Building a better government affairs function in China

By Jonathan Zhu, Heidrick & Struggles’

New standards for the clinical and regulatory approval of foreign drugs and treatments in China’s pharmaceutical market are clouding revenue projections for multinational drugmakers, but they also represent an opportunity. A closer look at the regulatory challenges multinational pharmaceutical companies face can better position MNCs for long-term success in China’s fast-growing market for pharmaceuticals.

The Lure of Growth

China’s pharmaceutical market is poised to overtake Japan as the second-largest market, behind the United States, in spending on drugs and treatments. Morgan Stanley estimates that Chinese pharma spending will double between 2012 and 2017, which would represent 15 percent of the $1.2 trillion in expected global spending on pharmaceuticals.

As these numbers suggest, sales have not been an issue for drug producers. The Chinese government continues to expand its social insurance blanket and widen the role of the private sector. For example, the country’s Ministry of Health suggested that up to 20 percent of hospital beds be privatized by the end of 2015.

Growth, however, comes with challenges. Profit margins are lower in China than in the West. Even as Beijing has encouraged foreign drugmakers to partner with domestic peers, scandal touched global and domestic players and provoked a stern official response.

Beyond stamping out corruption, the government has other plans for the industry — most notably, reshaping the country’s domestic pharmaceutical market by redistributing expertise from foreign entrants to domestic peers, as it has done in other technology-based industries.

No longer content to boost Chinese GDP growth through foreign direct investment, the current administration is emphasizing China’s domestic capabilities and looking to achieve a sustainable rate of growth through innovation. To that end, the government encourages partnerships between foreign and domestic drugmakers as well as with local Chinese clinical laboratories.

Moving the Goalposts

For multinational pharmaceutical companies, external factors increase pressure on management, raise levels of uncertainty, and cloud profit forecasts. Meanwhile, increased government oversight raises the bar for foreign pharmaceutical firms’ government affairs (GA) functions.

In early 2014, the Chinese Food and Drug Administration (CFDA) caught many drugmakers by surprise when it announced that foreign drugs would require three applications and three approvals, up from two of each.  In retrospect, the lack of communication shouldn’t have been so surprising. Apart from the government’s historical reticence in such matters, it’s worth noting the resource constraints involved: China’s Center for Drug Evaluation (CDE), under the country’s CFDA, with a staff of roughly 110 employees, regulates more than 4,000 pharma companies. By contrast, its US counterparts, The Center for Drug Evaluation and Research (CDER) and The Center for Biologics Evaluation and Research (CBER) of the US FDA, regulate about 200 pharma companies and collectively have a staff in the thousands. Moreover, the entry barriers in the United States, in the form of application fees, are much higher.

Tasked with monitoring developments in government policy and attitudes, the GA functions at many international pharmaceutical companies were the most surprised of all. Many GA leaders struggled to gain insight into the decision and some found that they lacked both the strategy and execution channels to mitigate the challenge. But despite lingering questions about policy interpretation, pharmaceutical companies continue developing and producing drugs and treatments for Chinese patients.

For senior pharma executives and the GA functions that support them, the relationship with government stakeholders must improve to meet new challenges. Forward-looking MNCs are starting to recognize these events as an opportunity to reframe the way the GA function engages with stakeholders. At the same time, MNCs are also preparing their organizations to successfully compete by recalibrating strategies, structures, and talent to anticipate and engage rather than merely react. Organizations that professionalize their GA functions will be best placed to navigate this new environment.

Time to Collaborate

CFDA’s departure from the “two applications, two approvals” process created immediate issues for the regulatory affairs (RA) teams of multinational pharma companies. While the regulatory changes might appear as an RA challenge, GA teams might be best suited to support, coordinate, and lead the response.

The regulatory change highlighted the lack of clarity in the industry, especially for projects currently in the approval process. Letters of inquiry were sent by most firms to the CFDA seeking clarification on the ruling; the only response, however, was to acknowledge that the letters had been received and were under consideration.

The lack of visibility into the Chinese government’s motivations on such a vital issue draws attention to the increased role of the GA function. In such circumstances, establishing more nuanced channels of communication between MNCs and regulators would be beneficial.  Phone calls between the local CEO and a policymaker, or meetings on the sidelines of public events or other engagements should be staples of GA best practice.  

More than ever, RA professionals in China need the help of their GA colleagues. While more effective coordination and support for the RA function would not have changed the policy, it might have given pharmaceutical executives an earlier opportunity to comment and prepare. The magnitude of the regulatory policy change and the competitive environment necessitate greater coordination between these typically siloed departments to build and maintain successful relationships with regulators.

Harness Public Relations and Corporate Social Responsibility Programs

The pharmaceutical industry in China suffers from lackluster public relations. Since pharmaceutical distribution and sales practices were thrust into the spotlight, the industry has been blamed for high drug and treatment prices. In reality, pricing is more complex, involving international and domestic drugmakers, policymakers, and healthcare providers.

