To meet the challenge of providing safe, cost-effective medicines for the world s largest

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1 An Executive Summary Biopharma in China: New Initiatives, New Opportunities To meet the challenge of providing safe, cost-effective medicines for the world s largest population, the government of China has embarked on comprehensive reforms to improve and encourage drug development innovation and manufacturing. These reforms, and anticipated opportunities for Western drug companies and manufacturers, were explained by Xu Ming, vice president of the China Chamber of Commerce for Import and Export of Medicines and Health Products; and David Deere, chief commercial officer, PaizaBio. Dr. Xu Ming Vice President for Import and Export of Medicines and Health Products China Chamber of Commerce David L. Deere, MBA, MAIMS Chief Commercial Officer PaizaBio China s Pharmaceutical Market China is undergoing a major healthcare reform to meet the demands of its population and societal shifts. These changes are generating business opportunities both at home and abroad. More than 90% of the population has basic health coverage and by 2020 every Chinese citizen will have access to basic healthcare coverage, Dr. Xu reports. China is an aging society, however, with an elderly population of 240 million. The income growth rate in urban areas is roughly 9% and more than 2% in rural area. The expenditure growth rate for healthcare in an urban area is 13% and 12% in rural areas. This has created opportunities for companies in the industry. The Chinese international marketplace is promising as well (Figure 1). In the past few years, many international companies have conducted clinical trials in China. As of August 2015, there had been 6,501 clinical trials in China; half are conducted by international companies and half conducted by domestic companies. In 2014, China s contract research organizations (CRO) market amounted to $3.9 billion with an annual growth rate of 25%. As of April in 2014, there were 550 clinical trial institutes in China qualified to conduct clinical trials. The Manufacturing Sector China has become the largest provider of APIs is the world; accounting for approximately 20% of the world market share, reports Dr. Xu. Chinese companies can produce 1500 types of APIs; almost 6500 pharmaceutical manufacturing companies and 16,000 medical device and equipment manufacturing companies produce 3000 kinds of medical devices and equipment, including high-end equipment. China has also become an important player globally in the development of the healthcare industry, Dr. Xu says. Last year, the output value was roughly $411 billion; compared to other industries, the healthcare industry in China is developing at a very brisk pace. Following China s accession to the World Trade Organization in 2001, Chinese companies became more involved on the international stage. More than 1500 drug master files have been filed with the US Food and Drug Administration (FDA), and have 560 valid certificates of SPONSORED BY

2 Figure 1: What are the opportunities in China s healthcare market? suitability filed with the European Directorate for the Quality of Medicines (EDQM) in Europe. Chinese companies have also made tremendous progress in prequalifying products with the World Health Organization (WHO) because the country attaches great importance to providing assistance to programs in developing countries, Dr. Xu explains. Twenty-eight APIs have been filed with WHO; 16 formulations have been prequalified, as well as three vaccines. In addition, Chinese companies have made a point of penetrating markets in the United States, Europe, Japan, and Korea. At the end of 2015, 40 ANDAs were successfully filed with FDA, and more than 50 Chinese manufacturing plants have been certified by the FDA and European Medicines Agency. The Chinese government attaches great importance to promoting the development of the healthcare industry by advancing the development of technology and upgrading the products exported to the overseas market, Dr. Xu says. Domestically, the Chinese government is trying to increase the consolidation rate of industry and is creating policies that encourage the development of international trade and investment. Specific policies promote the development of the industry over the next five years and, according to the goals released by the government for the health industry output, China will have an average of 10% increase every year in the next five years. The industrial output value of the industry is projected to be $440 billion (Figure 2) by the end of In March 2016, the State Council of the Chinese government issued a guiding opinion to promote the health development of the industry to garner financial support. For example, the Chinese government is encouraging companies to be more actively be involved in R&D and improving the quality of their products. Provincial policies have been developed to help Chinese companies to market internationally. Additionally, the Chinese government is trying to reduce the time it takes to get a drug or medical device registered, and Dr. Xu says, they hope to see that reduction within the next three years. In February 2016, Boehringer Ingelheim announced that the Boehringer Ingelheim China Biopharmaceuticals site jointly developed by Boehringer Ingelheim and Shanghai Zhangjiang Biotech & Pharmaceutical Base Development Company has been selected to launch the country s first biopharma CMO pilot project. The new site will provide biopharma CMO manufacturing for BeiGene s self-development immuno-cancer therapies. Regulatory Changes In the past year, the China Food and Drug Administration (cfda) has put forth a series of policies to improve its regula-

3 Figure 2: What s going on in China s healthcare industry? tory system, with five major pillars of the reform system for drugs and medical devices: Improved quality of the review and approval process; Elimination of the review backlog; Improved quality of generics; Encourage R&D innovation; and Increase the transparency of the review and approval process. These policy changes may bring positive effects for the companies both at home and abroad, says Dr. Xu. For example, in March 2015, the cfda issued a directive that companies could use collected data in overseas markets for the application of products made in China. This could help Chinese companies become more actively involved in international drug manufacturing. Business Opportunities in China In the next five years, more dramatic changes will be taking place in China, reports Dr. Xu, and the country will become more attractive to international companies. China has a lot of room to grow relative to the amount of money that they need to spend per capita, says Mr. Deere. China s population is larger than North America, South America, and the European Union, combined, and by 2050 the country will have 25% more elderly than the United States. Thus, there will be more healthcare spending occurring in China. In addition, the gross domestic product (GDP) growth rate in China is unprecedented, Deere says, with a 30-fold increase over the last 35 years. Between 2011 and 2015, the average GDP growth in China was about 7.8%. The Chinese economy is in transition; however, he reports, moving from a low-cost export model to a consumer-driven model. Citizens need to make more money, exports need to be higher value added so they make more money as they export, and citizens need to have more money to purchase items. This will move China from an internationally dependent export market to an internal consumer-driven market, Mr. Deere says. A significant portion of the growth will be in the healthcare. Pharmaceutical Industry Reforms The Chinese Government is undertaking a new five-year strategic plan, and has specifically targeted the pharmaceutical sector for a number of revisions: modernization, increase in the quality, and to promote it as one of their targeted industries for the future. The Chinese pharmaceutical market is moving from a market based on branded off-patented generic drugs and toward generic drugs and patented products (Figure 3). In China, most drugs are distributed through the hospital system, not the retail sector; hospitals earn about 40% of their operating income from the sale of these products. Domestic generic drugs are given to patients at no cost and the hospi-

