Market Entry Strategies for the Chinese Pharmaceutical Space

Calling a market like China’s “emerging” is starting to come across as quaint – if not slightly paternalistic; after all, the country is some thirty years into an impressive set of economic changes that has jump started its once beleaguered economy.  Yet, for multinational pharmaceuticals working in China, the shifting sands that constitute selling into, developing for, and strategizing within China leave executives very much with the feeling that at least as pharmaceuticals go, China remains very much an emerging economy.  The twin pressures of increasing access while controlling costs are acutely felt in China, a country that believes social stability may well ride on its ability to manage these pressures.

Consequently, the Chinese government has taken an increasingly active role – both at the level of the Central and Provincial government – to attempt and both control costs while also improving access.  The last 18 months have seen an impressive series of changes in an attempt to achieve these, embodied most noticeably by the general emphasis on healthcare reform that is part of the , as well as the proliferation of the Anhui Pricing Model, and the recent announcement about changes to China’s IP law and its application to pharmaceuticals.  The net of this is that pharmaceutical, medical device and diagnostic companies interested in accessing China have had to go back to the drawing board and re-think their market entry, or better said, their market access strategies.

During a recent event in Singapore, I had the opportunity to meet and spend time with , one of the world’s leading experts in market access for pharmaceuticals.  She is currently the Head of Emerging Markets Access at Biogen Idec, a pharmaceutical company with therapies for MS, non-Hodgkin’s lymphoma and rheumatoid arthritis.  She has a strong background in Health Technology Assessment (HTA), and has worked in a variety of capacities in the industry at both the research and practice levels.  Chia Wen was quick to point out that relative to China, what is driving the changing policies is pricing reform.  She shared, “the big blockbuster drugs have lost global patents, but still have protected pricing – they call it independent pricing or differential pricing –this classification is the most profitable in most of MNC’s portfolio.”  This protected pricing was a head nod to multinational pharmaceutical companies who, twenty years ago, entered China with their patented pharmaceuticals and surrounded with generics in the market.  The Chinese government wanted them to enter the country, and in part to address these fears of IP protection, extended a special class of pricing that essentially protected a family of drugs from being knocked off by local manufacturers.  Chia Wen added, “Local manufacturers believe this to be unfair, so the government is under pressure to remove the protection.  The political sentiment is with this and, plus the fact that this policy is twenty years old, this category is likely to go.”  As you might imagine, multinationals are not eager to see this classification be dropped – even though most (if not all) of the drugs now no longer would enjoy patent protection anyway.  For many, the profit margins being reaped by these drugs staying in a protected classification are one of the lucrative factors of operating in China.

When China drops this protected classification, the question is what mechanism for evaluating new and existing drugs the government will adopt.  Chia Wen added that “there are two streams of thought – one based on quality, and another is pharmaco-economics based (PE) pricing.”  According to Chia Wen, they are both different ways of trying to capture the value of different drug therapies.  She expanded on this by sharing, “The first one in terms of quality is around the idea of GMP.  Because a lot of domestic manufacturers do not have good quality manufacturing, multinationals were trying to differentiate on the basis of quality.”  She also shared that multinationals hoped to emphasize local service and support as part of why their pricing was higher, although she did not see the Chinese government buying into that service argument. Currently, the best differentiating factors in China are efficacy, safety and quality. Chia Wen believes the PE pricing is unlikely to be adopted by the Chinese government in its strict sense.  She added, “no one really knows how to do PE pricing in China.  If they take the international cost-effectiveness model for PE and work backwards – reverse engineer it based on China’s GDP per capita – then we have to drop price 70% to 90% or even further depending on the approach and perspective – this opens up Pandora ’s Box regarding price setting at both Beijing and Provincial levels, and is not a good situation for anyone.”

I wanted to explore Chia Wen’s thoughts about the impact of the Anhui Model, and I was surprise to hear her acknowledge the difficulties it has created, while also suggesting that its long-term impact might not be as great as some in the industry fear.  Chia Wen offered up “the Anhui Model was coming up from provincial government leaders who were trying to meet their KPIs covering all essential drugs in the EDL and drive down the prices that are inappropriately high.”

What Chia Wen is suggesting is that the Anhui Model’s long-term impact will ultimately be curtailed by a more well-thought out policy mandated by the Central Government.  She added, “When Anhui started this, everyone thought it was a good idea; there is a strong desire in Beijing to streamline the bidding and tendering process and of course to cover the essential drugs.  In the aftermath of the Anhui Model, the Central Government realized the risk, that the downside to the model is worse than the upside.”

What should industry take away from the Anhui Model as it relates to market access in China?  First, a point that I have made earlier, that market access in China is inherently a combination of local and top-level government access.  Chia Wen added color to this by reminding me that, “You don’t do business with Beijing, you do business with the provinces.”  As she shared, “You have to have good relationships with the provinces and at the same time access to critical relationships in Beijing.  Both are very important, and that does make market access in China very labor intensive.”

Second, I think Chia Wen’s comments on the whole represent a mature way of managing your own company’s expectations about how policy changes in China are going to be made:  if you don’t understand the KPIs provincial leaders are going to be held to, you won’t be able to anticipate or plan for contingencies related to what they believe must be done in order to hit the numbers they are measured by from the Central Government.  In China, even if you understand this, the dynamic interplay between the provinces’ organic attempts to make new policies that empower them to meet these KPIs and the Central Government’s more scientific driven approach is unsettling.  On balance, while pharmaceuticals may complain about the price pressures set in motion by the Anhui Model, they also benefited from the differential pricing policies Beijing mandated.  The net of these is important to keep in mind, even if in the short-term pharma may feel China is adopting policies that are not entirely to their advantage.

In summary, under the current Healthcare Reform plan in China, no one component should be viewed in isolation, the industry has to look at the environment and market place with a holistic approach.