One way the GA function can adapt is to shift from a purely responsive organ to a proactive partner of the pharma company’s corporate communications department. In addition to relaying policy considerations to executives, GA leaders should actively work with the PR department to inform and engage with stakeholders, including government officials, on the issues facing their company and industry. When the CFDA announced the change in approval policy, GA leaders could have given their PR teams clear, tactful messaging to communicate the effects of this change on public health issues. Most did not, however, in part because corporate PR has a relatively short history in Chinese business and is not as sophisticated as it is in the West. In the China offices of some pharmaceutical companies there is no PR function at all. Even where it is well developed, the levels of cross-functional collaboration are often poor.

Conversations with government officials will always be primarily about listening, but corporate communications can do more to share the value that MNCs provide to the communities. A practical example is to draw connections between pharmaceutical companies’ corporate social responsibility (CSR) efforts and their interactions with governments. One global pharma company, for example, has been supporting the Ministry of Health in an important public health initiative by providing data and technical know-how. Such connections bolster the credibility of foreign firms in the minds of government officials.

Multinational GA teams can also help their RA counterparts manage the effects of regulatory change by presenting the views of the public and their downstream customers to government officials. To do so effectively, many pharmaceutical companies operating in China will need better access to providers so they might develop stronger relationships with patients. Leveraging such relationships to present regulators with a richer picture of the effects policy changes have on patients’ lives will improve the company’s relationship with regulators. This shift to a more proactive form of GA is not new to most foreign firms in China: the practice is common in the United States and Europe.

Smart companies address organizational disconnects head-on, recognizing that while the benefits of greater coordination between functions such as PR and GA outweigh the effort required, that effort must be spearheaded by senior leaders within the company and supported by dedicated resources.

Demonstrate the Policy’s Effects on Patients

Multinational pharma companies can benefit by reframing the discussion away from cost and toward patients and quality of care. The “three applications, three approvals” change was made to give greater assurance about the safety of drugs and treatments in the Chinese market. Focusing more clearly on this goal could help MNCs open a broader discussion with regulators.

Companies can demonstrate a new policy’s effects by supporting their conclusions with data from a respected third-party provider. For example, companies could use data to examine the clinical and commercial effects of new treatments, including the implications for patients’ access to treatment. Data should also be employed to demonstrate the economic effects on domestic drug manufacturers. Doing so would create an external reference point that government officials and management can discuss without being unnecessarily provocative. Data-based advocacy could improve the level of engagement with regulators and broaden the discussion, facilitating a collaborative relationship where industry representatives and regulators explore the economic and scientific effects of policy changes together.

Direct advocacy is also important. As the Chinese government nurtures the domestic pharma industry and looks to stamp out improper sales techniques and other forms of corruption, it may generate wariness toward foreign pharmaceutical companies. Thus far, much of the resulting advocacy burden for multinational pharmaceutical firms in China has been shouldered by the R&D based Pharmaceutical Association Committee (RDPAC). Representing 40 companies, RDPAC articulates the contributions of the international firms in China, with an emphasis on its members’ investment in manufacturing and research facilities. While such advocacy is necessary, it isn’t sufficient and shouldn’t preclude pharma companies from acting on their own behalf as well.

In fact, to break regulatory impasses, international pharmaceutical firms must be more directly involved in communications with the government. To be effective, this communication should also acknowledge underlying Chinese cultural assumptions that guide interactions with government leaders. Operating on cultural principles imported from other markets is shortsighted and will inhibit constructive dialogue.

For example, drugmakers’ interactions with regulators in China are very different from the ones they have in the United States. The difference in accessing Western versus Chinese officials can be thought of as the difference between an  avocado and an egg. Just as the avocado has a soft exterior and hard core, Western regulatory officials readily grant personal access, but are typically unwilling to grant access to core decision-making processes. Chinese officials, for their part, resemble the egg. Although they present a hard, seamless shell, they are more fluid underneath. While slow to grant access initially, Chinese decision makers may invite trusted counselors to share their opinions.

Government Affairs Self-Evaluation: 5 Questions to Ask

1. PR/ CSR Coordination: How integrated is your company’s government affairs (GA) function with public relations (PR) and the organization’s corporate social responsibility (CSR) activities? Do your PR and CSR functions know how to assist your GA function?
2. Public Conversation: Does your firm have a compelling, concise description of the effects of the “three applications, three approvals” process? Could you easily articulate its effects on the public’s access to quality healthcare?
3. Domestic Alliances: Who are your domestic GA partners? Do you have access or working relationships with executives at your Chinese peers if you wanted to collaborate or discuss an issue?
4. Voices of Influence: Whose voices would best represent your company’s interests in public and private GA discussions? Do you have respected advocates and ambassadors, both in China and internationally?
5. Global Resources: When was the last time your global GA resources were deployed in China, either through personnel or research? Are your global executive leaders adequately briefed on the impact they can have on local market discussions?

