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Leveraging China’s Life Science Opportunities

By Daniel Allen

Scientists examining petri dishes in a lab
China's life science market is dynamic, evolving and outward-looking. (Photo credit): Gettyimages.com/Jason Butcher

A complex market can still offer a rich reward for well-prepared Western businesses.

Today the fallout from the global financial crisis continues to affect businesses in the developed markets of North America and Western Europe. While the majority of well-established life science companies still enjoy healthy profits, it has become evident that product development methodologies that worked in the past can no longer be applied so successfully.

A growing number of such companies are now focusing their efforts on the next generation of drugs, devices and treatments – those based on biological organisms. Many are diversifying their portfolios to spread out risk and help fund the ballooning cost of innovation, adding generic brands, crop and animal science, and even consumer products through corporate consolidation.

With life science companies attempting to innovate with less funding, location strategy has become an increasingly pertinent issue. While many maintain R&D operations in developed markets, a growing number of companies are now moving into emerging global clusters due to the greater availability of private and public funding, as well as the opportunity to boost sales and drive down costs.

“For many life science companies, finding an investment partner inside America is now harder than finding one from outside,” says Fernando Corona, executive vice president of Glucovation, a California-based life science small and medium sized enterprise (SME) developing an innovative continuous glucose monitoring (CGM) system for diabetics. “In most cases, that investment is coming from China.”

While economic growth has slowed in countries such as China, evolving demographic trends continue to work in the life science sector’s favor. Aging populations, increasing healthcare spending and burgeoning incomes are creating legions of potential new consumers, with rising rates of chronic illness. According to the Economist Intelligence Unit (EIU), global healthcare spending will grow by an average rate of over 5 percent annually until 2018, with much of this growth happening in Asia.

Dynamic market

An aging domestic population and growing urban middle class have seen China’s life science sector enjoy whirlwind growth over the past decade. While revenues from sales are now levelling off after the double-digit growth of the recent past, China is still a compelling market for international players who typically remain ahead of the technological curve in comparison with Chinese competitors.

China is already the second-largest pharmaceutical market in the world. According to a recent report by the United States Department of Commerce, revenue is expected to grow from $108 billion in 2015 to $167 billion by 2020, representing an annual growth rate of over 9 percent. Total public and private healthcare expenditure, which reached $640 billion in 2015, is expected to almost double to $1.1 trillion by 2020 as the Chinese government rolls out universal insurance coverage.

The Chinese market already generates much of the revenue of the world’s largest life science companies. In a recent survey by KPMG, the majority of life science executives interviewed were positive about the long-term outlook for China, particularly for those companies involved in treatments for age-related, chronic diseases.

Demographic drivers

Chinese society is rapidly getting older. When the country’s one-child policy was introduced in 1979, only 5 percent of the Chinese population was over 65. By 2050, this figure is projected to rise to more than 30 percent.

As China’s aging trend has played out, so the country’s chronic disease burden has burgeoned. According to the International Diabetes Foundation (IDF), the incidence of diabetes rose from around 90 million adults (9.29 percent of the adult population) in 2011 to 110 million (10.6 percent) in 2015, and it is projected to reach around 150 million by 2040.

“As the second-largest diabetic market in the world, China is crucial for us,” says Glucovation’s Corona. “Dexcom [another California-based CGM company] will generate over $550 million in sales in 2017, with most of their revenue based on a diabetic population of just 29 million in the United States. This gives you an idea of the enormous potential of the Chinese market.”

Top-down approach

China’s efforts to catch up to various high-technology industries in the West are well documented, with the Chinese government now investing heavily to transform its life science sector into a global leader. It has already established national laboratories for stem cell research, medical devices, biologics, infectious diseases and drug development.

Take the field of precision medicine, for example, which uses genomic, physiological and other data to tailor treatments to individual patients. Last year, US President Barack Obama announced that Washington would invest $215 million (for the first year) in the so-called Precision Medicine Initiative. In March 2016, China announced its own 15-year initiative, with funding of over $9 billion.

With innovation being one of Beijing’s key watchwords, a number of directives in China’s 13th Five-Year Plan (2016-2020) apply to life sciences.

In March 2016, China’s State Council outlined a plan to promote the development of the country’s healthcare industry. This includes steps to accelerate the commercialization of innovative drugs, the upgrade and transformation of the medical industry, and the modernization of traditional Chinese medicine. It also contains proposals relating to venture capital (VC) funds and insurance for technical equipment, and measures to attract and retain the brightest minds, such as the so-called Thousand Talents Program, which aims to recruit “experts” in their fields from around the world.

“There is a real hunger for innovation within China’s life science sector,” says Cheni Kwok, managing partner and founder of California-based life science consultancy Linear Dreams, and president-elect of the Chinese-American BioPharmaceutical Society (CABS). “This explains why so many companies are looking outward, hunting for new employees and investment opportunities.”

