A new normal in China for pharmaceutical industry as reforms accumulate?

Print 12 August 2015
EJ Lane / FeircePharmaAsia

Second-quarter earnings from nearly all multinationals showed a drop in business in China from double-digit paces in recent years, blamed on tough tender and reimbursement policies and domestic competition as well as an economic slowdown.

The results certainly captured attention in the press. But what if the news is that healthcare reforms in China are working according to plan? That tighter regulations on manufacturing, quality and the push of national champions now means more trust in domestic drugs and the prospect of lower cost copies of innovative drugs from local companies and neighboring ones?

Indeed a slew of measures aimed at quality and cost in the past two years may have cumulatively led to a new normal in China where local companies increasingly make generics under GMP licenses and essential and reimbursed drugs from vaccines to insulin and newer oncology drugs come from home or nearby.

Reforms can imply moves to make it easier to do business. But that would be an industry wish. In China, the better example is of shifting costs away from consumers by eliminating a 15% markup in drug prices charged by hospitals. A government subsidy of some kind will likely take the place of the lost hospital revenues--but the end user is the target. Or in the parlance widely used--reforms with Chinese characteristics.

Instead, the government is making it tougher to continue old business practices for domestic companies and multinationals by taking steps to tweak tendering rules to get price and quality while also removing retail drug price caps--which are also aimed at quality. Domestic companies will likely continue to gain an edge in government business if they meet higher standards and multinationals will see models upended that saw their drugs favored because of safety concerns on domestic products.

Of course this depends on the China FDA working hard to prevent a major quality or safety scandal.

To be sure though, the pie is forecast to get larger in China for all no matter what, with a Deloitte report this year suggesting double-digit growth in spending from 2014 to 2018 to reach $892 billion from an estimated $511.3 billion in 2013, roughly 6% of GDP.

That still is well below the nearly $3 trillion in U.S. spending estimated in 2014, according to a recent Bloomberg story citing Charles Roehrig, director of the nonprofit institute's Center for Sustainable Health Spending. That clocked in at over 17.4% of GDP and is forecast to cross $4 trillion this year.

But like the U.S. under the Affordable Health Care Act, China's spending is changing under new policies that came in with President Xi Jinping in 2014.

The most recent is serious illness coverage insurance nationwide--a real milestone for an emerging market and especially so for the world's most populous country with surging cases of chronic illness from diabetes and cardiovascular to cancer.

Adding to the government spending are efforts by China-focused companies from Hutchison MediTech to Sinovac ($SVA) looking at China approvals as a priority while aiming for the global market. That list is growing almost daily in oncology as candidates get in-licensed--but also for other indications such as cardiovascular.

Do multinationals see the China market in a new normal phase?

Maybe not, at least on diabetes. Jakob Riis, Novo Nordisk ($NVO) executive vice president for China, Pacific & Marketing, responded to a question from Florent Cespedes, an analyst with Societe Generale, on the Aug. 6 earnings call on whether China healthcare has changed on a "fundamental" level.

"So part of the efforts from the central government in China to control costs, some of the things that have been implemented in the first part of the year was, amongst others, to ban the institutions' ability to mark up with 15% and thereby derive an income from selling the pharmaceutical products to the patients," he said.

"I wouldn't call it a fundamental change, but it changes some of the dynamics in how we interact with institutions. Government has opened up for the possibility that after the provincial biddings there could potentially be a second round of negotiation with the institutions, not a fundamental change but still one that will further increase the competitiveness also from a pricing point of view. And there's also some new rules around the whole way that prices are governed."

Other executives on recent quarterly earnings calls voiced the same thoughts on China--a general economic slowdown and tweaks to policies. However, that sentiment is not uniform and strategies vary among multinationals with GlaxoSmithKline ($GSK) one to watch as it partners with local company Desano on manufacturing and pushes wholesale changes to its sales model.

It is not just policy or domestic competition, but a growing ecosystem of products in China and from nearby countries that are essentially new--though not always original.

South Korea and China for example are rushing into capabilities to manufacture biologics, and South Korean companies like Samsung Bioepis are bringing biosimilars to market that can easily overturn price expectations on treatment when paired with China's potential demand.

Some innovative companies eyeing approvals and expanded insurance prospects are already in talks with the government--most recently Gilead Sciences ($GILD) has confirmed talks on Sovaldi access and pricing--and this for a drug that is not even approved in China with part of its patent invalidated there.

There's little doubt China has its own plan on access, approval and pricing--and it won't be on the same terms as those worked out on Sovaldi with mostly Indian companies on licensing, manufacture and sales for emerging markets at sharply reduced costs. These are for markets, like India, with almost no public reimbursement outside of essential medicines--with pay-out-of-pocket the norm.

Indonesia is a notable exception, launching phased universal health insurance coverage in 2014. With Thailand also having tiered coverage and Vietnam nibbling at the edges. But Indonesia, like India and Thailand, has also issued compulsory licenses for drugs--a path China has not so far followed to cut prices.

China however will likely get the Sovaldi original via a patent pool at a price it deems appropriate for a market with the highest number of potential patients in the world--and an insurance system that is growing to cover them. The expansion squarely fits in with efforts by the government to demonstrate tangible benefits to rapid economic growth and the country's rising status in the global economy.

At the same time, the China FDA will winnow out quality concerns if it sticks with a growing list of reforms from manufacturing--possibly joining the international pharmaceutical inspection convention and cooperation scheme--to clinical and distribution rules that at least so far in word appear to be on track.

Still, as Reuters noted in a story published Aug. 9, even as China has ramped up healthcare reforms for private investment that aided $30 billion worth of healthcare merger and acquisition investment so far in 2015, deep problems remain.

The news agency said the reality has seen some companies curbing plans because of infighting between regulators and pushback from the state-run companies that dominate the sector--"and don't want change." Reuters said a fax to the healthcare ministry seeking comment on the pace of reforms went unanswered.

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