Build Alliances with Domestic Drugmakers

The GA function must focus on improving relationships with government officials, including regulators. However, it is not the only way forward. Just as regulators are likely to respond positively to economic and scientific research, they are also likely to look favorably on positive feedback from the domestic pharmaceutical industry. Given China’s goal of developing local players, cultivating relationships with domestic management is a prudent course for MNCs. There is substantial scope for inviting Chinese drugmakers to contribute their influence and understanding to their foreign GA peers.

For example, many of the senior executives and board members of Chinese pharmaceutical firms also serve on committees of the Chinese People’s Political Consultative Conference and National People’s Congress, two of the country’s highest political bodies. Participation in these bodies grants access to policymaking at a level that foreign GA leaders and their executives cannot reach on their own. Relationships with domestic peers gives foreign GA leaders relational, albeit indirect, access to policymakers. Even if meetings with government regulators cannot be arranged, the management at domestic pharmaceutical firms can offer vital insights into the prevailing regulatory mind-set.

Cultivate Additional Voices of Influence

Too often the conversation between foreign drugmakers and regulators is adversarial. Rather than frame the discussion as between two competing positions, influential figures in China’s public health dialogue can help bridge the two sides.

When identifying influential figures, GA leaders should pay attention to their levels of access and networks. Drug regulation is split among China’s Ministry of Health, the CFDA, the National Development and Reform Commission (NDRC), and the Ministry of Human Resources and Social Security. At the local level, drugmakers are confronted with similar layers of bureaucracy as they navigate import procedures and regulations, taxation, tendering processes, and labor relations.

Government officials can also be invited to foreign pharmaceutical companies’ internal events. When firms hold their annual staff gatherings, for example, the insights and perspectives of experienced officials would hold great value for RA staff, while potentially deepening rapport between GA leaders and local officials.In addition, more can be done to build strategic connections with the growing number of retired policymakers. Engagement with retired senior government officials helps cultivate influence for multinational firms in China.

Bring Global Leadership and Policy Experience to China

Foreign pharmaceutical firms attempting to improve influence and access without bringing the full resources of a global organization to bear are unnecessarily limiting their efforts. Much of the GA work in China by MNCs has been driven locally, and many companies’ failure to tap into the experience and insight available throughout the firm’s global operations has hindered their operations.

Global leadership at multinational pharmaceutical firms needs to more actively support the efforts of local GA and RA functions. Companies can start by making better use of global executives’ time spent in China. Many of the biggest global drugmakers send their CEOs to international economic forums in China, yet far too many leave without meeting national, or even local, government officials.

Direct engagement with Chinese officials and influencers is key, but much can be done outside of China too.  One way is to start exchange programs between Chinese and American government agencies through global trade organizations, such as the Pharmaceutical Research and Manufacturers of America (PhRMA). Representing the interests of the largest American drugmakers, PhRMA could convey the concerns and proposals of multinational drug companies in China as a part of the group’s existing market education efforts.

Hire the Whole Package

Multinational pharmaceutical companies have run sizable GA functions for decades, but the experience levels and skills of the teams have changed. In the past, the heads of GA were leaders with access to the highest levels of policymaking. The small leadership pool of the late 1980s and early 1990s enabled interconnectedness between governmental authorities and corporate executives. Many GA leaders from that first generation have since moved on to other pursuits, opening the way for a new generation. This new cohort, however, does not have the same level of access to government officials, in part because industry growth and the rise of domestic players mean multinational  pharma companies contribute relatively less to the overall employment and industry investment as they once did and are therefore no longer valued as much.

To compensate for reduced interconnectedness with policy makers, GA team leaders must possess a broad range of skills. Within global pharma organizations leadership integrity is especially valued in GA team leaders. Recent public relations crises overpricing and physician subsidies exposed the lack of integrity of some firms’ GA teams. Substantive business skills and access are vital for GA function heads, but personal integrity must be the starting point — and must be maintained above all.

Intelligently allocating resources within the GA function is another skill that GA leaders should possess. Establishing sustainable structures that address the needs of a broad group of stakeholders (including government officials and internal company stakeholders) requires exceptional managerial skills. A high-functioning GA leader should also be a strong collaborator, able to effortlessly communicate and coordinate activities and plans with global and local stakeholders and thus earn buy-in for future efforts.

A New Opportunity

China’s dynamic and occasionally unpredictable  pharmaceutical industry calls for new levels of coordination, leadership, advocacy, and creativity from multinational firms’ GA leaders. More than ever, the GA function has an opportunity to make significant contributions to its colleagues and the industry at large. Realizing the opportunity will require GA leaders to coordinate with public relations and corporate social responsibility programs, demonstrate the effects of policy changes, build alliances with domestic drugmakers, cultivate relationships with key opinion leaders, and better leverage their firms’ pools of global leadership. Companies that invest in building strong GA functions will have the upper hand in navigating the fast-changing market for pharma in China and can position themselves well for years to come.

About the author: Jonathan Zhu is a partner in Heidrick & Struggles’ Shanghai office and a member of the Healthcare and Life Sciences Practice. [email protected]