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The past decade has been marked by the significant expansion of both public and private healthcare insurance systems around the world. The increasing internal use of pharmaceuticals in China, as well as the country’s evolving role as a major contributor in the global pharma value chain, have coincided with “the period covering patents of former high revenue blockbuster drugs about to expire” (Grimes & Miozzo, 2015, p. 1873), which has been driving down the industry’s revenues.
Therefore, it is necessary to reconsider the operating model of the global pharma value chain. The aim of this paper is to discuss recent developments in the global pharmaceutical industry. The paper will focus on internationalization of pharmaceutical R&D activities within China. The topic has been chosen because it is a globally discussed issue that can help in understanding how globalization and the evolving healthcare needs of emerging economies will lead to changes in big pharma.
The pharmaceutical industry is often described as a sector of economic activity that requires one of the highest R&D intensities (Hu, Scherngell, Qiu, & Wang, 2015). R&D expenses that contribute to enormous pressures on the growth of big pharma have become one of the key drivers for the development of internationalization strategies.
In order to reduce the negative impact of the increased control of the US government over the pharmaceutical industry, big companies have offshored their clinical research and trial activities to China and other emerging economies (Gautam & Pan, 2016). According to a recent study, more than 25% of the revenue of most pharmaceutical companies is derived from BRIC countries (Gautam & Pan, 2016). Another study shows that due to the West to East dynamics in the industry, the Chinese pharmaceutical sector grew by more than $3 billion from 2000 to 2011 (Ni et al., 2017).
Researching the topic has brought to light that despite R&D internationalization being a boon to the Chinese economy, pharmaceutical innovation faces many obstacles in the country. China’s regulators, such as the Center for Drug Evaluation (CDE) and the China Food and Drug Administration (CFDA), have created numerous regulatory barriers that slow down both the application and registration process. This means that in order to decrease drug development costs, the country needs to optimize the work of its examination institutes, which handle 7,000 applications on an annual basis (Wang & Li, 2015).
Imperfect regulation undermines the integrity and efficiency of drug development, thereby reducing the growth rate of the industry. Grimes and Miozzo (2015) pointed to the fact that “the most significant costs of establishing remote R&D labs are more related to institutional barriers to effective communications rather than physical distance” (p. 1873). Therefore, the Chinese government needs to understand that in order to have a knowledge-based economy, it should perfectly position big pharma subsidiaries within its pharmaceutical industry.
The Ethics of Global Clinical Trials
Many of the pharmaceutical research activities of US companies are carried out in China and India, raising the question of economic exploitation of disadvantaged populations. A study on the ethics of global pharmaceutical R&D indicated that as many as 30% of the clinical trials of US-based big pharma companies were conducted at foreign sites (Weigmann, 2015). Just like any other corporate entities, big pharma companies can exert a detrimental influence on both the social structures and the environment of host countries.
Therefore, it is a responsibility of the Food and Drug Administration (FDA) to ensure that companies carrying out R&D activities overseas have the proper regulatory environment in terms of ethical standards, as well as sound practices with respect to corporate social responsibility (Peng, 2016).
It was surprising to discover that it is extremely difficult to apply Western ethical standards in international settings. For example, the principle of informed consent is not congruent with Eastern philosophy that is more open to community-based participatory research. Furthermore, when internationalizing R&D, it is important to remember that “people in developing countries belong to severely socio-economically disadvantaged populations” (Weigmann, 2015, p. 568), which can considerably affect their freedom to consent, thereby rendering them vulnerable.
Therefore, big pharma companies that are willing to move their R&D facilities abroad should anticipate the possibility of a significant reduction in sales due to negative publicity. According to a set of ethical principles outlined in the Declaration of Helsinki issued by the World Medical Association (WMA), placebo-controlled trials and other research that involves disadvantaged populations are only justified when they are “responsive to the health needs or priorities of this group and the research cannot be carried out in a non-vulnerable group” (Have, 2016, p. 60).
Another unexpected fact discovered during the research on the topic was that the realignment of the global R&D footprint has led to a deterioration in the integrity of the Chinese clinical trial industry. According to a recent report, more than 80% of the data supporting drug applications is fraudulent (Macdonald, 2016). An investigation involving 1,622 applications for new drugs submitted to the CFDA revealed that 1,308 of them were substandard or relied on fabricated clinical trials data (Woodhead, 2016).
The blame for fraud and misrepresentation of information has often been attributed to a lack of regulation in clinical research organizations. Such claims are doubtful since China’s pharmaceutical industry is associated with stifling regulations that slow the drug registration process. In its report, the CFDA found a variety of problems that contributed to the controversy and stated that “there had been a breach of duty by supervision departments and malpractice by pharmaceutical companies, intermediary agents, and medical staff” (Woodhead, 2016, para. 4).
Another issue that has recently come to light is the problem of widespread corruption in the industry. An investigation involving the Chinese subsidiary of GlaxoSmithKline (GSK) revealed that the company had been engaged in bribing officials and doctors to promote its products. The GSK controversy along with research fraud scandals will have harsh consequences for the country’s pharmaceutical industry. However, even though many experts concur that the investment patterns in pharmaceutical R&D might be changed by the recent loss of reputation of Chinese drug developers, nobody expects investors to cease their operations in the country (Hvistendahl, 2013).
Despite numerous obstacles faced by big pharma companies in China, the necessity to reduce the cost of R&D will continue to drive the country’s pharmaceutical innovation in the next five years. Given that the CFDA is adamant about restructuring the regulation of drug registration, it can be argued that investment in the industry will continue to grow. Furthermore, the country’s need for better medication along with increasing healthcare awareness is likely to facilitate the reformation of the industry. Therefore, it can be concluded that tremendous market opportunities are available to big pharma companies that are willing to explore the changing structure of the global pharma value chain.
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