Incipient innovation

China has not produced a new drug for the global market since artemisinin for malaria in the 1970s. Yet a new generation of Chinese life science companies are now competing to come up with the next breakthrough “made in China” medicine, with government funding and a return of Chinese talent from overseas fueling the race.

Shanghai and Beijing are key pharmaceutical R&D bases due to the presence of China’s best universities and most prestigious hospitals. The Yangtze River Delta, which boasts China’s two wealthiest regions – Jiangsu Province and Shanghai – is home to the largest number of domestic life science companies and accounts for more than 30 percent of the total investment in the industry.

Moving away from a focus on low-cost manufacturing, Western life science multinationals are also heavily involved in China’s innovation landscape. Over the last few years, several companies from Johnson & Johnson to Medtronic has made investments to boost their China-based R&D capacity.

Such investments reflect simple realities: the Chinese appetite for innovative medicines means that more R&D inevitably can and will be done inside China.

As this trend plays out, there is good reason to believe that China’s bench science capabilities could ultimately become a competitive threat to those capabilities in developed markets.

“When a PhD in a white lab coat in a pharma research lab in New Jersey has to be competitive with his counterpart in Shanghai, it adds another layer of complexity to how developed markets think about their relationship with China,” says Ben Shobert, founder and managing director of the Rubicon Strategy Group, and the National Bureau of Asian Research’s life science specialist. “This is something that will require smart policy responses from such markets.”

Going forward, the real challenge is that China-focused innovation must be priced at a level the market will bear.

“Even with the emergence of a Chinese middle class with disposable income, the ability to spend on innovation is not a given,” says Shobert. “China needs innovation, but affordable innovation.”

Opportunities and challenges

As it continues to evolve, China’s life science market presents companies seeking entry with unique opportunities and obstacles. Against a background of multiple decision makers and an ongoing government focus on reducing costs, the past 18 months have seen the launch of numerous programs that may offer greater access, but that also bring with them a degree of uncertainty.

For those multinational companies having significant experience with China and resources who tend to employ Chinese returnees to lead their China-based operations, navigating such a market is relatively straightforward. But for Western life science SMEs, especially those focusing on service-oriented work, the prospect of establishing a presence in China can be daunting.

“Such companies should learn as much as they can, in advance,” says Helen Chen, managing director and head of China Life Sciences at management consultants L.E.K. Consulting in Shanghai. “Talk to those who have gone before. Participate in organized visits or attend conferences. Work with advisors. Know your risk tolerance level and objectives.”

Perhaps the biggest challenge for Western life science SMEs is negotiating China’s regulatory environment, which is currently undergoing a period of major reform. Current rules make it difficult for smaller, research-based firms to bring new drugs to the Chinese market, as they must invest in expensive manufacturing plants before seeking approval.

The China Food and Drug Administration (CFDA) has recently instituted several initiatives designed to ease and expedite the drug approval process, with a goal of significantly reducing the average drug approval timeframe.

“Over the last several years, the biggest issue facing SMEs has been CFDA reforms, and the ways in which the CFDA’s approval process is not transparent or based on science,” says Rubicon Strategy Group’s Shobert. “While this remains a problem, the situation is improving.”

“The CFDA has learned tremendously over the past 20 years,” says Chang-Hong Whitney, founder of Whitney Consulting and a seasoned specialist in China’s regulatory environment for medical devices. “Over time, the speed and transparency of the approval process should get better while also driving improvements in drug quality and effectiveness.”

The device dimension

The CFDA also oversees medical device regulation, issuing more than 20 guidance documents over the last two years as it attempts to tighten control and boost standards.

The chief concern and area of uncertainty for medical device SMEs revolves around China’s clinical trial regime, especially for devices that are not on the so-called “exempt list.” Adding to the confusion, some devices on the list may still require a clinical trial, while others not on the list can be registered and approved without a trial.

Chang Hong Whitney of Whitney Consulting agrees that the CFDA approval process for medical device manufacturers is currently far from straightforward. But she also believes the administration is not intentionally freezing any company or product out of the Chinese market.

“We just need to know what CFDA is looking for,” she says. “Any company which is looking at Chinese approvals needs to be sure that their consultant is experienced and able to think logically. Building good relationships with the Chinese submission reviewers is also critical, as they have discretionary powers.”

SMEs should also bear in mind that China’s relatively weak intellectual property (IP) laws are both difficult and expensive to enforce.

“IP concerns are always going to be an issue in China, especially for life science companies pursuing a partnership with a local company,” says Rubicon Strategy Group’s Shobert. “These concerns are manageable, if enough advance due diligence is undertaken. But this is a costly, strategic issue that demands timely attention.”

Pricing pressures

Today most Chinese citizens are enrolled in some kind of public health insurance. Beijing is now ramping up its funding and reforms in this area, which should benefit Western life science companies by deepening coverage for potential customers, particularly in lower-tier cities and rural areas.

Yet with government involvement in drug pricing likely to remain strong for the foreseeable future, Beijing’s efforts to rein in spiralling expenditure are dampening the market, squeezing profit margins and creating considerable confusion.

