Last month, the China Pharmaceutical Industry Research and Development Association (SINO-PhIRDA) and the Pharmaceutical Research and Manufacturers of America (PhRMA) signed a cooperation framework that embodies the intent of multinational pharmaceutical and Chinese pharmaceutical companies to continue a regular dialogue to facilitate the two organizations working together. So what is the status of China–US pharma relations?

Members of SINO-PhIRDA, which is registered by the Ministry of Civil Affairs of China, includes China’s leading research institutes, pharmaceutical universities and colleges, and domestic pharmaceutical companies. The agreement was signed following a two-day conference between SINO-PhIRDA and PhRMA in November 2010. The conference highlighted topics such as intellectual property rights and other incentives for innovation, ensuring safety and efficacy, and the challenges and opportunities of simultaneous global development of pharmaceuticals. The conference included speakers from the US Department of State, the US Patent and Trademark Office, the International Trade Administration, and US Food and Drug Administration. Chinese and US industry leaders also addressed the conference, according to a Nov. 19, 2010, PhRMA press release.

“Everyone is impressed by the dedication and commitment of Chinese biopharmaceutical research companies to create new and better medicines for the global market,” said John J. Castellani, president and CEO of PhRMA, in the PhRMA release. “At PhRMA we all look forward to the time when we, hopefully, will count many of the companies here today as PhRMA member companies.”

PhRMA’s need to broaden its reach to include China in its policy considerations is a byproduct of the new global economic order overall and within the pharmaceutical market specifically. According to an October 2010 analysis by IMS Health, China’s pharmaceutical market is expected to increase 25–27% to more than $50 billion in 2011, making it the third largest national pharmaceutical market behind only the United States and Japan. China is among the leaders of the 17 so-called “pharmemerging countries,” which are expected to see aggregate growth of 15–17% in 2011. In contrast, the US pharmaceutical market is expected to grow at 3-5% in 2011 and reach $320 billion to $330 billion. Growth in the five major European pharmaceutical markets (Germany, France, Italy, Spain, and the United Kingdom) collectively is projected to increase only 1–3% in 2011. Japan’s pharmaceutical market is expected to increase 5–7% in 2011.

But aggregate market numbers alone do not explain the calculus of the Chinese pharmaceutical market. A recent article in Fortune magazine analyzed the forces at play. On one hand, the pharmaceutical industry is encouraged by a recent policy decision by the Chinese government to boost healthcare spending in China by earmarking $125 billion with a goal of providing universal healthcare coverage by 2020. Greater healthcare expenditures and broader access would seem to translate into growth for pharmaceuticals and for multinational companies, but will it?

A crucial and still-to-determined consideration relates to reimbursement and pricing policies for innovator drugs. Traditional Chinese medicines currently account for approximately one-third of pharmaceutical spending in China, according to some estimates. The question for the large Western pharmaceutical companies is, to what extent will their drugs find a place in China’s market. No doubt, the medical needs of a large population will create demand for their products, but the larger question is how China’s pharmaceutical product mix will evolve. The factors influencing that evolution will be the Chinese government’s pricing and reimbursement policy for pharmaceuticals, changing socioeconomic conditions and the affordability of these medicines in China, the role of traditional medicines and generic drugs in the market, and the positioning of China’s domestic pharmaceutical players in a highly fragmented Chinese market.

What is known is that the large pharmaceutical companies have their work cut out for them. According to the Fortune article, although half of the top 10 pharmaceutical companies in China are multinationals, no company has more than a 2.5% share of the total market In 2010, the 15 largest global drug companies derived only 0.9% of their combined sales from China.

Given these dynamics, what is fair to say that the traditional innovator drug model that has served the pharmaceutical industry well in Western markets will not likely be the model for success in China’s market. Further diversification in generic drugs, consumer healthcare products, and vaccines as well as more tactical product positioning and creative partnerships with domestic players would seem to be some elements for success. Ultimately, it is these business choices that will largely shape US–China pharma relations.