China: The Future Of Pharmaceutical Industry Innovation?
Rachel Howard, associate director of the Research Partnership
I recently visited a London art gallery in which one of the so-called Old Masters had been replaced by a “Made in China” replica. The gallery invited members of the public to try to identify which painting was not authentic. Although in the West replica art is typically denigrated as “fake,” perceptions are very different in China, where such art is considered aspirational. The exhibition made me think about the parallels between the art world and the pharmaceutical industry, in terms of perceptions of Chinese-made drugs versus Big Pharma.
The most obvious parallel to draw would be counterfeit pharmaceuticals originating from China. This is a business globally estimated by WHO to be worth $75 billion US dollars a year and rising. Counterfeit drugs are a huge problem in emerging markets and China is no exception. Outside of the art world, the country already has a long-standing reputation for producing inferior and counterfeit goods, from imitation Louis Vuitton bags to copycat smart phones.
As with the replica painting in the gallery, counterfeit pharmaceuticals originating in China are often expertly copied, right down to the writing on the pill – to the point where only labs are able to distinguish between real and fake. However, unlike the benign replica painting, these drugs result in negative patient outcomes, sometimes even death. Given they are trafficked globally, their production is a regulator's nightmare, and China's government is desperate to shake off the negative reputation the counterfeit drugmakers have caused.
Even Chinese-made pharmaceuticals that are genuine often face questions over their quality. When conducting market research in China, we frequently encounter physicians who avoid, or are at least suspicious, of locally manufactured pharmaceuticals, with an underlying attitude that “West is best.” There is an evident hierarchy of perceived quality of pharmaceuticals, from imported to joint venture to domestic.
An example of physicians' distrust of locally-made products would be the anti-TNF biologic treatment YiSaiPu (etanercept). While the molecule, manufactured by Shanghai CP Guojian Pharmaceutical Co., would be unlikely to meet the international standards required of an etanercept biosimilar, it is granted the same generic name as the originator, Enbrel, and is approved to treat many of the same indications by the Chinese regulatory body, SFDA
As a result, physicians often have little choice but to prescribe YiSaiPu to patients in need of a biologic, because of its lower cost and more favourable reimbursement listing in many provinces. This makes it one of the country's most widely used biologic treatments. However when free to choose, or where patients can afford to pay more, many physicians say they would prefer to prescribe international, branded biologics such as Enbrel with its perceived higher quality and guaranteed efficacy.
It is no surprise, then, that branded generics, manufactured by “prestigious” western pharmaceutical companies, have found a place in the Chinese market. Despite facing intense cost pressures, branded generics marketed in China are typically associated with uniform specifications, rigorous testing and stable doses. While level of concern about generics varies by type of medication, these are qualities physicians often feel far from assured of when prescribing local generics. Eli Lilly are among the pharmaceutical companies to have capitalised on this need, pursuing a joint venture with Chinese pharmaceutical company Novast Laboratories to create a platform for Lilly-branded generic medicines.
However, times are changing. It is widely acknowledged that the pace of China's development over the last few decades is without parallel in modern times. In December 2014, China overtook the US to become the world's largest economy. While this figure is somewhat misleading (China's much bigger population size means it still has a long way to go to catch up with the US economy in per-capita terms), the fact remains that China is on the rise. Increasingly, this is being driven by genuine innovation, as opposed to the examples of replication discussed earlier, which it seems the rest of the world more commonly associates with China.
Evidence of innovation in China is most obvious in consumer start-up industries, notably phone apps and e-commerce. This is exemplified by the online marketplace Alibaba, which last year registered the largest IPO in history. However the thread of innovation is increasingly seen among China's largest multinational companies. Huawei, the technology giant headquartered in Shenzhen, has been said to epitomise the rise of innovation in China; while shaking off a “copycat” image, in recent years the company has claimed numerous technical breakthroughs, such as super-thin smart phones. These innovations increasingly position it as a pioneer at the cutting edge, as opposed to a copier or a follower.
To what extent is there evidence of a similar innovation trend in the pharmaceutical industry?
China's pharmaceutical R&D industry has hitherto been held back by lack of expertise, a limited talent pool and a shortage of manufacturing facilities. Another key challenge has been the slow review process of the SFDA, which results in China lagging behind other countries. A recent analysis found that Chinese tourists visiting Japan over the Lunar New Year holiday spent more on pharmaceutical products than anything else. While this is partly driven by the numerous scandals involving Chinese-manufactured products leading to quality concerns, it is also the result of the SFDA's incredibly slow approvals, which mean many innovative drugs are not yet available in China.
While the blockbusters of today remain almost universally developed by drug manufacturers headquartered in the US, EU and Japan, there are certainly rumblings of a trend towards global pharmaceutical companies establishing R&D capabilities within China, as opposed to simply aiming to maximise their commercial opportunity in the market (something we have long witnessed within our emerging markets team, with interest in China at a continually high level among our clients). Sanofi, Novartis and Merck are among the big names to have established research hubs in China. More recently, Eli Lilly have entered into another partnership, this time with China's Innovent Biologics, who are investigating a number of proprietary monoclonal antibodies and rapidly raising their profile in the West.
However the Chinese government has also made concerted efforts to incentivise a domestic life sciences industry. Within the industry, there has been a general shift away from state-run conglomerates to privately-owned companies. With foreign pharmaceutical companies operating in China facing increased scrutiny, the country's longer-term potential for innovation may be greater among these private domestic companies attracting venture capital funds than global pharmaceutical companies setting up local R&D sites or pursuing strategic alliances.
For example, China has already contributed a great deal to DNA sequencing. The Beijing Genomics Institute, which accounts for about half of the world's global genetic sequencing capacity, has been at the forefront of advances leading to the reduction in cost of genome sequencing, to the point where it is much closer to being within reach of being incorporated into standard medical care. OrbiMed, a biotech investor, has pledged $300 million for a venture capital fund across Asia, with China a designated key market. This fund has a focus on diseases that are common in China, such as gastric cancer, and takes advantage of the lower cost of R&D in China relative to the West.
Perhaps China's greatest potential lies in the space somewhere between innovation and replication – biosimilars. With neighbouring South Korea a frontrunner in the booming biosimilars industry (the country's manufacturers are expected to capture 22% of the global biosimilars market by 2020), Chinese companies such as Henlius Biotech and Innovent Biologics (of the recent partnership with Lilly) are aiming to follow suit and claim a stake in this increasingly lucrative industry. This will involve developing true biosimilars, following more rigorous processes than in the development of YiSaiPu and other locally-manufactured biologics.
In conclusion, while China is undoubtedly a master of fakery and imitation in industries as diverse as the art world and pharmaceuticals, there is increasing evidence to argue that the country cannot be dismissed as lacking in originality. While it is premature to expect China will pose a serious threat to the well-established R&D facilities located in the US, Europe and Japan, signs that the “Invented in China” trend is expanding beyond consumer industries and into healthcare mean global pharmaceutical companies cannot afford to be complacent. For us as market researchers, it will be interesting to see if increasing domestic innovation will be successful in shifting physicians' and patients' perceptions of quality away from a preference for trusted Western brands in favor of domestically manufactured alternatives.
Rachel Howard is associate director of the Research Partnership