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China: a dangerous game that pharma must play

Published on 01/09/14 at 08:40am
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Set to be the biggest country for pharma growth in the 21st century, with rising levels of chronic disease, an ever-growing ageing population and an increasing hunger for Western medication, China undoubtedly presents a tantalising opportunity to the world’s pharmaceutical players.

However, while big pharma has much to gain, the Chinese market is no pushover, thanks to an attentive government, strong local competition and, among other issues, ongoing decreases in the prices of drugs.

A window into Chinese healthcare

The Chinese government provides minimal funding to hospitals, which are then responsible for balancing the books themselves, says a spokesperson for a Europe-based global research-driven pharmaceutical company, who has chosen to remain anonymous given the sensitive information he is imparting.

Although Chinese hospitals exist in different tiers and levels of hospitals, they do not operate a formal referral system and patients are able to attend their choice of facility.

Rather, the spokesperson tells Pharmafile: “Hospitals tend to ‘keep’ patients as they are their ‘clients’.” Meanwhile, those patients with medical coverage can visit appointed hospitals. That said, if the fixed government funding cannot cover the actual expenses, hospitals have to bear the excess expense.

In addition, doctors receive bonuses from departmental profits, which are also generated from pharmaceutical products and diagnoses, among other options. With this in mind some pharma companies offer a cash rebate to doctors to increase their product prescriptions. 

“Some increase the retail price a lot, so as to leave a margin to the stakeholders in between, for instance distributors, hospitals, pharmacy, doctors, and also those pharmaceutical companies’ promotion fees etc.,” he says.

“Some doctors may prescribe or ask the patient if they can perform an unnecessary treatment or diagnosis, in order to get more advantages from the vendors,” he adds.

One outcome of this approach is that some patients become infuriated at having to pay for expensive drugs at low manufacturing costs, while other drugs can even be unnecessarily prescribed.

Another outcome is that those patients who have already visited many hospitals but are still not satisfied with the treatment of their diseases tend to be very impatient by the time they ultimately visit larger hospitals.

In addition he notes: “Doctors may prescribe stronger medication in order to settle the symptoms or problems quickly – even when such stronger medication is supposed to be used at a later stage,” he says. “Then, when the disease deteriorates, doctors may run out of treatment methods.

“In my company’s experience, as its product pricing is relatively high-end, some patients and stakeholders simply do not believe that the doctors who are prescribing our products have no cash rebate.”

The firm’s approach is to ensure patient consent: that healthcare workers explain why its products are recommended, and that patients are asked to think before committing – with the result, according to the spokesperson, that the organisation has seen very few disputes in recent times.

Diseases and conditions

In today’s China, the most likely direction for big pharma to take is in tackling chronic diseases, such as cancer of the colon and oesophagus, as well as hypertension, diabetes and respiratory diseases such as asthma, rhinitis or allergies.

Many of these diseases come hand-in-hand with economic development (and the rise of the middle class) and are potentially huge areas of development for Western pharma companies, especially with a population of 1.35 billion, and ever-growing.

According to Patrick Flochel, the global pharmaceutical leader at consultants Ernst & Young (EY), China’s most burdensome disease areas are rising rapidly because of income, ageing and diet, not to mention the shadow cast by smoking and high levels of pollution.

The country has been impacted by its increasing ageing population and also its ‘one child’ policy, Flochel explains.

“In families whose child died in adulthood, parents are left with none of the caregivers who traditionally looked after them, and in terms of healthcare and the increasing life expectancy of people, this will have an impact for at least the next 20 years.” 

One means of tackling this is via private insurance for specific diseases, such as that operated by Swiss cancer drug specialist Roche, together with insurance firm SwissRe.

“This has reached very large numbers of people in just 18 months, and has also created a market for modern cancer drugs,” he says.

Eric Althoff, the head of global media relations at Novartis, adds that all populations of developing countries which continue to rapidly grow in both size and age are facing unprecedented health challenges.

“This is particularly apparent in China, where 85% of deaths are caused by chronic, non-communicable diseases, such as cancer and heart disease, compared to 63% worldwide,” Althoff says.

