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21st Century Business Herald reporters Ji Yuanyuan and Han Liming report from Shanghai

Multinational pharmaceutical companies are adjusting their layout strategies in China, which is also determined by the current market environment.

On the one hand, my country's pharmaceutical industry has experienced rapid development over the past decade, witnessing the "Cambrian" explosion of innovative drugs. Drug review reform has greatly increased the speed of new drug launches, and dynamic adjustments to medical insurance have accelerated the inclusion of new drugs in the reimbursement system. Whether it is the share of the global pharmaceutical market or the future growth trend, my country is a market that multinational pharmaceutical companies cannot ignore and need to pay attention to and focus on.

On the other hand, the "capital winter" has not yet subsided. The impact of centralized procurement, medical insurance cost control, fierce product competition and shortened product life cycle have made internal cost control and benefit measurement of pharmaceutical companies extremely important. Looking back over the past year, the performance of multinational pharmaceutical companies in the Chinese market has been significantly differentiated, with layoffs, pipeline cuts, clinical suspensions, acquisitions, spin-offs and divestitures becoming key words. While tapping the potential of the Chinese market, multinational pharmaceutical companies are also re-evaluating risks and opportunities and adjusting their business models in China.

Opportunities and challenges coexist, and multinational pharmaceutical companies need to adjust their commercialization strategies in China and seek new market growth points. Speaking of the changes in the market environment for multinational pharmaceutical companies in China, Chen Jialin, CEO of Menarini China, told the 21st Century Business Herald reporter, "In the early years, most multinational pharmaceutical companies were more likely to get positive feedback after investing money and talents in China. With the intensive introduction of policies such as centralized procurement, considering the external price reduction and the need to reduce costs, in the long run, pharmaceutical companies will compete on R&D, product pipelines, market positioning, etc."

A 21st Century Business Herald reporter found that in addition to pipeline adjustments, commercial changes are also imminent. In the past, many multinational pharmaceutical companies focused on the in-hospital market at the channel level, but now the retail and e-commerce markets are more promising. An unnamed business manager of a small and medium-sized multinational pharmaceutical company told reporters: Previously, the in-hospital market accounted for 50%, but now it has shrunk to 20%. Of the remaining 80%, 50% of the channel layout is allocated to retail pharmacies and e-commerce, which is handled by the company's own team, and the remaining 30% is handed over to distributors or CSO partners.

As the trend of specialization and division of labor in the pharmaceutical industry continues to strengthen, my country's innovative pharmaceutical companies, CSOs (contract sales outsourcing service providers) and other entities have joined the competition. It is natural for multinational pharmaceutical companies to change their traditional operating models to maintain their "profit high ground" and to carry out more extensive cooperation with local companies.

“Faced with the complexity and huge potential of the Chinese market, it is difficult for a single company to cope with all the challenges alone. Therefore, establishing partnerships and leveraging external resources and channels will be one of the key strategies for the success of multinational pharmaceutical companies.

Yin Xiaofeng, general manager of Leo China, also emphasized to the 21st Century Business Herald reporter that "a company can only do what it thinks is important and what it can do well. Although large multinational pharmaceutical companies have strong coverage capabilities, they have many product pipelines. Therefore, for non-core products, external cooperation has become one of the important choices for business models, which also brings new opportunities to domestic companies. In contrast, it is a common choice for small and medium-sized multinational pharmaceutical companies to conduct business through partners when resources are limited."

Digging Deeper into the “Moat”

Against the backdrop of a cooling global pharmaceutical investment and financing market, Fierce Biotech released a report on layoffs in biopharmaceutical companies, showing that by the second quarter of 2024, a total of 38 layoffs had been announced, affecting more than 7,000 employees, including large multinational pharmaceutical companies such as Gilead and Bayer. This year, Bristol-Myers Squibb also mentioned in its first quarter financial report that it would restructure its organizational management structure and optimize its product pipeline.

For multinational pharmaceutical companies, the "golden age" is fading away. In the current market environment, layoffs and streamlining of product pipelines may be a means to reduce costs and improve operational efficiency in the short term. In the long run, pharmaceutical companies still need to develop innovative drugs and dig deep moats before core patents expire to achieve sustained and stable growth in performance.

In this context, the Chinese market has gradually grown into a "core element" in the global supply chain of multinational pharmaceutical companies. It is not only an important source of capital and talent, but also an important link in the innovation chain. Ipsen emphasized to the 21st Century Business Herald reporter that "Ipsen Innovation Center is one of Ipsen's four major R&D centers worldwide and the only R&D center in the Asia-Pacific region. The Chinese market has always been our strategic innovation center."

