“China is rapidly increasing its life science R&D, encouraging its companies to move beyond producing generics drugs into developing their own. It’s also willing to steal technologies it covets.”
Perhaps the report on China’s strategy for eclipsing the U.S. lead in biopharma from the Information Technology & Innovation Foundation (ITIF) resonated so strongly with me because of several articles in The Wall Street Journal. Taken together, they present a sobering picture of what we’re up against.
The first was a book review of “Leadership and the Rise of Great Powers” by Yan Xuetong, a prominent Chinese professor. Characterized as “a window into Chinese elite thinking about the world; it is as much a political manual as an international-relations text book.” The thesis is the inevitable rise of China as the world’s dominant power at the expense of the United States. Here’s a point worth pondering:
What Mr. Yan does predict should make clear the geopolitical challenge America faces from China. Implicitly contradicting Beijing’s constant call for “win-win” diplomatic relations, Mr. Yan argues that international politics, and specifically that between leading and rising powers, is a zero sum game. He believes that neither Washington nor Beijing can effectively exercise international leadership and foresees an era of disarray. The struggle will be primarily played out in East Asia, where the two have irreconcilable interests. He believes, moreover, that it is immoral to categorically refuse to use military force for any reason.
This last point should be a wake-up call to U.S. policy makers who assume that Beijing would never risk a greater confrontation by protecting its interests with armed force. While Mr. Yan claims that China and America are unlikely to get into a war… he says nothing about Beijing using force against its smaller neighbors…
“The Trade War Hits China Where it Hurts” is an opinion piece co-authored by former Senator Jim Talent. It states:
With declining growth, Beijing is reaping what it had sown. For two decades after the death of Mao Zedong, the party injected a degree of freedom into China’s moribund economy. But there is a limit to how much control the socialist regime is willing to sacrifice. It refused to create a private banking system or an independent legal system. It won’t privatize the vast state-controlled enterprises that account for 30% of China’s economy, serve the regime’s goals and enrich political allies.
Those relying on recent improvements in the Chinese patent system to protect their technologies should realize that it can change anytime at the government’s whim.
Finally, the Wall Street Journal reviewed a new documentary, “One Child Nation” on the horrors inflicted on women under the Chinese government’s one child per family decree that only ended four years ago. The film “is not for the faint of heart.” You’d better not be in the way when China adopts a new policy objective.
Enter, the Dragon
With that background, here are the “key takeaways” from the ITIF report:
- The U.S. biopharmaceutical industry is a key driver of U.S. competitiveness and good jobs.
- America’s competitive position is being challenged by China, which has targeted the biopharma industry for development, in part through its “Made in China 2025” plan.
- Like so many other industries in which China has gained global market share, the core component of its strategy appears to involve copying—in this case copying foreign drugs so it can develop and export generics.
- While China has some positive biopharma policies, its strategy is mostly premised on “innovation mercantilism,” including weak IP protection, biased drug approvals, severe price controls, subsidies, import restrictions, and substandard exports.
- Rolling back China’s biopharma mercantilism is important—but the main way for the United States to remain competitive is to continue rapidly developing new drugs. That requires robust investments in R&D, which drug price controls would weaken.
Currently, the United States is far and away the leader in the life sciences. Biopharma grew 26% between 1998 and 2019, it performs most of its research domestically, produces the majority of the world’s new drugs, and pays its workers well. The U.S. lead is a recent phenomenon, driven by successful policies like the R&D tax credit, the orphan drug tax credit, the Bayh-Dole Act and the strengthening of IP protections. These, combined with increased funding of the National Institutes of Health (NIH), created public-private sector partnerships which shot the United States into the leadership position we now enjoy.
We should not be surprised that biopharma is targeted by China. There’s nothing wrong with fair competition. China is rapidly increasing its life science R&D, encouraging its companies to move beyond producing generics drugs into developing their own. But it’s also willing to steal technologies it covets. The ITIF report lays out how this is done:
- In 2018, “one in five North American CEOs reported their companies experienced IP being stolen in China;”
- “The IP Commission Report on the Theft of U.S. Intellectual Property found that China accounted for nearly 80 percent of all IP thefts from U.S.-headquartered organizations in 2013, amounting to an estimated $300 billion in lost business. An updated 2017 Commission report put that figure at $600 billion.”