China sees 3.12 million new cancer cases each year and, according to the National Central Cancer Registry under the Ministry of Health, there has been an 18.74% incidence rate of lung cancer.

Additionally, China has the largest diabetic population in the world: 90 million Chinese currently suffer from diabetes and by 2030, 40 million more citizens will have the disease.

“To meet these rising numbers, Novartis and other healthcare companies are investing heavily in research, prevention, diagnosis and treatment of these conditions,” Althoff says.

‘Off-the-scale’ growth lies ahead

Given the widespread assumption that China is set to be the biggest country for pharma growth in the 21st century, big pharma is increasingly turning its focus on the opportunities it presents.

China is positioned to become the second-largest pharmaceutical market, after the US, by next year, according to healthcare analysts IMS Health; meanwhile, by growing an estimated 15% to 18% annually, the organisation says its market is expected to reach $155 to $165 billion.

Further research by the same organisation indicates that emerging markets such as China are projected to make up 30% of global medicine expenditures by 2016, spending $35-$40 billion on pharmaceuticals alone.

“This trend is already reflected in our Chinese business: in 2013, Novartis’ net sales increased 23% in China, and the country now ranks as one of our top ten markets,” Althoff says.

“At Novartis, we see great opportunities for further growth in China – we train local talent in the sciences and are putting significant investment into R&D in the country, as well as collaborating with local partners on innovative research and drug discovery methods – and this will help us provide better care for future generations of Chinese patients,” he explains.

A prime example of this is the Novartis Institutes of BioMedical Research in Shanghai (CNIBR), where Novartis has committed to invest over $1 billion for a new, state-of-the-art R&D centre for CNIBR.

Currently, CNIBR’s research concentrates on gastric cancer and hepatoma (a primary cancer of the liver caused by HBV virus infection), which are indigenous to the Chinese population. Another focus is lung cancer, which affects about 19% of Chinese.

“CNIBR has also created a cancer model platform, which is useful for discovering biomarkers and profiling pre-clinical drug candidates in our oncology pipeline,” he says.

“Furthermore, we are researching treatments for diseases associated with ageing, which are increasingly afflicting the Chinese population: we’re using the principles of stem cell research to explore regenerative medicine in areas like hearing loss, obesity, and sarcopenia [loss of muscle mass due to ageing].”

The company’s investment in CNIBR is boosted by partnerships with Chinese universities and hospitals to collaborate on research and drug discovery.

These include the Novartis-Fudan Joint Research Laboratory with Fudan University, the goal of which is to develop disease models whilst discovering novel drug targets by using new molecular genetic techniques.

Many rivers to cross

Despite the copper-bottomed opportunities presented by China, significant challenges still exist not only at present, but also in the years to come. Current corruption charges are unarguably being taken seriously in terms of pharma confidence in China, and this includes allegations against GSK, Novartis, Lilly among others.

While all interviewees were predictably reluctant to discuss this topic, Novartis’s Althoff says that China is one of the fastest-growing markets in the world for the pharmaceutical industry, and a fair and transparent business environment is vital to that continued growth.

“Novartis remains committed to its long-term presence and investments in China and is also committed to enhancing patient access in the country to our life-changing and innovative medicines,” he says.

As regards other challenges, the anonymous spokesperson forecasts that patient affordability will keep increasing and healthcare reforms will continue to proceed, while drug prices will continue to decrease.

He notes that medical coverage will continue to increase in terms of availability and coverage, as will the social status of doctors – and their income – accompanied by further challenges to doctor-patient trust. The decrease in drugs prices poses a challenge for the entire industry, he adds.

“We need to have more new products to sustain growth: however, registration requirement is getting more demanding, and the cost of new product registration is therefore increasing, especially for imported products.”

One knock-on effect, he predicts, is that local pharma will become more competitive in this new environment. Meanwhile EY’s Flochel notes that, as with most emerging markets, China is proving more difficult than it was perhaps anticipated a few years back.

This is because it is coming to express what it wants out of pharma in terms of how it wants to regulate or price, or how much it is prepared to pay for the medicine being imported by multinationals into the country.

But Flochel admits that: “China is different from most other emerging markets.”