In recent years, a group of dynamic innovative pharmaceutical companies have emerged in the Chinese market, focusing on the unmet clinical needs of domestic patients. Public data shows that in the first half of 2024, Chinese pharmaceutical companies have reached 31 different types of licensing cooperation for innovative drugs. From the perspective of the research and development stage of the cooperative drugs, phase 2 preclinical drugs accounted for 33%; phase 2/3 clinical stage drugs accounted for 39%; in addition, there are 4 drugs that have been approved for marketing.

Ogallon told the 21st Century Business Herald reporter that "China is now a global highland for pharmaceutical innovation and cooperation. In recent years, it has achieved remarkable innovative achievements in various fields including cancer treatment, gene therapy and digital health, and has cultivated a large number of high-level innovative talents. In the face of the rapidly developing local biopharmaceutical industry, we regard it as an opportunity for cooperation rather than competition."

"The next 'China' is still China. Ogallon plans to launch at least one new product or indication in China every year to help women and their families better cope with health threats." Ogallon said that it is also seeking cooperation with more local companies to find solutions for a variety of diseases including endometriosis, polycystic ovary syndrome, hair loss, etc., and at the same time build a bridge for Chinese innovation to go overseas.

For most multinational pharmaceutical companies, acquiring "external innovation" and "internal R&D" through mergers and acquisitions and licensing is equally important. However, with limited resources and energy, for Menarini, which entered the Chinese market 11 years ago, acquiring product pipelines from outside has become a must.

"Due to the size of the company, Menarini is very cautious in comprehensively exploring new areas." Chen Jialin pointed out, "Complementarity and synergy with current products are the key screening criteria for acquiring external pipelines. In addition, the acquisition of clinically certified Phase III clinical products can also achieve higher cost-effectiveness."

When selecting cooperation projects and cooperation companies, multinational pharmaceutical companies have different standards. In Yin Xiaofeng's view, "On the one hand, the selected cooperation projects must be in line with the global strategy, which is a consistent insistence. On the other hand, truly innovative products are needed to bring added value."

The problem of admission to the hospital needs to be solved

Over the past years, the accessibility of innovative drugs in my country has been far lower than that in developed countries, and the industry still has a long way to go.

According to BCG's calculations, China's innovative drug sales in 2021 will be approximately US$25 billion, accounting for approximately 11% of the country's total drug sales; the United States' innovative drug sales will be approximately US$456.5 billion, accounting for approximately 79% of the United States' drug sales. Behind the gap is the inability of the payment guarantee system to support the development of innovative drugs. The difference in the payment environment has caused some multinational pharmaceutical companies' products, especially innovative drugs, to face the dilemma of "not being able to adapt to the local environment".

Today, this situation is changing. The National Healthcare Security Administration has carried out a lot of work related to drug prices, and multi-party and diversified payments have become an important breakthrough in ensuring and improving the accessibility of innovative drugs. China's National Healthcare Drug List (NRDL) has been updated annually since 2019, which has also promoted the pace of multinational companies launching new drugs in China in recent years.

Take rare diseases as an example. Due to the small number of patients, scarce drugs and high prices, the affordability of drugs is a big challenge for patients. For example, the drug "Vimza" for treating mucopolysaccharidosis finally announced that it would withdraw from the Chinese market due to the failure of medical insurance negotiations, the limited number of patients and limited payment ability. In recent years, relevant national departments have actively explored and piloted new policies in the field of rare diseases, pressing the accelerator for pharmaceutical companies to accelerate the introduction of innovative drugs into the Chinese market.

Ipsen gave an example, in 2020, its acromegaly treatment drug lanreotide acetate sustained-release injection (prefilled) was included in the medical insurance catalog through negotiation. According to public information, with the adjustment of medical insurance policies, the reimbursement amount of lanreotide for acromegaly caused by pituitary growth hormone adenoma can reach 90% in Shenzhen.

However, the inclusion of innovative drugs in medical insurance is only the first step. For pharmaceutical companies, the "last mile" problem of entering hospitals still plagues the entire industry. According to a report released by IQVIA at the end of 2022, among the 3,300 tertiary hospitals in China, only about 10% of hospitals have purchased innovative drugs included in the medical insurance reimbursement catalog in the past five years, of which only 5.4% of hospitals purchased innovative drugs included in the medical insurance reimbursement catalog in 2021. The situation of entering hospitals in 2023 is worse than that in 2022.

