Mr. McGuire: I want to say one word to you. Just one word.

Benjamin: Yes, sir. 

Mr. McGuire: Are you listening? 

Benjamin: Yes, I am. 

Mr. McGuire: Plastics.

From the movie, The Graduate

In a post entitled, “China Has Health Care Too,” I talked about health care as one of the great opportunities for foreign businesses in China:

A few months ago I was on a China panel at Northwestern’s Kellogg Business School where, among other things, we were asked to list China’s best opportunities. I stressed that because I am not a China business expert, I would have to answer the question based entirely on what I was seeing of my firm’s clients and, based on that, I listed health care, technology, and food.

If I had to pick just one of the three, I would pick health care and technology (I know I said one, but hey, it’s MY blog). I would pick these two now because even within just the last few months, China’s government has made clear, both in its policy statements and in its spending, that it is going to be increasingly emphasizing these two during the next few years.

And if I had to pick one part of health-care, it would be China pharma because it is booming for both domestic and international reasons. China pharma is growing because as China gets wealthier, its citizens can better afford drugs. China pharma is also growing because China is more and more being seen as a good base for pharmaceutical production and even research. Pharma in China is huge. Just one word huge. Plastics huge.

To assist those looking “to do China pharma,” I asked Robert Walsh, the founder of Samsara Biopharma Consulting,” to write a guest post on China pharma.  Samsara is “a Nanjing based company that works all over China trying to get Chinese and foreign pharma companies to play nicely with each other. Samsara has seasoned veterans in drug development, process development and scale-up, quality, and regulatory affairs, all of which skills are needed to drive effective collaboration between foreign and Chinese companies.” Robert accepted and he, along with Jennie Shi, Wendy Zheng, and Zhou Tong collaborated on the following, which is part one of two:

We have been asked to guest-write a post on the Chinese pharmaceutical industry, with the spirit being to advise on how small and medium foreign pharma can get into China: how to go about it, what to look for, and what to avoid.

Broadly, there are less than maybe fifty very large pharma companies in China, largely centered in the East, with thousands of small-to-medium sized pharmas scattered all over the map.

Technically, pharma is divided for regulation purposes into Traditional Chinese Medicine (TCM), small-molecule chemical synthesis drugs, and biotech. It is not unusual to find a Chinese company with divisions involved in all three; Simcere in Nanjing is an example. Some Chinese companies even include medical devices and diagnostics in their mix of products.

The Jiangsu Valley lays claim to being the hub of Chinese pharma, but we find amazingly competent Chinese pharma companies as far west as Lanzhou. One driver of regionalism in Chinese pharma is that the two largest and oldest pharma-focused universities are in Nanjing and Shenyang. As hyper-mobile Americans, we find remarkable that in most Chinese pharma companies, 90% or better of the management and workforce are locals. The effect of this is that a company’s management style tends to mirror local custom.

At a fundamental level, Chinese pharma companies are pretty solid in manufacturing and packaging of whatever it is that they sell. The major problem we see with virtually every Chinese pharma company is that their quality systems are generally very weak and devised to meet the very minimum standards set by the China SFDA. This creates a gap between “current Good Manufacturing Practice” (cGMP) as we find it in China, and what is expected in the rest of the world.

Compounding the quality problems is that the local city and provincial SFDA offices charged with enforcing SFDA standards are oftentimes ”too close” to the companies they are to be overseeing. If the local party leadership considers a local pharma company a key component of the economy or involved in a “prestige” project, oversight of that company can become somewhat lenient.

Chinese pharma sells large amounts of Active Pharmaceutical Ingredients (APIs) all over the world and upwards of a billion dollars worth to the US alone. Most Chinese API manufacturers have been, or will eventually be, inspected by teams from the US FDA, for compliance with cGMP. The US FDA currently has a significant backlog of Chinese companies slated for inspection.

Our having worked with both Indian and Chinese companies enables us to see a fundamental difference between the pharma companies from those two countries. For various historical reasons, India, unlike China, has built up large numbers of senior and middle managers knowledgeable about running pharma manufacturing operations to the standards expected in the US and Europe. It is also important that India naturally uses English naturally as its default language for pharma operations management. China does not have this same history

Western and other foreign pharma companies are operating everywhere in China, setting up their own WFOEs (wholly foreign owned entities), or continuing the legacy Joint Venture’s that were common 10-20 years ago.

There are real pharma business opportunities in China for foreign businesses. In the last few years, we have seen an influx of foreign Private Equity (PE) and Venture Capital (VC) firms investing in Chinese pharma companies, including many that sell only into China’s domestic market. In our view, their biggest concern should be to avoid investing in Chinese pharma companies that will be unable to comply with with the SFDA’s potentially increasingly stringent Good Manufacturing Practice requirements. There are many pharma companies all across China that will be unable to pass inspections under standards under discussion (and likely to come into place) and many of these companies will need to build new, compliant facilities, or be forced to shut down their operations.

Our Second part will offer advice to small-to-medium foreign pharma on how to structure their approach to the Chinese market. 

 

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.