4 tal gets reimbursed. Branded generic products brought in by multinational pharmaceutical companies are touted as better quality, so patients pay accordingly, Mr. Deere explains. To lower costs, the Chinese government must increase patient acceptance of domestic generic drugs by increasing the quality of drugs produced there. Improved quality also will begin the long process of achieving international acceptability of the Chinese pharmaceutical sector. Not only does the Chinese government want to increase the quality of its domestic generic-drug market, it also wants to focus on innovative branded products from the West. Regulations passed in 2010 that implemented current good manufacturing practices (cgmps) affected nearly 5,000, mostly small, pharmaceutical companies. Upwards of 80% of these companies will be forced to close because they do not have the capital or the staff to implement the cgmp requirements, Mr. Deere says. As a result, there will be a consolidation within the industry, but overall quality will go up significantly. The cfda has also began to inspect foreign imported branded drugs, mostly from second-tier markets that do not have established regulatory agencies. New regulations link the food and drug laws with the criminal justice system. Among other reforms, the government changed advertising laws, published technical guidelines for biosimilars to include stability, and published regulations for stem cell research and the accompanying quality controls, Mr. Deere reports. The government has begun to formalize requirements for bioequivalence studies for all generic products, which make up about 75% of the market share. And it passed laws will that require older generics to undertake bioequivalence studies or face removal from the market. There has also been a focus on integrity of the clinical trials of the applications. Out of 1,429 filings, 241 were approved and 52 failed; the rest were voluntarily withdrawn. Of those 241 approvals, 89% were domestic, about 10% were marketing authorizations from research-based multinational companies. Of the drugs approved in the West, only about one-fifth of them are approved in China, and that represents a significant opportunity for Western companies, Mr. Deere reports. In addition, cfda reform efforts have created new definitions of drug classes and new opportunity for Western companies. Figure 3: China pharmaceuticals market evolution Reform Strategies and Structure China s strategic objective for the domestic pharmaceutical sector is access to foreign innovative drugs now, not years after they have been approved in the United States or Europe. The regulatory pathway has been modified to focus on a much faster approval pathway for innovator drugs. For the domestic pharmaceutical industry, cfda wants to raise the quality of standards by fostering innovation, especially for biologics, bio-betters, and novel compounds, and by creating an export capability. The cfda reforms announced in 2015 included new definitions for new drugs and generic drugs. Prior to the policy changes, a drug that was previously marketed outside China (but not domestically) was considered as a new drug. Under the new reforms, a drug that was previously marketed outside China (but not domestically) will be considered a generic drug for China approval. The reforms also presented fundamental changes to the drug approval pathway, providing for a fast-track process to accelerate drug approvals for drugs that have a clear clinical value, Mr. Deere explains. Drugs with clear clinical value must meet one of the following categories: 1. Novel new drugs that have not been launched in or outside China; 2. Novel new drugs that will transfer production to China; 3. Drugs adopting advanced formulation technology and innovative therapeutic approaches as well as with clear therapeutic benefit; 4. Clinical trial applications for drugs with patents expiring in three years and production applications for drugs with patents expiring in one year.

5 5. Simultaneous global clinical development: developing the drug in the United States, China, and Europe; 6. Registration applications for drug products manufactured in China on the same production line that are applying for synchronized marketing approvals in the United States and European Union with completed onsite inspections. 7. Target specific diseases for prevention and treatment. Implications for R&D-Based Multinational Companies Some multinational companies have established sites and have declared that China will be one of their regional centers. Most began adding development capability over the last three to five years, Mr. Deere reports. Less than one-quarter of the top 25 R&D-based multinationals companies, however, have started to establish significant development centers. As they move forward with these commitments, they may increase their research and collaborative relationship with academia and startup companies. Multinational companies do need to build and/or transfer technologies and processes to Chinese manufacturing plants. Until recently, contract manufacturing organizations could only serve in a secondary capacity to domestic companies. Now, CMOs can serve as the primary manufacturer for innovative companies. One of the pivotal reason is because start-up companies had limited manufacturing capabilities; CMOs manufacture for these smaller organizations, Mr. Deere explains. Recommendations China is the second largest drug market in the world and will be the largest one in the decade or less, experts predict. Multinational drug companies should consider the following recommendations when considering business in the Chinese market: For research-based multinational companies interested in directly commercializing new innovative drugs or older innovative cash cows in China, the cfda fast-track drug approval pathway is the principal option that must be followed. Manufacturing finished product in China is the only fully objective and pragmatic option at this time. Planning for Chinese regulatory filing by global project development teams should commence no later than Phase III.