China Preparing for Pharma Big Bang: Is this Alarm Bell for US, Euro Pharma Giants?

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. 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 as the pharmaceutical industry that is currently dominated by the developed economies in an attempt to move China’s economy up to the value-added chain. 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.

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 USD 1.5 million, which many of the smaller companies simply cannot pay. As they are unable to meet these costs so they will be forced to sell themselves to the larger companies, this will ensure their market share. Increased market share will allow these larger companies to devote more resources to research and development.

The government is also moving quickly to 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. 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.

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.