Corner-cutting drug makers can no longer get away with murder – at least that was the message the government sent down in July. The execution of Zheng Xiaoyu, the former head of China’s State Food and Drug Administration (SFDA) who was convicted of taking bribes to approve drugs, was a decisive move by Beijing.
In recent times, disgraced top officials have usually had their death sentences commuted to jail terms. Zheng’s execution signaled the government’s intent to crack down on illegal activity in the pharmaceuticals sector.
Responding to questions on the situation, an SFDA spokesperson admitted that China “started late and our foundation for this [regulatory] work is weak.”
But by the time Zheng’s sentence was handed down, the beleaguered agency was up to its neck in a far more wide-ranging crisis over product safety.
The problems started in June when US authorities recalled Chinese-made pet food after contaminated shipments were blamed for the death of 4,000 American pets. Then came warnings of tainted toothpaste, seafood and cough medicine – all wholly or partly made in China.
No matter what Beijing did – China’s first five-year plan to improve food and drug safety standards was unveiled and US$1.2 billion was pledged to the cause – things seemed to get worse. In August, US toymaker Mattel and its Fisher-Price subsidiary issued two recalls of around 20 million products made by Chinese sub-contractors due to safety concerns.
This has inflicted considerable damage on China’s international reputation as trade partners question the country’s ability to meet required quality standards across a string of industries. But those involved in the pharma sector are hoping that the bigger the embarrassment, the more effective the regulatory response.
“Is all of the adverse publicity from these safety concerns enough to push things over the edge?” said Ray Hill, general manager of global consulting at health industry consultancy IMS.
“The government is under huge pressure and, from what I have seen, it seems they will crackdown on the [pharmaceutical] manufacturers,” Hill added.
Many of the problems stem from the way in which health care is structured in China. In addition to the SFDA, the ministries of health and commerce, the National Development and Reform Commission, insurance bureaus and the military all have some say over the industry, whether it is pricing, licensing, hospitals, distribution or reimbursement.
“There are so many different players at regional and national level that the coordination is often counterproductive,” said Eric Zwisler, CEO of Zuellig Pharma China, which distributes pharmaceuticals in China for multinationals (MNCs).
“It is very difficult to enforce standards as this has to be done at local level.”
Scattered far and wide
The companies are even more fragmented than the regulators. According to IMS, there are 10,000 drug distributors, 230,000 pharmacies (of which 3,000 are properly certified) in China as well as countless manufacturers.
Beijing has been promising consolidation for some years and, while it appears to be the natural way forward, Hill claims to have seen little progress.
In such a climate, corruption is rife and local authorities go against central government reforms to ensure their GDP is not hit by cutbacks.
All this might seem sufficient to put off the keenest of foreign investors. It isn’t. The Big Pharma heavyweights – Pfizer, GlaxoSmithKline (GSK), Sanofi-Aventis, Novartis, Roche, AstraZeneca (AZ) et al – are spending big money in China.
Clinical trials and medicine materials production were shipped to the country initially because of low cost. But as costs mount and the quantity and difficulty of the research work carried out in China – either at companies’ own facilities or sub-contracted to local pharma firms – rises, other factors become more important.
“Cost is increasingly insignificant,” said Dr Zang Jingwu, head of GSK R&D in China. “What is more important is that domestic companies have huge talent pools and do high quality work.”
These developments are taking place while the US$670 billion global pharma industry is struggling to regain momentum, dragged back by a US market that IMS believes could see negative growth in the fourth quarter of 2007.
By comparison, China’s pharma industry has nearly tripled in size since the start of the decade. Spurred by strong economic growth and a richer, older and more urban-focused population, IMS calculated the market was worth US$13 billion last year and is set to reach up to US$25 billion by 2010.
The 25-30% growth rate posted so far this year hasn’t been seen since the early part of the decade, which industry watchers put down to rising government investment. Although generic drugs account for three quarters of the market, a lot of the gains have been made by MNCs.
Zwisler suggests that Beijing’s anti-corruption drives have steered doctors away from prescribing risky drugs towards more reliable MNC products, while price reductions on a general level have hit generic manufacturers hard. Tighter controls have also been placed on hospital spending and, while demand for generic drugs isn’t falling, the market model has been tweaked in favor of MNCs.
“Hospitals are now limited to just two brands for a particular pharmaceutical chemical compound,” said Zwisler. “This tends to be the MNC that created the original and one generic manufacturer.”
The price is right
The sense is that, after a few years of difficulty, Big Pharma has turned the corner. It is still in its very early days but it appears that higher-end drugs are finally realizing their market in China.
