How a ‘local-first’ strategy in China can help global pharma and life sciences players reduce risk, drive growth

A functional assessment can help confirm that you’re on the right strategic course

Many multinational pharmaceutical and life sciences companies came to China years ago seeking to tap a vast commercial market, economical labor and raw material costs, and a solid talent pipeline. But rising geopolitical tensions, higher costs and new regulatory requirements from both the United States and China may be challenging the business projections of even a few years ago, compelling companies to reevaluate their growth assumptions.

For most pharma and life sciences companies, the question isn’t a simple, “Should we stay or should we go?” The better question — How can a holistic “local-first” strategy help safeguard and expand our business in China?

Many multinationals are already contemplating such strategies. For others, the time may have arrived to scrap earlier efforts and formulate more concrete and integrated plans to help reposition themselves in an increasingly uncertain geopolitical and business climate. A wait-and-see approach isn’t likely to succeed.

As governments and industry work to find the right balance between security and business development, some multinationals have successfully spun off parts of their foreign operations over the past decade. That’s helped parent companies better focus on the true growth areas of their business, while greater local control has spurred growth and helped avert potential political and regulatory issues.

CEOs and board members should consider how prepared they are to navigate the geopolitical regulatory environment. Beyond having a plan to safeguard the business and improve continuity, how fast could you execute?

Just how local? 5 considerations

No single local-first strategy guarantees success, but maintaining the status quo is increasingly untenable. Begin with these questions.

  1. What are the assumptions for your Chinese business? How have the assumptions that led you to China changed?

  2. What scenarios require new plans to help mitigate risk and guarantee business continuity? Consider geopolitical and regulatory developments at the governmental and local levels. Also consider economic, compliance, supply chain and health-related factors.

  3. What are the benefits of creating a more independent local entity? They may include tax benefits, patient access, increased agility and speed in markets, faster approvals, higher product sales and greater sustainable growth. Conversely, what are the costs of duplicating corporate functions and systems?

  4. If the Chinese entity is separate from the rest of the Asia-Pacific market, what are the implications of managing it?

  5. What new opportunities might a local-first strategy open for deals, joint ventures and collaborations with Chinese and other life science companies?

Three strategic options

For most pharma and life sciences companies, three scenarios can emerge. Each option comes with distinct choices for how to structure global functions.

As you assess your operations, it may make sense to diversify or even duplicate some functions so they can operate more nimbly. You may, for example, need to establish a China-specific supply chain if local content requirements call for drugmakers to manufacture at least parts of their products in China to be eligible for reimbursement by state-sponsored health insurance. Certain medical equipment is already subject to these rules and generic medicines, which are more commoditized, could be next.

While it hasn’t yet happened in the pharma and life sciences space, some multinationals have already carved out a stand-alone Chinese entity that operates as a satellite of the parent company. This generally means duplicating most functions and creating clear separation of Chinese units from the rest of the company.

Spinning off parts of the business can take many forms and may become more common if companies face significant regulatory, compliance and legal challenges in the future. Some companies may opt to leave the market completely or limit themselves to holding shares in the spinoff. Companies exiting the Chinese market could also explore licensing deals that allow limited use of brand and intellectual property.

Weighing operational impacts and opportunities

As you determine a local-first China strategy, consider the following operational impacts and opportunities such a move entails.

Research and development

Segmenting R&D efforts may involve imposing technical controls, limiting access to global systems and better detecting and responding to threats against intellectual property security. Companies that set up local research and development capabilities may be in a better position to understand what the Chinese market demands. It’s not uncommon for a multinational pharma and life sciences player’s VC arm to be globally focused on certain molecules that may not align with China’s agenda.

While China-based R&D may not lower global R&D costs, innovative drugs developed in China have made it to global markets. Although the research process might be viable within China, clinical development would still need to occur elsewhere to gain the confidence of regulatory agencies globally. Cleanly separating what is and isn’t under regulation is increasingly difficult. For example, any ideation or intellectual property that’s developed in China or by Chinese employees of US businesses will likely fall under the purview of existing Chinese data laws. 

Contact us

Nalneesh Gaur

Principal, TX, PwC US

Email

Ben Rhee

Principal, PwC US

Email

Glenn Hunzinger

Health Industries Leader, PwC US

Email

Follow us