Photographer: Xaume Olleros/Bloomberg

China's Drug-Price Cuts Are Hitting Big Pharma Where It Hurts

  • Hospitals and provinces pressure drug companies on prices
  • Growth in China's $115 billion drug market has stalled

The world’s largest pharmaceutical companies are facing a roadblock in China as a state-led campaign to slash drug prices has triggered a slowdown in sales growth.

One of the biggest problems: China’s government-run health insurance funds, which are struggling to keep up with an ageing population and surging incidence of diseases like cancer or diabetes. As they grapple with tighter budgets and a slowing economy, many of these funds are capping reimbursements to patients and pushing local authorities to negotiate with companies to lower drug prices.

More than $115 billion of drugs were sold in China last year, according to researcher IMS Institute for Healthcare Informatics, making it the world’s second largest market after the U.S. China’s pharmaceutical market shrank by 1 percent in dollar terms from October to November, according to Barclays Plc, a sharp contrast with the 17 percent expansion in the second half of 2013. As a result, companies from the U.K.’s GlaxoSmithKline Plc to AstraZeneca Plc and New York’s Pfizer Inc. saw China sales growth weaken last year.

In the latest sign of price pressures for the industry, Li Bin, director of the National Health and Family Planning Commission said at a press conference at the National People’s Congress on Tuesday that China has won price cuts of more than 50 percent in national-level bargaining with drug companies on about five kinds of costly imported drugs for illnesses including cancer. The official didn’t specify the names of the drugs or the manufacturers.

Chinese citizens pay premiums to the country’s public health insurance funds from their salaries, but those amounts are rising more slowly as the economy has expanded at the slowest pace in 25 years. Meanwhile, the insurance funds face rising costs because the country’s citizenry is ageing so rapidly, said Joseph Cho of RDPAC, an industry group representing foreign drug companies in China.

"Increase in premium income cannot keep up with payment growth, so there are various kinds of measures to curb costs, and starting with medicines is the easiest way," said Cho.

The pressures on the public health system had a particularly visible effect in the fourth quarter, when Glaxo experienced a 25 percent decline in China pharma sales. Merck’s fourth-quarter pharma revenue growth slowed to 2 percent from 13 percent in the same period a year earlier and AstraZeneca’s fell by about two thirds to 6 percent, according to Bloomberg Intelligence.

Government insurance funds decide on the reimbursement levels at public hospitals, which treat about 90 percent of China’s patients and sell 70 percent of the country’s drugs. By the end of last year, many hospitals had hit their reimbursement caps and had to curb prescriptions of more expensive drugs from multinationals while also postponing costly surgeries and inpatient stays, said Cho. About 185 of China’s 380 locally-managed public health insurance funds appear to be making losses, he said, citing research from a local academic.

Bidding

Both Chinese and foreign companies have been hurt as all drug manufacturers must compete in local bidding to sell their medicines in public hospitals. Some like the Eastern Zhejiang province have asked for cuts of 10 to 20 percent as a requirement to participate in local tenders, according to consultancy McKinsey & Co. Companies can decide to take the cuts or drop their bids, essentially stopping sales of certain drugs in parts of the country.

"The tenders are indeed relatively chaotic," said Ding Lieming, chairman and chief executive officer of Betta Pharmaceuticals Co., a local drugmaker. "Once isn’t enough, after the provincial tenders, cities also have one round of price negotiations, and then another round at hospitals."

The Chinese ministries for health and for human resources didn’t immediately respond to faxes seeking comment.

While China accounts for less than 10 percent of total revenue for most multinational drug companies, they see it as an important avenue to boosting their growth.

Last year, Glaxo’s sales fell 17 percent in China, the lowest among its multinational pharma peers. The company has restructured its business after a government probe into its sales practices crippled growth since 2013, and it predicts that its China business will return to growth this year.

Glaxo published an apology to the government when the probe ended in September 2014, saying it “fully accepts the facts and evidence” of the investigation. In an e-mail statement, the company said it has revamped its commercial model, including dealings with doctors and how it rewards its sales people.

A mix of older and newer drugs such as the recently approved Tivicay for HIV and an expanded vaccines portfolio will help the company return to growth in China in 2016, it said. The company also said it is working on increasing patient access to medicines through efforts like affordable pricing, local manufacturing, or public health partnerships.

To answer questions on Pfizer’s China business a spokeswoman highlighted comments from its fourth-quarter conference call, where the company said it remained "bullish on China" despite some moderation in growth. Merck said it continues to see "significant opportunity" in China as its underlying growth is strong, aided by products like its diabetes medicine Januvia. AstraZeneca didn’t respond to e-mails seeking comment.

To keep growing, foreign companies are exploring different models to make their drugs available to different patient segments, engaging local authorities to improve access and seeking to accelerate registration of new drugs, said Franck Le Deu, a senior partner at McKinsey. With 1.37 billion people and a large ageing population, China has immense unmet needs for medical treatments for everything from heart disease to cancer. A rising middle class is also more willing to pay out of pocket.

"China is still a growth market for most companies, but they’re not all in the same situation, it’s largely driven by what they have on the market and also their attitude towards a changed market in terms of investment and commitment," said Le Deu.