- “Former NSA Director Keith Alexander has called Chinese IP theft … ‘the greatest transfer of wealth in history.'”
- “Another vector for purloined IP is tricking companies in the United States into believing a Chinese firm wants to invest in them. For example, a seemingly independent Chinese investment fund will approach a small or mid-sized U.S. technology company and indicate a willingness to invest needed capital in the company. But before the Chinese company can do this, they must ‘do their due diligence’ and send over employees that actually work for a state-owned Chinese company, and are there to obtain key information about the company, including trade secrets. The firm never hears back from the investment company again.”
- “Another path is through exchange visits and student enrollments in U.S. universities. Chinese exchange visitors to the United States have used opportunities to visit factories and other facilities to engage in industrial espionage, including measuring equipment, taking photos, and writing detailed technical notes to bring back to China.”
- “… there have been numerous reports of Chinese biomedical researchers working at American universities, often on NIH grants, taking the IP their labs develop to China… The Chinese 1000 Talents program also supports this effort, as one key qualification for the Chinese government offering incentives to scientists to come back to China is access to IP.”
- “… China is investing in U.S. universities in order to gain access to their research, often with the backing of U.S. state governments.”
- “China has also ramped up its efforts to buy into early stage U.S. technology start-ups.”
- “Dwarfing these tools is forced technology transfer. China’s accession agreement with the World Trade Organization (WTO) contains rules constraining it from tying FDI (foreign direct investment) or market access to requirements to transfer technology to the country. However, China routinely requires firms to transfer technology in exchange for being granted the ability to invest, operate, or sell in China… To be sure, because such conditions usually contravene China’s WTO commitments, officials are careful not to put such requirements in writing, instead typically resorting to pressuring foreign firms to transfer technology.”
- “… the sophistication and value of the technology the Chinese government is now demanding is significantly higher than in decades past, when U.S. companies, confident in their ability to innovate faster, could afford to give their Chinese “partners” older generations of technology. Now, for many foreign advanced industry companies, doing business in China requires transferring ever-more valuable technology to Chinese joint-venture partners.”
China is trying to become the “world’s low-cost medicine cabinet,” allowing its firms to sell drugs abroad “so foreign patients (and governments) end up paying for China’s drug development.” It’s also protecting its domestic market. Before a foreign company can sell drugs in China it must perform clinical trials there, even if the drug is already approved by the U.S. Food and Drug Administration. That takes significant time off the life of the patent, as there is no extension given for this delay. ITIF adds:
Moreover, some have argued that the Chinese patent office imposes overly strict sufficiency of disclosure for enablement and inventive step requirements for biopharmaceutical patents that result in foreign firms. having to disclose too much data, which may include trade secrets. A failure to provide this data may result in the Chinese government invalidating the patent, which it could then share with domestic firms.
Protect Bayh-Dole, Avoid Price Controls
The ITIF report concludes with a number of recommendations for countering this challenge, such as including biopharma issues in our trade negotiations, blocking Chinese acquisitions or investments in U.S. drug making companies, combating IP theft or forced tech transfer, and closely examining science and technology agreements with China, insuring they do not give away the fruits of our government funded R&D.
The document makes clear the importance of protecting the Bayh-Dole Act, the centerpiece of our government-industry partnerships, which underpin our lead in the life sciences. It concludes the U.S. recommendations with this:
Perhaps most importantly, as it seeks to ensure more affordable health care, Congress should safeguard that any efforts do not inappropriately limit drug prices. The scholarly evidence is clear that limiting industry revenues through price controls results in less investment in R&D, which limits badly needed drug discovery. A number of studies have found this causal relationship. For instance, as OECD [the Organisation for Economic Co-operation and Development] wrote, “There exists a high degree of correlation between pharmaceutical sales revenues and R&D expenditures.” Imposing significant drug price controls would starve biopharma companies in the United States from the innovation “fuel” they need to stay at the global cutting edge, and in turn, would enable China to catch up to the United States.
That’s timely advice as Congress wrestles with the thorny issue of the high cost of some drugs. Ideas like imposing arbitrary “reasonable pricing”—as established by government—restrictions on drugs arising from NIH-supported R&D would do considerable damage without achieving the desired objective.
China’s revered figure, the dragon, is a symbol of power, strength, and control. This is no time to shoot ourselves in the foot. We’d better realize that the dragon is playing for keeps.
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