Yin Xiaofeng also pointed out that in the past few years, with the advancement of medical reform, the speed of innovative drugs entering hospitals has increased, but the problem of the 'last mile' is still obvious. Although Leo's products have entered China for a long time, the coverage in hospitals is still limited. The biggest bottleneck lies in the listing of hospitals. Each hospital has its own requirements and timetable for listing, which brings many challenges to the operational efficiency of pharmaceutical companies. "We look forward to the introduction of further implementation paths to accelerate the deep integration of medicine and industry, so that innovative drugs can benefit patients in a timely manner, and also provide stronger support for companies to shorten the R&D investment cycle."

Listing is a laborious job. The aforementioned unnamed business manager of a small or medium-sized multinational pharmaceutical company told the 21st Century Business Herald reporter that pharmaceutical companies need to invest manpower to visit hospitals, and only after doctors are interested in their products can they get a chance to be listed. In the past, due to the uniqueness of multinational pharmaceutical products, after investing manpower and material resources, they were generally able to be successfully listed.

"But medical insurance is too strict in some aspects. Since some small and medium-sized multinational pharmaceutical companies have only entered China for more than ten years, the registration of many products has not yet been completed, which has affected sales in the hospital market to some extent." said a relevant person in charge of the pharmaceutical company.

In order to solve the problem of "difficulty in entering hospitals" for some drugs, my country's regulatory authorities have also put forward requirements for "dual-channel" management of negotiated drugs to further improve drug accessibility.

How to balance the input-output ratio?

As the scope of volume-based procurement continues to expand and the "dual-channel" policy steadily advances, the separation of medicine and pharmacy continues to deepen, and the circulation of prescription drugs has begun to partially shift to outside the hospital. The continued efforts of online and offline retail terminals have become a major direction for pharmaceutical companies to achieve efficient layout with limited resources.

But for pharmaceutical companies, the "dual channel" is more like a double-edged sword. "In the context of outpatient coordination, it is emphasized that the price of drugs purchased by patients in pharmacies should be synchronized with that in hospitals, but hospitals have their own profit system, and pharmacies can only "take money" from pharmaceutical companies when they cannot make profits, which is disadvantageous to the operation of enterprises to a certain extent." said the unnamed business manager of the above-mentioned small and medium-sized multinational pharmaceutical company.

"From the current situation, the 'dual channel' can only solve some problems to a certain extent. Different hospitals have different attitudes towards the 'dual channel', including the trust issue between doctors and patients, which may also make doctors more concerned about the decision to outsource prescriptions." Yin Xiaofeng added, "These problems cannot be solved in the short term. It requires the government, experts, enterprises and all parties in the industry to work together to truly make innovative drugs accessible and help patients solve the problem of purchasing and using drugs. As an enterprise, it also needs to start from its own business and expand the coverage of the population with innovative models to improve the accessibility of drugs. For example, in addition to the hospital end, online and offline retail business can be carried out simultaneously."

Chen Jinhao, head of IQVIA China Management Consulting, told the 21st Century Business Herald that in China, the government's cost control policy for medical insurance is very strict, which poses a major challenge to multinational pharmaceutical companies' product pricing and market strategies. In order to adapt to this environment, pharmaceutical companies need to adjust their business models to meet the government's medical insurance negotiations and price control requirements.

"In terms of Menarini's channel layout, the three channels of hospital, retail and e-commerce are carried out simultaneously." Chen Jialin analyzed, "Different channels can disperse the impact of large-scale centralized procurement. In addition, unlike hospitals that need to invest a lot of time in the registration process, retail and e-commerce channels can even be launched simultaneously with global products."

Although omni-channel layout has become a consensus among many multinational pharmaceutical companies, balancing cost investment and actual benefits is still a problem facing corporate decision makers. Chen Jialin analyzed, "Hospital investment has always been relatively stable, but the investment costs of retail and e-commerce are difficult to predict. It is often seen that investment costs increase sharply, but commercial benefits may not be significantly improved."

In addition, the omni-channel layout has enabled patients to obtain corresponding treatment through prescriptions in large hospitals, county hospitals, community hospitals, retail pharmacies, and Internet hospitals. Medical specialization and accessibility have moved to wider areas, placing higher demands on the pharmaceutical service capabilities of pharmacies, and the education and investment of pharmacists are also inevitable.

