Market Landscape and Best Practices for Biopharmaceutical Players in China

“What’s your China strategy?” is a query heard in most sectors of the economy, and biotech is no exception. This paper is a synopsis of research conducted as part of Kellogg’s Global Initiatives in Management program into strategies biopharmaceutical firms should take in approaching the China market, focusing particular attention on the role of government regulation and intellectual property protection. Specific strategies examined by the research include filing patent applications in China, using Chinese contract research organizations to achieve cost savings in research and development, conducting portions of clinical trials in China, and licensing products to firms with an established domestic sales force.


Overview of Biotech Products and the Approval Process

While traditional medical therapeutics are chemical-based, biological therapeutics, or biologics, encompass materials including proteins, viruses, serums, and gene transfer products. Biotech products are generally more expensive than their traditional pharmaceutical counterparts, but have “generic” versions known as biosimilars. Biosimilars are conceptually similar to traditional chemical generics. However, unlike traditional generics, they are not chemically identical to the innovator (brand name) product.

Biotech drugs account for an estimated $27.5 billion in annual sales, with the erhtyropoietin franchise (e.g., Amgen’s Epogen) alone representing worldwide revenues of almost $6 billion. The biotech sector is in the growth stage of the industry lifecycle, with sales expected to significantly outpace that of pharmaceuticals as innovation, product diversification, and consolidation increase. Accordingly, robust growth is predicted for biosimilars as well.

In the US, innovators must submit lengthy applications for approval for brand-name chemical drugs (a New Drug Application, or NDA) and biologics (a Biologic License Application, or BLA). Manufacturers invest significant time and money to complete these applications and thus expect a return on the investment. The approval process typically takes about 15 months. There is currently no approval process for biosimilar products in the US, though Congress began proposing related legislation in 2007. Manufacturers of chemical generics must file an Abbreviated New Drug Application (ANDA) in the US if the active ingredient, route of administration, dosing, and strength are the same as those of the brand-name drug.

In the EU, innovators of brand-name chemical and biologic products must submit an application to the European Medicines Evaluation Agency (EMEA), which submits an opinion on the product to the European Commission. The commission’s decision, which takes about 14 months, applies to the entire EU.

In China, an estimated 95% of pharmaceutical products are generic. China’s regulatory framework, managed by the State Food and Drug Administration (SFDA), does not distinguish between the review of an investigational drug and a drug-approval application. Moreover, the same approval process applies to pharmaceuticals, biologics, and generic versions. China’s application process is 11 months longer on average than that of the US. Because the process is manufacturing-site-oriented, China requires much more documentation about the process and methods of manufacturing. As a result, companies must protect their intellectual property more carefully (e.g., file a patent before submission) when submitting the application.

In order for a multinational firm to register a drug in China, clinical trials must be conducted there. But an advantage of this requirement is that Japan now accepts applications for new drugs that have been tested in China. Upon completion of clinical trials, manufacturers must submit a dossier to the SFDA with test results and documentation of the manufacturing process. Following approval, companies must continue to conduct and report the results of clinical trials conducted in China; this period is commonly referred to as Phase IV.

Given the length of both the drug development (including discovery, testing in animals and humans, and post-approval clinical trials) and China’s approval process, biopharmaceutical firms aiming at this market should plan to submit for approval soon after submitting their Investigational New Drug application in the US.


China-related Considerations for Biopharmaceutical Firms

Biopharmaceutical firms must consider several issues before and during their entry into China.

Intellectual Property Rights. Insufficient intellectual property rights (IPR) protection is a major concern for biotech firms in China. Despite recent amendments to the country’s IPR regulations, counterfeit goods are still estimated to make up 20% of all Chinese consumer products. According to the US Department of State, IPR issues in China are driven in part by the country’s focus on administrative rather than criminal measures to combat the problem, along with corruption, limited resources, and a lack of public education on the issues. Nonetheless, Chinese courts are handing down guilty verdicts in a growing number of infringement cases across industries (e.g., online music), and the SFDA has stepped up its enforcement in this area. In general, companies are best served by registering their intellectual property as early as possible with the appropriate Chinese agency. American biotech firm Amgen’s failure to seek a patent for Epogen in China allowed 3Sbio to patent its own version in the country 11 years after Epogen debuted there.

The Biotech Landscape. Because the SFDA is a relatively young organization compared to its Western counterparts, it sometimes struggles to fulfill its mission, especially in the areas of the enforcement of regulations and promulgation of best practices. The 2007 execution of Zheng Xiaoyu, the SFDA’s former chief, for accepting bribes from the makers of several sub-standard medications linked to fatalities is strong evidence of the SFDA’s ongoing challenges. Other recent incidents have also called into question the safety of Chinese products across sectors: toothpaste containing antifreeze compounds; a “killer banana” rumor associated with fruits from Hainan Island; the recall of over 100 pet food brands due to animal deaths. In response, Chinese authorities have stepped up efforts to enforce regulations, most notably with crackdowns on makers of counterfeit food and fertilizers.

The Biopharmaceutical Industry. A recent McKinsey Quarterly article estimates that China will spend $41 billion on pharmaceutical products in 2012. Biopharmaceuticals, while historically representing only about 7% of this market, are expected to grow disproportionately. A 2004 study identified 370 biopharmaceutical firms in China, of which one third produced SFDA-approved products; the vast majority are generics. The prevalence of generics is driven by expired patents on therapeutics, growing demand for low drug prices, the ease of manufacturing generics versus novel products, and low regulatory hurdles. Nonetheless, a growing number of Chinese firms, including Shenzhen SiBiono GeneTech, maker of Gendicine, the world’s first commercially approved gene therapy product, have focused on innovation. Gendicine treats certain tumor types; other Chinese biologic innovations include treatments for non-Hodgkin’s lymphoma and kidney transplant rejection. Yet given the lengthy development process for such innovations, most Chinese investors continue to put their money in shorter-term investments.

Research and Development Options. There are benefits to contracting with Chinese contract research organizations (CROs) such as WuXi PharmaTech for the later stages of drug development. Reputable providers can save biotech players significant money; this study estimates average savings of 30% of specific development costs. As WuXi’s website boasts, “its 80 customers included nine of the world’s top ten pharmaceutical companies” in 2007. Interviews conducted with biotech practitioners suggest that China has more than enough talented researchers to execute large-scale biotech work, though there is still a relatively small number of experienced managers.

Government Initiatives. China’s government is increasingly encouraging innovation in biotech and other sectors by pledging resources toward this effort. This is reflected in the growing number of MS and PhD degrees in the life sciences. Analysts estimate that China’s government spends more than $600 million annually on biotech research and development, significantly more than estimated US spending. Several research parks are under construction by local Chinese governments to support innovation efforts, and large multinationals such as Roche and Eli Lilly are considering locating R&D centers in China.


Best Practices

Four recommendations are offered to biotech players aiming at China.

• Patent Applications. Firms should apply for patents in China at the same time that they file such applications in their home countries.
• CRO Use. Firms can cut costs significantly by contracting with CROs for a range of development-related services.
• Clinical Trials. Firms can also cut costs by conducting portions of their clinical trials in China. Remember that Japan also accepts the results of these trials for approval in that country
• Licensing Agreements. Firms that do not have established sales forces in China should consider licensing their products to counterparts that do, given the fierce competition for management talent in that country. Establishment of a longer-term presence in China, however, may warrant development of an in-house sales force.

Despite the challenge of providing an accurate overview of China’s biopharmaceutical industry, this assessment of the sector’s landscape and best practices for entering it should be helpful for biotech players considering the country as part of their overall strategy.