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.


Al­so pub­lished on LinkedIn. Franck Le Deu (@fle864) is a Se­nior Part­ner with McK­in­sey & Com­pa­ny, lead­ing the Health­care Prac­tice in Greater Chi­na and serv­ing clients across Asia. 

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