China health reforms help global pharma groups despite price cuts

Beijing requires that makers of domestic generic versions of biologic drugs — known as biosimilars — demonstrate that the quality of their drugs is equivalent to that of foreign drugs. Photo: Reuters

Beijing has forced the world’s top pharmaceutical companies to cut prices for their bestselling products, but they are feeling positive in China as expanded state insurance and accelerated approvals boost sales in the world’s second largest drug market. 

The two largest overseas pharma companies in China by sales, AstraZeneca and Pfizer, both said China sales rose 24 per cent in the last quarter compared to the same period last year. 

That was a sharp increase from last year’s growth of 15 per cent and 16 per cent respectively. “It’s suddenly a very nice performance,” AstraZeneca’s chief executive Pascal Soriot told investors on a conference call. 

Pharmaceutical companies are the most positive of any European business in China, with 83 per cent optimistic about growth, the EU Chamber of Commerce in China said in June. 

Optimism levels among US pharmaceutical companies jumped 40 per cent to 87 per cent over the past year, the biggest change of any sector, according to the American Chamber of Commerce in Shanghai. 

China’s pharmaceuticals generated $123bn in sales last year, according to London-based LEK Consulting, which predicts the market will grow at an annual rate above 5 per cent in the years to 2022 as an increasingly wealthy and ageing population becomes more susceptible to chronic diseases such as cancer. 

Multinationals grew in China over the past two decades mainly by selling off-patent branded drugs at premium prices, as domestic companies could not match them on quality. China is Pfizer’s third biggest market after the US and Japan.

But companies struggled to win approvals for innovative drugs, often waiting an additional seven years before selling drugs in China after launching them in developed markets, due to additional requirements such as the need to rerun medical trials.

Multinationals’ growth slowed in recent years as Beijing pushed for price cuts to hundreds of branded off-patent drugs as a condition of adding them to state co-payment schemes.

But drugmakers are now finding that state-insurance boosts sales. For instance, Roche cut the price of chemotherapy drug Avastin in China by nearly 70 per cent last year, but achieved a roughly 25 per cent rise in revenues for the medicine due to its addition to state insurance, according to Swiss bank UBS. 

“The fact that we are getting reimbursement for a number of new products [is] accelerating our growth in China,” said Mr Soriot. 

The other positive for multinationals is a rapid increase in the pace of new drug approvals. Beijing last year scrapped the requirement that foreign groups rerun medical trials in China to launch drugs already approved in their home market, and has increased its drug-approval staff eightfold since 2014 to clear a backlog.

The results have been clear. Last year saw the approval of 39 imported drugs, more than in the previous three years combined, according to industry data service GBI Health. 

More than 15 imported drugs have been approved this year, including Bristol-Myers Squibb’s Opdivo in June, Merck’s Keytruda last month and Roche’s Alecensa this month, all part of a generation of immunotherapy treatments that are huge revenue generators in the US and Europe. Keytruda was approved in five months. 

Other bestselling treatments approved this year in China are Gilead’s hepatitis treatment Epclusa, approved in May, and Merck’s vaccine for human papillomavirus, Gardasil 9, given the go-ahead in April after three years of review — compared with a decade for similar vaccines that launched earlier.

Daniel O'Day, chief executive of Roche, said that 16 per cent growth in China in the most recent quarter indicated “the ability for China to be able to launch and seek reimbursement for newer oncology medicines in a much faster period of time than we have in the past”. 

Helen Chen, an LEK partner, said companies with oncology, hepatitis and rare disease  products have seen the largest benefits from the accelerated product registration. ”The biggest companies have been the biggest beneficiaries,” she said. 

But there are clouds on the horizon due to Beijing’s drive to cut healthcare spending and create a world-class domestic pharmaceutical industry. Chinese companies are producing better quality generics, winning approvals even in the US.

That has seen the growth of local companies outpace the offshore groups, causing the market share of the 10 largest foreign pharma firms in China to fall slightly in the past few years to just below 20 per cent, according to Citibank. The decline is set to become more dramatic for some drugs. 

For instance, Sanofi’s anti-clotting drug Plavix had 83 per cent of the market for drugs of its class in 2016, but that will fall to 60 per cent by 2020, as Chinese company Shenzhen Salubris makes gains, according to Citibank.

The market share of Pfizer’s cholesterol treatment Lipitor is projected to fall from 74 per cent to 46 per cent over the same period, due to competition from generic drugs made in China, it predicts.

Multinationals are selling manufacturing rights to products with declining sales to local competitors, with about 20 such deals made in the past few years, according to Citibank.

But multinationals are still likely to see growth from their off-patent drugs, analysts said, because the market is growing overall and Chinese patients have higher levels of trust in foreign brands following domestic quality scandals— such as the revelation this month that two Chinese companies had sold 1m faulty vaccine doses.

Bi Jingquan, the former head of China’s food and drug administration, who masterminded the country’s approval reforms, resigned over the vaccine scandal, which could slow growth in the sector as regulators took a more cautious approach. 

“We saw quite a bit of attitudinal change for the Chinese government towards more self-responsibility rather than being enforcement and inspection oriented,” said Ms Chen. “Broadly speaking, this was a good policy trend which might be slowed down or reversed.”

Beijing this month said it was in negotiations with foreign companies over the price of 18 cancer drugs, including Novartis’s Jakavi, and Pfizer’s Inlyta, as a prelude to including them in a state-insurance scheme. 

UBS analyst Zhao Bing said the announcement showed that the current regulatory system would survive Mr Bi’s downfall.

A longer term risk is Beijing’s requirement that domestic generic drugs demonstrate their quality is equivalent to foreign rivals. 

Regulators originally said it would require domestic producers to demonstrate equivalence by the end of this year, or be forced out of the market. So far, 68 Chinese drugs have passed the test.

With thousands of drugs on the market, industry executives say the process will take years. But once it is complete, “hospitals will switch totally to local drugs”, said Mr Zhao. “It will be a big problem for multinationals.”

As a result, multinationals need to accelerate a shift to selling more on-patent drugs to China — a process eased by faster approvals.

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