“Often the Chinese get the rights to the Chinese market, the Israeli side other international markets.” Analysis by Ilan Maor, Managing Director (Israel), SHENG- BDO The pharma industry global map of activities and growth, which traditionally centers around the developed countries, particularly the U.S. and Europe, is now gradually but steadily, includes a new key player – Mainland China. For decades, the main activities of the Chinese pharmaceutical industry were concentrated on strong capabilities of traditional Chinese medicine (TCM) a mediocre performance in APM and generic drugs for local consumption. The Chinese industry now demonstrates substantial change, presenting rapid growth as well as new development path. In 2013 the Chinese pharmaceutical industry recorded a growth of 20% and yielded a product of 373 billion dollars. The growth of the pharmaceutical industry, including bio-pharma sector, comes against the backdrop of two decades of economic growth and accelerated development in the country, under which a suitable infrastructure was gradually built and currently enables and supports the development of this complex field. The Chinese industry as a whole is undergoing a process of growth and extensive technological upgrading, creating industrial infrastructure and improved technological environment that allows the development of more advanced transition in the life sciences and the establishment on an appropriate capacity in this unique field. Moreover, in recent years the Chinese government has been leading a concerted effort towards expanding and upgrading the research and development (R&D) activities in the country, with the government – at all levels: from the central government to the provincial and municipal government – taking active role in initiating, encouraging and. This new policy is also reflected in the growing Chinese investment in R&D which reached around 220 billion USD in 2013, second only to the U.S. Seven sectors were chosen as strategic development targets, within the framework of the 12th Chinese Five-Year Plan (2011-2015) and the Bio-Phama sector is among the seven selected sectors and its support expanded accordingly. Alongside with industrial development and strengthening support to the technological upgrading and R&D efforts, the Chinese Pharma industry have been significantly driven and benefiting from the constant increase in quality of life in China and in this context also in the level and quality of the Chinese health care system . In 2009 the Chinese government launched an ambitious program, with a budget of 124 billion USD, whose stated purpose was to provide 1.3 billion Chinese with access to quality health services at a reasonable cost, and try to close the gaps created since the last reform in 1992. The government investments, together with the entering of Chinese and foreign private investors and companies into the sector, especially in the construction of hospitals and health centers (with government support), are essential components in dealing with the growing demand, maturing population and the Chinese population expectation of improved services and higher quality. One of the areas that stood at the center of the government development plan and accompanies the government efforts in recent years is the pharmaceutical sector, with an emphasis on the number of main aspects: o Effort to increase efficiency and control over usage of drugs (and neutralizing the phenomenon of over registration of drugs, which was prevalent in the past, as a source of revenue to hospitals o Quality control of the medicines sold in China, alongside with improving and regulating the operations of the China Food & Drug Administration (CFDA), whose status has been upgraded last year to a Ministry level. o Reducing the price of drugs (from local and foreign manufacturers), in order to allow the general public access to needed medications. The effort to expand and upgrade the Chinese pharmaceutical industry has been producing first fruits, and judging the Chinese experience in other areas it would make sense to adopt an optimistic view as for the future of Chinese pharma industry. The Chinese pharmaceutical market concentrates on generic drugs manufactured by local pharmaceutical manufacturers (the Chinese companies hold a market share of about 80%). However, the Chinese government is aware of the need to improve the industry capabilities and develop the innovative drugs development in China. It is also clear to the Chinese government and the industry leaders that achieving rapid development of the pharma industry and reducing the gaps in relation to the global pharmaceutical industry will require cooperation with foreign pharma companies and importation of foreign originated technology and IP. This understanding represents a significant potential for foreign companies in China…. Foreign pharmaceutical companies are steadily expanding their operations in China. This includes not only marketing products in China, but also establishing manufacturing and R&D centers in Chinese mainland. Leading global companies already maintain an extensive and broad activity in China and other are launching or expanding their operations in recent years. Two leading pharma companies who reported in 2013 as for their plans to make wide investment in establishing R&D sites in China were Novartis (1.2 billion USD) and Merck & Co. (1.5 billion USD). Other big Pharma companies who reported their plans to expand research efforts in the country include GSK, Bayer, Bristol-Myers Squibb, Eli Lilly, AstraZeneca and Boehringer Ingelheim. . Chinese companies are gradually expanding their cooperation with foreign companies and institutions in order to expand and enhance the product lines, through acquiring the rights to manufacture generic and ethical drugs developed abroad, launching cooperation in drug development, etc. In recent years, Chinese companies have also begun exploring the option of mergers and acquisitions in the pharmaceutical sector, including the acquisition of foreign companies in the industry. Chinese companies have made two 2 M&A deals with American companies in 2013: Complete Genomics & Scientific Protein Labs. Cooperation with major multinational pharmaceutical companies is an important factor in the pharma industry development in China, however it still faces significant challenges. China’s problematic record in the field of intellectual property protection is a major concern for foreign companies, troubled by the threat to their