China's ICH Membership: A Strategic Windfall for Multinational Pharma Companies

Recently, news broke that China has joined the ICH. Even before the ICH released an official announcement, this development sparked widespread and enthusiastic discussion. For the pharmaceutical industry, the impact is comparable to, or even exceeds, that of China’s accession to the WTO in 2001, when China committed to aligning certain standards of its pharmaceutical industry with international norms.

However, the notion that “first-tier nations set standards, second-tier nations manufacture and sell products, and third-tier nations supply raw materials” remains deeply entrenched in the industry. As China’s pharmaceutical industry embraces global standards, will Chinese pharmaceutical companies be the biggest beneficiaries?

It should first be clarified that the ICH is an organization dedicated to establishing standards for innovative drug development, clinical trials, and registration, thereby directly impacting new drug development. This area, however, is not a strength of China’s pharmaceutical industry.

According to data from China Business Industry Research Institute, by the end of 2016, the total number of approved drug registration numbers in China reached 189,000, with generic drugs accounting for 95% of these approvals.

“China is a major pharmaceutical country, but not a strong one.” Currently, there are more than 4,700 pharmaceutical manufacturers in China. These enterprises are numerous and fragmented, with low sales revenue and profits, and severely insufficient R&D investment. On the other hand, innovation in China is primarily at a stage transitioning from imitation-based to a combination of imitation and innovation, indicating weak technological capabilities.

According to a previous analysis by VCBeat (WeChat ID: vcbeat) of the 2016 annual reports of 130 listed pharmaceutical companies, the total R&D expenditure of the top ten pharmaceutical industrial enterprises amounted to only RMB 7.133 billion, accounting for merely 6.21% of their revenue.

Globally, leading innovator and generic drug companies in the industry all allocate more than 20% of their revenue to R&D. Taking Roche as an example, its industrial revenue amounted to approximately $39 billion in 2016, with R&D expenditure reaching $11.58 billion, representing an R&D intensity of 29.6%.

On the one hand, the market is dominated by generic drugs; on the other hand, pharmaceutical companies lack sufficient willingness and capacity to invest in new drug R&D. Consequently, the dominance of generic drugs in China’s pharmaceutical market is likely to persist.

Joining the ICH, or requiring China to align its drug registration standards with those of highly innovative countries and regions such as Europe and the United States, or potentially amending regulations related to drug registration, may facilitate the introduction of new products by multinational pharmaceutical companies into the Chinese market.

Where Chinese standards align with those in Europe and the United States, multinational pharmaceutical companies may outsource new drug research and development and conduct clinical trials in China. The resulting data will be recognized by the China Food and Drug Administration (CFDA) and serve as the basis for drug registration. This means that innovative drugs led by multinational pharmaceutical companies may be launched in China simultaneously with or even prior to other markets. It will also encourage these companies to develop specialized medicines targeting indications specific to the Chinese market. Compared with the previous requirement that imported drugs undergo registration equivalent to that of new drugs, this approach can significantly shorten the registration timeline.

In fact, in March this year, the China Food and Drug Administration (CFDA) also released a draft for public consultation on adjustments to the registration management of imported drugs, proposing to allow drugs that are not yet registered or have not entered clinical trials abroad to conduct international multi-center clinical trials domestically. After completing clinical trials in China, applicants may directly submit an application for drug marketing approval.

At the time, industry commentators noted that this move effectively opened a “fast track” for imported drugs, significantly narrowing the gap between their overseas and domestic launch timelines. The era when multinational pharmaceutical companies had to wait several years for new drugs to enter the Chinese market would become a thing of the past. By breaking down the “policy barriers” in approval and review processes, domestic pharmaceutical companies would truly compete on a level playing field with multinational firms, marking a development of profound significance.

The 2013 Report on China’s Pharmaceutical Market, released by the Chinese Academy of Social Sciences, pointed out that in the markets of secondary and tertiary hospitals, the top ten enterprises in terms of market share were predominantly foreign-funded or joint-venture pharmaceutical companies. This indicates that foreign pharmaceutical companies have, to some extent, surpassed domestic pharmaceutical companies in both innovation capability and market competitiveness.

Accelerated approval of imported drugs and policies encouraging innovation may, to some extent, provide foreign pharmaceutical companies with new competitive advantages.

Of course, the CFDA has not only facilitated market access for foreign pharmaceutical companies and their products in China but has also placed significant emphasis on the innovation capabilities, quality, and product portfolios of domestic pharmaceutical enterprises.

For instance, the GMP reforms initiated in 2015, the reform of drug registration and approval, the consistency evaluation of quality and efficacy for generic drugs, and the pilot program for the Marketing Authorization Holder (MAH) system all demonstrate the regulatory authorities’ determination to advance “supply-side structural reform” in the pharmaceutical sector.

In terms of drug registration and approval reform, the approval process and standards have been strictly enforced, gradually shifting from an administrative procedural approach to one guided by scientific evaluation. Corresponding clinical trial capabilities and regulatory workforces have also been developed.

According to the “2016 Annual Drug Review Report” released by the Center for Drug Evaluation (CDE), the CDE improved review efficiency and quality by strengthening project management, refining review procedures, enhancing timeline management, establishing special task forces, increasing reviewer staffing, and implementing tiered authorization for sign-off. In 2016, the number of completed registration reviews increased by 26% compared with 2015, while the backlog of pending registration applications decreased from a peak of nearly 22,000 in September 2015 to 8,200, essentially eliminating the registration backlog.

The pilot program for the Marketing Authorization Holder (MAH) system, implemented in June last year, has also had a significant impact on encouraging pharmaceutical innovation, improving drug quality, and optimizing the drug review and approval process. Many companies are actively following suit, collaborating with universities and research institutes to pursue greater innovations in drug development.

In early May this year, the China Food and Drug Administration (CFDA) issued four draft guidelines for public comment in succession, covering measures to encourage innovation in drugs and medical devices and accelerate their market approval, clinical trial management, implementation of lifecycle management for drugs and medical devices, and protection of innovators’ rights and interests. The administration’s strong support for pharmaceutical innovation is self-evident.

From the perspective of encouraging innovation and reforming pharmaceutical supply, joining the ICH at this juncture is a timely move for China. We need higher external regulatory standards to guide domestic enterprises in further enhancing their focus on innovation and quality, and we also need to introduce new competitors to stimulate market competition, thereby positioning China’s pharmaceutical industry on the global stage in terms of both regulatory and product frameworks.

When China joined the WTO, many domestic enterprises worried that foreign companies would monopolize the market and squeeze out national industries. In retrospect, such concerns were both protectionist and reflected an insufficient understanding of market economics. As times change, these worries should not apply to the pharmaceutical industry.

With the CFDA’s accession to the ICH, there will be a prolonged transition period before integration at the standards and regulatory levels translates into product and market competition, thereby providing a buffer for China’s pharmaceutical industry to adjust its mindset and competitive strategies.