March 5 was an edgy day for Pfizer senior executives when they met the investment analysts to discuss future growth plans and prospects of the company. As CEO Jeff Kindler gave his pep talk, Pfizer?s stock plunged within spitting distance to the 52-week low of $21.56 - a sure indicator of investors' grave concern over its upcoming patent expiration of Lipitor, which had sales of $12.7 billion in 2007.

Rising importance of China for big pharma companies

Desperately trying to calm investors, Pfizer prepared a robust plan to restructure and seek global growth. While Asia is in the heart of this plan for both R&D, manufacturing outsourcing and for future market growth, China is by far the driving force behind Asia. Pfizer is counting on China to deliver a rising share of its future growth. In order to achieve the goal, the company plans to expand to 650 Chinese cities from presently 110. 

Pfizer is not alone. All pharma giants are now facing the same challenges of expiring patents of their blockbuster drugs, rising numbers of product failures and recalls, unsatisfactory R&D productivity and mounting pressure from governments of developed nations, especially the US government, to cut healthcare costs.

It is my firm belief that China is now of long term strategic importance to MNCs – not only does the country offer the largest emerging market, but also it is a stronger supporter of big pharma?s model of drug innovation and IP environment. Besides, it offers abundant talents, skilled workforce and a strong industry and overall infrastructure for R&D and manufacturing. Putting political ideology and bias aside, China makes a perfect candidate to be one of the future nesting places of pharma MNCs. 

Coming back to the present time, we have leading big pharma companies report their high growth in China last year with Bayer Schering Pharma (+47%) leading the league in terms of growth rates.

With the regulatory and market environment becoming increasingly stabilized and the uncertainties over the future healthcare reform easing somewhat, MNCs such as Pfizer are believed to be brewing for another major expansion in the country. They will call for entry and expansion into many new market segments such as lower tier cities and rural areas, the community healthcare market, the OTC market, off-patent/generic drugs and vaccines.

Leading MNCs are also found to be accelerating R&D relocations to China while closing down some of their other global R&D locations as seen in the recent closures of Japanese R&D sites by Pfizer and GSK. MNCs are hoping to step up manufacturing outsourcing and their own production capabilities in China to supply international markets, but given the somewhat overblown quality concerns over Chinese drug exports at the present time, such plans may have to be postponed or understated.

The Chinese pharmaceutical formulation sector saw revenue growth of 16.9% last year, which was lower than that of the API and biological product sectors (+21.6% and +21.4% respectively). However, the revenue growth of formulated TCMs was even lower at 14.3% in the same year.

By comparison, the profits of the Chinese pharmaceutical formulation sector jumped 41.7%, although it also underperformed by this measure compared with the API and biological product sectors. The huge profit growth was attributable to the sharp rise of investment income from the stock boom in 2007 and investment income was excluded, local companies saw only moderate profit growth.

Many local companies continue to face significant market and pricing pressures, and more small and medium sized companies are likely to be closed or consolidated in 2008. As a result of tough domestic market environment, most local leading companies have started to embrace international business as their key future growth area and many are stepping up investments into R&D and facility upgrading in order to improve their local and global competitiveness. 

SFDA claimed initial victory at a recent official drug registration conference over its regulatory corrections in drug registration, but the agency is still backlogged with 20,000 drug registration applications.

In addition, it faces the daunting task this year of re-evaluating and re-approving around 100,000 existing drug approvals issued between 2002 and 2003. With these in mind, it is unrealistic to expect the SFDA to move faster on product approvals this year.    

Some new regulations including those covering the special drug approval process and technology transfer registration are expected to be issued in the first half of this year. The earlier is expected help expedite new drug and clinical study approvals, while the latter will alleviate the ban on contract manufacture and domestic sale of approved imported drugs. Both regulations are anticipated to benefit the R&D-based companies considerably.

Traditionally China does not regulate companies that produce intermediates, APIs or drug formulations for export. In the case of intermediates, which are often regarded as chemicals, there is no control over such products whether they are for domestic sale or export.

With Baxter?s heparin ADR incident in the spotlight recently, SFDA is now under considerable pressure to begin regulating China's drug export in collaboration with foreign government agencies. While the SFDA stressed that by international practice foreign governments should bear the responsibilities of "safeguarding the legality, quality and safety of active pharmaceutical ingredients", the agency has been fully cooperative with its US counterpart in investigations, and agreed in February to experiment on a small scale export control system for drugs. In March, the Chinese Pharmacopoeia Commission headed by SFDA Deputy Commissioner Wu Zhen signed an MOU with US Pharmacopoeia for a range of collaborations including standard setting. In addition, the USFDA announced that it now has the US government approval to station eight field office personnel in China plus an unspecified number of local employees.

