Is China the cure for ailing pharmaceutical innovation in the west? Part I of III

The phrase “big pharma” conjures a litany of responses; from visceral to analytical, opinions regarding the pharmaceutical industry’s reputation are as varied as their product portfolios.  Regardless of whether pharmaceutical giants are viewed as exploitative or pioneering, their essential role in the healthcare chain is irrefutable.  Pharmaceutical companies provide the avenue to transform scientific discoveries into medical treatments.  The pathway to new drugs typically originates in academic laboratories, where researchers investigate the complexities of basic science.  This process identifies signaling cascades, proteins or genes as potential therapeutic targets, which are subsequently commercialized to develop small-molecule compounds in industrial labs.  After extensive in vitro examination and animal studies, candidate drugs undergo three rigorous phases of clinical trials before being submitted to a regulatory agency for approval and marketing.
This drug discovery and development pipeline is exceedingly expensive, intensive and inefficient: new drugs require an average of twelve years and $1 billion in investments.  Compounding these figures is the high failure rate; nine out of ten new molecular entities fail in clinical trials.  The drug pipeline is costly and fraught with peril.  Clearly, investors would only consider such ventures if the potential for return was correspondingly high.  Indeed, successful drugs that achieve blockbuster status rake in revenues greater than $1 billion per year, with the highest earners attaining over $10 billion in annual sales.  In the United States, the ageing baby boomers are increasing the demand for healthcare and targeted therapies.  Scientific discovery has also proceeded at an exponential rate, unraveling many biological mysteries as technologies advance.  Despite this, FDA approval for new drugs has remained stagnant for the past twenty years.  Pharmaceutical R&D expenditure has increased more than ten-fold since 1975, but new molecular entity and new biological approvals have not reflected even a fraction of this growth.
The majority of the top grossing drugs will come off patent by 2015, representing a devastating loss for pharmaceutical companies, many of whom lack promising candidates to replace them.  Typically, original manufacturers enjoy 20 years of market exclusivity once applications for new molecular entity status are approved—it is important to note that an average of twelve out of those twenty years is consumed by the R&D process, leaving eight years to make a profit before generics become available.  Christened the “patent cliff,” the looming revenue collapse is alarming given that the affected companies represent the innovative leaders in the healthcare industry.  Its causes are varied and complex.  The essence of the problem is the enormous surge in R&D costs.  Clinical trials comprise the majority of R&D spending—typically 40-50% of a project’s total budget—and their price tag has increased, while available funds for this purpose have plummeted.  Venture capital sources have also played a pivotal role in drug innovation, frequently financing small university spin-offs before their purchase by major pharmaceutical firms.  However, funding has dried up due to general economic conditions and the growing view of unfavorable returns in the sector.  The climate for innovative drug development is depressing and negatively reinforcing.  Consequently, companies are abandoning areas of great public need; new treatments for neurodegenerative diseases, psychiatric conditions and others are becoming scarce.  American federal funding for basic science research has not kept pace with inflation, but the rate of scientific progress has continued despite this hurdle.  Therefore, other forces have crippled the drug pipeline; understanding and addressing those issues now is critical to the quality of available healthcare in the future.
China’s relatively nascent pharmaceutical sector presents a blank slate that could provide the solution to the western industry’s R&D woes; fostered correctly, China has the potential to become a leader in biomedical innovation.  Domestic companies have historically focused on the generics market; R&D expenses pale in comparison to first-in-class drug manufacture, not to mention that product offerings are much less volatile.  The tides are shifting in China, however, and the government is upgrading its economy from high-volume, low-cost to quality products with more appeal to domestic consumers.  This sphere is extending to the healthcare industry, and a strong emphasis has been placed on pharmaceuticals.  The evolution is being fueled by demographic trends, such as an ageing population, higher incidence of diseases associated with urbanization, and the goal to universalize healthcare coverage.  The relationship between China and multinational corporations (MNCs) is also in turmoil.  The MNCs were useful for the industrialization of the country; they brought capital, human resources and technology into the country.  But now, as the economic paradigm changes, the Chinese are trying to rebalance the power distribution.  Several foreign heavyweights have come under attack for violations previous administrations overlooked, and for infractions numerous domestic companies are likely also culpable, but have escaped prosecution.  In order to sideline multinational giants, the Chinese will need to make significant gains in pharmaceutical innovation, a course they have already begun to cultivate.
There are three broad aspects that are useful for determining a country’s propensity for R&D: government policies and policy makers; the structure and processes resulting from government action; and resources, including human talent and other assets in the public and private sectors.  China is in clear possession of all three.  In 2011, the Chinese administration identified the healthcare industry as a strategic sector in its 12th 5-year plan, unequivocally sealing its fate as a source of government investment and development.  Sectors targeted by these plans have not escaped rapid advancement.  The government’s commitment has materialized in several ways, including erecting high-tech research parks, tax incentives, and direct investments: RMB 12 million has been allocated for the creation of new drugs from 2011 to 2015.  Universities continue to churn out graduates, an estimated 200,000 of which specialize in biotech R&D.  Emphasis has also shifted to areas of need within the drug pipeline.  For example, Peking University has addressed the dearth of high-quality midlevel managers to act as an interface between foreign executives and local front-line managers by creating a master’s degree program in International Pharmaceutical Engineering Management.  In addition to the burgeoning trove of human resources in China, multinational pharmaceutical corporations have been making significant investments in China since the mid ‘90s, building manufacturing, distribution and R&D centers.  “Brain drain” has thusly evolved into “brain circulation,” as many foreign-educated and employed scientists repatriate.  The staggering rise in healthcare demands expected over the next several years makes the biomedical sector impossible to neglect.  China’s innovative capacities may not be as advanced (yet), but what it lacks in maturity is compensated by its freedom from restraints experienced in the west, and could be just the cure the ailing industry needs.