Whither Big Pharma as China enters a new era in the global drug industry?

China is at the center of global corporate strategy for Swiss-based F. Hoffmann-La Roche AG in the coming decade, the company's China head recently told business graduates of the China Europe International Business School.

That strategy, which aims to make Roche one of the top three multinational pharmaceutical companies in China by 2030, will rely on a value chain structured to mitigate geopolitical risks and take advantage of China's cutting-edge role in biotech innovation, Vivian Bian said.

The market for new medicines in China is expected to almost triple to US$70 billion by 2030, thanks to government policies encouraging growth of the sector, which include streamlining the drug regulatory-approval process.

Roche said it plans to further upgrade its core competency in research and development, manufacturing, marketing and industry partnerships, utilizing the expertise of its China Innovation Center in Shanghai. It seeks to include three new China-originated medicines into its global Phase 3 trials.

The strategy may indeed work well for Roche, but one size doesn't necessarily fit all as Big Pharma seeks to make inroads in the world's second-largest pharmaceutical market. Each multinational company is tailoring the path forward based on its own operational model, expertise and assessment of opportunities.

Three-decades of a golden age

A bit of historical perspective is needed to explain how we got to this crossroads.

In the late 1970s, China adopted policies opening the nation to foreigners and modernizing its domestic industries. They allowed foreign pharmaceutical companies to gain a first toehold in China.

Japan-based Otsuka and Sinopharm, China's largest state-owned pharmaceutical company, set up the first foreign joint venture in the industry in 1981. A year later, US-based Bristol-Myers Squibb followed suit in partnerships with Sinopharm and Shanghai Pharma.

The ventures built manufacturing sites, which created a "license to operate" for any foreign pharmaceutical company doing business in China at that time. The sales generated in China were very limited compared with home markets, but the foreign partners introduced modern drug manufacturing techniques, marketing expertise and medical knowledge to China, setting themselves up to benefit from early entry in the country.

In the 1990s, the rush was on. Several multinational companies knocked at China's door, among them, Merck Sharp & Dohme, AstraZeneca and Roche. At the time, foreign companies focused largely on manufacturing and commercialization, with all of them enjoying a golden period of annual growth of between 20-30 percent.

Research and development were not an initial focus for their China affiliates, which suffered from poor infrastructure and limited talent pools.

In 1994, Roche was the first foreign pharmaceutical company to set up a China headquarters and manufacturing base. It was located in Pudong's Zhangjiang, then China's first national high-tech industry park.

China entered the World Trade Organization in 2001, fundamentally transforming its growth trajectory. Leading multinational companies began to set up research and development centers in China.

Roche, which set up its facility in 2004, was among the first to recognize the potential of drug research in China. The early stages of research and development efforts in China were focused on the development of medicines, with foreign companies basically bearing the huge cost of labor-intensive Phase 3 trials.

Adapting to China's normalization

The decade that began in 2010 was the first crossroads for foreign companies to decide their paths forward in China.

For some Big Pharma companies, sales in China contributed to more than 10 percent of global sales, making China a top market after the US and Japan. By 2020, AstraZeneca's China sales contributed up to 20 percent of global sales, making it the UK-based company's second-largest market.

Beginning in 2016, Chinese government required generic drug producers to conduct "quality equivalence" studies to demonstrate efficacy and safety on a par with a drug's original patent holder – a usually foreign player. This move paved the way for the government to replace patent-expiry drugs with lower-cost generic copies.

In 2019, China began a pilot program in 11 cities – fully extended nationwide in 2021 – to lump original patent medicines and quality-tested generics into one basket on the bulk-buying national drug reimbursement list. This ended the golden age when foreign companies enjoyed preferential pricing for patent-expiry medicines.

In mature pharmaceutical markets, the prices of drugs typically plunge when patents expire. But in China, before the volume-based purchasing policy was adopted, drug originators could enjoy high pricing even after patents expired.

Industry lobby group such as the R&D-based Pharmaceutical Association Committee, which represents foreign companies doing business in China, mounted a significant campaign to convince the Chinese government to take a more moderate, step-by-step approach in reducing off-patent pricing, but it wasn't successful.

The performance of multinational companies in China began to diverge as a result.

At the same time as China was normalizing its pricing strategy for off-patent medicines, it was also significantly accelerating its drug regulatory approval process, reducing it from the previous seven-to-eight years to the current one-to-two years. That makes it possible to simultaneously launch new medicines in China and other countries, helping compensate pharmaceutical companies for any loss of sales due to the off-patent medicine policy.

Multinational companies found themselves at another crossroads in China strategy.

Companies like AstraZeneca, Roche and Eli Lilly strengthened their research and development arms in China, seeking to enhance their new drug pipelines with discoveries in China.

German-based Boehringer-Ingelheim set up its first biologics-contracted manufacturing base in China. Innovative new biotech players like US-based Amgen, Biogen and Celgene began entering the Chinese market.

