As opportunities in developed markets saturate, India Pharma Inc is looking to optimise the growth potential in China. But what are the challenges ahead?
Rising competition among pharmaceutical players in the developed markets along with increasing isolationist trade policies by the US, is an indication for pharma payers to focus more on the emerging markets.
As a result, India Pharma Inc needs to look at newer markets to continue its growth trajectory. And, many believe that China, the second-largest drug market, could be the next land of opportunity as healthcare services in China is likely to see an overhaul with rising ageing population, cancer, obesity, COPD and high blood pressure.
According to GlobalData estimates, the Chinese pharma market is expected to grow from nearly $132 billion in 2018 to more than $209 billion by 2022 at a CAGR of 12 per cent.
Moreover, with policies like Made in China 2025 and Healthy China 2030, the Chinese are also trying to attract foreign companies to its soil to set up their base in the country. These measures are attracting global players, including India.
Companies like Dr Reddy’s, Sun Pharmaceuticals, Cipla, Strides Pharma, Aurobindo Pharma, Piramal Enterprises, Wockhardt, Alembic, NATCO Granules India, Claris Lifesciences, Syngene International, Ecron Acunova, Epsilon Clinical Research, KlinEra Corp India, SIRO Clinpharm, have already established its presence in China either in the form of joint venture (JV) or independent manufacturing capabilities.
Giving an overview of the market conditions, Anil Khanna, Partner, Wisdomsmith Advisors says, “The China – US trade war has opened an opportunity for the Indian companies to explore the Chinese market, wherein Indian export is very miniscule (not even $200 million). Sustained pricing pressure in the US market and US FDA giving priority approvals to ANDAs in the categories with lower competition, have reduced the exclusive period duration for commanding the pricing premium. Recent measures like Competitive Generic Therapy (CGT), which encourages more generic R&D investments in off-patent drugs and sharp decline in the approval timelines for generic ANDAs approval, with further decline in offing, are some of the reasons for Indian firms to venture into the China market.”
Likewise, China’s recently revised drug law, which removes drugs that are legal in foreign countries but not approved in China from the category of fake medicines, will also allow entry of Indian generic medicines in the country, thereby strengthening India Pharma Inc’s foothold .
Vijay Charlu, Vice President, Corona Remedies informs, “Out-of-pocket and private insurance healthcare payments rose steadily from 2007 at a CAGR of 13.5 per cent. Many multi-national players who have regarded China only as a source of raw materials or research are now contemplating an entry into the Chinese market. Others who have previously entered the market through joint ventures with Chinese companies and research institutes are now ready to ramp up their growth through drug licensing and acquisitions.”
China has also taken a number of regulatory developments to enable fast track approvals of differentiated high-quality generic drugs. These will have an impact on the Indian pharma players trying to venture into the China market.
As Charlu says, “As part of China’s 2018 government administration overhaul, the name of China Food and Drug Administration was changed to ‘National Medical Products Administration’ and merged into the newly-created state administration for market regulation to further optimise the medicine registration and approval process. Two months later, another guideline was issued on overseas clinical trials where innovative drugs are developed synchronously at home and abroad. Introduction of the two new policies is regarded as a symbol of further opening up the import market and generic drugs from India are likely to be benefitted.”
Peter Shapiro, Senior Director, Drugs and Business Fundamentals Healthcare, GlobalData informs, “In the recent past, China has introduced regulatory reforms such as the reduction of approval timelines and promoting cheaper generics usage through bulk procurement scheme. It will help foreign companies, especially the Indian companies, which are more likely to provide cheaper generics to grow their business in China. It will be mutually beneficial to both India and China. Indian pharma companies can increase their business in the region besides helping the Chinese healthcare to benefit from the lower drug prices and healthcare expenditure.”
Shapiro also highlights, “Creation of the National Medical Products Administration have encouraged generic pharma companies to mark its presence in the country by improving the speed of regulatory approvals and enhancing reimbursement plans for generics.”
He further informs, “This includes the ability of Chinese drugs to be produced by a company other than the Market Authorization Holder, leading to the possibility of a domestic contract manufacturing industry. However, restrictions requiring the final dose to be manufactured domestically in China exists. This requires Indian pharma companies to find local partners. Sun Pharmaceutical Industries and Cipla are entering China through local partnerships, as they seek new markets to sell their generic drugs.”
Upadhye opines, “The government’s steps to reform the healthcare sector by expediting the pace of approvals by the regulatory board and offering better reimbursement plans for generics has made China an attractive opportunity for Indian generics companies.”
He further elaborates, “China has recently rolled out various policies that encourage the use of generics, which has proved beneficial for several companies entering the Chinese market.”
Khanna too highlights, “New regulations in China, which talks about fast-track approvals for products cleared by the US Food and Drug Administration, could help Indian companies secure a foothold in the market. Further, EU-approved Indian suppliers can be granted the industrial drug license in an expeditious manner so they can enter the Chinese market within six months.”