To illustrate that it is possible for high-priced patented drugs to be successful, Hill points to Glivec, a leukemia drug made by Novartis, and Iressa, AZ’s lung cancer treatment. A course of Glivec had a retail price of around US$19,000 in 2005, three times that of Iressa. Yet Glivec still posted sales in China of US$29.6 million to Iressa’s US$31.2 million. More than twice as many patients were on Iressa but the potential market for the two drugs in China is roughly the same.
With the situation also improving in terms of the providing adequate protection for the intellectual property behind these drugs, it would appear that Big Pharma firms have even more reason to be bullish about their prospects in China.
To this end, considerable investments are being made in R&D facilities in the country. While these centers do play well with the Chinese government, which could pay dividends for the companies’ long-term strategies, the principal aim is to better serve the domestic market.
Last year, AZ said it would spend US$100 million over three years on R&D while Pfizer hopes that its total US$500 million investment in the country will see it launch 20 new drugs in China by 2010. Novartis built one of its five global R&D centers in Shanghai and, in June, GSK opened its own facility in the same city.
“What we are doing is setting up a global center for drug discovery, clinical development and global registration,” said Zang. “Among other things, we will focus on therapeutic treatment and degenerative conditions. These are huge areas not just globally but also in China. There are many people with Parkinson’s and Alzheimer’s in Asia.”
According to Hill, this is all part of a strategy that will give China more prominence in the firms’ product portfolios.
“All the big firms are now looking at how they can take their global assets and tailor them to China,” he said, noting how GSK customized its India product range and rose from nowhere to become the second-largest firm in the market.
A general trend in China is the shift from acute to chronic diseases, driven by an aging population and the encroachment of Western habits on traditional Chinese lifestyles. But there are also specific diseases – diabetes, hepatitis, lung and liver disorders, as well as certain cancers, notably those affecting the stomach and sinuses – that are more prevalent in China and Asia than in the West.
Targeting these conditions is a path well trodden by Western boutique pharma firms as well as a clutch of smaller foreign-invested players operating in China.
Dr Christopher Savoie, chairman and CEO of Japan-based pharma firm GNI, points to two US companies – Vertex and ViroPharma – that are both working on treatments for Hepatitis C. He doesn’t believe they would be investing so much if they didn’t have an eye on marketing the drug in China, where the disease affects up to 15% of the population.
“In the US, hepatitis treatments would be considered a niche market but that doesn’t mean to say there aren’t a lot of people in the world who wouldn’t welcome new drugs,” he said.
Filling the gaps
GNI itself, which was scheduled to make its trading debut on the Tokyo Stock Exchange on August 31, has always focused on treating Asian conditions with a view to filling gaps in the market that traditionally Western-oriented Big Pharma does not. Using processes that allow it to reverse engineer cells and develop treatments based on how specific genes interact, GNI currently has drugs for lung inflammation and liver damage in clinical and preclinical development.
“In the past, Western pharma companies have not really cared about the Asia market but this is changing,” Savoie said.
“They think that the big market is Europe or the US; we have taken a contrarian view. We decided to go after a market where there is 30% quarter-on-quarter growth and, after that, maybe there is also a market for the drug in the US.”
For foreign pharma firms in China, developing the right product is just part of the challenge. The fragmented distribution system means that getting the product to the customer is not easy.
“We have people asking us, ‘How do I get my representatives when the sales force turnover in China is 30%?’” said Hill. “The whole supply chain side of things is very complex.”
The situation is further complicated by the current drive to expand into tier -two and three cities. Companies have to promote their products to hospitals, pharmacies and wholesalers in scattered regional markets where the level of wealth and medical information is far removed from Beijing, Shanghai and Guangzhou.
Zuellig Pharma runs supply chains for companies that are not able to do it themselves but Zwisler admits there are limits to what the company can achieve.
“We operate to international standards but as soon as something leaves our hands we can’t guarantee these standards will be enforced. Even in retail pharmacies in Hong Kong, you see drugs stored in rooms that are not air-conditioned. How can you control that?.”
The big picture
Just like the concerns over domestic drug manufacturers, these logistics issues will ultimately be resolved as part of a wider discussion on the structure of health care in China.
The decline of the welfare state has left the majority of people without any health insurance. Ministry of Health figures show that, in 2004, 54% of all health care costs were met by the patients themselves. In 1980, when 90% of the population had some form of insurance cover, this was just 23%.
“Creating a functioning private insurance scheme or a NHS-style, state-funded model is critical,” said Hill. “It is central to a well functioning society.”
Foreign pharma firms have a vested interest in helping Beijing find a workable solution as it will have an impact on their own business plans.
Yet it remains unclear how such a system would operate – such as the balance between tax-linked, social insurance and private insurance contributions and whether it will be centrally or regionally managed – and Zwisler doesn’t expect an answer to come soon.
“Health care will be a never-ending debate in China,” he said.