Pharmaceutical companies in China are facing a severe downturn due to rising competition and a fall in consumer confidence, yet the authorities recently ordered dramatic cuts in the prices of three key drugs. The counterintuitive move can be seen as a cynical ploy by the government to exploit a moment of weakness in the industry, but China's actions may belie its intentions.
China's pharma sector is in a state. Apart from competitive pressures and consumer worries, the industry is facing price wars and a drought in product lines. Pharma executives are palpably anxious about ongoing investigations into corrupt sales practices involving Chinese physicians and company sales representatives.
Against this backdrop, the National Health and Family Planning Commission announced price cuts for three patented drugs -- GlaxoSmithKline's hepatitis B drug Viread was cut to 490 yuan ($74) a month from 1,500 yuan; AstraZeneca's lung cancer medication Iressa was cut to 7,000 yuan from 15,000 yuan; and Icotinib, a lung cancer drug manufactured by China's Betta Pharmaceuticals, was cut to 5,500 yuan from 12,000 yuan.
In early June international publications carried stories of a brain drain at China Food and Drug Administration -- a problem which could further hobble the understaffed agency, preventing the development of the effective system of drug testing and approval that is essential if China is to continue to develop national expertise in life sciences.
These developments might suggest a looming calamity for both domestic and international pharma companies in China, where the CFDA was seen to be impotent even before the latest revelations. Drug applications face waiting periods of many years, and the whole agency has fewer staff than the San Francisco office of the U.S. Food and Drug Administration, its American equivalent. Vigorous pleading by traditional pharma companies and China's thriving biotech community for an easier path to commercialization for novel compounds falls on deaf ears.
At first glance it looks as if the pharmaceutical industry is being stifled by authorities that neither understand it nor care about it. But the truth is that the future of pharmaceutical innovation, and in particular of homegrown innovation in life sciences, is of the utmost concern to China.
The latest and best report on the state of Chinese life sciences innovation was authored in April by Benjamin Shobert, Josh Wong and Xiaru Fei, writing for the National Bureau of Asian Research, a Washington D.C. -based think tank focused on Asia policy.
In their two-part report, the authors write that China is in the midst of massive government spending on life sciences infrastructure and early-stage company funding, and is reaping the fruits of decades-long efforts to attract foreign-educated science and technology professionals from the Chinese diaspora.
They write that infrastructure build-up and capital infusion into life sciences have been accelerating since 2007, adding that in "the life science field specifically, there are currently estimated to be at least four hundred provincial and national biotechnology parks and clusters in China."
China's State Council, the country's chief administrative body, has aggressively been providing funding for government-owned venture capital vehicles to invest in health and biotech endeavors. The year 2014 alone saw an addition of 39 such funds totaling roughly 196 billion yuan, according to the report.
Harboring a dream
With the return of close to 2 million Chinese science and technology researchers educated abroad, the infrastructure build-up and government cash investment has resulted in impressive pipeline gains. As an example, Suzhou's BioBay, one of hundreds of life sciences parks built since the early 2000s, hosts more than 100 companies involved in drug discovery. Between 2007 and 2015, Biobay's companies submitted 58 applications for clinical trials to the CFDA, which granted 18 approvals in that period.
The report said that the goal of this nationwide effort was to create an innovative product with the aim of reaching the final stages of approval by the FDA, which would facilitate global distribution, by 2020. This is a dream harbored by the Chinese government since the publication of China's 11th five-year plan more than a decade ago. Now, facing financial and economic turbulence, the pursuit of innovative drugs is more important than ever.
One reason is that high-salary jobs in the industry might help China's battle to avoid the so-called middle-income trap -- the tendency of developing economies to stagnate before achieving high-income status. Another is that domestic drug innovation has the potential to help the Chinese government to extend its soft power on a global scale, especially in an era when China is being sidelined from large-scale trade agreements such as the Trans-Pacific Partnership.
Given the importance of the sector to China, it would be odd if the government were actively working to undermine the potential of life sciences, or if it were actively pursuing policies with little thought being given to their impact.
A better analysis is that both China's life sciences dream and the best intentions of government planners and companies are running up against growing demands for low-cost healthcare provided by the state, which is exposing the natural limitations of the country's governance structure.
The price cuts come at a time when the rising Chinese middle class is demanding better healthcare options, but China cannot afford to respond. According to one anonymous CFDA official, cited in the NBAR report, establishing healthcare standards at even 60% of the cost in Western economies "would bankrupt the Chinese government."
Similarly, China's inability to retain talent in the CFDA and related institutions at the local level is not really the result of a lack of top-level political interest. It can be better understood as a function of a government structure that has parallel lines of authority at the central level, leading to delays in funding and policymaking.
When the CFDA needs funding, multiple ministries and administrative organs have to be involved. When local CFDA offices need to be funded, the headaches are multiplied because both central and local branches of the same ministries and organs have to be consulted.
The recent price cuts show that analysis of government action or inaction related to pharma and life sciences needs to start from the basis that China is deeply committed to those industries for a variety of political and economic reasons.
When policies and actions seem contradictory, observers should look not for deliberate sabotage but for the built-in roadblocks that stand in the way of China realizing its life sciences dreams.
Damjan DeNoble is a partner at Rubicon Strategy Group, a health care business consultancy that focuses on China and Southeast Asia.