HSM Student Travels to China on a Fuqua Gate Trip

Maria McLemoreI spent the first two weeks in May on the China GATE trip, along with 95 other Fuqua students.  GATE is an opportunity to learn about global business by visiting enterprises operating abroad – on the China trip, we visited both American and international companies operating in industries across the spectrum.  While in China, some students, including more than twenty HSM folks, had the opportunity to visit the Shanghai offices of British pharmaceutical company GlaxoSmithKline (GSK).  At GSK, we learned not only about the company’s business model in China (including some discussion over its recent bribery scandal), but more importantly, how the pharmaceutical industry operates in China.

Pharma in China is flourishing.  As a component of its socialist market economy, the State Council of China publishes five-year plans to outline significant economic initiatives.  The 12th five-year plan, published in March 2011, establishes the “biomedical” sector as one of its seven key industries to grow China GDP.  The plan broadly defines the biomedical sector as anything from small-molecule pharmaceuticals to more complex biological products, vaccines, medical devices, and diagnostics.  Historically, government backing has significantly accelerated the growth of designated strategic initiatives, and the biomedical industry is not expected to be an exception. The central government has pledged to spend 20 billion yuan ($3 billion)[1] specifically on innovative medicine, the cultivation of new varieties of genetically modified organisms, and on the prevention and control of infectious diseases. Since the State Council published the plan, various ministries—including the Ministry of Health, the Ministry of Science and Technology, and the Ministry of Industry and Information Technology—have contributed their own 12th five-year plans to develop the biomedical industry.  The biomedical prioritization is expected to generate 1 million jobs in these five years alone.

However, like any industry, the pharmaceutical industry in China is not without its challenges.  The GSK visit enlightened us to a variety issues borne out of the biotech expansion that present both challenges and opportunities for foreign drugmakers operating in China.  For example, quick growth has overburdened regulators, slowing the approval process for drugs.  The Chinese regulatory agency, the SFDA, is understaffed and underfunded, resulting in a backlog of new drug applications that can take up to five years to be approved.  Current regulatory processes require that all marketed drugs in China be approved by the SFDA (i.e. there is no reciprocity based off approval from the FDA or the EMA, for example).

A second issue is that, in order to be successful, foreign drugmakers must partner with Chinese companies via joint venture.  China’s 12th five-year plan encourages the biomedical industry to look outside China to gain best practices from industry leaders, begetting partnering and consolidation and creating opportunity for multinationals looking to enter or expand presence in China.  China incentivizes multinationals to seek joint ventures simply by the promise of an easier operating environment – it is widely suspected that the Chinese government looks more favorably, in terms of drug approval and reimbursement, upon multinationals operating jointly with local companies. Currently, all the top 20 pharmaceutical companies in the world have set up joint ventures or wholly owned facilities in China, suggesting that market conditions have never been more attractive or competitive.  However, in pursuing JVs, multinational cede autonomy to the partner organization, a challenge for many big pharmaceutical companies that are accustomed to dominating smaller partners.

A third issue is reimbursement for drugs, which continues to be a major problem in China, not only for GSK but for other major pharma companies.  China’s public health insurance programs covers 90% of the population, but coverage is not extensive.  The formularies are particularly selective, and those drugs that do get coverage are often not covered in full.  Over 30% of healthcare costs in China are borne by the patient as out-of-pocket expenses, and prices for drugs on government programs’ formularies are under immense pressure.  This causes prices for drugs that are not covered to skyrocket, and become out of reach for even wealthy Chinese.

Ultimately, the success of the 12th five-year plan for the biomedical industry will depend how well China aligns the viewpoint and needs of its many different stakeholders to foster policies that better support innovation and quality.  Progress could be slow due to the existing infrastructure and the hub-and-spoke nature of Chinese government, however, the eagerness of foreign multinationals to enter China is promising.  The road will not be easy for them, either: they will want to increase their investments across the value chain, step up their core capabilities, and explore creative ways of reaching new customer segments through partnerships.   Despite the challenges, the future is bright and promising growth suggests that the biomedical industry will continue to be a focus, even beyond these five years.

[1] GaBI http://www.gabionline.net/Biosimilars/News/China-s-5-year-biotech-investment-fires-clear-warning-to-US