably will not change much in the near future. Under the current environment, all reforms in health insurance, medical treatment, and medicine are plowing ahead in the direction of medical insurance payment structure optimization.   Two main approaches can be applied. First, by reducing the cost of medicine, CFDA aims to effectively cut off the interest chain. Second, through improving the medicine structure, China is on track to substantially reduce the use of expensive and patent-expired original medicines. Instead, high-quality generic drugs will begin to dominate the market. This will see China save hundreds of millions in medical insurance funds.  

• Consistency assessment

  A consistency assessment for generics was initiated in 2017. According to CFDA, 17 drugs passed the consistency assessment in the first round. This effort will continue in 2018. A total of 289 products from more than 1800 manufacturers are slated to complete their consistency assessment this year. Currently, the market price for consistency assessment of a single-species drug ranges from $720,000 to $1,440,000. This huge evaluation cost has directly intimidated a slew of small to medium-sized pharmaceutical companies.   Additionally, the long application process time-1-2 years per drug-has further decreased their enthusiasm. Thus, consistency assessment will serve as a complete clean-up of the chaotic generic drug market. Low-quality and inferior products will gradually withdraw, whereas outstanding contenders will further expand their market reach.  

• Two-vote system

The two-vote system refers to the procedure that sees pharmas open one invoice to distribution companies and another invoice to medical institutes. Admittedly, the arrival of the two-vote system is impacting the traditional marketing model, but at the same time it is increasing the transparency of the drug distribution industry.

• The adjustment of marketing models

Currently, two strategies are dominating the Chinese pharmaceutical market - low-open and high-open. The former refers to pharmas selling drugs to distributors with low manufacturing price, and then going through layers of subcontracting, eventually reaching the medical institutes. The latter refers to raising the manufacturing price and circulating medicines through exclusive distributors. After the implementation of the two-vote system, all pharma companies are expected to gradually shift to the latter approach. At the same time, their existing channels will also be compressed from the original multi-level commercial channel to a single-level channel.

• The adjustment of the medicine distribution industry

The most obvious and direct impact of the two-vote system is on the drug distribution industry. It will reduce the layers of medicine circulation. Non-standard distributors will be eliminated from the market, raising the whole industry concentration as a result. Down the line, companies with upstream resources and downstream hospital sales will have a leg-up in the competition.  

Internationalization

• Joining ICH

  On June 1, 2017, CFDA officially became a member of the International Council for Harmonization of Technical Requirements for Pharmaceuticals for Human Use (ICH). This was a landmark event for the Chinese pharma industry, marking the true integration of its drug regulatory system into the international community. In the short term, it means China must raise its standards in all aspects of pharmaceutical regulation, which will present obstacles to a large number of local pharma companies. However, in the long run, China will benefit from it. ICH is a door that lets China in to the international community, allowing the country to catch the high-speed new drug development wave in Europe and the United States. At the same time, it is good news for overseas pharma companies. In the wake of the optimized review progress and international multicenter clinical trials, the listing process and the time to bring products into the Chinese market will be dramatically reduced, saving more costs down the line.  

• Overseas investments

  Overseas investment was the other aspect China’s internationalization progress. In the past year, a slew of Chinese pharmaceutical companies and investment firms have engaged in mergers and acquisitions abroad, consistently breaking highest-investment-capital records.   According to an incomplete statistic, a total of 17 M&As were initiated by Chinese pharmaceutical companies last year, of which seven deals exceeded the $500 million mark. On May 24, 2017, private equity firm Pagoda Investment announced a collaboration with Queensland and Goldman Sachs to acquire ICON. Three months later, Fosun Pharma pulled the trigger on a deal to acquire 74% shares of the Indian company GlandPharma for $1.091 billion. Shangdong Weigao beefed up its pipeline with an $850 million buyout of American medical device company, Argon. And Sanpower Group picked up Dendreon for $819 million.   With the rapid development of the Chinese pharma industry and the transformation of its domestic companies, overseas integration has resonated positively across the industry. From a technical perspective, local Chinese pharma companies are still lagging behind the development of European and American pharma giants. It will be hard to catch up if they rely on their own R&D capabilities. International acquisition is therefore the solution. It primes Chinese pharmas to bring back high-quality medical resources and business models from abroad, speeding up their domestic acquisitions, as well as their international markets.  

Conclusion

The four key area above shaped the Chinese pharmaceutical industry in 2017 on different levels, including policy, market, capital, and investment. Their effects will continue into 2018. In the next 5–10 years, the Chinese industry will inevitably go through drastic structural adjustments and transformations. In this upgrade, its position in the global market will change, shifting from an international manufacturing base to a most promising strategic market and efficient R&D center.  

Jin Zhang M.D., Ph.D is project and account manager at LakePharma, and editor at 

The Pharmaceutical Consultant

.