After a hot period of rapid growth from 2009 to 2012 and a relatively cooler period of slower growth from 2013 to 2015, China has once again become a top-of-mind priority for the CEOs of most large, multinational pharmaceutical companies.
In March 2019, the R&D-Based Pharmaceutical Association Committee (RDPAC) and the Pharmaceutical Research and Manufacturers of America (PhRMA) hosted the International Pharmaceutical Innovation Forum in Beijing. No fewer than seven CEOs of major multinational pharmaceutical companies—Eli Lilly, GlaxoSmithKline, LEO Pharma, Merck KGaA, Pfizer, Sanofi, and UCB—participated. A few days earlier, the CEOs of several other large multinationals attended CDF (China Development Forum), an annual business forum hosted by the research arm of China’s State Council.
It’s hard to imagine any other country, except the United States, having such drawing power at CEO level. What’s behind this trend? And more importantly, what are the implications?
I see four primary sources of value creation, applicable across industries, for multinationals operating in China (Exhibit 1) and nine main implications for pharmaceutical multinationals to ponder and debate.
1. Growth from millions to billions: China is already a key contributor to the revenues and growth of multinational pharmaceutical companies
The trend of China being a CEO-level priority is not unique to the pharmaceutical sector: we observe it in medtech as well as the consumer and auto sectors. For example, China’s contribution to global growth in personal consumption by 2030 is expected to equal that of the United States and Western Europe combined. The country is already the largest market for several important product categories, ranging from luxury goods to cars.
The trend is made clear in the quarterly earnings releases of most major pharmaceutical multinationals. Their performance in China is often a bright spot—and one they increasingly showcase. Some companies even position China as a “key pillar of future growth.”
For some pharmaceutical multinationals, China is already a top two contributor, second only to the United States, to total top-line revenues. For others, it is the main growth driver. At the end of the second quarter this year, several companies disclosed year-to-date China growth figures of well above 30 percent. Given the scale of businesses operating in China today—several of which have revenues in the billions of dollars—these numbers have a meaningful impact on global performance. For some companies, China accounts for as much as 25 percent of global growth (Exhibit 2).
2. Innovation: China is an emerging source of product, portfolio, and business-model innovation
In a recent interview with China Daily, Novartis’s head of global drug development and chief medical officer announced that the company is working on “having every pivotal drug-development program include China from the beginning by default.” Many companies are embarking on that journey, made possible by the National Medical Products Administration (NMPA) reform.
Beyond pipeline management and acceleration, companies are also tapping into China’s innovation ecosystem. In the past three years, we have seen AstraZeneca open a commercial innovation center in Wuxi, Merck KGaA open innovation hubs in several locations, Novo Nordisk open its INNOVO platform in Beijing, Johnson & Johnson introduce its JLABS concept in Shanghai, Sanofi announce a global research institute in Suzhou, and F. Hoffmann-La Roche announce a new early research center in Shanghai. While these centers may vary in scope and operating models, they typically aim at fostering innovation through partnerships with other players in the ecosystem (Exhibit 3).
3. Global supply chain: China is emerging in a more central role for biopharmaceuticals
Sectors like advanced electronics are likely to give China a central role in their global supply chains. For the biopharmaceutical sector, however, the trend is only emerging. While we do see significant manufacturing capacity for small-molecule organic compounds in mainland China—for both the Chinese market and for export—multinational companies have so far resisted adding capacity for large-molecule manufacturing. This can be explained by several factors, most notably a concern around intellectual-property protection. One would expect that, over time, this will become increasingly manageable. Some companies, such as Boehringer Ingelheim International, already operate plants for large-molecule-contract manufacturing in mainland China, while others, like Lonza, have announced plans to do so.
4. Capital and talent: China’s role in both is expanding
We have seen China’s expanding role in capital play out clearly in the world of biotech, with Chinese venture capitalists being very active players in global funding. In fact, in 2018, roughly 40 percent of biotech funding in the United States came from Chinese sources. We also see China’s pharmaceutical companies and investors—including Luye Pharma and Fosun International—making larger and larger strategic investments outside of China; however, it is still an early trend. On the talent side, several senior executives of leading pharmaceutical companies are China based. For example, the current executive vice president of the international group for AstraZeneca and the head of the Africa, Asia–Pacific, and Middle East region for Novartis are both of Chinese origin and based in Shanghai.
