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China Cutting Health-Care Costs Threatens Drugmaker Profits

China vowed to extend drug-price cuts, rankling some of the country’s largest manufacturers, in an overhaul of its health-care system to trim the cost of caring for an aging population.

Political leaders, wrapping up their annual National People’s Congress in Beijing today, pledged to make medical care more affordable and widen coverage of state-paid health insurance. The plan will be supported by a tendering system tested in Anhui province that encourages drugmakers to compete on price and quality for state contracts.

While the elderly were looked after in the past by their children, urbanization and the nation’s one-child policy have eroded the tradition of family care, shifting the burden to the state. The government wants to broaden the use of the new procurement method, which led to price reductions of at least 30 percent on medicines on its essential drugs list in the past year, said Sun Zhigang, the top official overseeing the changes.

“The China government will keep increasing the number of drugs on the essential drugs list and expand the coverage” from basic health centers to hospitals, Nomura Holdings Inc. health- care analysts Gideon Lo and Sunny Ding said in a March 13 report. “This move is positive for drugmakers long term as it will likely help to drive volume growth.”

The cost-cutting measures have so far led to profit warnings at United Laboratories International Holdings and Wuyi International Pharmaceutical Company. United Laboratories, whose shares trade in Hong Kong, said last month that its 2011 income would “decrease materially” because of the government’s price reduction policies.

‘Irresponsible’ Policy

“Health-care reform is basically about tendering to compete on prices, and I feel this is irresponsible to the drug industry,” said Guo Guangchang, chairman and co-founder of Fosun International Ltd. (656), which controls one of China’s biggest drugmakers, Shanghai Fosun Pharmaceutical Co. (600196) “They need to prioritize on guaranteeing quality first, rather than focusing on just prices, or this will be very unfair to China’s drugmakers,” Guo, ranked China’s 27th richest by Forbes Magazine, told reporters on March 9 in Beijing, where he also attended the legislative meeting.

The Research and Development-Based Pharmaceutical Association Committee, an industry group representing the interests of multinational drugmakers including Pfizer Inc. (PFE) and Merck & Co. (MRK), is also lobbying against the expansion of the so- called Anhui model tendering system.

Safety Guarantee

“The tendering system that we have implemented for basic drugs has proved to be effective and able to guarantee the drugs’ safety, reasonable prices, and timely supply,” Sun, deputy director of the National Development and Reform Commission, said on March 7. “Our next step is to further improve on these plans,” said Sun, who also heads the State Council health-care reform office.

GlaxoSmithKline Plc (GSK), the U.K.’s largest drugmaker, hasn’t been treated unfairly by the Chinese government compared with local companies, Chief Executive Officer Andrew Witty said.

“There is a tension that the Chinese government needs to try and manage, but I feel like we get a fair treatment here in China,” he said in an interview in Beijing on March 5.

Witty declined to say how much the government’s price cuts have affected Glaxo’s margins in China.

No ‘Easy Ride’

“Nobody expects drug companies to be given an easy ride,” he said. “What we do look for is a fair playing field, and I think in China we’ve got that,” said Witty, who has 4,000 medical representatives selling Glaxo’s drugs throughout China.

The government isn’t likely to back down before a leadership transition in which the ruling Communist Party will appoint a new generation of leaders this year, said Jason Mann, a Hong Kong-based health-care analyst at Barclays Capital.

“Drug companies face growing risk as political scapegoats,” he said in a telephone interview on March 12. “Though profits are shrinking significantly, these firms remain profitable, and in some conversations we’ve had within the government, that reason alone is enough to support further price cuts this year.”

Mann expects disappointing earnings announcements from Chinese drug manufacturers whose shares trade in Hong Kong, especially United Laboratories, China Shineway Pharmaceutical Group (2877) and Sino Biopharmaceutical (1177), because of falling drug prices, he said.

Shineway fell as much as 5.8 percent in Hong Kong trading, the most since Nov. 16, before closing 0.9 percent lower at HK$13.70. United Labs declined 2.7 percent to close at a seven- day low of HK$5.40. Hong Kong’s benchmark Hang Seng index fell 0.2 percent. In Shanghai, Fosun Pharmaceutical lost the most in seven months to finish 4.2 percent lower at 9.22 yuan.

Cancer Treatments

In addition, the government’s intention to target price reductions across more expensive medicines, such as cancer treatments and heart pills, could mean more drugmakers are affected, Mann said. The number of people with cancer in China is increasing as the population lives longer.

China had 178 million people over 60 in 2009. The tally could reach 437 million, one third of the population, by 2050, according to the United Nations. After expanding 2.5 percent a year for the past three decades, China’s working-age population has stopped growing and will contract 1 percent a year by the mid-2020s, according to the Center for Strategic and International Studies in Washington.

That’s intensifying the need to drive down government-paid medical costs.

Foreign Companies

China’s Minister of Health Chen Zhu wants the tendering system to apply to about 800 medications, from 307 now, and include oncology drugs used in large hospitals. The sale of expensive treatments for major illnesses mostly benefits “foreign drug companies,” Zhao Ping, the former head of the Cancer Institute and Hospital in Beijing, told reporters on March 10, adding that he supports the government’s measures.

“At the Cancer Hospital, most of the drugs we use are imported from overseas, and just one oncology drug can cost as much as 20,000 yuan ($3,200),” said Zhao, who is a member of the Chinese People’s Political Consultative Conference’s health- care committee, an advisory body to the government. “A lot of our medical expenses goes needlessly to foreigners.”

Zhao, who was speaking at a briefing held alongside the legislative meetings, said he has been “strongly proposing” that the government invest more to support local drug companies to create their own drugs as a way to control prices.

To contact Bloomberg News staff for this story: Daryl Loo in Beijing at dloo7@bloomberg.net

To contact the editor responsible for this story: Jason Gale at j.gale@bloomberg.net

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