Pharmaceuticals: Chinese Companies to Increase Efforts in Innovation and Expand to Higher-Added-Value Processes

Given China’s aging population, the ability of the country’s pharmaceutical companies to provide high-quality products has become a critical issue. As the world's second-largest individual pharmaceutical market, China exhibits a competitive landscape in the pharmaceutical industry that still has room for further development compared to the US, the leading market in the world. In China, the contradiction between rising medical demand and a lack of innovation in pharmaceutical products may be one of the core issues affecting people's livelihoods. We believe it is critical for the government and public sector to improve the innovation capabilities of the pharmaceutical industry and to build value chains locally, expanding to processes with higher added value on the value chain and narrowing the gap with the world’s leading market. In this chapter, we analyze the Chinese pharmaceutical industry’s upgrading trend from the perspective of the pharmaceutical supply chain system and ecosystem innovation. Pharmaceutical supply chain systems are classified based on the R&D process. Pharmaceutical R&D has a long cycle. It is relatively independent as it has to meet various types of needs. The economies of scale achieved from the division of labor in the R&D process can substantially reduce R&D costs. Therefore, core pharmaceutical supply chain systems are classified according to the process from R&D to production and marketing. Meanwhile, hardware such as equipment and reagents are used in R&D and production, and they constitute a secondary supply chain system. Pharmaceutical R&D is an ecosystem in which the software is more important than the hardware. Given that every individual has personalized pharmaceutical needs, allocating resources to pursue breakthroughs in a single category cannot improve the competitiveness of the whole industry. Therefore, a well-balanced and evolving ecosystem is the key to competitiveness. The ecosystem includes systems for regulation, scientific research, payments, as well as the capital market, among other factors. Good products can only be continuously incubated to meet patient needs by achieving a dynamic balance of these factors and through market-oriented means. These “soft factors” are the key to competition between countries. Although hardware factors such as medical equipment and reagents are important, most weak hardware processes can be solved or replaced through R&D. As a result, software is more important than hardware in pharmaceutical R&D. A new national system to strengthen the software of the pharmaceutical ecosystem; Chinese companies to increase their presence in higher-added-value processes. Since 2015, China has implemented a comprehensive reform of the pharmaceutical industry, aiming to improve the ecosystem’s competitiveness and to encourage domestic companies to expand into higher value-added processes. Regulation: R&D efficiency of new drugs has improved notably since the drug review reform, and integrating its drug review system with global standards has accelerated the integration of China’s R&D ecosystem. Market-based payment: The National Healthcare Security Administration (NHSA) is accelerating the exit of inefficient products so that more resources are channeled to high-quality products. Capital market: The introduction of Chapter 18A (The Stock Exchange of Hong Kong Limited introduced Chapter 18A to permit the listing of biotech companies that do not meet any Main Board financial eligibility tests.) and the establishment of the SSE STAR Market has made financing more convenient for innovative companies. The primary market has become more active in investing in the pharmaceutical industry, attracting a large amount of investment for innovative product incubation. Comprehensive reform has improved the pharmaceutical ecosystem, making it more competitive. We expect the domestic pharmaceutical industry to gradually shift from R&D outsourcing toward high-value-added innovative products.