Will Apple’s Business Model Work In Pharmaceuticals?
If you have ever spent time in China – as we have – you will find Cities of Industry leading to dominance in a market sector. Medicine is next.
Flip over any Apple iPhone or iPad and you will find, “Designed by Apple in California. Assembled in China.” It is an apt summary of a business model Apple arguably made famous; a Western company handles product development, design and commercialization activities in its domestic headquarters, and outsources manufacturing to China, the world’s leader in cost-efficient, economy of scale manufacturing for the past three decades.
From the perspective of both the developed world and China, this model has worked just fine; China has benefited as its economy has grown, and Western consumers have taken advantage of new products at lower costs. But as China’s economy has grown stronger, so too has Chinese awareness that their reliance on the Apple model must change. This adjustment reflects awareness by China’s best domestic companies and policy makers that low-cost manufacturing will not be enough to sustain China’s economy tomorrow. Now, Chinese firms are working aggressively to move up the value chain of global commerce. One sector that has so far not felt the full weight of the Apple business model is pharmaceuticals, but if the Chinese government and its growing class of entrepreneurial scientists have their way, this area soon will. If this group is successful, the implications of the Apple business model for pharmaceutical manufacturing to Big Pharma, public health, and broader questions about globalization are only now beginning to be felt.
For multinational pharmaceutical companies, the China market has become a significant growth driver during a period that growth prospects in developed markets have diminished. In 2014, the domestic Chinese over-the-counter (OTC), branded generic and patented Rx market is projected to reach approximately $95 billion, and by 2020, at current growth rates, the Chinese market should grow to $369 billion. If this holds, China will become the world’s second largest pharmaceutical market, followed only by the U.S. But top-line growth is only one part of the story. The other is how China is crafting policies designed to capture more pharmaceutical research and manufacturing, both for China’s own domestic health needs and for export.
China has already taken the first step to see if the Apple business model will work in pharmaceuticals. The FDA estimates that China and India account for roughly half of all active pharmaceutical ingredients (APIs) consumed in the US. This past December, in what came as something of a rude surprise to Indian pharmaceutical manufacturers, researchers determined that over 80% of the precursor materials that go into Indian pharmaceutical manufacturing supply chains also originate in China. China’s success at the low end of the pharmaceutical supply chain – precursor materials and APIs – parallels the country’s similar successes in other sectors: start out at the low end of the value spectrum, then move up as quickly as the market will allow. Now, China’s added ambitions to see more bench science and drug discovery activities take place within the country adds a new wrinkle to where global life science R&D will be done.
Since 2008, when the New Drug Creation and Development program was announced, China’s appetite for western therapies has dovetailed with an explicit policy mandate by the central government that the country develop a domestic life science sector. The 12th Five Year Plan is clear in its goals: to ensure life sciences account for at least four percent of China’s GDP. To see that this objective is met, China has allocated government capital into the life science sector, created twenty new “incubator bases,” and formed multiple alliances between government, industry and academia. At the same time, it has pushed forward on forcing its domestic industry to adopt good practice (GxP) standards, a step which provides greater confidence by foreign companies in the capability and integrity of development, trialing and manufacturing from a Chinese partner.
Between 2008-2010, the Chinese government invested $2.7 billion into pharmaceutical R&D, followed up with planned spending of an additional $6 billion by 2015. China has twin objectives driving these policies: to ensure the country has a viable domestic manufacturing capacity to produce basic medicines and to create a new export industry that represents higher technology products. Whether China will be successful as a result of these policies is quite another matter.
Kewen Jin, a serial healthcare entrepreneur based in Shanghai and Chairman of BayHelix (a leading returnees organization), is one of the most respected voices on China’s pharmaceutical industry, in particular on the topic of what Chinese companies will need to do to become globally competitive. Kewen is cautiously optimistic about China’s prospects: “China will have isolated pockets of excellence in the beginning … but for innovation to happen here or anywhere, you need three things: people, money and a regulatory framework that encourages and protects innovation.” China has its share of very smart scientists returning from the west with ideas and experience specifically of benefit to the country’s pharmaceutical sector and, at least for the time being, capital is not in shortage either. However, problems do persist around harmonizing China’s regulatory standards to global norms that could harm the ability of Chinese sciences to realize their goals.
A number of problems in these areas persist, especially around intellectual property for life science companies and China’s challenges around adoption of what is known as multi-regional clinical trial data (MRCT). This has caused drug lag, as innovative molecules from western pharmaceutical companies cannot be brought to market at the same time as in the west. Chinese patients suffer from lack of access to the newest and innovative therapies; multinationals watch precious patent protection slip away as they conduct China-specific trials and regulatory approvals. This lack of harmonization also creates obstacles when Chinese pharmaceutical companies with their own innovative therapies have to go through review and approval processes in export markets simply because the equivalent processes in China are out of sync with global standards.
