No discussion of China’s pharmaceutical industry would be complete without addressing intellectual property rights. Over the years, China has made significant strides toward joining international standards concerning patents, trademarks and copyright protections. China has recognized intellectual property rights (IPR) and instituted an indigenous system of controls as early as 1979. Since then, Chinese IPR has undergone numerous revisions pursuant to enrollment in the World Intellectual Property Organization (WIPO) in 1980 and the World Trade Organization (WTO) in 2001, which required compliance with minimum IPR standards delineated in the WTO’s Trade-Related aspects of Intellectual Property rights obligations (TRIPs). In fact, China currently maintains highly detailed and comprehensive IPR legislation. In light of this, why is China notorious for its blatant disregard of IPR law and renowned for its technology theft and piracy? The simple answer is that the judicial system is so poorly enforced in terms of intellectual property, that it provides an abysmal deterrent to would-be thieves. Opacity and difficulty navigating the legal system create enormous barriers for companies seeking retribution for wrongdoing; this problem is particularly acute when the companies are foreign. Although it is important to note that the vast majority of IPR cases being tried in China are between domestic companies—98 %— this statistic could be skewed by the impediments to bringing a case to trial for foreign entities and the perception that a favorable verdict is improbable. More importantly, fines imposed on the convicted are so inconsequential that they frequently fail to cover the cost of legal proceedings. For many counterfeiters, it’s undeniably more profitable to copy and steal technology even at the risk of prosecution, especially considering the heavy investments and risks involved in pharmaceutical R&D.
A second consideration is the level of cultural pride that is actually bestowed upon imitation products. In China, certain levels of intellectual property theft are considered inventive in their efforts to replicate and perhaps improve upon foreign technology. From trains to smartphones, several Chinese companies have made little effort to hide their products’ mimicry and even use it as a badge of national honor. This practice is particularly alarming to multinationals seeking to forge partnerships with Chinese companies in R&D-intensive sectors. Sharing vital information becomes problematic in a background of unreliable commitments. Chinese businesses have a tradition of making lofty promises to entice foreign involvement, but once they have acquired the necessary know-how and experience from multinationals, the MNCs are excluded and enter into direct competition with their previous partners, frequently as a result of their proprietary technology. Clearly, this issue will need to be rectified in order for greater trade to be possible between China and western tech-savvy nations. IPR is a recurring theme in international media, and the Chinese government has responded by pledging reform and improvements to the system. As recently as March 2013, the government has outlined a new plan for improving key aspects of its intellectual property protections. However, because the problem lies with enforcement rather than legislation, these commitments will likely do little to dissuade anxiety. It remains to be seen whether the Chinese administration will make strides in this area, and until concrete proof is available, prudent strategies concerning trade secrets are ideal.
Languishing drug sales in the US and Europe, coupled with unparalleled sales prospects in China, leave pharmaceutical companies little choice but to enter the market. Even in the face of IPR theft and restrictive pricing policies, the sheer size and growth of the Chinese drug market overwhelmingly justify the risk. Multinationals can also take measures to safeguard their products and innovation pipelines by exporting only fragments of their R&D chains rather than the entire process. As discussed in a previous section, the development aspect of drug R&D proposes the greatest potential financial savings, and outsourcing development to China, whether in joint ventures with domestic companies or in a local subsidiary, could present the best approach for market entry. This model could also be employed to keep critical phases of innovation in more secure and protected regions. Furthermore, pharmaceutical companies wishing to do business in China must be more proactive about patent registrations and procedures that are automatically afforded in the US and Europe. Many provisions are unnecessary in the west due to institutional policies that endeavor to safeguard IPR, but in China become the producer’s responsibility. For example, the FDA checks originator patent expiry dates and provisions when generic applications are submitted, but there is no comparable practice in the SFDA, and the originator must file a complaint in the event of infringement. Another key measure in protecting vital information is employees. Blatant corporate espionage and high degrees of employee attrition are not uncommon. It is necessary to scrutinize employee contracts, paying close attention to the beneficiaries of patents resulting from an individual’s work; in some cases a previous employer or university may have legitimate claim to royalties from their findings. Demands for improvements in IPR protections have been widespread and ardent among the international business community in China. While it may be safe to remain skeptical on the topic, it is inarguably within China’s best interest to enact meaningful reforms, not just in name only.
Neglecting actionable IPR policies will have a detrimental impact on domestic Chinese research and development, regardless of multinationals’ interests or involvement. There is good reason why most of the technological leaders also possess the most stringent IPR laws. Without adequate protection, the incentives to innovate vanish. China’s judiciary system will be forced to improve its practices in order for its pharmaceutical industry to flourish; when this will happen, however, is unclear. In addition, whether these evolved policies will put foreign companies on a level playing field with domestic firms remains a question. Given cultural precedent in China, outsiders may never enjoy equitable representation in the eyes of the law, but this has not been sufficient to deter involvement in the enormous—and growing—market. Recent corruption scandals have exclusively indicted foreign multinationals in widespread bribery of medical professionals to increase their sales. There is no doubt that every company selling drugs in China employs this practice. In fact, this behavior was made necessary by pricing and procurement policies as well declining hospital funding. Drug mark-ups are the principle means by which hospitals can subsidize their operations and doctors’ salaries. Most likely, the crackdown is an attempt to force drug manufacturers to lower their prices, but they are focused solely on multinationals; the media have not reported a single Chinese perpetrator. It remains to be seen how multinationals will mitigate preferential behavior, especially if it increases. Some may simply consider it a cost of doing business in China.
At least for now, in many ways the Chinese pharmaceutical industry needs foreign participation. The quality of research in China at both the university level and in terms of first-in-class drug applications has steadily improved over the years. Nonetheless, they still lack the maturity and scientific discipline of western research (including research performed by Chinese scientists in the US and Europe). While China is the second most prolific country with regard to the number of published scholarly papers, their articles are disproportionately represented in lower-tier journals and register less impact than knowledge created in other countries. This is not surprising, as China’s scientific community has only recently transitioned to greater freedom from previously having research areas dictated by the government. China may be producing a staggering amount of science graduates, but many of the brightest are recruited to foreign universities, and the remaining may not have access to developmental opportunities on par with their expatriate counterparts. It would be a tremendous effort for China’s R&D culture to arise independently; the more likely scenario is the continued involvement of western multinationals capable of providing expertise. Although well underway, Chinese pharmaceutical innovation lags behind the west and will require a long period of time before it reaches equivalency. With dependency in mind, multinationals may harness some degree of leverage when confronted with IPR and commitment issues on behalf of Chinese partners.
A converse scenario may also be multinationals’ desire to withhold their knowledge and safeguard their wealth of experience. A superficial examination of trade policies between the US and China reveals a heavy bias: the US wants to preserve its technological superiority. Certain industries can be obviously tied to issues of national security, but the same paradigm can be applied to the pharmaceutical industry. Although it is hard to imagine a way that the Chinese could use pharmaceutical technology against the US, the US may lose a critical bargaining chip in other negotiations if the Chinese acquire sufficient innovative capabilities to negate their leverage. Again, this may discourage multinationals from relocating early-stage research to China. Clearly, without additional meaningful and substantive assurances, multinationals will be very reluctant to fully open their doors to the Chinese. However, cooperation is within the best interests of both western pharma giants as well as local Chinese companies, as both have a lot to gain from combining resources. Hopefully, a resolution will be reached ensuring a harmonious relationship that allows for the progression of science and medicine to benefit all, regardless of nationality.