Moving to China

Every other MNC pharma company is setting up R&D operations in China. The Chinese Government is also determined to attract big pharma. The controversy over the patent law in India has only added to the phenomenon. However, the move to China can be attributed to various reasons. Sushmi Dey explores

Surveys and predictions say that in the near future Asia will become the centre of activities for the global pharmaceuticals market. This is also evident because the scientific research is becoming exceedingly expensive in West. Consequently, there is a shift of focus towards the East. Moreover, the research base itself is shifting from North America and Europe to Asia. No wonder, India and China are increasingly attracting multinational pharmaceutical companies. A recent report from PricewaterhouseCoopers says, "By 2020 the E7 countries—Brazil, China, India, Indonesia, Mexico, Russia and Turkey could account for as much as one fifth of global pharmaceutical sales".

While India is expected to be in the top ten pharma markets by 2020, China has attracted a lot of pharmacos and FDI of late through its talent pool, science base, quality of potential partners, infrastructure and tax benefits. The trend seems to have only been increasing with the differences in Indian industry on IPR protection. The recent judgement on Novartis' Glivec case has only added to such speculation. In addition to increasing investment in manufacturing facilities, in recent times many multinational pharmacos have preferred China over India for setting up R&D operations. Besides Novartis, GSK, Astrazeneca, Roche and J&J are the other companies to forge with their R&D operations into China market lately.

The growth

"Our focus is driven by patient needs in Chinese markets and our ability to provide suitable answers" - Rajiv Gulati Director-China-India Strategy Corporate Strategic Planning Eli Lilly

From being the 12th largest market a few years ago, Chinese drug market is now the ninth largest and forecasted to become second largest market, overtaking Japan by 2020. China is considered to be one of the fastest growing economies, globally. According to a McKinsey report, between 2002 and 2005, the pharmaceutical market in China grew by 24 percent annually with local company growth exceeding 27 percent. According to Rajiv Gulati, Director, China-India Strategy, Corporate Strategic Planning of Eli Lilly, the trend of big pharma's movement and increase in operations in China is because pharmacos have started recognising the growth of the industry in the country.

"Big pharma has been investing in China for a while now. What you see now is a more investment and acceleration of R&D centres" - Ranjit Shahani Vice-Chairman and Managing Director Novartis India

However, the Indian pharma industry believes that the move towards China cannot be termed as a "sudden trend". Many companies like Eli Lilly, GSK and Novartis have already been present in China for a long time. "Big pharma has been investing in China for a while now, at least since China joined the WTO. What you see now is a more investment and acceleration of R&D centres," avers Ranjit Shahani, Vice-Chairman and Managing Director, Novartis India Limited and President, Organisation of Pharmaceutical Producers of India (OPPI).

While India is extremely advanced in terms of pharmaceutical technology, China represents a large and expanding market, growing technical expertise and protection of intellectual property. According to Gulati, all these factors combine to make it imperative for most pharmacos to have a comprehensive presence in China. Agrees Sunder Rajan, General Manager, Corporate Communications, GSK India, "There are many factors that are considered while making investment decisions. For instance, talent pool, science base, quality of potential partners, infrastructure, tax, size of market, market access, policy environment including IPR and pricing. Not one but all factors in totality are considered to determine the setting up of investments," he asserts.

China offers a competitive advantage in terms of expertise in chemistry and is developing in other areas of discovery and development too. It has emerged as a world class centre for clinical trials and other forms of collaboration in R&D. The country over the years is also developing a pool of enormous scientific talent. However, Shahani asserts that pharmaceutical companies have accelerated their investments in the country as industry conditions have become more favourable following China becoming a member of WTO and its effective endeavours to better protect intellectual property rights.

Although, intellectual property protection was introduced in China much before India in 1993, the Chinese Government has taken a series of steps thereafter with an intention to attract R&D investments in the country apart from boosting the investments in manufacturing. For instance, China strengthened its system in 2006 towards boosting the confidence of foreign multinationals in the country's commitment to IP security. The establishment of the Judicial Court of Intellectual Property and examination guidelines published for court use in mid-2006 are steps by the Chinese Government in this direction.

"Currently, they (Chinese companies) are not doing as well as the Indian generics companies, but this is not for lack of capability. They lack legal expertise and management vision" - Utkarsh Palnitkar Partner-Transaction Advisory Services Leader - Policy & Investment Advisory Services Ernst&Young

"In March 2006, the Chinese Government announced the establish-ment of a new civil court, which will handle piracy on a national level. The Judicial Court of Intellectual Property, which will operate under the auspices of China's Supreme Court, will hear IP lawsuits filed by local and foreign multinational companies," informs Utkarsh Palnitkar, Partner, Transaction Advisory Services and Leader - Policy & Investment Advisory Services, E&Y. According to Palnitkar, the stated intent of China's State Intellectual Property Office (SIPO) to complete a National IP strategy by 2007 and the expected third amendment to China's patent law by mid-2007 also suggests the rationale behind big pharma's move to China.