The story so far
India has been approaching China for a long period of time to open up its pharma market, which is facing pricing issues due to the rising incidence of cancer. Earlier, Executive Director of the Pharmaceuticals Export Promotion Council (Pharmexcil) of India had also stressed on initiating attempts to make formulations exports to China.
Regulators from both the countries recently met in Shanghai to find a suitable solution and to remove the roadblocks. Charlu informs, “Post high-level meeting of heads of the country last year, China has begun importing of rice, sugar and soybean from India, but there was no breakthrough on the pharma front, which is regarded as a ‘big ticket’ item. In the same meeting, India insisted that China should seriously consider importing more Indian drugs which are in demand from various countries including the US.”
Moreover, rising cost of healthcare has become a serious issue in China and a movie named ‘Dying to Survive’ was filmed based on the real-life story of Lu Yong, a Chinese leukemia patient who smuggled cheap but unproven cancer medicine from India for 1,000 Chinese cancer sufferers in 2004. The film showcased the need for more accessibility and affordability of medicines.
Upadhye says, “There was a lot of pop-culture-driven emphasis on the need for affordable generics after the release of ‘Dying to Survive’ last year. Healthy China 2030, the public health plan proposed by the government, is receiving much added attention to speed up modern healthcare uptake in the country, which includes new medicines.”
And India as one of the major providers of affordable medicines, is well poised to leverage this opportunity.
Growth potential galore
Khanna informs, “Antibiotics and respiratory are the two key therapies which companies are focusing on. The antibiotics market in China is double that of the US by value and is 25 times bigger in volumes. Respiratory is also another big category thanks to higher pollution levels in urban China. In addition to these therapies, anti-cancer therapy is also under focus. A few months back, China exempted import tariffs on 28 drugs, including all cancer drugs.”
Charlu says, “The Chinese government is under huge pressure from its public for high price of cancer and other generic drugs. No country can give such pricing benefits other than India along with quality, which is well known to China as well.”
Adding more insights on the growth opportunities in China, Upadhye says, “Some time back, China’s FDA outlined a plan to effect priority review for early generics, novel drugs for serious illnesses, products in short supply and medicines that have been approved in the US and European Union, or are undergoing review in these regions. At Cipla, while our core home markets remain our current growth anchors, we see China as a crucial part of our future roadmap, where our primary focus shall remain on producing respiratory products.”
He continues, “Considering President Xi Jinping’s vision to foster local manufacturing of medicines, consequent steps taken by the regulatory body to take this forward and create more opportunities for companies building the industry there, it is an excellent time to leverage the growth tide and grow along with the country. And given the size of the market and relevance of the industry, pharma will continue to play a significant role in China’s manufacturing goals, as laid down in ‘Made in China 2025’.”
So, what does it comprise and what does it offer Indian companies.
Made in China 2025
Made in China 2025 is a strategic plan issued by Chinese Premier Li Keqiang and his cabinet in May 2015. President Xi Jinping in order to counter the country’s dependency on foreign drug imports and to tap the revenue generated by the Chinese market, felt the urge to reinvest in the pharma sector with an emphasis on research and development capabilities.
Charlu while emphasising on the government’s goal behind the launch of the ‘Made in China 2025’ says, “The set goal was to increase Chinese domestic core content from 40 per cent by 2020 to 70 per cent in year the 2025. Along with automobiles and other industrial sector, the pharma sector was also included in the blueprint.”
Shapiro says, “China is lagging in innovative bio/ pharma market as its previous focus was on generics. With recent changes, the country is trying to attract leading global players to start or extend their R&D efforts within China as well. With ‘Made in China 2025’, the emphasis is on innovation within the pharma industry to bring more locally produced innovative drugs to the market. China has been actively courting the return of highly-skilled American and Canadian scientists of Chinese origin, who are colloquially referred to as Sea Turtles or “Haigui”.
American and Canadian citizens who were born in China or are of Chinese origin make up a sizeable percentage of the leadership of the current Chinese biotech industry.”
Shapiro further says, “There is a concern that has been publicly expressed, by industry luminaries as former US NIH chief and head of Global R&D at Sanofi, Elias Zerhouni mentioned that recent restrictions on immigration to the US paired with first time enforcement of Intellectual Property and government funding rules for scientists with foreign laboratories will further accelerate the exit of these “sea turtles” and weaken the US Bio/Pharma industry.”
The possible talents are not only restricted to come from the western/ developed world, in fact China is already in the process of building an ecosystem and ready for such collaborations from India as well. China’s ‘Made in China 2025’ strategy has provoked a backlash from the US and contributed to the ongoing US-China trade war.
As Shapiro points out, “Although the US recently decided against imposing tariffs on Chinese pharma imports in response, China’s strategy appears to have been one of the drivers for US Congress giving greater powers to The Committee on Foreign Investment in the United States (CFIUS). While the act empowering CFIUS did not mention China by name, experts believe China’s five-year development plan and its biotech growth plans generally gave the impetus to expand the powers of the US committee that is authorised to review transactions that could result in foreign control of a US business and to block the deals in the name of national security (see Emerging Markets Outsourcing Report, January 2019). In turn, CFIUS threatens to limit Chinese investment in US pharma.”