I was recently interviewed by Reuters about my reflections on the Chinese heparin incident during which I suggested it would be unfair to lay all the blame of export drug safety problems on the Chinese government and over-expecting it to produce miracles single-handedly. I pointed out that in this incident the USFDA was supposed to have inspected Changzhou SPL, the producer of the contaminated heparin raw material, but it failed to do so due to an error with names of Chinese manufacturers. In addition, it should be noted that Changzhou SPL is the subsidiary of a US company which followed production processes and protocols provided by the US firm.

While recent collaborations between China and the US will help improve quality control of Chinese drug exports, there is no promise of quick fixes to the emerging cross-border drug quality problems in the age of global supply chain. But they represent a good beginning in the development of a new cross-border drug safety system participated by all stakeholders of the global supply chain including the Chinese government, Chinese exporters, foreign importers and manufacturers, and foreign governments. In order to safeguard the country's image as a reliable supplier of healthcare products, there is no doubt that the Chinese government must take more initiative in finding creative and effective means to improve quality control and curb counterfeiting.

As a simple starter for the Chinese government, it should begin regulating the English names of its enterprises which are not subject to any registration requirements now. During our development of SNAPI, a database-driven intelligence of Chinese API producers and products, getting the English names of Chinese exporters standardized was a mind-boggling challenge. I can fully understand why the USFDA stumbled over a seemingly simple thing.

SFDA loses cabinet status and some important jurisdictions

The downgrade of SFDA did not come as a surprise to me, except that I didn't expect it to take so long. SFDA was formed ten years ago with the State Pharmaceutical Administration of China (SPAC) absorbing the Drug Administration Department of the MOH and a part of the Ministry of Commerce.

Looking back at the government reorganization that led to the formation of SFDA ten years ago, I believe two rationales were determinant factors then: 1) the emphasis of the Chinese government was economic development back then and the SPAC was the lead industrial administration agency responsible for the pharmaceutical industry, so it was important for it to take the lead; and 2) the government desired to set up an drug regulation agency modeled after the USFDA to step up regulation of the pharma industry.

In the ten years that followed, the historical links of the SFDA and some of its officials with the local pharmaceutical industry often contradicted and caused conflicts of interest with its roles as an independent regulatory agency over the industry. These contradictions and conflicts of interests were partially responsible for many subsequent failures of the SFDA.

The focus of the Chinese government has now shifted to building a harmonious society, and in order to achieve that, it is of paramount importance to ensure food and drug safety through effective and streamlined regulation of the healthcare industries.  Merging SFDA into the MOH will not only serve the above purposes, but also help the state better contain the rapidly rising healthcare expenditures. In addition, the reorganization will make the SFDA almost an exact copy of the USFDA, which also does not have full cabinet status but rather an agency under the Department of Health and Human Service.

It is interesting to observe just how much influence the United States has on China in so many aspects including China's economic system and government. For the Chinese government, I believe it is perfectly logical for it to model its healthcare regulatory agencies after the US - after-all its healthcare system is also modeled after the market-oriented principles of the US system and its pharmaceutical industry increasingly resembles that of the US. Despite the ongoing healthcare reform which stresses government leadership in basic healthcare, the majority part of China's healthcare will remain to be privately funded and market oriented.

In my opinion, the Chinese government would be thrilled to see a much bigger role of private insurance companies in healthcare (as in the US), but unfortunately the country's failure to reform its hospital system bottlenecked the vast potential growth of the healthcare insurance sector. The absence of a strong private health insurance system forced the government to step up its role and funding in healthcare.

Well, enough speculations - the said government reoganization is not going to change SFDA's independent agency status, except it is now under the Ministry of Health, rather than the State Council.

It is also unlikely that SFDA will need to introduce any major internal restructuring because most of its jurisdictions are intact, and consequently no major personnel reshuffles are anticipated. Besides, SFDA Commissioner Shao Mingli is likely to be anointed the Vice Minister of Health if he is to stay on with his current position. 

The MOH is expected to have overwhelming influence over the SFDA in future especially in areas of regulations, policy and personnel appointments. It will take away some of the most important responsibilities from the SFDA including the responsibilities for formulating policies and regulations, and the development of the national essential drug system.

Although minimal restructure is anticipated at the central government level, this reorganization might trigger wider local government reshuffles. Local food and drug administrations used to be directly under local governments, but a downgrade of the SFDA may mean that they will have to report to local departments of health in future. MOH and SFDA said that they are now working on the reorganization plan for local food and drug administrations.