He goes on: “If there is one country that can develop a strong pharma industry, it is China because of its talent pool, its magnitude and the scale of the country, and also because of its attractiveness to scientists as it already has scientists there.”

As with other markets, tough issues are likely to include increased pricing pressure – especially given the impact of the many price cuts which took place between 1997 and 2011.

In this period, drugs prices were cut almost 30 times: meanwhile, imported drugs were cut by as much as 35 times in just one year (in 2011). In addition, most products subject to price cuts in 2010 were international brands, driven by the Chinese government’s desire to build their own industry.

“The government wants its own companies to be more in line with international standards, so it is pushing for quality and it is also providing some incentives to attract and develop R&D,” Flochel says.

Another approach which is piling up the pressure is the expansion of price control, with an essential drugs list which includes around 800 drugs, of which 500 are Western medicines, and details specific on low cost drugs.

“On the opposite side, there is a differentiated drug pricing policy to compensate for those who make specific efforts to demonstrate their drugs’ safety, quality record and drug surveillance systems,” he says. “All of this plays on both sides – pushing for enhanced quality and keeping prices at bay.”

One tough issue is that of re-establishing trust between the government, doctors and pharma companies. Changes to the healthcare systems lie ahead, such as the way in which the government runs hospitals and how they are asked to perform their tasks and services to the public.

As with many other industries in China, such as technology or the auto industry, Western pharma already faces increasingly stiff competition from local players and this is unlikely to stop given the Chinese government’s belief in local industry, backed by very strong industrial policy.

“Experience gathered in biosimilars [difficult-to-make copycat versions of biologic drugs] is likely to be significant, as the majority of the biosimilars commercialised in the world are in China,” Flochel explains. “For example, roughly half of the genome sequencing machines in the world are around Shanghai, which will reinforce local R&D.”

Challenges, yet opportunity

Despite such challenges, it is still viable for pharma to expand in the country. While some companies such as Ireland-based Actavis, have announced that they are moving out of China, Flochel says that most companies with a large portfolio will find their way through and adapt to the changes in its healthcare market.

“Given the growing economy, the fact that the middle class is becoming vaster every day, and given the real commitment of the Chinese government, contrary to many other emerging markets, to developing universal healthcare, this is a very attractive market,” he says.

“The pharma market in China has been growing at a very significant rate of around 15% or so, and this is forecast to continue for years to come.”

Big rewards

In essence, the challenges of China’s big economy and the chasm that still lies between conditions in its rural provinces and its burgeoning cities, mean that doing business here may be complex.

However, the government’s willingness to ensure social peace incorporates a commitment to providing adequate health to its citizens, for example by using technology to provide remote healthcare to far-off villages.

Ultimately, says Flochel, the big advantage of building an infrastructure is the opportunity it offers to forego mistakes that were made in Europe and instead build something that uses the latest technology. China also offers manufacturing companies a number of immediate benefits.

Juicy carrots include lower costs for local and/or neighbouring markets and tax incentives to perform R&D, which are particularly competitive in comparison to Western markets.

Finally, the advantages of carrying out trials in China are not to be sniffed at, given the dual advantages of a large, treatment-naïve population and a desire for drug trials for the Chinese market to be carried out in the country.

“This is proving to be an advantage as there is faster recruitment for trials,” Flochel says.

Reaping the benefits

In order to reap these benefits, pharma industry players are advised to align themselves with the rules of the region they are doing business in. “At a central level, the government issues policies for the regional governments to implement,” Flochel explains.

“It’s therefore very important for pharma companies to really understand the central government’s real objectives and to be aligned to the local environment,” he says.

Companies can also benefit from paying close attention to the central government’s multi-year plans, which spell out key goals and provide a blueprint for future objectives.

The overall principle, it seems, is to do the right thing, modify your strategy to be aligned with the growth that the government wants, identify regions that they want to push or where populations are assembling, and respect rural areas which are big areas of focus for the government.

In addition, rather than enter the market with a product-driven focus, pharma companies are advised to focus on bringing solutions to healthcare issues.

In a country like China, keeping population at the heart of the company is essential. “Pharma companies need to demonstrate that this is what they want,” he says.

Susie Lunt

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