Leadership and Democracy LabWestern Social Science

Risks to Introducing Branded Drugs to the Chinese Market

Main Contributor: Gabrielle Guizzo

Team Leaders: Marissa Vaillant and Nick Avis

Keywords: China, pharmaceutical, generic, investment

As the Chinese pharmaceutical market grows, many foreign pharmaceutical companies are considering an expansion into China. Foreign companies, however, must be aware that the Chinese market has a number of unique risks. In particular, the four main areas of risk that need to be evaluated when considering an expanding to China are:

The above risks may manifest differently and their impact depends on the business model that a foreign pharmaceutical plans to implement. In particular, differences will arise depending on whether the company plans to manufacture drugs in China or import them to China. That being said, each risk is generally present and most business models share many similarities.

Generic Drugs

The prevalence of generic drugs in China will impact the prospects of certain brand-name drugs in the portfolios of pharmaceutical companies hoping to expand to China. Generic drugs arise when a company's patent expires, at which point other manufacturers can start to copy the off-patent drug. A cheaper price is attached to generic drugs because the manufacturer does not have to invest in research and development to bring the drug to market. Generic drugs are popular in China, representing a total value of $82 billion in 2015. The generic industry is so large within the country that 98% of its five thousand pharmaceutical companies produce generic drugs. The size of the industry is in part due to China’s public healthcare system favouring cheaper generic drugs over their brand-name counterparts as it minimizes government expenditure.

Generic drugs represent a significant threat to brand-name drugs produced by pharmaceutical companies because the generic drug often undercuts the brand-name drug. Patents are the best way to prevent generic drugs from entering the market, but patents have a set lifespan. Patent-stacking is a possible method of prevent a drug from going off-patent as it extends the duration of the drug’s patent protection.

Patent Protection is Still Uncertain

Brand-name drug producers rely on their patents to prevent generic drugs from entering the market; however, patent protection is only as strong as the law and legal enforcement allows it to be. As the Chinese government continues to search for lower cost alternatives to alleviate the country’s rising healthcare costs, one strategy it has adopted is the removal of patents to allow for generic drugs to enter the market. This most notably occurred in 2012 when the Chinese government modified intellectual property laws to allow for generic copies of branded drugs still under patent. Although this occurred in what Beijing called a state of urgency, it is a deterent for foreign companies that hold patented drugs and want to enter China.

The identification of patent infringements is also a concern. The Chinese State Food and Drug Administration (SFDA) has significant shortcomings when it comes to identifying possible patent infringements, as infringements often go unidentified when companies apply for drugs to receive approval to enter the market. The lack of preventative measures by the SFDA contribute to a marketplace that is disadvantageous to brand-name drugs.

Regulatory Barriers

The barriers faced by foreign pharmaceutical companies are particularly notable when importing foreign-made drugs into China. Drugs being imported into China need to be approved by the SFDA, which requires extensive documentation. Importers must also be legal Chinese entities, which for foreign companies requires hiring and appointing an entity (usually a lawyer) to act as the importer. The drug must be tested in a Chinese laboratory and may require a clinical study, though this is dependent on the classification of the drug. Finally, if a clinical study is required then another application with trial findings must be submitted for approval. If the SFDA grants approval to the drug, it will send a certification of approval allowing the drug to be brought to market. What this regulation shows is that the barriers that need to be overcome to import drugs are high, making it more difficult and costly for foreign companies to enter the market.

Growing Domestic Pharmaceutical Industry

The growth in China’s pharmaceutical market has fueled a burgeoning domestic pharmaceutical industry. In 2015, China’s pharmaceutical exports rose 11%, and in 2016 China’s domestic producers announced over $5 billion of foreign healthcare acquisitions, a fifteen-fold jump from 2012. High levels of government investment in the pharmaceutical industry, as well increasing demand for drugs from a rapidly aging population, have contributed to the demand for domestic players. Domestic drug companies also have a competitive advantage in that they understand the marketplace better than foreign companies, which is particularly beneficial due to the unique nature of China regulatory environment. Strong domestic drug companies suggest that foreign competitors will face fierce competition should they enter China. 

Conclusion

For a foreign company to enter the Chinese pharmaceutical market, it must be willing to assume a high level of risk. With rising costs, threats of generic drug competition, and regulatory barriers it is important to weigh to the gains of Chinese expansion against possible losses. Weak patent protection is perhaps the most serious concern, as intellectual property is a fundamental aspect of drug manufacturing. With generic versions flooding the market at lower prices, differentiation between pharmaceutical products is reduced to price and profit margins are diminished. With all of these factors to consider, foreign pharmaceutical companies must carefully evaluate whether an expansion to China is the best business strategy.