China has become a CEO-level priority for multinational pharmaceutical companies: the trend and the implications
After a “hot” period of rapid growth between 2009 and 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.
At the International Pharma Forum, hosted in March in Beijing by the R&D Based Pharmaceutical Association Committee (RDPAC) and the Pharmaceutical Research and Manufacturers of America (PhRMA), no fewer than seven CEOs of major multinational pharmaceutical firms participated, including GSK, Eli Lilly, LEO Pharma, Merck KGaA, Pfizer, Sanofi and UCB. A few days earlier, the CEOs of several other large multinationals attended the 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 US, 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, and nine main implications for pharma multinationals to ponder and debate.
1. Growth from millions to billions: China is already a key contributor to the revenues and growth of multinational pharma companies
This trend is not unique to the pharmaceutical sector and can also be observed in medtech as well as the consumer and auto sectors. For example, by 2030 China’s contribution to global growth in personal consumption is expected to be equal to that of the US and Western Europe combined. It 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, China is already a top two contributor to total top-line revenues, second only to the US, while 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 well above 30%. Given the scale of businesses operating in China today—several of which have revenues in the USD billions—these numbers have a meaningful impact on global performance. For some companies, China accounts for as much as 25% of global growth.
2. Innovation: China is an emerging source of product, portfolio, and business model innovation
In a recent interview with China Daily, Novartis’ 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 last three years we have seen AstraZeneca open a Commercial Innovation Center in Wuxi, Sanofi open a global research institute in Suzhou, Merck KGaA open Innovation Hubs in several locations, J&J introduce its JLAB concept in Shanghai, Novo Nordisk open its INNOVO center in Beijing, and Roche announce a new early research center in Shanghai. While they may vary in scope and operating models, all these centers typically aim at fostering innovation through partnerships with other players in the ecosystem.
3. Global supply chain: China emerging in a more central role for biopharma
Sectors such as advanced electronics are likely to give China a central role in their global supply chain. For the biopharma 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, but most notably a concern around IP protection. One would expect that, over time, this will become increasingly manageable. Already, we observe that some companies, such as Boehringer Ingelheim, 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 expanding as a source of both
We have seen this trend play out clearly in the world of biotech, with Chinese VCs being very active players in global funding. In fact, in 2018, roughly 40% of biotech funding in the US came from Chinese sources. We also see China pharmacos and investors—including Luye Pharma and Fosun—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 pharma companies are China-based. For example, the current EVP of International for AstraZeneca and the head of the APMA region for Novartis are both of Chinese origin and based in Shanghai.
So what does it all mean? Here are a few implications, and predictions…
Up and up: China’s importance in many pharma companies’ global agendas will continue to rise, with an increasing number of companies managing China as a region, rather than as a country within Asia-Pacific. This is not to say that the current model won’t continue to work well, but as China grows bigger as a country, its appetite for investment and impact on regional performance becomes such that the APAC region will increasingly resemble a China+ region. As a result, many companies may decide to have China report more directly to the CEO or to a direct report to the CEO.
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 at best a “guesstimate.” Companies will need to manage expectations but could still find themselves surprised by their performance on a quarter by quarter basis.
Expect peer pressure: As more and more companies communicate to investors about their China performance and strategy, more discreet companies could be asked by financial analysts to clarify their strategic stance towards the market. This is not to say that all companies should necessarily make China a top priority. But not doing so may increasingly require a clear explanation.
Be wary of tensions emerging with proponents of the status quo: As China takes its rightful 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 requires more allocation of resources—particularly capital and talent—and will inevitably lead to difficult budgetary discussions as companies aim to maximize ROI 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 last few years, we have witnessed some supply chain disruption due to the sudden uptake of demand post-reimbursement, for example. Going forward, allocation of supply to China could become a complex strategic decision that considers the significant upside in volume, but 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 pharma 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 fundamentally rethink their value proposition 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: 1) How much a company can motivate and mobilize its global product leaders to fully engage the China team; 2) Clear strategic alignment and effective communication between the global and China product teams to drive robust strategy, along with high quality and rapid execution; 3) 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 resume with global aspirations: China experience can be a big career boost and it’s a message that will be increasingly heard by middle management. What better proving ground for future senior executives than experience running their China business? China is a large, volatile market, where 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, including the current CEOs of Lilly, GSK, and Biogen Idec who all held senior responsibilities in China at some point in their career.
Expect the unexpected: China will not fail to surprise us. While the news coverage has been largely positive for multinationals in the last 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.
If you enjoyed this blog, please share comments and consider reading my prior entries, all available under my LinkedIn profile. Most recent ones include views on recent investment trends in China healthcare, reflections on the Cambrian explosion of China biotechs, and perspectives on 8 reasons why China is the most exciting healthcare story in the world right now.