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Michael J. Kuchenreuther, PhD, is a research analyst at Numerof& Associates, Inc., St. Louis, MO, www.nai-consulting.com.
China’s emergence as a significant commercial market is forcing manufacturers to re-evaluate their overall business model.
Many pharmaceutical manufacturers consider China as one of the most important strategic markets for future growth. It’s the second largest market in the world after the United States. More importantly, China currently accounts for less than 3% of global revenue for most major pharmaceutical companies, leaving significant opportunity for expansion and growth (1). China is more willing to support biomedical research than other countries, and its healthcare system is characterized by expanding coverage and access, as well as a higher prevalence of chronic disease. China’s emergence as a significant commercial market coincides with changes in the global landscape that are forcing manufacturers to re-evaluate their overall business model.
Manufacturers, however, have struggled to realize this market’s true potential to date, because China’s market is highly complex and fragmented. Multiple, conflicting regulations concerning market approval requirements, market access/drug procurement, and pricing have undermined the growth opportunity China presents.
In recent years, the Chinese government has been focused on simultaneously improving the quality of healthcare, relaxing certain regulatory policies, and allowing market forces to drive healthcare and pricing reform. This article presents an overview of some of these recent market dynamics and discusses their potential impact on global pharmaceutical manufacturers, exploring new and existing opportunities for growth in China.
China’s health and pharmaceutical market overview
By the turn of the century, Chinese citizens had become increasingly dissatisfied with a healthcare system that suffered from chronic government underfunding, urban and rural inequalities, and overpriced, low-quality products and services. Much of the population was without access to medical care (2). Spurred by these social and economic challenges, China began planning for healthcare reform. Plans for reform have largely focused on healthcare coverage, access, and pharmaceutical expenditure (3-4, see Table I).
|Broadening basic healthcare coverage||By 2013, basic insurance programs covered more than 95% of the population (3).|
|Providing urban and rural populations with equal access to basic public healthcare services||Increased subsidies taken together with a system of price controls on doctor visits, surgery, and other procedures have widened access to basic care for rural and urban populations alike (4).|
|Improving the quality, accessibility, and regulation of pharmaceuticals||Interventions have sought to cut pharmaceutical prices for consumers, either through government subsidies or regionally fixed drug prices that target common infectious and chronic diseases (4).|
Due in part to these reform efforts, China’s healthcare market is seeing strong growth as health spending continues to advance. With rising per capita incomes, China’s increasingly affluent consumers are demanding the latest in medical treatment and services (5). At the same time, changing diets and an ageing population are increasing the incidence of cancer, heart, diabetes, and other chronic diseases. For instance, according to the World Health Organization (WHO), there are an estimated 3.07 million new cancer cases annually in China-21.8% of the global total (6). WHO also estimates that approximately 230 million and 114 million Chinese currently suffer from cardiovascular disease and diabetes, respectively (7, 8).
Against this backdrop, it’s not surprising that the Chinese government expects healthcare spending to surpass $1.3 trillion by the end of this decade (9). The aforementioned market dynamics-the emergence of China’s middle class, increased coverage and access, and the chronic disease burden of the country’s rapidly aging workforce-clearly create significant opportunities for pharmaceutical and medical device manufacturers. In fact, China, already the world’s second largest pharmaceutical market, is projected to reach spending levels of $155-185 billion by 2018 (10).
In addition to opportunities for increasing product sales, the recent growth and future prospects of China’s healthcare market have also attracted infrastructure investment from major multinational pharmaceutical companies. More than half of the top 20 global pharmaceutical firms have built R&D facilities in China and, together with smaller firms, are taking advantage of China’s sizeable skilled workforce (4). Manufacturers’ interest in making these infrastructure investments is spurred by the country’s requirement for at least some domestic clinical testing before drug approval, as well as China’s willingness to invest in life and medical sciences research. China is currently the world’s second-highest investor in R&D and is poised to overtake the US in R&D spending by 2023 (11).
While pharmaceutical and biotech companies continue to view China as an attractive market, regulatory issues and other hurdles continue to serve as obstacles. China offers poor intellectual property (IP) protection, and the drug application timeline is the longest of all Asian countries. Consequently, innovation continues to stagger in China compared to other parts of the world, and more than 80% of the market is comprised of generic drugs (12). There are also a number of challenges to setting up clinical trials and performing biopharmaceutical development, including language and cultural barriers as well as infrastructure, regulatory, and quality issues.