What does it all mean? Implications and predictions
For pharmaceutical multinationals operating in China, I see nine main areas to consider:
- Move up—and up. China’s importance in many pharmaceutical companies’ global agendas will continue to rise, with an increasing number of companies managing China as a region itself rather than as a country within the Asia–Pacific region. The current model may continue to work well, but as China’s position grows, its appetite for investment and impact on regional performance will become such that the Asia–Pacific region will increasingly resemble a China-plus region. As a result, many companies may decide to have their China groups report more directly to the CEOs or to direct reports of the CEOs.
- Beware of the spotlight. The top-line contribution of China to revenues and growth will become a hot topic, given the visibility of these metrics to global investors. We are reaching the point at which performance in China can “move a stock.” The challenge, however, is predicting China’s future growth with accuracy—it remains a guesstimate, at best. Companies will need to manage expectations but could still find themselves surprised by performance on a quarter-by-quarter basis.
- Expect peer pressure. As more and more companies communicate to investors about their performance and strategy in China, more discreet companies could be asked by financial analysts to clarify their strategic stances toward the market. This is not to say that all companies should make China a top priority. But not doing so may increasingly require a clear explanation.
- Be wary of tensions emerging from proponents of the status quo. As China takes its position at the global boardroom table, internal tensions with traditional developed markets could increase. The rise of China as a global priority will inevitably lead to some soul searching in markets where growth prospects are more uncertain or even declining. Committing to China will require more allocation of resources—particularly capital and talent—and will inevitably lead to difficult budgetary discussions as companies aim to maximize return on investment on a global basis.
- Mind the gap in supply chain. Demand in China is on a scale not seen elsewhere in the world. In the past few years, we have witnessed some supply-chain disruption because of the sudden uptake of demand after reimbursement, for example. Going forward, allocation of supply to China could become a complex strategic decision that considers the significant upside in volume. But it will also, in some cases, need to be weighed against the lower price point of drugs required to secure national reimbursement in China. The question of ramping up local manufacturing to supply the local market will be squarely on the table.
- Count on the talent market to heat up. The rapid growth of the market is creating an exceptional environment for talented executives at both multinational pharmaceutical and local Chinese biotech companies to pursue a range of attractive career opportunities. To stay competitive in this new market for talent, companies will need to rethink fundamentally their value propositions to the talent they hope to hire—and retain in China. Just adapting a global recipe for talent management may not be enough to sustain differentiation.
- Plan for “fast and slow” integration with global R&D. Integration with global R&D remains a work in progress. The strategic intent is relatively clear. But the ability to execute the strategy remains a challenge in the context of what is still a developing innovation ecosystem. Success will depend on several key factors, including how much a company can motivate and mobilize its global product leaders to engage the China team fully; clear strategic alignment and effective communication between the global and China product teams to drive robust strategy, along with high quality and rapid execution; and a strong and capable China team that can put China into the global context and effectively influence the global organization. This is not an easy formula to follow.
- Consider China a must-have on a senior-executive résumé with global aspirations. China experience can be a big career boost, and that message will be increasingly heard by middle management. What better proving ground for future senior executives than experience in running China businesses? China is a large, volatile market in which the complexity of engagement with external stakeholders is among the highest anywhere and the pace of external change is often greater than the pace of internal change. We already have examples of this trend, such as the current CEOs of Biogen, Eli Lilly, and GlaxoSmithKline, who all held senior responsibilities in China at some point in their careers.
- Expect the unexpected. China will not fail to surprise us. While the news coverage has been largely positive for multinationals in the past few years—China’s new “4+7” volume-based purchasing policy aside—some bumps on the road should be expected. Resilience and commitment will be tested. Ultimately, China remains a high-risk, high-reward market.
China is the most exciting healthcare story in the world today. The latest chapter of robust performance by multinationals is just an example of that.