property rights presented by their Chinese competitors. The Chinese government actions taken to strengthen the protection of intellectual property have already produced a gradual improvement in this area in recent years and it is estimated that the improvement will be felt especially in the heavily regulated pharmaceutical sector. Another challenging factor is the general tendency among Chinese companies to avoid the extensive investments and relatively high risk involved in entering into R&D activity and new innovative technology in general – and in pharmaceuticals sector, where processes are longer and more expensive, in particular. Many Chinese companies have therefore chosen to concentrate on generics and adopting mature or late stage projects. In the past year we have seen a gradual change here. In a long series of meetings we have held recently (many of them during the last Bio Conference in Beijing) with leading Chinese pharma companies, we could identify a growing openness among a significant group of them towards investing and cooperating with foreign companies in the development of ethical drugs, including projects that are in relatively early stages. It should be noted that some of the multinationals have faced new challenges during 2013 with pressure coming from the Chinese administration (including the powerful NDRC), including accusations regarding policy rates, improper conduct involved in promoting their products in front of the health system, etc. These pressures are seen as tendentious and designed to weaken the foreign companies competing with the Chinese competitors. Most companies involved have so far made clear they intend to continue and expand their operations in China, but such challenges might affect foreign companies that plan the operations in China. One should also remember that entering the Chinese pharma sector requires foreign companies (and Chinese) to go through the local regulatory processes managed by the local regulator, the CFDA. Having FDA / CE constitutes an advantage but do not replace local CFDA registration. . Operating in China in general and in the complex and highly regulated pharmaceutical sector in particular are a significant challenge for any western company, as it is required to prepare for and cope with this complex target market, operate within a different business culture environment, engage within a unique economic structure which combines institutional and business operations, and deal with different geographical zone, different language, different time zone, etc. Looking at the Israeli perspective – there is no doubt that the Chinese pharma sector represents a significant potential opportunity for Israeli companies, which enjoys the appreciation for their technological and innovation based advantages. Moreover, the Israeli companies benefits from the general very positive attitude and respect among many of the Chinese leadership and public towards the Jewish people and Israel. China is the potential target market for products and medications in which the Israeli company has a comparative advantage. Since the majority of Israeli companies in the industry are SMEs, much of this type of activities are to be carried out in collaboration with the Chinese strategic partner, that it’s often taking him the registration process and later on the marketing and sales activity . The growing Chinese interest in foreign technologies strengthens China’s position as a prominent target for technological cooperation for Israeli companies. The technological cooperation translate into launching joint development activities (which enjoys encouraging and the Chinese government support and in some channels also Israeli – Chinese support); licensing of complete solution or IP which still requires some development; full or partial technology transfer; etc. . In quite a few cases the cooperation is set in a formula which gives the Chinese party the rights to the Chinese market, while the Israeli side preserves rights and activities on other international markets. Chinese overseas investments have showed significant growth during the past decade, reaching 90 billion USD in 2013. The Chinese investments abroad began with investing in securing natural resources bases and assets, followed by financial investments in the global markets. With the growing need for the technologies, more of the Chinese investments abroad are directed towards the technological world, with Chinese investing in R&D centers abroad, in technology transfer and licensing, as well as in M&A targeting technology oriented companies. This process is gradually reflected also in the world of pharmaceuticals (e.g. the two acquisitions made last year in the U.S.) and is likely to include the Israeli life science industry and poses a unique potential in this area. It is important to note that alongside with the significant opportunity which China is currently presenting for Israeli companies – it is also quite a challenge… Initiating cooperation with a Chinese business partner – on any of the above cooperation path – requires therefore a strategic decision and the commitment, at management level, to investing the required relevant capabilities, appropriate preparations, and suitable budget in entering this challenging and complex arena. Proper preparations and careful execution are crucial to avoiding mistakes in the Chinese arena, which may cost a loss of time, money, as well as the loss of good opportunities… How to properly prepare and successfully make the Chinese challenge into success are a separate story and an issue for an article by itself… Ilan is the Managing Director (and an equity partner) of SHENG-BDO Ziv Haft, a leading business development, investment and technology cooperation company with presence and operations in China and Israel. Ilan Maor have also been serving as the Vice President of the Israel-Asia Chamber of Commerce and the Vice Chairman of the Israel-China Chamber of Commerce. Before joining SHENG-BDO in 2008, Ilan headed the Economic Department responsible for Asia-Pacific, Russia and the CIS region, as well as for economic international organizations, at the Israel Ministry of Foreign Affairs. Ilan also served as the head of the Israeli negotiating team with the OECD. Between 2001-2005 Ilan served as the Consul General of Israel in Shanghai. He was the first (and only) Israeli diplomat to be listed among the “100 Most Influential People in the Israel Economy” list, published by Israel’s leading business magazine, “The Marker”.