Plus - minus

For pharmacos, the Chinese drug market stands for an ageing population, increasing life expectancy, easy access to patients for clinical trials and hence a large rural and urban market place. In this regard, the Chinese Government has also effectively taken steps for the improvement in standard of living by providing better healthcare facilities and access to medicines. "The healthcare spending as a proportion of GDP is constantly increasing in China since healthcare is one of the top priorities of the Chinese Government," says Gulati.

However, there is also a rapid growth in population of China which acts as a defining factor of the market. According to Palnitkar, the estimated size of the pharmaceutical market ranges from $6 billion to $20 billion, depending on which figures you go by. While $6 billion may sound like a big number, it represents six Dollars per patient per year spent on drugs when divided by the total population of one billion. Besides, there is a lack of proper health insurance in the country. "Only ten percent of the total population is covered by health insurance, which includes about 30 percent of the urban population and almost nothing in the rural areas," adds Palnitkar. Agrees Shahani, "It is largely a self pay market with some form of insurance coverage. Around 150 million people with basic medical insurance, which is funded by employers or employees and has a reimbursed drug list that helps with payment on drugs," says Shahani. Hence, ensuring patient access to drugs is a major challenge while insurance coverage is limited in the country.

Besides, Chinese drug market is also very fragmented. The market comprises of 70 percent local and 30 percent multinational pharmacos. According to Shahani, leading players only have two percent share. A feature unique to China is the hospital pharmacy account for a majority of prescriptions in the country, as hospitals capture the margin on drugs and use it to subsidise their operations. The large geographical area of the country also results in difficulties for setting up distribution system to make medicines available across the country. Experts also say that although IP protection is improving, there are still gaps in China's policy on data exclusivity and issues with illegal counterfeits.

Pharmacos eyeing

The objective of big pharma's R&D move to China is to leverage the global advantage. MNCs are focusing on both the chronic and specialty therapeutic areas. "Areas like oncology are growing very fast but there are huge unmet needs in chronic areas like hypertension," says Shahani. Novartis set up the Institute for BioMedical Research (NIBR) in Shanghai's Zhanjiang Park in 2006. "We have invested $100 million in two phases in our R&D centre in Shanghai and have a target of recruiting 400 scientists in phase 1," informs Shahani. The company plans to focus this centre on Asian infectious diseases and oncology, especially hepatitis and liver cancer. Novartis has also partnered with Shanghai Institute of Meteria Medica (SIMM) to develop natural compounds in traditional Chinese medicine.

GSK claims to be one of the first international companies to fund pharmaceutical R&D in China and one of the largest investors in R&D collaborative projects. According to Rajan, the company has invested $134 million in China in drug discovery and clinical research. While GSK already has an OTC research facility in Tianjin, it has recently announced the launch of an R&D center in Shanghai, focusing on research in neurodegeneration. "GSK China is currently undertaking clinical trials with the emphasis on cancer prevention and treatment. Current main R&D activity is in chemistry with two companies: Wuxi PharmaTech and ChemPartner," informs Rajan. Besides, GSK has four manufacturing sites in the country which are focused on domestic consumption. The company is also planning expansion of its manufacturing facilities in Tianjin.

Similarly, Lilly has a comprehensive presence in China for the last several years and is now expanding to include other areas too. "Our focus is driven by patient needs in Chinese markets and our ability to provide suitable answers. For example, China has the largest number of diabetics in the world. Lilly not only provides world class insulin, insulin analogues and devices, we do a lot in terms of physician training and patient education, as we do in India too," points out Gulati. Apart from diabetes Lilly has lot of focus on management of infections as well as cancer. The company's business model is based on investment in local companies and local capabilities. Lilly has also developed partners in China that engage in early R&D activities.

However, multinational pharmacos are acting more visionary in their strategies and business models and have a long-term focus. "These companies have not only focused on the geographic turf from sales and marketing perspective, but also have a well-rounded approach to outsourcing of active pharmaceutical ingredients (APIs), contract research, clinical trials, data management, bioinformatics, and collaborative research," opines Palnitkar. And though getting into a collaborative relationship with Chinese pharmaceutical companies is often difficult, it is expected that they are going to mature in the future. "Currently, they are not doing as well as the Indian generics companies, but this is not for lack of capability. These pharma companies currently lack the legal expertise and the management vision needed to move forward in the global market," says Palnitkar.

No wonder China is increasingly becoming a popular base for multinational pharmacos to start their R&D. However, whether it is going to have a detrimental impact on the Indian industry or not is something to see in days to come.

sushmi.dey@expressindia.com