The Challenge of China

Much has been made of the advantages of doing business in China in recent years. Unlike western markets, it is far less mature – the pharma sector is growing at double-digit rates, for example. In fact, it is already the world’s second largest pharmaceutical market, and the IMS Institute for Healthcare Informatics predicts the annual spend may reach $185 billion by 2018 in its report, ‘Global Outlook for Medicines through 2018’, published in November 2014.

Per capita spending may be low, but the huge population bumps up the total, and this per capita spending is predicted to grow by more than 70 percent in the next five years; even then, it will still be just nine percent of the level in the US. Little wonder then that western pharma companies see China as a huge opportunity.

Alongside this burgeoning market for pharma products is a growing outsourcing market, thanks to western pharma companies’ eagerness to outsource the more routine pharma research operations to Chinese companies, from chemical synthesis to biological screening, with the aim of saving money. Although it is not the cheap option it once was, there is still a heavy reliance on outsourcing research to China. The authorities’ requirement that any medicines licensed in China must have undergone Chinese trials has also encouraged western companies to carry out clinical studies there. And let’s not forget that the large, untreated population can offer a huge pool of potential trial subjects.

The tide is turning

Growth has now started in the other direction, as well. China has a well-established manufacturing industry but Chinese companies in the pharma sector are increasingly outsourcing to the western companies, who have set up operations within China.

Even with the flood of returnees – young scientists trained in western universities and pharma companies heading back to China (often to care for aging parents) – there is still an enormous need for the experience, knowledge and skill set offered by western experts. I have visited many small-to-mid sized Chinese pharma companies and found that while they have money and enthusiasm, they are often very short on technology and know-how.

Yes, many large Chinese pharma companies have already collaborated with partner companies in the west to secure the expertise they are missing or hired the talent they need to run their operations from overseas. Indeed, most of the large western pharma companies have entered the Chinese market via some form of joint venture with a big local rival; brand names are everything and while some of the Chinese companies have managed to develop their own brands fairly successfully, the additional cachet of big western brands is perceived as extremely advantageous to their prospects. However, their smaller counterparts frequently have not entered into such arrangements. I think if it is properly packaged, marketed and targeted, an annual growth rate of 10 percent, if not 15 percent, should be easily achievable for companies looking to work with smaller Chinese companies. As well as technology and knowledge, western partners can offer quality improvement and organization, with more streamlined business processes and expertise in GLP and GMP procedures. Western partners can also act as a conduit to help Chinese companies to expand globally by using their knowledge of markets and regulatory demands.

Analytical opening?

There is another area ripe for partnerships between western and Chinese companies in the pharma sector: analytical services. Outsourced analytical services is still a fairly young market and, therefore, offers plenty of potential for growth. SGS established its Life Science Services operations in the Chinese market in 2006 at a time when there was huge demand in the country for testing, a lack of fundamental knowledge and, crucially, an absence of that all-important international accreditation which allows a business to create products that will be acceptable for export to international markets. In 2006, SGS began its Life Science Services operations with a small team of 10 employees in response to a request from a global client. By mid 2014, the laboratory space had increased to 1,500 square meters with 75 employees. Recently, SGS announced additional investments to increase the laboratory to 2,000 square meters, also increasing its capabilities to include extractables–leachables packaging testing, inductively coupled plasma mass spectrometry (ICP-MS) to address upcoming USP<233> Elemental Impurities guidelines, a dissolution lab for generic drug stability studies, and a highly active compound testing laboratory to meet growing market demand.

As the Chinese start to develop this know-how, acquire the skills and develop potential, they will surely start to become more protective of their own companies. Though they were sadly lacking before, the money and market are now there, and their knowledge and expertise are growing, so why allow foreign companies to compete? And another notable factor that must be taken into account is that as Chinese exports stagnate or even decline, companies are starting to put a much greater focus on serving their own domestic market. After all, a population of 1.4 billion generates a lot of consumers! The upshot? Well, I would say that unless a US or European company providing analytical services already has a foothold in the Chinese market, they will find it increasingly hard to enter. In other words, the clock is ticking...

