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China sets its sights on life sciences

By Advisor Perspectives
Capital Markets

Governments and public health policy makers around the world have long struggled with providing access to affordable health care while at the same time promoting life science innovation. China is no different. Its pharmaceutical landscape today has been shaped by the government’s quest to achieve universal health care through a national health care system. And the evolving industry landscape and the government’s pro-innovation policies are driving indigenous innovation in its life science industry.

China is a market too large to be ignored—this has long been a saying among those considering doing business in the country. But increasingly, multinational corporations see China as a hub of nascent innovation in life sciences, and have been setting up research and development (R&D) centers for new drug candidates that target global markets. To be sure, there are some challenges. This month’s Asia Insight explores China’s path in this arena.
China’s Pharmaceutical Landscape
It’s hard to overlook China’s pharmaceutical market given its size and growth rate. Public and private expenditure on pharmaceuticals totaled US$76 billion in 2014, and this is expected to reach US$315 billion at a compound annual growth rate of 23% by 2020, which would make it the second-largest pharmaceutical market in the world after the U.S. Both China’s central and local governments have played an integral role in shaping the current landscape of the fragmented pharmaceutical market. The focus on affordable health care has led to the prevalence of generic drugs, which have taken over 80% of the market. Domestic and multinational pharmaceutical companies have pursued very different strategies. Multinational companies have focused on patented drugs and some drug originators that enjoy preferential pricing premiums under the existing drug pricing system. Domestic companies, on the other hand, have not invested much in R&D, and have focused predominantly on making generics.

The most successful domestic companies have focused on branded generics, which are generic drugs marketed under a company’s proprietary brand name. This has been a profitable approach due to the limited scope of R&D investment and price premiums. But generic drug makers often have to participate in government tendering, and face intense competition and government price cuts. They rely on their knowledge of tiered markets and extensive distribution networks to achieve economies of scale.

Essential Medicines
Essential medicines are defined by the World Health Organization as those that satisfy the priority health care needs of the population. In 2009, China’s Ministry of Health published its first list of essential drugs, which are subsidized by local and central governments. China’s fragmented domestic pharmaceutical industry includes approximately 5,000 drug manufacturers, with the top 100 drug makers comprising just one-third of the market. Going forward, the regulatory environment is increasingly shifting against sub-scale inefficient generic players due to the more intense pricing pressure from the expanding Essential Drug List (EDL) and higher compliance costs.

The EDL was initially designed to make medicine more affordable for low income patients, and was implemented at grassroots, mostly rural, facilities. In 2013, the government expanded the coverage of EDL to larger and better-equipped hospitals mainly located in urban areas. It required EDL drugs to reach 40% of Class 2 hospitals and 25% of Class 3 hospitals in revenues to ensure better access to affordable dr

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