With global growth in international pharmaceutical sales easing, particularly in the key US market, China’s rapid rise up the wealth charts has given the international drug-making industry a new lease of life.
According to Tony Chen, a pharmaceuticals and biotechnology patent specialist for law firm Jones Day, you don’t need to go very far to see the modern day version of the California gold rush. But instead of a tent city, it is a pharmaceutical development park springing up.
"You just need to visit Zhang Jiang Hi-Tech Park," he said. "Every other month you will see a name brand pharmaceutical life sciences company from outside China putting their name on a new building."
All the big names are here. AstraZeneca, the Anglo-Swedish pharmaceuticals group, plans to spend US$100 million in research and development in China over the next three years, focusing on medicines for the domestic market.
Pfizer, which has invested more than US$500 million setting up plants in China since the 1980s, has established an R&D center in Shanghai with plans to spend US$25 million over five years. GlaxoSmithKine is looking to set up a stand-alone R&D centre and Novartis announced in February it would build an US$83 million medicine material base in Suzhou.
These companies are lured in part by a wealth of returnee Chinese scientists, low research costs and state-of-the-art research facilities, which have established China as an attractive research location. But more importantly, the investment frenzy has been fueled by three years of 20%-plus annual growth in pharmaceutical sales and prospects of much more to come.
According to figures from IMS Health Consulting, pharmaceutical sales in China grew 20.4% to US$11.7 billion in 2005, far outstripping the 7% global growth rate. China is now the world’s ninth largest pharmaceutical market and IMS expects the market to double by 2009 to become the world’s seventh largest.
But multinationals are still behind the eight ball when it comes to China. Not only do they have to contend with the ubiquitous counterfeiters, they are also facing aggressive competition from generic domestic drug makers, which share about two-thirds of legal domestic sales between them.
It is this legitimate competition that is arguably the greatest long-term threat to foreign players.
While some doubt the government’s commitment to cracking down on pirated goods, medicine and pharmaceutical counterfeiting seems to be an exception. As one risk investigator put it, "The Chinese government takes medicine and pharmaceuticals very seriously because people get killed. It’s not like a fake Nike sneaker."
"In China, counterfeiting of any amount of pharmaceutical products is criminal," said Chen. "Consumer products have to reach certain thresholds before it becomes a criminal activity. Before that it is just a violation subject to civil liability. In terms of pharmaceuticals, the threshold for counterfeiting is zero."
Chen said the prevalence of fake drugs in China was mainly a function of primitive distribution channels, and supply would slow as the market matured. In the long term, it is the Chinese patent process – and clamping down on "legal counterfeiters" – that is most important for the pharmaceutical industry.
In this regard, Beijing No. I Intermediate Court’s decision last month to uphold Pfizer’s appeal against a controversial patent board ruling invalidating its Viagra patent was greeted with a sigh of relief by the international drug community.
The ruling at issue, by the Patent Reexamination Board (PRB) of the State Intellectual Property Office (SIPO) in 2004, invalidated Pfizer’s claim to exclusive rights to sildenafil citrate, the main active ingredient in its erectile dysfunction drug. The ruling effectively gave domestic manufacturers free reign to copy and sell the male potency pill in China.
Pfizer said the decision to uphold its appeal, which has since been challenged by domestic drug makers, affirmed China’s commitment to patent protection. "This decision will give businesses that critically depend on intellectual property protection, renewed confidence in the value of a Chinese patent."
In fact, the pharmaceutical industry is already better protected than many others. Pharmaceutical products were included in Chinese patent law in 1993, but unlike other industries there is a clear link between the patent office and the drug regulator.
In 2000, patent linkage was established between SIPO and the State Food and Drug Administration (SFDA), which is responsible for licensing manufacturers, requiring that the SFDA must be satisfied that no patent is being infringed before it grants a license to manufacture and sell a drug. Furthermore, even if a patent has been invalidated by the PRB, it will not grant a license until any appeals are settled.
"Companies that have patents in China can expect very good enforcement through SFDA in terms of stopping competitors from launching competing products," said Chen. "Despite the original PRB ruling, no generic Viagra has been approved."
Price of entry
But IP is not out of the spotlight as China develops its pharmaceutical industry as part of a larger healthcare reform plan.
"The Chinese government’s agenda is quite clear in that they want to develop the domestic industry and they want to develop it to be world-class," said Ray Hill, global head of IMS Health Consulting. "They don’t want to be third and fourth in the business, they don’t want to be also-ran generic players, they want to be bona fide pharmaceutical leaders."
For that to happen, leaders have their eyes firmly set on Western knowledge, which means technology transfers could be the price to pay as foreign drug makers seek increased access to the sector. Hill said multinationals have the ability to use the older molecules and technologies that are not part of their core business to win concessions from the government and a seat at the table to discuss reforms.
"They could clearly give some of those things in exchange for market access and a seat at the table to discuss health care reform," said Hill. "The smartest companies are pushing this pretty aggressively."