Flying from Newark, NJ to Beijing in the second week of April, I was surprised to find the flight was almost half empty – the first time for me in the past couple of years.

Bashing China through 2008 Beijing Olympics – a dangerous game

In the weeks before I left the US, there were waves of attacks from mainstream Western media and many leading politicians on China over a mix of issues including the recent events in Tibet, the country’s policies on Tibet and human rights, trade issues and its export product quality.

As the public in the West was led to believe that China is somehow responsible for a rising number of their own mischiefs at home, including both job losses caused by the globalization of the world economic and structural flaws in their home economies, I began to sense that people are less friendly to me on the streets in this small US town with few Asian Americans.

Sadly, 2008 Beijing Olympics becomes an easy target for all those seeking to further their political pursuit or to simply express their anger over China. Equally unfortunate, mainstream Western media failed to provide a balanced coverage of issues and leading politicians in many Western countries rushed to pressure China rather than exercising their much-needed independent political wisdom.

When I landed in China this time, I was overwhelmed by the deep frustration, anger, and disillusion from the common Chinese with the Western media and their governments over their biased reporting and proposed boycott of the opening ceremony of Beijing Olympics.  

The public anger was further inflamed when CNN host Jack Cafferty called the Chinese “the same bunch of goons and thugs they’ve been for the last 50 years”. This led to protests from both the Chinese government and the Chinese worldwide. As I am writing this article, grand-scale demonstrations by overseas Chinese are about to happen worldwide on April 19. Anger towards the West is also showing signs of spilling to the economic field – Chinese citizens who were agitated by the French attitudes in recent events called for a nationwide boycott of French supermarket chain Carrefour on the basis of an allegation that one of the major shareholders of the company supported and funded Tibet independence movement. The call quickly gained momentum and forced French politicians to step back their attacks on the country.   

Putting aside my personal feelings and international politics, I have a hard time understanding the motives and objectives of the West towards China in recent events. In my opinion, the West gains nothing from backstabbing China; instead, by doing so, it destroys its own image together with any idealism the Chinese have left about the West. Inevitably, it brews more distrust about the West and fuels nationalism in a land which has opened to the world for just two decades and is still learning to be in step with it.

In particular, it seems senseless to insult the genuine hospitality and good will of 1.3 billion face-loving Chinese people for hosting a global sports event, and at the very same time, expect them to be the docile cheap labor force and loyal customers for the world. This huge mistake will surely result in political and economic ramifications in both the short and long term.

Turning to the domestic market front, I received strong signals from local elites that things are cooling in China this year after the boom of 2007. Plummeting stock market, falling real estate prices, rising inflation and international hostilities have undermined the confidence of many in China’s short term economic prospects.

Potential roadblocks ahead for MNCs

Multinational pharmaceutical companies experienced sharp growth in China last year, but the growth was primarily driven by the expansion of their off-patent innovative drugs (or “originator drugs”) as a result of favorable government policies for such products.

Domestic companies have long been resentful of such policies but they had limited influence over government in the past. Faster growth of MNCs in 2007 elevated their market share in major hospitals, further agitating domestic companies with their grievances over government policies on off-patent innovative drugs.

The expanding political democratization in China is now helping local companies and they choose the National People’s Congress, a former rubber stamp but a rising political power, as the platform to launch their discontent over the government’s drug pricing policies. As a result, National Development and Reform Commission (NDRC) is now under enormous pressure to address the complaints of local companies – personally I believe it would be impossible for NDRC to simply sit on the matter and do nothing this time. 

I understand from our sources that NDRC remains committed to maintaining the category of “originator drugs” (off-patent innovative drugs) for drug pricing, but has put forward a number of plans to revise the pricing policy for such products. Possible options range from 1) sharply reducing the gap between prices for local products and off-patent innovative products, 2) introducing the much talked about two tier system under which off-patent innovative drugs will be reimbursed at local product prices, and 3) fixing the hospital profit margins of both off-patent innovative drugs and local products at the same level regardless their prices.

All three options put forward by NDRC are believed to be unsatisfactory to multinational pharmaceutical companies in China due to potential implications of these schemes under the current irregular Chinese healthcare system. Any move by NDRC to cut back on its support for off-patent innovative drugs is expected to hurt the business of MNCs in China badly, given the fact the most of them have yet to establish a strong China business led by patented new drugs and few of them have developed competitive business models to take advantage of China’s huge market potential outside the urban hospital segment. Given the current state of affairs and an overall backdrop of rising nationalism, there seems to be no perfect solutions and MNCs will be forced to pick the best deal they can get when they still can get it.

Talking to MNC executives, many of whom are government affairs managers, during and after my presentations at the latest Pharma China Forum and a presentation for RDPAC members this month, I sensed growing uncertainties from them about the immediate future.