Celgene later merged with Bristol-Myers Squibb. After entering China, Biogen shuttered its China office due to the long regulatory approval process for new medicines, and then decided to re-enter China in 2017 with its portfolio of rare disease drugs.

Amgen's approach is perhaps the most noteworthy. It set up its China operation in 2012. Seven years later, the company entered into collaboration with China-based biotech company Beigene to expand its cancer-drug presence in China.

Under the arrangement, Amgen acquired a 20.5 percent stake in BeiGene for about US$2.7 billion in cash, and both companies agreed to work on advancing Amgen's innovative oncology pipeline in China, while Amgen continued to market non-cancer drugs in its portfolio in China. The strategy proved a success.

Coronavirus upends the industry

COVID-19 changed the pharmaceutical world.

Biotech investment has cooled since 2022 and only began showing signs of a rebound last year.

Pharmaceutical companies had to adjust to single-digit growth in China after a rapid era of growth. Geopolitical tensions and supply chain concerns have been recurring topics since the coronavirus outbreak.

Roche, which celebrated its 30th anniversary in China last year and will celebrate its 130th global anniversary next year, has committed itself to strengthening investment in China. More importantly, it is one of the few Big Pharma companies to boast a full supply chain in China – from research to manufacturing, marketing and domestic partnerships on a large scale. That has positioned the company uniquely to play a big role in China and Asian markets, notwithstanding US-China tensions.

Roche's global group sales rose 7 percent last year to 60.5 billion Swiss francs (US$69 billion), with key growth drivers like Vabysmo to treat severe eye diseases, Phesgo for breast cancer, Ocrevus for multiple sclerosis and Hemlibra for haemophila A.

Roche has set itself ambitious goals: At least 80 percent of drugs in its pipeline must have the potential to be the first or best in their respective fields of treatment. This clearly requires an acceleration in the development of pioneering drugs, while bringing selected offshore innovations on board.

In China, Roche's sales rose 6 percent last year, driven by the growth of cancer drugs Perjeta, Alecensa and Avastin, and higher sales of the influenza drug Xofluza.

Roche set up its China research and development center in 2004, and upgraded it into the China Innovation Center, which has its own independent power to decide on new drug development. That is a reversal of the standard corporate policy where such decisions are typically made by multinational global headquarters.

By the end of 2024, Roche's center had generated 320 patents and advanced 11 compounds into clinical trial stages.

Starting from 2022, Roche also entered into several of exclusive global licensing deals with Chinese biotech companies, mainly in the realm of cancer treatment.

In January, Roche signed an agreement with Suzhou-based Innovent, one of China's leading biotech players. It involves development of Innovent's IBI3009, a novel "antibody drug conjugate" that targets DLL3, an antigen with low exposure in normal tissues but significantly overexposure in certain cancers, particularly small-cell lung cancer and other neuroendocrine tumors.

The drug promises to be potentially the best in its class. Innovent will receive an upfront payment of US$80 million under the agreement and is eligible to receive up to US$1 billion in development and marketing milestone payments, along with tiered royalties on net sales.

Roche is doubling down in areas with distinctiveness in China as a growth engine. It has scaled up play in selective areas of strength, such as cancer and neuroscience. It has also modernized its commercialization model, with partnership in digital and AI solutions.

A few interesting examples.

The average treatment response rate for liver cancer patients is about 20-30 percent. That means one of three patients, after taking medicines, may have a response. Roche collaborated with Zhongshan Hospital in Shanghai to develop a drug response prediction model, combining PET scan data and AI algorithms, which could predict the treatment response rate for liver cancer patients up to 80 percent.

The company collaborated with Xiamen University in southeastern China to develop a flu forecast model to help prepare governments and hospitals for influenza seasons. The accuracy rate could reach up to 90 percent in predicting a flu outbreak within two weeks' time.

Roche is clearly positioning itself to take a leading role in the next phase of growth of the pharmaceutical industry in China.

There is no doubt that China is poised to become a dominant force in the development of high-quality medicines. It is just the beginning of a new era. To take advantage of the potential, companies must move beyond research and development and forge more innovative ways to partner in the marketing of drugs and the adoption of digital and AI technologies to enhance efficiency.

Some players, such Amgen and Biogen, see China more as a commercial market. Amgen has taken a very focused approach in sharing its oncology portfolio with Beigene, and Biogen has narrowed its portfolio to achieve healthier margins.

Looking forward, multinational pharmaceutical companies may need to choose a path forward in China that embraces expanded partnerships with local companies or that beefs up their own commercial muscle in such an important pharmaceutical market.

(The author has more than 20 years' experience in China's pharmaceutical and meditech realms and held senior executive positions in industries spanning oncology, neuroscience, corporate strategy, commercial operations and public affairs in China and the US. She was CEO of a Hong Kong-based biotech startup before founding her own business consulting firm.)