Despite continued absence of a final conclusion for China’s healthcare reform, the past month has been an inspiring one for the pharmaceutical industry in China with many major local companies reporting high sales and profit growth in the second quarter or the first half.  Although some local analysts suggest that some companies generated parts of their growth from financial investments rather than operations, I would give credit to the stabilizing regulatory environment with NDRC basically terminating its sporadic price cuts and SFDA winding down most of its major regulatory corrections in the past few months.

Sources close to the SFDA told me that the personnel reshuffle within the agency is approaching an end with Zhang Wei confirmed formally as Director of the Drug Registration Department recently. It is said that a number of prominent regulatory officials formerly in the drug sector were moved to medical device related posts, while some officials previously in the medical device field were transferred to take over drug related duties.

The SFDA is making progress on harmonization of Chinese and foreign requirements on new drug approval. It is said that a top Japanese regulator visited the SFDA repeatedly this year for a major harmonization effort which is likely to be concluded soon.

The SFDA recently finished the drafting of implementation rules for the newly-released Provisions for Drug Registration that will streamline the approval process for registration and clinical investigation of innovative new drugs, and significant improvements can be expected in this area.  This forms a clear contrast with the policy and attitude of the Indian government which recently frustrated and angered multinational pharmaceutical companies such as Novartis over the patentability of certain new drugs. 

In a recent consulting session, I was asked by a leading venture capital firm to compare broadly the pharma industry in India and China.  It is an intriguing question indeed – I believe the two countries have two distinctively different paths for development of their pharmaceutical industry (although the Indian government is beginning to modify its approach reluctantly). Indian generally adopts a protective approach for the local industry in order to foster its growth when it is weak, and I must admit this approach has achieved impressive results so far. China, on the other hand, possibly inspired by the old Chinese wisdom of “prepare the nest first to lure phoenix”, focuses more on bringing in foreign technology and investment in order to transform its domestic pharmaceutical industry, thus the country has developed a friendly local business environment for foreign investors, especially for multinational companies.

The choice of their different paths by the two governments is closely related to the political strength of their respective local pharma industry. While India has a very strong local pharma industry lobby that is hard to beat, the weight of the Chinese pharma industry in the Chinese political system has always been insignificant since the beginning of PRC. Compared with its Indian counterpart and other Chinese industries, the development of the local Chinese pharmaceutical industry in the past two decades has been, in my opinion, almost shameful.  But this is not to deem that the Chinese path is without its merit. In fact, I am a firm believer that the Chinese approach has a higher chance to prevail in the long run.  As multinationals become increasingly engaged in China with their high level operations, they will also help facilitate, along the way, the transformation of the local pharmaceutical industry into a powerful player with global competitiveness.

My faith in the destination led by the Chinese path is evidenced not only by the mounting enthusiasm of multinational companies for setting up R&D units in China, but also by accelerating foreign entry into the Chinese distribution sector. Three major M&A or joint venture deals have taken place in 2007 and more can be expected soon.

The latest development in the sector involves the acquisition of a piece of Jointown Group, the third largest pharmaceutical distributor and the largest private pharmaceutical distribution company in China, by a foreign venture capital firm.

Jointown said it had a number of candidates and those who failed to get their hands on Jointown are surely working hard. Will SinoPharm Group, the largest pharmaceutical distributor in China, be a target? We know SinoPharm is now under threat for a state-mandated reorganization under which it may be passed on to China Resources, and it is trying to grow faster through aggressive acquisitions. M&A with a foreign investor may also be a good way out for the company….

Rising foreign investment will definitely help speed up and intensify the ongoing consolidation of the Chinese pharmaceutical distribution, which will for sure lead to another vigorous restructure of the pharmaceutical industry and marketplace.

While the Mandarins of various Chinese central and local government agencies had their thrills in axing drug prices in the past few years, negative impacts are surfacing now nationwide with ordinary Chinese having the bear the pain of drug supply shortage. Many low-priced life-saving drug products are now in short supply and hospitals are frequently forced to seek emergency help from the Ministry of Health.  In Guangdong province alone, manufacturers refused to supply over 1,000 drugs products that were selected in the tender process.

Instead, pharmaceutical manufacturers have been working hard to expand sales of alternative drug products that are not or less affected by the price cuts.

For the same reason, imported drugs, whose pricing structures are not transparent to the Chinese authorities, won the favor of market once again. Drug import by China jumped 32% in the first half while the country’s export grew only 23%. It is hard to predict how long this drug import boom will last, as this can be ruined any minute if the government decides to tighten up regulations on pricing of imported drugs.

RDPAC has done an excellent job recently to persuade the government not to do so – the association helped facilitate a comparative study of international drug prices by the Price Department of NDRC. The study concluded that the Chinese drug prices are on the low end internationally and large price differences between generics and brand name drugs are commonly acceptable in countries/regions that are studied.

Moving to a different subject, a recent policy paper of NDRC indicates the completion of an initial framework for healthcare reform by the agency which will soon be submitted to the State Council. However, it is very likely that such a framework contains only broad principles that are easily to be agreed on by all sides, and the debates on the path and components of the Chinese healthcare reform are likely to continue.

When I asked in private about the likely timeframe for a decision on the healthcare reform plan to someone who I believe can surely answer my question, his response came as a surprise to me - “What is the hurry? It is a vital issue for the country to be worked out carefully…”  Well, it is time for me to re-learn the Chinese art of patience.

Nevertheless, the recent high profile launch of the trials for urban resident basic medical insurance program in 79 Chinese cities (with attendance of Premiere Wen Jiabao and Vice Premiere Wu Yi) does gives us a glimpse of the central government’s inclination on the future healthcare funding model (more details later).

Finally, there is good news to report about Pharma China itself – we inaugurated our first advisory board with nine distinguished leaders of the pharmaceutical industry in China whom we will consult from time to time for trends in the sector, and we are planning to launch a quarterly advisory letter, The Vision, which will be exclusively prepared for the top management of the global pharmaceutical industry.

As always, we try hard to ensure our subscribers to be the first to know and the ones to know the most about important events and trends in the Chinese pharmaceutical sector.