There were hopes expressed among them that if NDRC’s modifications of the existing pricing policies on off-patent innovative drugs are unavoidable, the Chinese government should at least introduce new policies that are designed to help research-based companies accelerate market entry of their patented new drugs.

Building winning strategies with Chinese characteristics

During my RDPAC presentation, I was asked if I remain to be optimistic of MNC’s business in China following recent developments. My response was a confident “YES”, as I see no sign from the Chinese government backing away from its commitments to build an innovative drug industry.

However, building a successful business in China requires much more than just favorable government policies. Companies should look beyond short term objectives and begin shaping business strategies with Chinese reality in the center so as to better position themselves for the huge untapped market potential China offers outside traditional market segments.

In fact, some companies among MNCs are less threatened than others by the possible pricing and reimbursement policy changes. Companies that are diversified or are more deeply-rooted in the Chinese market, such as XiAn Janssen, are likely to be less affected. Novartis, which has a generic business unit (Sandoz), offers a different approach for success in China. I am sure Sandoz has very different cost structures and business strategies from other units of Novartis to ensure its competitiveness and profitability in the Chinese generic drug market environments.

In addition to being creative with business strategies, I always advise Western companies that “goodwill”, not pressure or threats, will get them the farthest in China at all times. Being aggressive with the Chinese may sometimes help win short term benefits but will surely lead to long term repercussions.

As a start, I believe that companies benefiting from the Chinese market have the responsibility to positively inform and influence their media and politicians at home about China. Extremist views and actions at home such as calling Chinese people “thugs”, comparing Chinese government to Nazis or boycotting China are likely to damage the hard-earned goodwill in the Chinese market. Unless this is done successfully, the long term prospects of MNCs in China may sooner or later be undermined or even ruined by a handful of ignorant politicians and self-serving media.

Secondly, it is important that pharmaceutical companies use their profits generated from China wisely – profits are intended for supporting continuous innovation, ensuring product quality, and rewarding employees and investors appropriately, rather than for being lavish and indulgent. Although it is anticlimax to some hearing me raise the issue time and time again, I feel compelled to warn against the unwise use of profits for lavish entertainment of guests and employees – let’s not forget as some of us indulge in some of the finest things in life using profits from medicines, many poor Chinese people are dying because they can not afford medications. Besides, how can we persuade the government or the public to support the pharmaceutical industry in the long haul if they find the industry to be over-generous with itself? Spending profits wisely and generously fulfilling corporate social responsibilities will help the pharmaceutical industry rebuild its reputation, generate goodwill and justify its legitimacy for profits.

Thirdly, the pharmaceutical industry should understand, respect and support the Chinese government in fulfilling its foremost responsibility and obligation to ensure basic healthcare provision to all Chinese people. The mission statements of MNCs share many common goals with the objectives of the Chinese government for healthcare, and these can only be achieved through a partnership of the two.

Fourthly, I have long been calling for the establishment of a platform where foreign companies and local companies can communicate and coordinate their common interests. An alliance of all pharmaceutical companies in China is much needed to ensure everyone works for the industry’s common interest, rather than struggling to drag each other down like now.

Stagnant hospital financing reform poses threat to pharma companies

Turning back to immediate concerns, the pharmaceutical industry in China is increasingly exposed to the potential threats from a dormant healthcare reform, which has been delayed due to controversies surrounding reform of public hospital financing, and attempts by various government agencies and local governments to launch certain isolated reform measures or policy changes ahead of an overhaul of the healthcare system.

The latest attempt by NDRC to modify its pricing policy for off-patent innovative drugs is a perfect example. MNCs found it difficult to swallow any of the policy revision plans put forward by the agency because all of them are hard to adapt and bound to hurt business in the absence of public hospital financing reform. MNCs are not alone, local companies have long suffered the pains of irregular policy swings stemmed from stalling healthcare reform, and the time for MNCs to bleed seems to be approaching.

The Chinese public hospital sector is one of the last few segments in China that have been left almost intact from the country’s sweeping reform in the past three decades. Meanwhile, in exchange for scaled-back government funding, the government allowed the sector to be creative with its own finance which led to many existing flaws in the Chinese healthcare system and rapidly rising medical expenditures.

To make things worse, public hospitals have grown dependent on drug sales profits for their funding and healthcare professionals have become financially motivated in drug prescription. As healthcare expenditures has run out of control, the government is seeking to deal with the problem by containing profit margins of the pharmaceutical industry rather than addressing the root of the problems.

Although the government has realized that its healthcare reform can not succeed without tackling the core component – public hospital financing model, relevant government agencies have so far failed to reach a consensus over how public hospitals should be financed and how government healthcare funding should be channeled due to various reasons including conflicts of bureaucratic interests.

