Looking to find a cure in an ailing industry
David Preston, chairman and chief executive officer of Boehringer Ingelheim China was recently honored with a Magnolia Silver Award under a program set up by the Shanghai government to recognize the contributions expatriates make to the city’s social and economic development.
Preston took over the China business of German-based drug maker Boehringer Ingelheim four years ago.
Since coming to China in 1992, he has also worked for French-based Sanofi-Aventis and Xian-Janssen, the US-headquartered pharmaceutical maker’s China joint venture.
An anti-bribery investigation has spread from UK-based GlaxoSmithKline to a number of foreign and domestic pharmaceutical companies, raising concerns about the possible negative impact the scandals could bring to China’s pharmaceutical market.
Shanghai Daily sat down with Preston to hear his views about the state of the industry.
Q: How do you think the GlaxoSmithKline revelations will affect your industry and what lessons have been learned?
A: The negative impact has been a challenge psychologically, for everyone in the industry. It’s a challenging period. Some of our employees have been advised by their parents to leave the industry.
The majority of our employees do an ethical job, and I don’t think the whole industry should be blamed for a few people acting beyond the rules.
It’s a sad time. It will take some time to get over, and hopefully everyone will come out stronger and companies will think more carefully in this environment.
I’m personally very positive on pharmaceutical industry growth, and we’re not leaving China because of a challenging environment.
We haven’t felt a big impact yet, but in the next few months, we may gradually feel it and then we’ll be able to better assess the impact on the business side.
Major multinational companies operating in China all have very strong compliance departments. The issue now is how to enforce the rules and make sure people don’t find loopholes to circumvent the regulations.
First, there has to be a strong compliance culture and a set of complete regulations. Second, employee training is also very important to make sure they understand and buy into the appriopriate values and follow the rules.
We encourage employees to report any non-compliance behavior if they come across it at any level. It’s important to have such a mechanism, otherwise compliance departments would be useless.
The industry challenge today is a reminder to everyone how we should behave and ensure that we redouble our efforts to make sure we are obeying the rules.
Q: There have also been reports about overpriced drugs in China. Please comment on that?
A: The government, pharmaceutical manufacturers and regulators all need to be committed to finding a way to give Chinese patients access to innovative and high-quality medicines at a reasonable price.
Ensuring high quality products for patients is the priority, before we talk about the drug price issue.
Manufacturers have to obey a standard for each kind of drug, and if you don’t follow the quality guidance, cost will, of course, be lower and quality won’t be guaranteed.
There are structural issues when comparing the Chinese mainland’s drug prices to those of other places, such as Hong Kong. Hong Kong has a flat retail channel without import duties and taxes.
In countries where products have been on the market for 15-20 years, the drug patent owner can afford to lower the price. In other countries where they are brand new, they have to ensure enough profit to cover some of the research and development costs.
Currently, it can take several years for innovative drugs to get on the reimbursement list, then go through the bidding process and finally get to hospitals and patients.
There are many proven drug-pricing mechanisms that the Chinese government could adopt in order to make access to innovative products faster and easier.
In my opinion, people themselves should pay for over-the-counter drugs. Nearly half of the drugs on the reimbursement list in China are OTC products, while the top targeted cancer drugs aren’t on the list.
The government could take more steps to ensure that more of reimbursement go to specific or chronic diseases instead of over-the-counter drugs.
Q: According to IMS Health figures, pharmaceutical sales increased by only half in this year’s first quarter compared to a year earlier and dropped from the October-December period of 2012. Do you see this as a trend?
A: The National Development and Reform Commission is driving down drug costs at all levels, and that is likely to continue in coming years. So the pace of overall pharmaceutical sales will slow from high double digits. But the pace still remains very fast compared with negative growth in the European region.
The ongoing crackdown on bribery and compliance will have a medium-term impact, but, overall, I think the industry remains healthy.
Q: Apart from double-digit growth in recent years, why does China matter to multinational companies? What do you think of Boehringer Ingelheim’s future here?
A: Domestic companies have more than an 80 percent market share in terms of sales volume in China, while the top multinational drug makers have less than 20 percent. China’s pharmaceutical industry is highly fragmented. Unlike in Western countries, where multinationals account for more than 80 percent of sales, the picture in China is very different.
We posted a 25 percent increase in revenue in our China business in 2012, driven by strong performance in our human pharmaceuticals and animal-health vaccine businesses. Our aim is to be in the top three in every category for our products.
China is currently our fourth-largest market behind the US, Japan and Germany. It will become third very soon. The majority of our sales and growth are still coming from developed countries because we have all the new products there.
China will eventually become the biggest pharmaceutical market in the world, and if you don’t succeed here, you won’t succeed worldwide. It’s clear that companies want to take a piece of the cake from the numbers perspective.
Boehringer Ingelheim is different from other drug makers in the sense that our growth is not dependent on China. It’s still from America and other developed nations because we have many new patent products in those markets.
Other multinational drug makers are running out of products, so they depend very much on China’s growth and are desperate to make the emerging markets succeed.
Because Boehringer Ingelheim is a family owned business, compared with other listed multinational drug makers, we can afford to take a long-term view and not be constrained by quarterly earnings.
China’s input in the very early stages of new drug development is taken into account nowadays. We are seeking innovative ways to treat China-specific diseases, such as liver cancer.
Q: Are joint ventures and partnerships with domestic pharmaceutical companies necessary for multinational drug makers to succeed in this market?
A: Multinational companies begin their business in China by establishing joint ventures and setting up representative offices. Then, they gradually buy back shares and start independent operations as their investment grows bigger.
They have now reached the next phase, where people realize that China is too big to cover on their own, so they are again seeking partners after buying back shares from the joint ventures they formed in the early 1990s.
I have a very good rapport with our joint-venture partners and collaborators. It’s important to make compromises to achieve our common goals.
Putting together the way two companies do business is certainly a challenge, but it’s possible to complete that task when you have the right partner.
Q: In such an intense, competitive industry with high staff turnover, how do you retain talented people in your company?
A: Attracting talent is an important task for the management team. I attract a lot of talent because they know their general manager is stable and staying in China instead of facing a new executive every few years. They feel the company could go a long way. The top person in the company has a huge responsibility in attracting talent.
Although in other parts of the world, Boehringer Ingelheim is customer focused, in China we are employee focused and maintain the principle that keeping good employees is a priority because that’s the only way we can expand our business and serve clients.
Q: What influence does Chinese culture have on your management style?
A: There has to be a balance between clear leadership and consensus within the management team. Asian culture would like employees to simply obey orders from their superiors, while in Western culture, a management team needs to reach consensus about business decisions. Striking a balance is an important part of my job.
Q: What do you think of Shanghai’s efforts to attract foreign investment?
A: The Shanghai government is constantly looking to the future and reforming in every aspect. I’m happy to see the progress it has made over the years.
Shanghai is a very friendly city for foreign investment. The Magnolia award, for example, is a very smart way to turn foreigners into Shanghai ambassadors.
The city has laid a very good infrastructure for education, medical care and other services for expats, and is constantly removing obstacles for foreigners to invest in China.
Q: What’s your most exciting experience in China?
A: I have a two-year-old daughter, and I made her a Chinese citizen. I came here for business and ended up finding a life here with my Chinese family.