Consolidation of the SFDA into the MOH may lead to some potential regulatory and administrative benefits including 1) policies and regulations in medical and pharmaceutical sectors become increasingly harmonized and consistent; 2) enforcement of drug regulations becomes more effective and streamlined in both sectors; 3) bureaucracies are reduced and administrative efficiencies improved, and 4) the regulatory compliance burden of pharma companies is reduced, while the regulatory environment becomes more transparent.

For the Ministry of Health, taking over SFDA might just be the first step of building a super government agency overseeing all aspects of healthcare. It is believed that the MOH also hopes to take over the jurisdiction of national basic medical insurance programs from the Ministry of Labor and Social Security (MOLSS), its biggest opponent in healthcare reform debates. The MOH now already has the jurisdiction over rural cooperative medical care system.

Although there are continuous debates in the backroom among officials of various agencies which are holding up the finalization of an overall healthcare reform plan, we now see progress on several fronts and it seems certain that the healthcare reform will move forward in these areas ahead of the publication of an overall healthcare reform plan.

Firstly, reform that was already initiated in community healthcare. Various reform schemes, such as drug sales zero margin policy, separated government control of hospital income and expenditure, government purchase and supply of essential drugs, and medical service integration between community healthcare facilities and public hospitals, will be pushed forward as government increases its funding for this sector significantly in 2008. Some companies, such as Novartis, are already taking the lead in developing strategies and exploring opportunities of this new market segment. 

Secondly, the State Council already decided to expand the trial of the urban resident basic medical insurance program to 229 Chinese cities this year, which covers more than half of the Chinese cities in total. The government wants to enroll at least 50% of all the residents in these cities who are qualified for the program before the end of 2008. This expands the base of people relying on the reimbursements of basic medical insurance programs and the trend will continue until 2010 when coverage reaches all city population.

Thirdly, the establishment of the national essential drug system, a core component of China's healthcare reform, will also not wait for the conclusion of the overall healthcare reform plan. According to the SFDA, the system will be launched in June 2008 on full scale without any trials or experiments, while the draft national essential drug list will be released in April for public comments. Following the recently announced government reorganization, the Ministry of Health (MOH) will be in charge of the development of the national essential drug system. It remains to be seen if this change will delay the introduction of the system, but I suggest companies and industry associations begin communicating with the MOH over the subject area immediately in order to exercise some influence. The national essential drug list is likely to have an overwhelming impact on the future reimbursement list. 

Fourthly, the Chinese government seemed to have elevated, in recent months, its efforts to promote the role of traditional Chinese medicine in prevention and treatment in hopes of fostering the growth of TCM and avoiding over-reliance on foreign companies for new drugs. Policies such as those allowing resident TCM doctors to practice at retail pharmacies and encouraging home treatment by TCM doctors are likely to boost the use of traditional Chinese medicine products in a long run. This development may have the potential to take away some market shares from pharmaceutical companies.

Lastly, the reform of public hospitals will begin with decentralizing the administration of local level hospitals to local governments with the MOH increasingly taking the role of a regulatory agency over the medical industry. In addition, experiments will be conducted to streamline and integrate the medical services of public hospitals and community healthcare facilities.

However, large scale financial reform of public hospitals is stalled at least for now as the financing mechanism of these medical institutions remains to be the center of debates among officials and scholars. In addition, the previously proposed reform scheme to separate hospitals from their pharmacies is also unlikely to be implemented on a large scale anytime soon.

With large hospitals mostly left intact from reform, the core businesses of pharmaceutical companies are not expected to be widely affected by the healthcare reform this year. However, some local governments, such as Jiangsu province, may take the lead in reforming their local hospital systems, so we may see varying impacts of healthcare reform experiments on the pharmaceutical industry in different regions.

Additionally, the MOH stressed recently that the healthcare reform in China will not be a highly uniform one, and a high degree of deviations may be allowed at the local levels. Should this policy be implemented, we are likely to see a more fragmented Chinese pharmaceutical market in future.

Public image of MNCs starts to dim - an early warning

A recent survey reminds MNCs the need to work harder on their public relations with the Chinese public. Local consumers are found to be strongly resentful of a number of MNC practices including unreasonable high pricing and withholding key information from Chinese language version of package inserts. Also only 22.54% of respondents in the survey believe MNCs have done sufficiently in social responsibility in proportion to their profits from China. 81.29% of the respondents believe that MNCs discriminate Chinese employees.

While I am not a PR expert, I have always believed in the need and value of building strong bonds and caring relationships with the public. Not only is this important for companies, but also for the pharmaceutical industry in China as a whole, which has been unfairly targeted and demonized for too long.

I have therefore invited Helen Yan, a leading healthcare communication expert with Edelman China, to write on this subject for us. I will soon have the opportunity to interview her further about healthcare PR in China.