However, despite the steadily growing challenges, China still offers great potential to western companies in terms of analytical services. In many cases, Chinese companies remain behind the bar when it comes to implementing and complying with international standards, such as ICH and GMP, because they simply cannot keep up with the growing demand. As they struggle to become a major force in overseas markets as well as at home, they need western companies to help them bridge the quality gap. Even at home, as the wealth per capita increases, consumers are ever more likely to want products that offer them quality rather than just simply being cheap. And quality is what the west has experience in providing.

One country – five markets

The tactic of providing a one-stop shop service to customers across the whole of China is very unlikely to succeed. Quite simply, China is far too big a country, with far too many people. My advice would be to treat China as four or five distinct markets, based on its different regions and dialects, including Mandarin, Wu, Yue (Cantonese), Min and Jinyu. The one-stop shop approach would mean having to find a way to satisfy the unique conditions of all five of these separate market segments, which would be complicated (and therefore costly) and doomed to fail.

Of course, there are local Chinese suppliers who meet some of the needs of local pharma companies. There is an abundance of local laboratories who offer contract analytical support. That said, adherence to those all-important GLP and GMP standards remains somewhat questionable. Many analytical service providers in China – both local and western companies with Chinese operations – aim to service western companies from their operations within China. And herein lies the big opportunity: working with the pharma companies whose needs are still under-served.

When it comes to keeping the Chinese regulators happy, it has to be said that they appreciate companies working with western partners, because they are more likely to adhere to international quality standards. However, they still expect those partners to respect and meet all relevant local regulations. Therefore, to be successful, it is vital that companies fully cooperate with the Chinese regulators and demonstrate that Chinese criteria are being fully satisfied. For SGS, having a laboratory in Shanghai means that we have local accreditation, and our scientists and quality experts have a good understanding of the local regulations. Importantly, this lab is part of the global SGS Life Science Services network, and therefore automatically works under our global quality standards, ensuring high quality and compliance with western regulations as well.

Chinese requirements

In recent years, the Chinese FDA has revised its guidance, and it now tracks very closely to the guidance set by the US FDA. This converging approach is also reflected in other documents. For example, the Chinese Pharmacopeia strives to harmonize with the existing guidelines set by the US and Japanese pharmacopeias.

Even though the Chinese FDA is now trying to streamline its processes, many overlaps in authority, requirements and agency oversight exist within the Chinese government. It is therefore very important to identify the correct regulatory agency prior to moving forward in business to ensure compliance with local and global regulatory agencies. The real area where western quality testing labs can make their money is in final testing of products for export. The importing country will have different testing requirements to those for the Chinese domestic market. And in many cases the requirements will be more stringent than those for internal use. The west does not fully trust the quality of testing work carried out by the Chinese regulatory agencies, so a western company in China with international accreditation for its laboratories can charge a premium to Chinese pharma companies wanting to export goods.

Chinese consumers often have a deep mistrust of their own regulatory agencies too, and this boosts the demand for outsourced testing of products for consumption at home. The most recent restructuring of the Chinese FDA has provided consumers with the ability to have an input into the formulation of food standards, the selection of risk assessments, the reporting of crimes, and even criminal punishment; we should never underestimate consumers’ knowledge and awareness – after all, they drive the future success of any product.

The most important piece of advice I can give to any company looking to set up as a service provider in China is to remember the essential point that it really is not a single market. Western companies tend to cut China up into homogeneous regions, but I would actually consider it as five different countries, each with their own unique culture, people, resources and business environment. Making generalizations that what’s right in Shanghai is also right in Chengdu or Hainan is guaranteed to hinder your growth – or even lead to failure.

SGS’s success in China is rooted in an understanding of the importance of China in the global market as well as the local market, local culture, hiring qualified local people and offering continuing training from our global quality and compliance.

Fadia AlKhalil is vice president of Global Alliance & Partnership, SGS Life Science Services, Fairfield, New Jersey, US.

Six Tips for Success in China

1. Hire locals with international knowledge
2. Train globally (especially in terms of quality/compliance)
3. Follow both local and global regulations closely
4. Understand the local and national culture
5. Offer capabilities based on your clients’ needs within each region
6. Focus on global clients’ needs and grow your capabilities accordingly