One of the adages about intellectual property (IP) frustrations in China is that IP law and enforcement will get better in China as domestic companies have their own technology they want to protect from others. If this is the case, then China’s aspirations around developing its own life science sector are going to be an important trigger for better IP standards, as well as harmonization to global standards around manufacturing, quality and clinical trials.
Tours of life science innovation hubs in Beijing, Wuhan and Xiamen illustrate how serious China’s ambitions are. In each of these parks, the government has carved out a large parcel of land, provided generous financing, and co-located regulatory agencies such as the CFDA (China’s FDA). This has all been done to create ecosystems attractive both to global multinationals hunting for locales in China where they can locate new R&D facilities, as well as smaller Chinese companies who have their own aspirations to become China’s national champions in the pharmaceutical industry.
The Wuhan Biolake Innovation Center, one of the many government-sponsored life science hubs sprouting up across China.
The Biolake Innovation Park in Wuhan may best capture the upside potential and downside risks to China’s central planners in particular. Walking through this park, the sheer scale of investment is impressive. The park features a local CFDA office, specifically put there to facilitate more rapid responses from Chinese regulators. A large and clean lake sits in the center of campus, around which walking paths and gazebos have been placed for researchers to walk and think. Guides are quick to point towards one building in particular that sports a large Pfizer logo. Three more 10-story buildings each have a prominent Sinopharm logo atop each. But look closely and the buildings offer up their secret: all three are empty. The building with the Pfizer logo? It is nearly empty, with around 60 Pfizer employees located on just one floor of the building. During a recent tour, our guide leaned in and whispered, “The Sinopharm executives are in the dining hall right now negotiating over the final details of their investment here.”
This is China. It is the madness, exuberance and gross over-capacity that both captivates and causes concern. Captivating simply because the audacity of government officials to boldly set out in pursuit of a lofty goal – developing a domestic life science sector and making grand infrastructure investments before final agreements with business are in place – is something western governments struggle to accomplish in today’s era of austerity. Concerning because when China’s goals in these high technology sectors are taken seriously, basic questions about whether western governments are ready and able to meet the challenges posed by the next stage of China’s development lack good answers.
Though China’s track record developing new parts of its economy is not perfect, few would argue that Beijing has not proven an uncanny ability to put in place policies that achieve what was formerly viewed as out of reach. One need only to look at China’s success in crafting a set of industrial policies around clean-tech to see how the country has proven nimble at building a high-technology sector of the economy, albeit imperfectly. China’s short-term success in clean-tech has also rocked the boat on trade issues, a recognition that should lead both the US and China to think more proactively and productively about how similar challenges are likely to present themselves as China works to develop its own domestic life science industry. The December 2014 US-China Joint Commission on Trade (JCT) meeting in Chicago yielded important commitments from China on some of these questions, specifically around addressing drug lag. The pursuit of a more proactive and productive policy framework around these matters holds the potential for western governments to find effective ways to engage China, to stimulate their own existing life science hubs, and to craft collaborative policies that encourage positive public health outcomes globally.
There is every reason to believe that if the west’s political systems continue to ossify, countries such as China, not to mention other, more nimble and ambitious countries with similar aspirations, may be able to create unique ecosystems capable of fostering new science, technology and industries simply because these governments are able to act forcefully with a clear mandate to experiment, absent many of the fears that beset their western counterparts.
Yesterday, China was either a new market the west could sell into, or a source of low cost manufacturing. Today, China’s leaders have their sights set on loftier goals; specifically, the development of high tech industries such as clean-tech and life sciences. It is not necessary to believe that China’s success achieving its goals should threaten American interests. In fact, China’s ambitions in these areas should present both countries with the opportunity to move faster on big public health issues, develop new therapies more rapidly with more risk sharing between the developed western economies and China, not to mention lowering costs during a time when healthcare expenses around the world are spiraling out of control. Unfortunately, the greatest danger is probably fighting protectionist impulses in Congress if China’s model proves to be effective in the global life science market.
China’s own economic development model is not perfect, and it may well be that the successes it has enjoyed thus far have made the country’s leadership more confident than they should be when it comes to these sort of grand investments. But, it would be a mistake to second-guess China’s ability to use inefficient means to achieve effective outcomes. It might very well be that beyond that sleek new iPhone 6 on your desk, China’s influence might soon extend to the most innovative and important pharmaceuticals trusted with your most basic healthcare needs.
Thanks to Forbes Magazine.