In May 2016, pharmaceutical giants GlaxoSmithKline (GSK) and AstraZeneca (AZ) both saw the price of specific drugs in China slashed by the Chinese authorities. Both insisted that the price reductions would be counterbalanced by increased sales.

Attempts to cut costs have affected both Chinese and foreign drug companies, who must compete in a bidding process to sell their medicines in public hospitals.

“Pricing pressure from China’s domestic tendering process continues to frustrate both domestic and international life science companies who are eager to see Beijing develop meaningful reimbursement schemes that reward innovation,” says Rubicon Strategy Group’s Shobert.

Drugs in China can now be reimbursed under one of three lists – the Essential Drugs List (EDL), the National Reimbursement Drug List (NRDL), and the Provincial Reimbursement Drug List (PRDL). But while reimbursement opportunities have recently increased, the processes for inclusion and reimbursement remain nebulous and complex.

“The three biggest concerns of multinational drug company executives looking at China are currently market access, reimbursement and CFDA reform,” says Shobert. “Many big drug companies are coming to the unpleasant realization that the Chinese reimbursement system is unlikely to significantly benefit their business.”

To maintain growth, progressive Western pharmaceutical companies are now exploring different models to make their drugs available to different patient segments, with a rising Chinese middle class increasingly willing to pay out of their own pockets. Experimenting with innovative approaches to market access, these companies, like GSK and AZ, are making significant trade-offs.

How long this phase of pricing pressure continues remains to be seen.

“Over the next five to 10 years, I expect such pressures to level off,” says Shobert. “International pharmaceutical companies will have traded away their margins, and the very real problem of trading additional price concessions for degraded product quality will become a serious issue for Chinese authorities.”

Venturing forth

Today, China’s life science industry is increasingly entrepreneurial and outward-looking. Over the past two years, healthcare start-ups in China have raised the highest cumulative funding in Asia.

“We are now seeing a lot of start-ups in all life science sectors, supported by angels, VC and government resources,” says L.E.K. Consulting’s Chen.

Underpinned by Beijing’s ambitions and funding, and driven by a desire to expand internationally, China’s biotech firms and VC funds are increasingly looking overseas for partners, markets and drug candidates. They see investing in and acquiring cutting-edge life science technology and talent as a fast track to commercial success.

For many American life science start-ups, the availability of Chinese capital is like a breath of fresh air.

“I think there is a general frustration over the degree of difficulty related to raising capital from domestic sources,” says Rubicon Strategy Group’s Shobert. “In addition, the promise of a new, large and growing market in China has made many of these start-ups believe they need to feature China as part of their go-to-market strategy.”

A growing number of Chinese companies and China-based VCs are now investing in Western life science SMEs, taking equity and then establishing joint ventures with those SMEs in China. Given the competition for prized Western technology, deal terms are steadily improving and in some cases approaching Western levels.

In August 2016, Histogen, a San Diego-based life science start-up specializing in regenerative medicine, received $6 million in financing from Huapont Life Sciences, a Chongqing-headquartered pharmaceutical company with estimated annual revenues of $1.1 billion.

“Having an established dermatology leader, with a track record of bringing innovative life science products to market in China, lead our Series D financing round was a tremendous validation of our technology,” says Histogen CEO Dr. Gail Naughton. “We believe that working with a Chinese partner strong on the regulatory and clinical side will greatly benefit our business.”

While Histogen will clearly benefit from China-sourced investment capital, the company was careful with its choice of partner, negotiating with numerous Chinese pharmaceutical companies over the last five years.

“I would advise all Western life science SMEs to find a partner who already has a strong track record of collaboration with companies outside of China,” says Naughton. “Moreover, that partner should have a solid history of regulatory and clinical development in China, and should also prove that it is dedicated to protecting patents and expertise.”

Cross-border collaboration

A number of organizations now exist to foster partnerships between the Chinese and American life science industries. One of the largest Sino-American professional associations in the US, the Chinese American BioPharmaceutical Society (CABS) was founded 19 years ago and now boasts 3,000 members.

“Within the global life science sector, we see ourselves as a bridge between China and the US,” says the CABS’s Cheni Kwok. “A lot of Chinese science parks approach us, and we organize regular investor forums and delegations to China.”

In early 2016, the CABS hosted the first life science start-up competition by BioSciKin (BSK), an open investment and incubation platform for life science innovation. Established in 2014 as a sister company of the Nanjing-headquartered Simcere Pharmaceutical Group, the platform has already invested over $165 million in around 20 overseas bioscience start-ups.

“A veteran Chinese collaborator like BSK, with abundant resources and know-how in the Chinese market, can be very helpful for Western life science companies,” says BSK President Dr. Dongliang Ge.

“The rapid advance of life science technology is generating limitless opportunities,” continues Ge. “We are calling for friends and potential partners from all over the world to explore this exciting future together.”

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