Ministry of Health (MOH), the central government agency responsible for administering and operating public hospitals, has been reluctant to reform the public hospital sector. Instead, it has been pushing for continued leadership and direct funding of the sector by the government and has rejected the idea of making public hospitals contracted service providers under the state basic medical insurance programs which was proposed by the Ministry of Labor and Social Security.

Meanwhile, stagnant healthcare reform has resulted in mounting public pressures on the government for progress. Unable to unlock the stalemate of the public hospital financing reform, relevant government agencies recently stepped up their efforts to make breakthroughs in other reform areas such as drug pricing, community healthcare and national essential drug system. But immature introductions of such new measures ahead of public hospital reform are unlikely to yield desired results and the pharmaceutical industry often falls victim to such isolated and ineffective attempts.

Despite intensifying pressures on relevant government agencies to resolve their differences and conclude the healthcare reform plan, the end of this long tunnel is still nowhere in sight. The latest indication from NDRC suggested that such a plan will be released for public comments in June, while MOH speculated the timing to be after Olympics. Even if such a plan is published eventually, unless consensus is built among relevant government agencies, the document is more likely to contain a collection of principles rather than a clear roadmap.

Despite a victorious year in 2007 and in the absence of a clear direction for healthcare reform, the pharmaceutical industry is far from being out of the woods. The tunnel ahead is still dark and long with many policy swings likely to pinch the industry here and there. Not all will survive the tough ride eventually but those who do will surely be rewarded more.

Other important developments this month

In its strongest public statement to date over the case of Baxter’s heparin, the USFDA reported its strong suspicion to the US Congress that the heparin sourced by Baxter from China is likely to be deliberately contaminated by interested parties for economic gains.

While such acts are most likely to be performed by highly-sophisticated criminals, it would be irrational to hold Chinese government responsible for it. I believe China, as a vital upstream manufacturer of the global supply chain for many products including foods and drugs, ought to draw serious lessons from such cases and immediately begin demising systems to monitor and control the quality of its export products. However, improving safety and health of the global supply chain is very challenging and will require cooperation and collective efforts by all governments and stake holders.

Officials of the USFDA/US Department of Health and Human Services (USDHHS) and those of SFDA have been working together closely over food and drug safety issues and there were frequent high level visits mutually in recent weeks. In addition, opening of a fairly sizable USFDA office in China seems imminent now. The close cooperation between the two sides presents a fresh and positive beginning for a better and safer global food and drug supply chain.

In an effort to improve surveillance and control of drug safety, the SFDA also announced a plan this month to expand its electronic regulatory system this year to more drug products in addition to narcotic and psychotic drugs. The system will eventually cover all drug products and, therefore, significantly boosting the agency’s ability in drug regulation, early detection and identification of potential safety hazards and faster implementation of product recalls.

On the front of managing healthcare expenditures, China has stepped up OTC switches of prescription drugs recently. In addition to OTC switches of 87 ingredients in the past two years, we saw another OTC switch of eight ethical drug products in March. Besides, the country is also hoping to contain medical expenditures by upholding the role of traditional Chinese medicine in healthcare, and a law of traditional Chinese medicine(s) is currently being drafted to further strengthen the role of TCM.

New developments at the Chinese pharmaceutical industry this month were highlighted by two major events: 1) Pfizer’s final defeat for its lawsuit against Guangzhou Wellman over trademark of Weige, the well-known popular Chinese name for Viagra, and 2) Sanofi Aventis’s plan to tap into China’s flourishing R&D capabilities.

In the first event, the “Weige” trademark ruling shows the inclination of Chinese courts for such disputes and this ruling will become an important reference for other similar cases.

Turning to the second event, Sanofi Aventis was highly complimentary of the emerging R&D capabilities and resources of China but decided to take a different approach from its peers in taking advantage of them. Instead of building its own R&D centers in China, the company is now seeking to strengthen research collaborations with a string of Chinese research companies. Sanofi Aventis believes the approach will help the company gain access to the existing new drug portfolios of its Chinese partners who will share profits with Sanofi Aventis for co-developed new products.

Lastly, let’s end this monthly review with a positive note. I am please to report that the Chinese pharmaceutical industry continued its sharp growth in both revenues and profits in the first two months of 2008, according to official statistics. Profits of the overall pharmaceutical industry and its pharmaceutical chemical formulations segment jumped nearly 57% and 60% respectively while their revenues rose at roughly 32% and 31%. The continued high growth of the industry’s revenues is likely to be stimulated by the rising government healthcare investments, while that of profits is driven by rising API prices and improving profit margins of formulation manufacturers.