China Tops U.S. In Healthcare Expansion Destination But Regulatory Burdens Weigh – Survey

Despite a deepening economic slowdown and ongoing market access challenges, China overtook the U.S. as the top destination for expansion in a survey of global healthcare executives. Meanwhile, the 300-plus executives surveyed by UPS also rank regulatory hurdles above cost as the top barrier to expansion.

BEIJING – One-fourth of senior-level decision-makers responsible for supply chain and logistics in pharmaceutical, medical device and biotech industries in the U.S., Europe, Asia and Latin America have picked China as their top destination for business expansion, according to a survey conducted by United Parcel Service.

In comparison, 22% of the executives preferred the U.S., 16% chose Brazil and 12% selected India as the top destinations for expansion of their businesses.

China’s growing middle class, expanded medical coverage and changing disease types have led to increased demand for medical services and therapeutics, and multinational companies have increased their pace of localization accordingly to maintain growth momentum (Also see "Multinationals Accelerate China Localization In 2012" - Scrip, 16 Aug, 2012.).

Meanwhile, increasing regulations in emerging markets presents the largest business concern for executives in the U.S. and Western Europe. Tighter regulations, underscored by increasing governmental involvement in reigning in healthcare costs in countries such as China and Brazil was cited by 57% of U.S. executives and 46% of their European counterparts as a top concern.

“As healthcare companies expand their operations, they have found keeping up with regulations in different countries to be a challenge,” the report said, adding that increasing regulations has led cost management as the top business issue reported by the global healthcare companies since 2011.

Not surprisingly, the cost for regulatory compliance is also rising, adding a burden to operations in emerging markets. "Healthcare companies are feeling the pressure to expand and drive new growth while containing costs and ensuring compliance around the globe," UPS Healthcare Logistics VP Bill Hook said in a statement.

In the case of China, regulatory hurdles result in prolonged approvals and delayed coverage, leading to a six-to eight-year lag on average for a new drug to gain market access, according to an IMS study (Also see "Lost In Reimbursement? Innovative Drugs Encounter Lengthy Delays In China – IMS Study" - Scrip, 13 Aug, 2012.).

Pharmaceutical executives also cited a complex regulatory system as one of the main stumbling blocks to innovation in China (Also see "China’s Drive For Innovation Stymied By “Nightmare” Pharma Policies" - Scrip, 23 Mar, 2012.).

Despite the headwinds, 77% of the surveyed companies said they have tapped into new markets in the past 18 months. Of those surveyed, 166 came from pharmaceutical companies, 165 from medical device and 46 from biotech firms.

Looking ahead economically, Asia-based decision-makers seemed to have more optimism. Roughly 53% in the U.S. said they are still feeling the economic pinch, while only 26% in Asia shared that view. Nearly 90% of Asia executives plan to expand globally in the next five years.

Collaboration Top Solution

“From industry leaders to middle market companies, healthcare companies are looking for ways to be more collaborative, provide integrated solutions and address segmentation issues around their customers,” UPS’ Hook added.

One such collaboration is increasing the use of third-party providers such as distributors and retailers, the report said. Yet when asked about channel strategies for the next 18 months, only 15% of the executives said they would increase collaboration with wholesalers and distributors, citing lower overall costs, faster delivery time, better patient visibility and centralized inventories.

Increased collaboration is evident in China. To reach China’s lower-tier market quickly and cost-efficiently, multinational companies are ramping up partnerships with leading distributors.

Pfizer Inc. signed on China’s largest drug distributor Sinopharm Group Co. Ltd. to expand product distribution in retail stores. In a July 15 agreement, the two firms are partnering on branding, channel management, data collection and information exchange towards a new pharma retail model (Also see "Pfizer, Sinopharm Partner In Drug Sales" - Scrip, 3 Apr, 2012.).

Sinopharm, which is partly owned and managed by China's central government, has its own plans to spend RMB 5 billion ($759 million) to acquire companies in 2012 and 2013. It signed a strategic cooperation agreement Oct. 13 with the Hainan provincial government to expand its presence to the southernmost province in China.

The deal came on the heels of Sinopharm signing a project cooperation agreement with Fujian province in southeast China Oct. 9. Sinopharm will invest RMB 3 billion through 2015 to build a pharmaceutical platform, providing drug manufacturing, distribution and R&D services.

Looking to leverage a potential lead in human papillomavirus vaccines in China, Merck & Co. Inc. teamed with Chongqing Zhifei Biological Products Co. Ltd. to distribute its Gardasil (Also see "Merck Ties Up With Zhifei To Distribute Gardasil In China, But What Happened To Sinopharm?" - Scrip, 12 Oct, 2012.).

In addition to collaborations with distribution and retail partners, global healthcare executives are also contemplating increased direct shipment to distributors and patients – more than 20% of those surveyed expressed a desire to do so in the next 18 months.

Similar measures are taking place in the Chinese operations of Cardinal Health Inc. Since entering China through its Zuellig Pharma Asia Pacific acquisition, the second-largest U.S. drug distributor has started a direct-to-patient retail platform. In Shanghai, it offers home delivery, patient education and data management (Also see "Riding Consolidation Wave, Cardinal Health Looks To New Business Models In China" - Scrip, 9 Aug, 2012.).

Regulatory Relief?

Recognizing a need to streamline its administrative process to speed up drug and medical device approvals, China has taken steps to reduce its regulatory complexity (Also see "China's Center For Drug Evaluation Remakes Itself To Enter New Era Of Transparency, Speed Up Approvals" - Scrip, 11 Mar, 2011.).

After a silent 2010 without a single new chemical entity approved in China, the State FDA approved a record five in 2011 (Also see "Five NCEs Approved In China In 2011: A Closer Look At SFDA’s Progress Report" - Scrip, 11 Oct, 2012.).

Moreover, earlier this month, the State Council issued a notice to eliminate some of the requirements for validation of Class II and low-risk Class III medical devices. China’s cabinet also lowered approval authority from the provincial level to the city level for license applications to sell Class II/III medical devices and to distribute anesthesia and Class I psychiatric drugs. It also streamlined processes for drug registration and re-registration.

“The initiative signals government’s intention to improve the drug approval efficiency; however, shortages in reviewers could remain a major bottleneck,” Citi Analyst Richard Yeh said in an Oct. 25 note to investors.