Scope for innovation Khanna says, “In the recent times, China has developed strong R&D capabilities. The country has a robust venture capital ecosystem dedicated to supporting pharma R&D; next only to the US in terms of active funds and monthly deals. In fact, Indian companies seem to be heading to China to tap the latter’s R&D expertise. The R&D arm of Sun Pharma – Sun Pharma Advanced Research Company (SPARC) – entered into research collaboration with a Chinese firm Hitgen in March’19. Under this collaboration, HitGen will apply its advanced technology platform, based on DNA-encoded library design, synthesis and screening, to discover novel leads for SPARC.”
Since the Indian government and other associated bodies are stressing on harnessing the trade relationship between India and China, how much scope does the market have?
In the past it has been observed that a majority of the Indian pharma companies were eyeing the US market. However, with changing times, both China and the US markets, have become the key markets.
The Indian pharma industry which caters to nearly 50 per cent of the global pharma demand is now gearing up themselves to optimise the rising trade opportunities in China. India, a global leader in supplying the generic drugs is largely importing intermediates and APIs in huge quantity from China. However, it still enjoys the leadership in the formulation space.
Like India, China too has low the cost advantage and growing number of aging population.Though Indian pharma companies have successfully established their presence in the highly regulated markets in the US, companies now need to explore the Chinese markets as well. However, the recent growth of the Chinese capital markets has given Chinese pharma funding to in-license technologies from western companies. This wealth paired with limited expertise in valuation has yielded unusually high deal valuations.
So, is it likely to hurt India’s foray into the Chinese market?
Khanna explains, “China, primarily supported and funded by the government, is focussing on either buying pharma companies in the US, or in-licensing the unique drugs, or buying the global rights. China is aggressively pursuing it and on an average doing two such deals every month. Indian pharma companies are unlikely to benefit much from this programme.”
“The Chinese government and pharma companies are focussing on high-end pharma markets. The Indian companies are still focussed on the branded generics, hence there is no overlap between the Chinese and Indian companies focus,” he reassures.
Agreeing with Khanna, Shapiro says, “There is no threat to Indian pharma economy looking at the current scenario. The Indian pharma industry is heavily dependent on Active Pharmaceutical Ingredients (API). China has been a leader in fine chemical intermediates, which are needed to produce these APIs. Both India and China are interested in developing higher value biological API markets but have only done so in select regions of both countries and by a few companies.
In order to correct the trade imbalance, China is also willing to open its market for the Indian pharma companies, by collaborating with Indian government and institutions. Thus, China does seem to be the gateway for progress as far as India Pharma Inc is concerned.
But, only time will reveal whether China can deliver on the promise of accelerated growth for Indian pharma manufacturers.
Business Climate for Indian companies in China
CII and Evalueserve recently launched the second edition of the survey of Indian companies in China, titled ‘Business Climate for Indian Companies in China’, a survey-based report on investments and operations of 57 Indian companies in China. The survey released this July provides insights into respondents’ locations, business activities, investments and performance and includes five Indian pharma companies under the Healthcare category. Of the 12 sectors represented in the survey, healthcare/pharma made up nine per cent of respondents.
While the presenters caution that the survey report is a snapshot of opinions at a certain point of time and more long term data collection will be necessary to glean in-depth insights, the results do point to certain realities. Quality of products and services’ continues to be a key success factor in China while internal and external challenges faced by companies continue to be the same, including rising labour cost, fierce competition and finding and retaining talent.
More than 70 per cent respondents consider Pricing as a major advantage that Chinese competitors have, in comparison with Indian companies. Other advantages are Local Knowledge and Reach (68 per cent), Marketing and Sales (60 per cent) and Cost Advantage (60 per cent).
40 per cent respondents from pharma/healthcare, IT&BPO, and consumer goods companies said that their 2018 revenue was substantially higher (>10 per cent vs. 2017). However there is a moderation of growth expectations for the current fiscal with only half (20 per cent) from pharma/healthcare expecting >10 per cent increase in revenue in 2019 (compared with 2018).
Similarly, 20 per cent pharma respondents expect to increase investments in 2019 while the remaining expect it to stay the same. In comparison, the numbers and sentiment is reversed for the IT&BPO sector. The plans of three chemicals companies are slightly better, with 33 per cent expecting to increase investments, while the rest expecting investment levels to stay the same.
In terms of profitability by years in business and industry, 60 per cent of the pharma respondents say that their China operations are are profitable, while for the rest, operations are either breakeven, loss, and substantial loss (0 per cent or less than 0 per cent profit) 40 per cent of the Indian pharma companies in China reported an increase in EBIT (2018 as compared to 2017), while 20 per cent remained the same, and for the rest it was not applicable as the time was too less.
Source: CII – Evalueserve Report on Business Climate for Indian Companies in China