Key trends and developmentsRegulatory approval
Gaining regulatory approval has been and continues to represent a significant roadblock for manufacturers trying to bring a new drug to the Chinese market, particularly multinational companies. The China Food and Drug Administration (CFDA) has been conservative, slow, and extremely risk averse, causing the waiting list for approvals to exceed more than 18,500 drugs at the end of 2014 (13). For an imported new drug, it generally takes two to three years or more for approval (14).
At the same time, quality and integrity have come under the microscope in China amid recent allegations of bribery and corruption, as well as a number of reported cases where implementers of clinical trials have manipulated results. Against this backdrop, the CFDA finds itself in a delicate position of looking for ways to expedite drug approval processes while simultaneously upholding quality in the application process, implementation, and scrutiny of clinical trials.
On one hand, China recently vowed to slash its approval backlog for foreign drugs within the next two to three years (15). China’s efforts will reportedly include the increased use of clinical trial waivers under certain conditions, outsourcing some of its approvals, and eliminating the time spent by government officials in dealing with the intermediaries manufacturers often hire to take their products through the approval process (16).
On the other hand, in 2015 the CFDA issued guidance on international multi-center clinical trials that adds new levels of regulation and could significantly lengthen manufacturers’ road to market approval. According to the guidance, international multi-center clinical trial data used for the application of drug registration must be derived from two countries, including China (17). Because these regulations are rather new, manufacturers are still trying to figure out how to interpret them and what changes need to be made to address them. At the same time, the impact of these regulations on the overall attractiveness of the Chinese market still remains to be seen.
In China, branded pharmaceuticals and generics that earn placement on the National Reimbursement Drug List (NRDL) are partially (10%-90%) or fully reimbursed. Since 2000, China’s National Development and Reform Commission (NDRC) has played a key role in pricing drugs on the NRDL by setting price caps based on the manufacturer-reported costs of production. This system, however, gradually created concerns that focusing purely on price would sacrifice drug safety and quality, as well as provide opportunities for manufacturers to inflate costs to obtain a higher price. At the same time, pricing restrictions squeezed certain drugs out of the market as manufacturers stopped production over profitability concerns (18). In the end, this system failed to achieve the intended reduction in drug prices.
Recognizing that a government-controlled pricing system was not working, the NDRC announced that price caps for all drugs aside from anesthetics and grade-one psychiatric medications would be removed (19). While at first glance this new policy may appear to benefit manufacturers, pricing pressures remain.
Drugs that receive regulatory approval in China must be purchased on a provincial procurement platform through a competitive bidding process before they can be used in hospitals. Until recently, bidding systems at the provincial level placed imported branded drugs in a separate group where they didn’t compete directly with low-cost local alternatives. Under the new system, these premium products must now compete with Chinese generic drugs. In fact, foreign manufacturers dropped out of approximately 61% of bids in the wealthy eastern province of Zhejiang in 2015 and thus won’t be able to sell their products to public hospitals (20).
In addition to facing more stringent drug procurement processes, manufacturers will also need to prepare for greater transparency and scrutiny from the government regarding pricing activities. Specifically, pharmaceutical manufacturers will be required to provide information on drug production and distribution costs. Also, the NDRC will launch a six-month campaign against price-related violations such as excessive pricing, price fraud, and collusion to manipulate market prices (21).
Online pharmaceutical sales. Drug sales to hospitals currently make up approximately 75% of the Chinese pharmaceutical market (22). Some of the market access challenges manufacturers may encounter due to more heavily scrutinized procurement and competitive bidding procedures, however, could be partially offset by the government’s recent decision to lift bans on online prescription drug sales. The country continues to wait for the CFDA to draw up regulations that are expected to be robust at first, in light of growing concerns over quality, safety, and corruption (e.g., counterfeit drugs). While manufacturers may have to wait some time before the true impact of this policy change on market penetration and pharmaceutical sales can be realized, even opening a slice of the huge prescription drugs market could be a big boost to the industry.
Implications for manufacturers
China’s government has verbalized a commitment to making its regulatory landscape for new and innovative pharmaceuticals more stable, predictable, and efficient (23). It has also taken multiple steps to create a more market-driven pharmaceutical industry, particularly with respect to pricing and access. Concurrently, China’s economy continues to develop at an unparalleled pace. The country is more focused on genuine innovation than ever before, and its healthcare landscape is characterized by an aging population with greater access to providers and medicines. While manufacturers across the globe cannot discount the aforementioned challenges and should anticipate policy changes to take some time, there are plenty of reasons why these organizations should be bullish on China’s potential for providing future growth and expansion opportunities.
