China's Innovative Pharma Industry: What the Latest Set of 5-year Plans means for this sector

It is China month here at Bioassociate, and in our previous post on China we covered some of the new initiatives filed in the latest set of 5-year plans aimed at making China a competitor in the originator pharma space.

One such initiative has been the direction of foreign investment towards niches which the government has deemed "innovative". Needless to mention, pharma and biotech are high priority on the list of said niches. 

Another issue which the government has prioritized (for very obvious reasons) is the intellectual property protection situation in the country. Historically, China has been one of the most notorious violators in the IP space, but perhaps all of that is about to change over the next decade. 

Direction of Foreign Investment

The Chinese government has specified rules on the direction of foreign investment in order to nurture certain priority sectors and to restrict investment in others. China’s foreign investment policy is outlined in the Regulations for Guiding the Direction of Foreign Investment, which essentially classifies foreign investment into one of four classes: encouraged projects, permitted projects, restricted projects and prohibited projects.

As of 2009, investment in innovative pharma falls under the category of encouraged projects, specifically the production of raw pharmaceuticals which are under patent, those which are granted administrative protection in China, and products which use new technologies. Investment in generic APIs and traditional Chinese medicines is currently restricted, in order to direct investment towards the innovative sector.

In a step to improve investment opportunities for its innovative industries, the Chinese government launched ChiNext on the Shenzhen Stock Exchange—China’s “NASDAQ”—in 2009, paying particular attention to innovative enterprises and supporting venture entities.  ChiNext is expected to play a crucial role in innovation by providing an important exit alternative for many start-ups over the coming years. The independent exchange caters to the high-growth, high-tech sector, and the majority of its 354 listed companies are SMEs with a combined market value of roughly US$ 118 billion.  Currently, 24 companies are listed in the Pharmaceutical Industry on the ChiNext, 9 of which were listed in the last year (see table 1).

Table 1. 24 Pharmaceutical companies listed on the ChiNext (as of Oct. 2012)

1. Ticker	Company Name	Listing Date	Market Cap. (CNY bn.)
   300006	CHONGQING LUMMY	30/10/2009	3.37
   300009	ANHUI ANKE BIOTECHNOLOGY	30/10/2009	2.37
   300016	BEILU PHARMA	30/10/2009	2.05
   300026	CHASE SUN PHARM.	30/10/2009	7.55
   300039	SHANGHAI KAIBAO	08/01/2010	6.50
   300049	INNER MONGOLIA FREE MEDICAL TECH.	20/01/2010	1.59
   300086	HAINAN HONZ	26/05/2010	2.65
   300110	QINGDAO HUAREN PHARM.	25/08/2010	3.09
   300119	TIANJIN RINGPU BIOTECH.	17/09/2010	3.28
   300122	CHONGQING ZHIFEI-BIOLOGICAL PROD.	28/09/2010	12.6
   300138	CHENGUANG BIOTECH	05/11/2010	1.67
   300142	WALVAX BIOTECH	12/11/2010	6.73
   300147	XIANGXUE PHARM.	15/12/2010	3.55
   300158	SHANXI ZHENDONG PHARM	07/01/2011	2.74
   300181	ZHEJIANG JOLLY PHARM	22/02/2011	2.02
   300194	CHONGQING FUAN PHARM	22/03/2011	2.66
   300199	HYBIO PHARM	07/04/2011	3.10
   300204	STAIDSON BIOPHARM	15/04/2011	6.24
   300239	BAOTOU DONGBAO BIOTECH	06/07/2011	1.80
   300254	SHANGXI C&Y PHARMACEUTICAL	19/08/2011	1.16
   300255	HEBEI CHANGSHAN BIOCHEM.	19/08/2011	2.17
   300267	HUNAN ER-KANG PHARM	27/09/2011	4.33
   300289	BEIJING LEADMAN BIOCHEM	16/02/2012	3.52

Note: There is substantial discrepancy between Market Cap values contained in the ChiNext company index found on the official Shenzhen Stock Exchange website, and values found on leading financial data websites. The official ChiNext company index can be found here: http://www.szse.cn/main/en/marketdata/sinformation/index.shtml?CATALOGID=1693&TABKEY=tab4

Intellectual Property Protection

Historically, China has had a skeptical approach towards IP protection, as it was viewed as a hindrance to the country’s imitation- and manufacturing-driven economy. Before 1992, patent protection was virtually non-existent, and between 1992 and 2008 pharmaceutical patents could essentially be violated on a “me-too” basis, where minor structural differences from existing drugs would suffice for marketing approval. In 2008 China became the newest entrant to the intellectual property arena, having finally adopted comprehensive patent protection regulations. Since then, the protection system strengthened significantly, albeit not sufficiently, and, despite the new initiatives, the IP protection arena remains in need of improvement. Current regulations still exclude IP protection of medical treatments, which encompass drug delivery, medical devices and personalized medicine.

Along with remaining regulatory concerns and loopholes, IP implementation is a pressing issue, particularly due to lack of adequate enforcement procedures in place, and due to insufficient numbers of enforcement authorities throughout the country whose pharmaceutical industry is highly geographically fragmented. In 2009, US businesses lost a colossal US$ 48 billion in sales, royalties and licensing fees due to patent infringement by Chinese manufacturers. 

In a recent move to act on this issue, the Supreme People’s Court of China (SPC) has set up two judicial IP protection bodies to act on behalf of the innovative pharmaceutical industry. The government is additionally making an effort to engage with industry representatives and foreign authorities in order to progress necessary amendments in the IP system. A positive increase in numbers of IPR cases in recent years showcases the government’s efforts, and, because the government is able to draw on established legal environments, it is a matter of time before a sufficiently operational IP protection system is in place. 

China’s strengthening IP protection regulations will certainly be an addition to the plethora of factors which will serve to buttress the innovative pharma industry over the next decade.