After a tumultuous two years that saw former State Food & Drug Administration (SFDA) head Zheng Xiaoyu executed on bribery charges and confidence in the regulatory system plummet following product safety scandals, China’s pharmaceutical industry stands at a crossroads. An industry plagued by a reputation for producing copycat drugs now has, with the help of foreign investment, a chance to shift towards genuine innovation. But only if Beijing can smoothly institute major reform.
Policy failure
Political scientist Lin Ying, in a soon-to-be-released paper, explains why China’s pharmaceutical industry failed to promote innovation: reliance on state-owned hospitals as the primary purchasers of drug products acted as a disincentive to innovate due to endemic corruption and price-fixing.
While foreign pharmaceutical companies have been active on the mainland for two decades, their presence also failed to help China move up the drug production value chain. According to Ying, foreign R&D centers focused on "early intermediate scale-up and organic synthesis" rather than new drug development. As such, the total R&D investment of 325 large Chinese pharmaceutical firms in 2002 was US$476 million, just over half of Pfizer’s annual R&D budget. As a result, an estimated 97% of the drugs produced in China today are generic.
Recently, however, things have begun to change. Last year, GlaxoSmithKline announced its intention to build a fully integrated R&D facility that will employ 1,000 staff when it is completed in 2010. Novartis has launched a similar project, spending US$100 million on a new R&D facility in Shanghai. AstraZeneca spent the same amount on expanding its China operations in 2006, one year after Wyeth relocated R&D resources from Australia to Shanghai. All of them are working on innovative drug development.
"The growth of R&D operations in China is to do with the restructuring of the global pharmaceutical industry and the problems foreign firms are having in their home markets," James Shen, publisher of Pharma China, said.
The big pharma model is struggling to produce new blockbuster drugs. Figures from Lehman Brothers and the US Food & Drug Administration (FDA) show that despite a 50% increase in R&D spending (around US$40 billion over the 10 years from 1995) new drug approvals actually fell from a peak of just over 50 in 1996 to under 35 in 2007. The problem has been compounded as blockbuster drugs come off patent and Western governments tighten the purse strings on research institutes.
China has a major advantage over Western markets when it comes to conducting clinical trials, a key stage in developing new drugs.
"They have a huge patient population," said Beatrijs Van Liedekerke, associate director of PricewaterhouseCoopers China, "and Chinese people tend not take other drugs that can cloud results." The latter, and the fact that you can recruit patients quicker from a smaller amount of sites, makes conducting trials in China "quicker and easier," despite the SFDA’s lassitude in granting trial approval. In the EU and Singapore, approval is often granted in 60 days. In China it is closer to 12 months. Yet after industry consultation, a new regime should be introduced in 2009 that experts say could cut waiting times in half.
Contracting out
What do Chinese companies stand to gain from big pharma? Although multinational corporations (MNCs) have in-house facilities, they also outsource drug development to Chinese contract research organizations (CROs) and institutions. "Big pharma is looking to small biotech companies for molecules and technology platforms that can facilitate R&D," said Van Liedekerke.
Recent deals include a collaboration agreement between leading CRO Wuxi Pharma and Pfizer to evaluate newly developed compounds. Another top CRO, Shangpharma, works closely with Eli Lilly, while Sanofi-aventis has paired up with the Shanghai Institute for Biological Sciences to develop breakthrough drugs for neurological diseases, diabetes and cancer.
These agreements do not solely revolve around reducing costs. "Cost is one thing, but more important is quality," said Dr Frank Jiang, vice-president of Sanofi-aventis’ China R&D.
Many of the key players are overseas returnees, tempted back to the mainland by the 20% expansion of China’s pharmaceutical sector in 2007. BayHelix, a group of leading Sino-North American life science professionals, has been instrumental in encouraging top scientists to return to head CROs and MNC R&D operations. The two are mutually dependent. The MNCs need access to the lower-cost innovative science, and the CROs require big pharma’s superior marketing and distribution networks.
However, Pharma China’s Shen is sceptical that these CROs will ever break away from the MNCs. "There’s a conflict of interest there. What will the MNCs think of the CROs trying to build their own brand?"
Instead, Shen suggests the returnees may move to domestic companies (or create their own), producing the spillover effect China has been seeking all along. "I have spoken to many returnees working for MNCs and get the impression they are not content," he said.
In the meantime, Chinese firms still struggle to innovate. Even Sibiono Genetech, which developed Gendicine, the world’s first approved gene therapy product, is having financial problems. "We are still growing in terms of trying to export to the international market," said Assistant CEO Wu Yiming.
Local firms are hampered by the perception that they work under lax regulatory controls; the US FDA just announced its intention to open China offices to help support its inspectors back home. However, Beijing is tightening the screw by reviewing its Good Manufaturing Practice (GMP) certification procedures.
"It’s what they should be doing. The certification isn’t granted for life and needs to be repeated regularly," said Van Liedekerke.
China’s patent law is also due to be revised in early 2009, much to the relief of Mark Cohen, counsel at law firm Jones Day and former Senior IPR attaché at the US Embassy in Beijing, Cohen finds the enforcement side of the current legislation somwhat lacking. "Obtaining preliminary injunctions or enforcing final injunctions remains difficult, and damages remain very low," he said. "There is also no system for patent term restoration for regulatory delays in marketing approval that occur during the life of the patent, nor is there an effective system of patent linkage to deny regulatory approval for products that infringe others patents."
A rock and a hard place
The draft patent law has a number of what Cohen calls "causes for concern." The most important of them is the prospect of compulsory licenses. Under a compulsory license, Beijing can compel patent holders to license patent rights to a third party. While such licenses might be granted during epidemics or other public health crises, they could also be issued in circumstances related to general health care and to help domestic exporters. This is a major disincentive to innovate. "No one likes their property taken away from them," Cohen said.
This legal wrangling is being conducted as China stands on the verge of implementing major healthcare reform. According to Shen, the government must reduce the price of drugs sold in hospitals, as the current 15% markup is keeping bottom feeders in business and encouraging corruption.
However, the government cannot do this unless the Ministry of Finance makes a major financial commitment. China is stuck between a rock and a hard place. Cutting prices and enforcing strict patent laws will drive many generic manufacturers out of business, but it cannot encourage innovation without doing so.
How the government manages healthcare reform and the enforcement of laws related to the industry is key to China realizing its potential as a major player in pharmaceutical R&D. As it stands there is much cause for optimism, but there are some hard choices to be made before China can shed its reputation as a manufacturer of low-quality copycat drugs, and cast off the negative image that has plagued its healthcare industry in recent years.
