The health care landscape in China is quickly changing, with both government and consumers increasingly concerned about the cost and quality of products from multinational pharmaceutical and biotech companies.
Over the past year, BSR conducted extensive research revealing that while some companies are adapting to (and even shaping) these changes, sustainability trends are quickly evolving in this challenging market, and all companies will benefit from an improved understanding of China-specific risks and opportunities.
Affordability and the Growth of the Domestic Market
For many years, global companies have understood the importance of affordability in the Chinese marketplace. But government intervention and expectations are rapidly changing the growth story for businesses operating in China.
Increasingly, these companies face direct competition from domestic companies, which have reaped the benefits of more government-led investments in R&D and an annual 23 percent increase in overall R&D spending. Today, China’s R&D-to-GDP ratio (1.7 percent) is twice that of India’s and quickly approaching levels familiar to Western countries. China is also retaining more of its talent in this field. Today, the country is home to 80,000 life sciences PhDs who trained in the West.
Whereas China’s pharmaceutical sector traditionally has been known for its manufacturing expertise, this injection of government investment is fueling innovation as companies work on new treatments for common diseases in China such as diabetes, hepatitis, and HIV. Already, China is the world’s largest vaccine manufacturer, and with the 2009 breakout of H5N1 (bird flu), China’s Ministry of Health fast-tracked approvals to become the world’s first manufacturer of the vaccine.
These trends mean that China will increasingly be able to serve its own market, intensifying the need for Western pharmaceutical companies to compete on price.
While it may be decades before Western companies’ R&D advantage comes into serious question, BSR interviews with government officials from China’s Center for Disease Control, Ministry of Public Security, and other organizations indicate that companies need to act now to improve the affordability of health services.
To address this challenge, GlaxoSmithKline has taken a page from its consumer goods division to expand volume and reduce prices for drugs marketed in the developing world. Of course, the devil is in the details: Price breaks for some countries beg questions around the need for higher prices in other (wealthier) countries. The challenge is exacerbated in many developing markets, where there are both relatively small but fast-growing middle class populations and enormous numbers of people who live in poverty.
Developing viable new business models for this environment requires extensive and highly localized engagement with stakeholders, bringing together partners from government, NGOs, academia, philanthropy, and other private-sector actors. And it requires a fundamental integration of business strategy with the company’s access agenda (which, too often, is anchored in philanthropy).
A good example of integrating business strategy and access is Novo Nordisk’s approach to forming partnerships by investing in local R&D, domestic manufacturing, physician training, and prevention programs. Other companies have adopted similar strategies, but where Novo Nordisk demonstrates best practice is in the communication and quantification of its business case for taking these actions. Through the company’s “Blue Print for Change” report, Novo Nordisk highlights its impact on job creation (14,600 direct and indirect jobs) and its commitment to strengthening ties with key government agencies.
Quality, Safety, and the Demand for Transparency
The second factor influencing China’s health care market is product quality and safety. From the drug heparin to milk powder, recent events involving tainted products have damaged China’s reputation for maintaining quality and safety in manufacturing. Both global and domestic attention has focused on the faults of domestic Chinese companies.
Recently, multinational companies operating in China have also had manufacturing challenges. In 2010, global brands including Johnson & Johnson and Pfizer issued recalls for musty-smelling bottles and other quality-control challenges. This recent trend has caused some in the public to become skeptical about the quality and safety advantages of Western brands.
Related to these concerns, there is increasing stakeholder demand for companies to improve transparency, especially on actions taken to protect supply chains and ensure product quality and safety.BSR’s research revealed that when global companies announce recalls in one part of the world, there is great suspicion among Chinese consumers and government officials that a similar problem will later surface in China. This concern comes in spite of the fact that many global companies recognize that the risk is more pronounced in China and have implemented their highest manufacturing and supply chain practices in their Chinese operations.
So how should global companies convince skeptical stakeholders that they are taking precautions? We recommend that companies engage stakeholders and improve transparency in order to shift perceptions and regain trust. These engagements should be proactive, specific to the concerns, and locally relevant. And transparency initiatives need to truly reflect what is unique about the company’s Chinese operations. Stakeholders perceive limited value in Chinese reports that speak primarily to global sustainability strategy; rather, they want to know what the sustainability agenda looks like for China specifically.
How to Stay Competitive in China
Global companies have looked to China as a tremendous source of growth, but those opportunities are contingent on understanding and engaging with China’s increasingly skeptical (if not critical) stakeholders—including many government ministries, NGOs (both those with and without strong ties to government), consumers, health care practitioners, and investors (particularly international investors).
For health care companies, primary stakeholder concern has focused on affordability, product quality and safety, and transparency. But when will the tides shift yet again? Will government regulate greener drugs? Will consumers demand greater transparency? What role will China’s burgeoning NGO network play?
To stay ahead of these questions, BSR recommends companies quickly start taking the following actions:
- Map and engage with key and emerging China stakeholders.
- Develop a China sustainability strategy and sustainability council.
- Improve transparency, and issue an annual China sustainability report.