Asia: Spotlight: China Sees Increasing Appetite For Innovative Products

China's life sciences industry is at a crossroads, and new commercial models are needed to drive future growth, but a disconnect between corporate strategies may derail execution, a strategic report released at the PharmAsia Summit finds.

On the second Monday of each month, "The Pink Sheet" provides exclusive news and commentary on the Asia biopharma market from the editors of our affiliated online publication PharmAsia News.

SHANGHAI – Although China is mostly a branded generics market, the country’s changing demographics suggest an increasing appetite for innovative products, and most multinational companies’ commercial strategies include a mix of branded generics and innovative products, according to a strategic report released at the PharmAsia Summit Sept. 24.

“The PharmAsia Summit Report – China 2012: Creating Value in a Rapidly Changing Landscape,” surveyed key opinion leaders, and was conducted by The Monitor Group, BayHelix and PharmAsia News.

For more than one-fourth of respondents, China represents the top target as far as global strategies, while 42% said China was the No. 2 and No. 3 priority. Only 2% said China was not one of their companies’ top five priorities. Most respondents were biopharma C-suite executives whose companies’ global revenues were largely derived from patent-protected products, with two-thirds of respondents located in China, while 29% were responsible for Asia Pacific and 36% had global responsibilities.

Five key themes emerged from the survey:

1. China's life sciences industry is at a crossroads;
2. A new commercial model is needed to drive future growth;
3. There may be a disconnect between corporate strategies for China and their execution;
4. China's role in global research and development is changing and firms that develop products in China will be best positioned; and
5. Companies view China as likely to disrupt the global industry over the next five years in drug discovery, first-to-market launches and then exports.

Respondents reported uncertainty regarding which approaches would drive the China market, partly due to a new government focus on biotechnology as a key industry to drive innovation and uncertainty about how that will play out.

The Chinese government's goal is to grow seven industries that represented 5% of GDP in 2010 to 8% of GDP in 2015, and 15% by 2020.

“This goal is not possible,” said Jimmy Zhang, chairman of Bay Helix, an organization for ethnic Chinese who are leaders in the global life sciences industry. Zhang noted that companies should “look outside China to get early-stage products in the U.S. or Europe and bring those into China for lower-cost development and get them approved in the next five years to fulfill that promise.”

Companies such as Ascletis Inc., BeiGene (Beijing) Co. Ltd. and Hua Medicine Ltd. have done just that, he said, noting that innovation in the business development arena will likely continue to grow.

Small and mid-sized companies under financial pressure in the U.S. might want to think about giving up China rights as another option, Zhang suggested.

Commercial Expansion Plans Vary Widely

The big commercial question for biopharmas operating in China is whether they will focus on boosting sales in major cities or expand out to tier 2 and tier 3 cities. Most companies plan to do a combination of both strategies, respondents said.

However, the old model of simply adding sales representatives to grow product revenues will not be enough, particularly for innovative products, where the biggest external barriers were reported, said George Baeder, Asia Life Sciences practice leader for Monitor Group, which tabulated survey results.

Baeder said it would be difficult for companies to expand geographic reach to lower-tier cities and focus on innovation at the same time. He said partnerships are one solution, and recent joint ventures such as Hisun-Pfizer Pharmaceuticals Co. Ltd. and SMSD (Shanghai) Ltd. are one attempt to deal with geographic growth in the branded generics segment (Also see "Dance With Domestic Companies: Pfizer And Merck Look To Broaden Market Access In China Via JVs" - Scrip, 13 Sep, 2012.).

Some MNCs are large enough and should consider spinning out their established products units and take those funds to invest in innovative products, Baeder said, because the potential upside in the future is simply too big to ignore.

When asked what the biggest revenue drivers in China would be for the next three years, the majority of survey respondents said innovative products over branded generics, but most said that a combination of the two would be required for success.

Many also said that China's pricing and reimbursement policies would put additional pressure on branded generics in the future. Surprisingly, even though MNCs selling branded generics are squeezed by pricing pressure, most did not see domestic generic companies as a threat – at least not in the short term.

"I believe that branded generics will still exist for many, many years," said Wu Xiaobing, China country manager for Pfizer Inc. "People always ask the question 'when will the government cut the price of off-patent [drugs] to the generic level?' As long as China has not established the quality, it will be difficult to switch all of the multinational off-patent products to local generics," he said in a survey interview.

Although China has released new GMP regulations, the industry remains fractured and it will take a while before they are on par with global companies (Also see "China Releases New Drug GMPs; Domestic Consolidation Expected To Accelerate" - Scrip, 18 Feb, 2011.). In China, “foreign products are still seen as better,” Lilly’s Zhang said.

Barriers To Growth

The top three external barriers to growth, according to survey respondents, are:

1. Slow product approval (80%);
2. Lack of reimbursement for innovative products (58%); and
3. Measures such as reimbursement caps that restrict sales (33%).

"Competition from state-owned enterprises was ranked as the third-biggest external barrier by non-biopharma respondents; that barrier was ranked much lower – tied for seventh out of nine barriers – by biopharma executives," the report says.

Given China's health care reform goals of providing universal health care to its 1.3 billion citizens, reimbursement for innovative products is not a top priority. Even so, some pilot projects are moving in that direction, such as Guangdong's $2,500 per month reimbursement for EGFRs Tarceva (erlotinib) and Iressa (gefitinib) for lung cancer, which suggests that changes in China's demographics are forcing government to consider some innovative approaches.

The top three internal barriers that hinder success, according to the survey, are:

1. The capability of local teams (38%);
2. A lack of high-quality market insight (33%); and
3. A lack of high-impact marketing programs (27%).

“We’ve built organizations that are very good at selling generic products, but as soon as it requires a level of sophistication that innovative products will demand, some of the skills needed are not in place,” Baeder said.

“Few industries or individual companies grow at 20%-30% annually over an extended period of time without the challenge of creating the people, skills, processes, teamwork and leadership becoming a top management priority,” the report says, pointing to expansion in sales forces as an example. Companies experience high turnover rates because of intense competition.

“China has surprised everyone, including myself,” Eli Lilly & Co. Global External R&D-Asia VP Tony Zhang said. “Industry itself has an R&D problem. When will the pharma market invest in China as much as it does in the West?”