19 July 2019
Researchers work at a laboratory in Shanghai. The government encourages Chinese companies to invest in innovation and the development of biotechnology. Photo: Reuters
Researchers work at a laboratory in Shanghai. The government encourages Chinese companies to invest in innovation and the development of biotechnology. Photo: Reuters

China’s biopharmaceutical firms to see structural growth

The Chinese blockbuster movie Dying to Survive earned over 1 billion yuan (US$149.4 million) within four days of its release. It has also earned the critics’ acclaim, receiving a score of 9 on a scale of 1 to 10 on a local online movie rating website.

The comedy-drama is seen by many as an indictment of the bad side of the pharmaceutical industry. But do drug firms and hospitals really squeeze obscene profits from the misery of the masses? Have the prices of pharmaceutical products gone beyond the reach of most people who need them? Is the movie a signal that the Chinese government is about to crack down on the sector?

The strong performances of pharmaceutical stocks indicate that the industry may now be in a golden era. A number of listed pharmaceutical firms have profit margins of 15 to 50 percent.

According to industry players, drug prices have become so expensive because of the huge R&D costs and the high risk of failure. Companies will not be motivated to develop new drugs if they don’t see the chance of making handsome earnings.

On the other hand, Chinese patients have to contend with exorbitant drug prices mainly as a result of flaws in the nation’s drug distribution system. For example, a medication mentioned in the movie, the anti-drug Gleevec, is selling for 40,000 yuan a dose in China, but the same drug can be had for half the price in the United States, Australia and Japan.

That’s because drugs have to go through various intermediaries in China, and all the kickbacks and other gray costs are factored into the retail price paid by end-users.

Early last year, the State Council ordered eight government agencies to overhaul the drug procurement system in certain provinces.

Authorities rolled out a “two-invoice system” for pharmaceutical distribution. Under the new rules, a maximum of two transactions will be allowed between the manufacturer and the hospital. This means that a manufacturer can sell to a distributor, which in turn has to sell directly to hospitals, thus eliminating multi-tiered distribution.

The government intends to reduce the layers of distributors in order to make drug prices more affordable for ordinary citizens. The nation’s healthcare reform is actually benefiting Chinese pharmaceutical companies, especially biotechnology firms.

What is the difference between “biomedicine” and “traditional medicine”? Western traditional medicine is very close to chemistry. The modern western healthcare system was developed a century ago, when humans had very limited knowledge about cells. Traditional drugs, in fact, are made of chemical substances. They may be effective in treating ailments, but they also have a lot of side effects primarily because they are different from human cells.

Meanwhile, research on stem cells has deepened over the last two decades. The most common medicinal cells include bacteria, yeast, Chinese hamster ovary, etc. Biotechnology is more suitable for humans because they have fewer side effects.

A company that has developed cell extraction technology can apply for a patent. Biomedicine is far more complex than chemical medicine. As such, the hurdle for entry into biomedicine is much higher.

Currently, there are a handful of internet stocks on the Hang Seng Index. But no healthcare stocks are included. The sector represents 15 percent of the S&P 500 index, trailing tech and financial stocks.

However, the sector is set to take off in China. The rise of the healthcare industry will be structural. The same is true with biotechnology.

The full article appeared in the Hong Kong Economic Journal on July 11

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal

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