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Big Pharma

Major pharmaceutical companies are investing billions of dollars to tackle diseases in China. Many of these diseases are not prevalent in the West. As a result, and for other reasons as well, drug companies are actually doing the research and development on the Chinese mainland.

This is a departure from past practice of selling existing drugs to China and trying to tailor those drugs to the unique circumstances of the local populations.


The Players

Among companies now setting up operations in China are Swiss drugmaker Novartis AG (NYSE:NVSC), Johnson & Johnson (NYSE:JNJF) and French drugmaker, Sanofi SA (NYSE:SNYC).

Novartis is working on a molecule to combat a rare form of head and neck cancer common to southern China. JNJ is developing treatments for lung cancer and hepatitis B and Sanofi is researching a new way to attack liver cancer. All this overseas investment is aimed at achieving a stronger foothold in the world’s second-largest drug market – something Western companies have never been able to do.

Regulations Also A Factor

Meeting the needs of local populations is a big part of the move but Chinese government regulations that make it hard for foreign firms to gain approval for treatments developed outside the country also play a part.

There have also been corruption scandals that have made Chinese courts even more wary of outsiders selling drugs in the country. In 2014 a Chinese court hit GlaxoSmithKline PLC (NYSE:GSKC) with a $500 million fine for bribing doctors. Last year Novartis paid $25 million in an SEC investigation involving bribery of officials in China.

From China To The U.S. And Beyond

A natural outgrowth of moving research to China would be the exporting of the results of that research to the rest of the world. U.S. biotech, Celgene (NASDAQ:CELGB) recently signed a collaborative agreement with Chinese firm BeiGene (NASDAQ: BGNE) to develop and commercialize that company’s treatment for patients with solid tumor cancers in the U.S., Europe, Japan and elsewhere.

Under the terms of the deal, BeiGene will acquire Celgene’s commercial operations in China including an exclusive license to commercialize Celgene’s therapies in China. The deal includes an equity stake in BeiGene for Celgene.


More On Chinese Pharma

Here to fore Chinese pharma has mostly been known for cheap generic alternatives to western drugs that are sold on thin margins. The industry has been extremely fragmented, consisting of thousands of small manufacturers and distributors. A typical Chinese pharma devotes less than 5% of sales to R&D. (Large global drug firms typically spend 14% to 18% on research).

China’s aging population, higher incomes and increasing demand for quality health care is starting to push Chinese pharma into a more professional mode in order meet this rising demand.

The Chinese government is encouraging companies to consolidate and adopt to new higher standards for medicine. The value of M&A deals has been increasing as a result. In addition, talent from abroad is boosting the quality of Chinese home-grown pharma. Much of this talent is native Chinese, educated and often employed in the western world before returning to China.

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