Like most of his neighbors, Lin Hecai used to worry about medical bills. The 64-year-old retired rice farmer lives in a remote village in Anhui province in southeastern China, one of the country’s poorest regions. Last year the Anhui government launched a program to force pharmaceutical companies to reduce the cost of basic drugs, and Lin says he’s now less concerned about paying for health care. “Even for small ailments, I can afford to see the doctor,” Lin says as he waits in his village clinic to be treated for a cold.
What’s good for Lin and others in Anhui is a growing concern for pharmaceutical companies. Across the country, officials are promoting programs designed to make basic medicines more affordable for consumers—and less profitable for manufacturers. Last year, Anhui introduced a system for hospitals and clinics that encourages competition to force down prices. By putting the focus on cost rather than quality or brand, programs such as Anhui’s have helped force sharp cuts in prices for more than 300 drugs, including treatments for heart disease and diabetes. “I might as well invest in funds or go buy property,” says Tang Changshou, who runs drugmaker Yangcheng Pharmaceutical. “Anything is better than drugs these days.”
Almost all of China’s provinces have started buying essential drugs through similar programs, the Ministry of Health reported in September, and prices for those medications have come down by an average of 25 percent. In Fujian province, the bidding process covers more than 2,000 drugs and accounts for about 65 percent of medications on the market. In many cases, “the price ceiling doesn’t allow our products to be used,” says Joseph Cho, who heads an industry group in Beijing that represents 37 foreign drugmakers.
Western pharmaceutical companies have been building their businesses in China as sales of prescription medications have more than doubled since 2006, to $41 billion, making the mainland the world’s No. 3 drug market behind the U.S. and Japan, according to researcher IMS Health. In March, Switzerland’s Novartis (NVS) completed a $125 million deal for 85 percent of vaccine maker Zhejiang Tianyuan Bio-Pharmaceutical. In February, France’s Sanofi (SNY) finalized a $521 million purchase of Chinese pharma manufacturer BMP Sunstone. Last November, U.S. medical supply manufacturer Cardinal Health (CAH) paid $470 million for Yong Yu, a drug importer and distributor. Japanese drugmaker Takeda Pharmaceutical (TKPYY) says it will invest $300 million in China over three years.
For now, the shift has hit Chinese companies hardest. The MSCI China/Health Care Index, which includes most of the country’s biggest drugmakers, has dropped 34 percent this year, compared with a 15 percent fall for the broader MSCI China Index. Many local companies are caught in a no-win situation, says Richard Yeh, an analyst in Hong Kong with Citigroup (C). Skipping a government auction means giving up on sales in an entire province. But winning means companies are unlikely to make profits. “The more they sell, the more they lose,” he says. The price-cutting frenzy will soon hurt foreigners, too, says William Dai, chief financial officer for researcher ShangPharma (SHP). “The best times for multinational pharma companies are over,” he says. “They can still make money, but they’re not expected to make a lot of money.”
Some pharma executives say there are plenty of opportunities to profit in China. While IMS has revised downward its original forecast of 20 percent revenue growth for Chinese pharmaceuticals this year, the firm still expects a 17 percent increase. With China’s aging population, growing wealth, and expanding health-care coverage, many long-term trends remain in the drug industry’s favor. “There is still the sheer volume of the Chinese market,” says Sanofi Chief Executive Officer Chris Viehbacher. That, he says, “is able to more than compensate” for government efforts to reduce prices.