The dynamic nature of global markets continues to apply significant pressure on manufacturers’ business models, from product design and drug development through commercialization. China is no exception. To maintain competitiveness, manufacturers are encouraged to develop an accurate and up-to-date understanding of the Chinese regulatory framework and an adaptive market access strategy.
Until there is more clarity around how the CFDA will reduce the length of the drug approval process and until these policy changes are fully implemented, multinational manufacturers looking to launch drugs already marketed in other countries will likely continue to face delays. By expanding their presence in China, either through partnerships with domestic companies or infrastructure investments, manufacturers may be able to reduce the extent of these delays. In fact, leading manufacturers such as Eli Lilly and Novartis are already shifting from late-stage drug development and R&D outsourcing to building facilities that will house more fully integrated R&D capabilities (1).
China’s domestic pharmaceutical industry has been dominated by generic-drug manufacturers that have not heavily invested in R&D or manufacturing excellence. Global manufacturers remain well positioned to leverage quality and innovation as competitive advantages. Lilly is among the pharmaceutical companies to have capitalized on this by forging a strategic partnership with a domestic pharmaceutical company to create a platform for Lilly-branded generic medicines (24).
1. S. Grimes and M. Miozzo, Big Pharma’s Internationalization of R&D to China (Routledge, Taylor & Francis Group, 2015).
2. C. Kahler, China Business Review (Jan. 1, 2011).
3. T-M Chen, Health Affairs (Millwood, 2012);31:2536-2544.
4. A. Daemmrich and A. Mohanty, Journal of Pharmaceutical Policy and Practice 7 (9) (2014).
5. J. Perkowski, Forbes(November 12, 2014).
6. International Agency for Research on Cancer, World Cancer Report 2014.
7. World Health Organization Representative Office-China, Cardiovascular diseases factsheet.
8. Y. Xu et al., JAMA, 310(9):948-959 (2013), doi:10.1001/jama.2013.168118.
9. China-Britain Business Council, Healthcare & Life Sciences.
10. IMS Institute for Healthcare Informatics, Global Outlook for Medicines Through 2018, November 2014.
11. Council on Foreign Relations, Chinese Pharma: A Global Health Game Changer?, March 31, 2015.
12. “Betting On China For New Drug Development,” Forbes, April 29, 2015.
13. “China drug approval backlog jumped by a third last year,” Reuters, March 13, 2015.
14. “Foreign Drug Companies in China See Approval Delays,” Dec. 7, 2014, Bloomberg.
15. US Department of Commerce, Fact Sheet: 25th U.S.-China Joint Commission on Commerce and Trade, Dec. 19, 2014.
16. E.J. Lane, FiercePharmaAsia (April 26, 2015).
17. NP Taylor, “Asia Regulatory Roundup: Clinical Trials in Focus in China, India,” RAPS.org, Dec. 2, 2014.
18. L. Burkitt, “Scraps Price Caps on Low-Cost Drugs,” Wall Street Journal, May 8, 2014.
19. Jing Li, “China Scraps Price Caps for Most Drugs,” South China Morning Post, May 5, 2015.
20. “Foreign Drugmakers Face Pressure to Lower Prices in China,” May 25, 2015, Bloomberg.
21. S. Wong and D. Pountney, “China Amends The Drug Administration Law and Removes Price Caps for Most Pharmaceutical Products,” Bird & Bird, May 15, 2015.
22. “China Web Pharmacies Would Have Alibaba Vying With Legacy Firms,” Bloomberg, March 29, 2015.
23. Asia-Pacific Council of American Chambers of Commerce, 2014 Annual Report, June 2014.
24. Eli Lilly and Company, Lilly Expands Strategic Partnership with Chinese Manufacturer Novast to Serve Chinese Patients with High-Quality Branded Generic Medicines, Press Release, June 12, 2012.
About the Author
Michael J. Kuchenreuther, PhD, is a research analyst for Numerof & Associates.
Vol. 28, No. 10
Citation: When referring to this article, please cite it as M. Kuchenreuther, “Market Access in China,” BioPharm International 28 (10) 2015.