Globalization comes calling from
China By Benjamin A Shobert
SINGAPORE - Industry leaders gathered this
past week at a series of life sciences meetings
understand better than most the challenge China
presents to their companies. Hailing from the
world's leading multinational pharmaceutical,
medical device and diagnostic companies, these
businessmen and women wrestle every day with how
to navigate the challenges and opportunities
inherent in China's modernization.
The
opportunity for these companies is obvious.
Christopher Milne, the Associate Director at the
Tufts Center for the Study of Drug Development in
Boston, shared with attendees at this week's
NextLevel Pharma event that "it is estimated that
800 million people in China do not have access to
care through large
hospitals in major
cities."
Even though access remains a
problem across the country, the pharmaceutical
market alone is growing at around 25% a year, from
US$41 billion a year in sales in 2010 to a
projected total of $125 billion by 2015. Much of
this growth is going into generics, no surprise
given basic drugs for pain management and blood
pressure - as only two examples - have
historically not been widely available across the
country.
Gavin Outteridge, vice president
at Kinapse, who said that Beijing must determine
how to "extend basic healthcare to the rural
population", best captured the business challenge
inherent in accessing China's domestic market.
From the point of view of payers - whether they
are from government, private insurers or
individuals - is to "increase access while
controlling costs." At least in the short term,
increasing access is going to be a conversation
largely dominated by cost. Industry understands
the opportunity within China's domestic market is
a two-edged sword.
Accessing China's enormous
potential means being willing and able to live
with lower margins. Managing the trade-off between
lower prices spread across larger volumes is part
of what has driven provincial governments to adopt
aggressive pricing strategies like that Anhui has
put forward. In the short-term, the Anhui Model
has lowered costs and improved access, but it has
set in motion quality problems and created a race
to the bottom among China's domestic drug
manufacturers.
Professor Liu Peng, an
Assistant Professor with the Institute of
Healthcare Reform and Development at Renmin
University in Beijing, shared this week his
concerns that while the Chinese domestic
pharmaceutical companies are "large in scale [and]
rapidly growing, they have relatively low
technology and quality." To Peng, "… that is why
Chinese domestic manufacturers are not
sustainable."
Like many strategic sectors
driven by the central government either as part of
a Five-Year Plan or a parallel strategic focus,
China's domestic pharmaceutical companies have not
yet proven they can be measured based on
successful commercial outcomes. Rather, their
success to-date has to be gauged by their
compliance with Beijing's objectives of increasing
access at lower costs.
As Professor Liu
points out, this brings to mind whether they are
sustainable businesses and, if not, whether China
has simply kicked the can down the road relative
to how to expand coverage without the full
participation of commercially driven
multinationals.
Liu drew this out in more
detail when he acknowledged that in China their
exists "a philosophical debate between whether the
country's healthcare reform process should be
market-driven or state-driven." He admitted, "It
is likely the final policy outcome is going to be
mainly state-driven, but the market will have some
partial wins." If this proves to be the case, the
implications to multinationals are troubling.
Certain players in this sector will shrug this off
as more of what they already knew and have been
dealing with in China for the last 30 years.
Companies like Johnson & Johnson will
likely find their brand value, and the trust that
Chinese consumers place in their products given
the numerous quality problems from domestic
manufacturers, may allow them to continue to build
market share in over-the-counter (OTC) products.
But for product lines where the consumer
has less knowledge or visibility of the brand, or
where government has the power to simply mandate
which drug manufacturer is selected as part of a
nationalized formulary, this brand allegiance will
likely be of little help. Consequently,
multinationals in these categories may find China
an increasingly difficult market.
The
traditional strategic response to this sort of
market dynamic is to focus on increasingly
innovative drugs; however, in a market Outteridge
characterized as "struggling to fund the basics",
this may not be a successful response. If
international players find the Chinese domestic
market limited in terms of revenue growth, what
other opportunities can they pursue?
Many
multinationals in China are exploring not only the
potential to sell into the domestic economy, but
also to use the country's large pool of scientists
as a way to develop new products both for China's
own market as well as for potential exports. Many
large companies like Pfizer, GSK and Eli-Lilly are
already using China as source of low-cost, high
technology drug discovery.
Two issues
limit how successful these strategies are likely
to be: first, China's history of lax enforcement
of intellectual property (IP) and second, the
perception by industry that innovative research
may not yet be something China's research
community is ready to produce.
Because
China's IP legacy remains a problem, multinational
pharmaceuticals in particular have begun teaming
up with former Chinese employees of their own
companies who have elected to return to China and
start their own research businesses. Companies
like Roche have seen a surprising number of
Chinese employees get trained at American
universities, learn the industry working in US
companies, and now head back to China.
Working with former employees helps
American and European companies feel more
comfortable in the risks they are taking, but most
go one step further and actually break apart the
research they outsource into smaller sub-sections
that are on their own of little value, but when
consolidated are quite valuable.
The
second challenge industry faces as it attempts to
develop domestic research competencies within
China is the legacy of group-think that runs
deeply within China's educational system tied to
the country's view of rigid hierarchies, neither
of which is helpful when trying to draw innovation
out of researchers. Some companies are attempting
to deal with this by focusing their Chinese
R&D on process innovation, while others
believe that this represents a very short-term
challenge, and one that the country as a whole is
preparing to break out of, not only in the life
sciences, but in other portions of the global
economy as well.
These two issues raise
the question of what to make over the next phase
globalization appears to be entering. The
traditional argument about globalization was that
developed economies like those in the United
States and Europe could afford to allow certain
industries and certain types of work migrate away
from their countries and go towards countries like
China.
Most of the lost jobs were in what
were commonly referred to as high-labor content,
low technology, heavy industry and manufacturing.
What would be left for the developed economies
would be high technology industries and high touch
service businesses, neither of which were segments
of the global economy most believed China would be
successful within.
What the life sciences
segment of the economy in general, and
pharmaceuticals in particular, suggests is that
this traditional model of what China would be
proficient at, and what would remain within the
purview of America and the EU, is rapidly
changing. China's ability to rapidly move up the
value chain has already been seen in clean
technology and high-speed rail.
Both
industry segments evolved from extremely
rudimentary manufacturing competencies, and built
up their know-how around process innovations,
until today Chinese companies stand as the world's
leaders in both areas.
Could this also
happen in the life sciences space? Certainly it
could, and many already believe the process is
well under way. The bigger question is how
American and European politics will respond if
they discover that portions of their national
industry which they believe safe from Chinese
competition prove to be equally vulnerable as
their manufacturing sector has proven to be.
As China's capabilities in these areas
grows, it will become increasingly difficult for
either popular culture or conventional politics to
avoid the realization that China's entry into the
world's economy has forever intensified and
accelerated what nations, businesses and
individuals must do in order to stay viable.
Whether the developed nations have the
vision to respond, or willingness to absorb this
lesson and commit themselves to personal and
national sacrifices necessary to compete against
China remains to be seen. If not, China's nascent
efforts to move up the value chain in the life
sciences industry may well mark a moment where
political recrimination against China becomes the
more convenient and palatable choice, and one
developed economies find popular support pursuing.
Benjamin A Shobert is the
Managing Director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis
for companies looking to enter emerging economies.
He is the author of the upcoming book Blame
China and can be followed atwww.CrossTheRubiconBlog.com.
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