According to Ogallon, many products continue to serve Chinese patients after being eliminated from the centralized procurement. Based on its deep insight into patient needs and market changes, Ogallon has continuously optimized its business cooperation model, including increasing investment in social hospitals, over-the-counter drugs, and pharmaceutical retail. Since last year, Ogallon has increased its education and investment in pharmacists, a group that influences the professional development of the retail industry, and provided them with customized educational resources to help pharmacists develop professionally.

"With the popularity of social media and digital education, patients have more and more say, and we are back to the situation in the European and American markets. We need to educate not only doctors but also the entire market, telling patients what the disease is and how to treat it." In Chen Jinhao's view, unlike the previous money spent on sales promotion, now it is really spent on market education. "This process may be painful, but if you look at it from a long-term perspective, it will be beneficial to the future development of the market."

Finding new distribution models

As the Chinese market continues to expand and mature, multinational pharmaceutical companies are faced with the challenge of how to more effectively penetrate this vast market. Due to the large number of hospitals in China's first-, second-, and third-tier cities, and the fact that coverage and penetration of each hospital requires a lot of resources and time, choosing distributors as a cooperative model for sales and market expansion has become particularly important.

At present, as the "product" of the market division of labor, multinational pharmaceutical companies are increasingly paying attention to cooperating with distributors represented by CSOs to tap the growth potential of upstream and downstream business synergy.

"After evaluation, we believe that some of our products will be able to play a greater role if taken over by external partners. In particular, those products in which we have invested for many years but have not yet found an ideal development path may not fully fit with our core business strengths. Therefore, we decided to hand them over to a more professional team. With the assistance of our partners, we will be able to cover more hospitals more efficiently in areas that are difficult for us to reach ourselves, so as to achieve the best market performance." Chen Jialin said that the era of fighting alone is over, and only through close cooperation with partners can we better seize market opportunities and achieve long-term development of the company.

Chen Jialin introduced that in addition to the three channels of hospitals, retail and e-commerce, it is an inevitable and key step for Menarini to develop business in the Chinese market simultaneously with its partner CSO. However, not all products are suitable for CSO operation. Chen Jialin analyzed, "For example, products mainly for chronic diseases such as cardiovascular diseases are more suitable for CSO cooperation because the patient group is large enough. On the contrary, some drugs in specialized fields are not suitable for CSO due to the lack of market attention to the disease and the low price of drugs."

Yin Xiaofeng also pointed out, "LEO China has chosen to build its own team in core areas to ensure independent management of key projects such as scientific research and development, medical cooperation, and patient education; in non-core areas, it has chosen to cooperate with capable partners so that cutting-edge medical information and solutions can reach medical institutions and patients in many scattered remote areas."

"The boundaries between core and non-core areas are not static. We will gradually adjust the regional share based on the market share. When there are fewer people in some areas and we cannot form an effective team, we will give priority to converting the area into a partnership model. When the development capabilities of some scenarios in the core areas are limited, we will also look for partners to supplement the insufficient coverage of the core areas through innovative models such as virtual representatives." Yin Xiaofeng further explained that a very strict set of standards is also needed for screening commercial partners. In addition to judging the other party's influence in local markets, management capabilities including compliance are also a point of particular concern to Leo.

After the reshuffle of the two-invoice system, CSOs are no longer just distributors of goods. Now many CSOs can not only do market access, but also negotiate, communicate, and even do market planning.

Chen Jinhao said, "The European and American markets also rely on several major distributors to build their presence. This is the only way for the development of the Chinese market. Pharmaceutical companies are gradually focusing on strategies rather than doing everything. And now many CSOs are also slowly moving up and gradually becoming their own pharmaceutical companies."

Overall, whether it is business adjustments or changes in market channels, each multinational pharmaceutical company has its own "scripture". When growth becomes rational, companies will pay more attention to the red lines and bottom lines of compliant operations while focusing on cost control and empowerment and efficiency improvement, and improving the investment-production ratio through new models and new cooperation.

In a market environment like China where regulation is becoming increasingly stringent, multinational pharmaceutical companies need to ensure that all their operations comply with local laws and regulations. This includes working with compliance teams with local experience and learning from the experience of foreign companies in the European and American markets to help them meet compliance standards in the Chinese market.

In Yin Xiaofeng's view, the establishment of a compliance culture is one of the key points for the sustainable development of an enterprise. "Building a commercialization team and a team with a compliance culture requires the accumulation of resources and time; for partners, Leo China extends the compliance system to their internal departments to ensure that compliance control can be carried out to the greatest extent possible."

These changes may require a process of qualitative change to quantitative change.