Bas Ludoph, Sonia Yan, Kelly Wang and Hannah Wang co-authored this post with Matt Furlow.
China has become the world’s second largest pharmaceutical market (the US is No. 1), but novel drugs contribute to just a small fraction of that market. While there's great potential in China for novel drugs—especially those developed to treat cancer—it has historically been a challenging market due to a difficult drug approval process, stringent market access policies and a complex healthcare ecosystem. Those factors have shifted over time and made China more amenable to external investments, particularly for novel oncology therapies.
As an example, Amgen struck a $2.7 billion deal for 20.5% of BeiGene, a multinational biopharma company founded in Beijing with research and commercial capabilities in both China and the US. While it’s one of the largest partnership deals between a pharma or biotech company headquartered outside China and a China-based company, it’s just one example of a global company expanding its business in China. AstraZeneca has taken similar strides with the recent launch of three large-scale initiatives to advance its global R&D footprint in China. The company is expanding its R&D center in Shanghai, building a new AI innovation center and establishing a joint investment fund (with a target size of $1 billion) with China International Capital Corp.
Ex-China biopharma companies that are planning their own expansion into China should first understand the changing regulatory and access landscape and then settle on a strategy to enter the market. Let’s take a closer look at some of these changes, along with two strategies that biopharma companies can consider.
Three changes in the domestic regulatory and access landscape are making China more attractive to companies headquartered outside of China that are seeking to develop and commercialize novel therapies.
1. The regulatory environment in China is becoming more receptive to novel therapies. The National Medical Products Administration (NMPA) implemented a series of changes in 2015 to accelerate drug development and approval, according to a State Council announcement. Specifically, the agency added additional resources and “voluntary inspection” to reduce the number of cases under review; reduced—and in some cases eliminated—the requirement for bridging China-specific studies; allowed for priority review of products with significant clinical value; and allowed for conditional approval of drugs serving patients with high unmet need.
These changes have played a hand in expanding the Chinese drug market. According to the NMPA, novel drug approvals from ex-China biopharma companies (including drugs like Merck’s Keytruda, Pfizer’s Ibrance, and AstraZeneca’s Tagrisso) increased from three approvals in 2016 to 39 in 2019.
2. Reimbursement and access are becoming more achievable for novel therapies. Historically, most novel therapies are paid for out-of-pocket, which limits uptake due to high price. Now, the Chinese government is shifting more funding to novel therapies and has a more transparent and frequent process to update the National Drug Reimbursement List. Thus, more novel therapies have achieved broader access to patients. However, reimbursement is typically accompanied by an aggressive price cut. Ex-China biopharma companies may need to evaluate the benefits and risks of drops in price and potential increases in access, especially when the price cut needs to be calibrated in the context of global pricing.
Profits from mature products are being squeezed by the volume-based procurement (VBP) program. While mature products historically have been a major value driver for ex-China biopharma companies in China, that dynamic has changed since the VBP program began to require “bids” on prices from manufacturers of the same generic drug. The pilot program was rolled out in 11 cities and provinces in 2018 and expanded to 25 cities and provinces in 2019, according to a National Healthcare Security Administration announcement.
3. The impact of VBP is twofold. On one hand, mature products become less profitable in China for both local manufacturers and ex-China biopharma companies, pressuring those companies to pursue novel therapies. As an example, Upjohn, Pfizer’s established medicine business, saw a 20% decrease in sales in second-quarter 2019 as Pfizer lost bidding in the 11 cities and provinces where VBP was piloted. On the other hand, VBP has reduced Chinese government spending on generics. Both VBP scenarios free up funds to reimburse novel therapies and create greater incentive for companies to develop and commercialize novel therapies.
Diminished returns on generics, an evolving regulatory landscape, and improved access and reimbursement for novel therapies have created a need for ex-China biopharma companies to re-think their China strategy. Broadly speaking, there are two options that ex-China biopharma companies may consider in order to expand their business in China.
- Partnerships: There is a relatively low barrier to entry and low investment required for ex-China biopharma companies that choose to expand in China via partnership. We have seen partnerships ranging from out-licensing deals, such as GlaxoSmithKline/ZaiLab and Incyte/Innovent, to co-development and commercialization deals, such as Amgen’s BeiGene, where Amgen leverages BeiGene’s existing commercial team for its own oncology portfolio. This option is especially useful for oncology drugs because establishing specialized oncology roles and building relationships with key oncology stakeholders requires deep local expertise and presence.
- Standalone organizations: With this option, organizations can choose to establish autonomous commercial teams, functional groups, headquarters or manufacturing sites—to name a few. Building standalone organizations requires a larger upfront investment and the ability to navigate the local environment, which is why larger ex-China biopharma companies are more likely to pursue this approach. For example, AstraZeneca has built a strong commercial team in China, which has helped the company grow quickly (AstraZeneca’s China operations account for about 20% of the company’s global revenue). This model also gives AstraZeneca a local footprint that allows them to partner (in China) with other pharmaceutical companies that are aiming to enter China.
With pressure on profits from mature products, progressive reform in regulatory policies, and improved access and reimbursement, the novel drug market in China has reached a tipping point. Now that there’s an easier path to entry, we’re likely to see more ex-China biopharma companies pursue partnerships with domestic companies or build standalone organizations. Partnerships like the one formed by Amgen and BeiGene reinforce the message: There's no time like the present to expand in China.