China’s Drug-Price Cuts Pressure Lipitor and Other Foreign Pills

(Bloomberg) -- China’s plan to slash the price of many widely used drugs is pressuring large pharmaceutical companies that have long viewed the country as a place where they could make fat margins on older products.

Global drugmakers including AstraZeneca Plc, Pfizer Inc. and Mylan NV are facing the prospect of having to cut prices in half to maintain their sales to China’s biggest public hospitals, as the country’s aggressive health-care cost control campaign gains speed.

As China expanded nationwide its program to reduce the cost of generic drugs on Tuesday, foreign pharmaceutical companies found themselves undercut by domestic drug makers in the race to supply 25 medications ranging from cholesterol treatments to chemotherapy, according to results circulated by brokerages like Bocom International Securities.

Tuesday’s round of winning bids are a quarter lower on average than the prices set during last year’s pilot, according to a statement on a website backed by the Shanghai government. The pilot plan across 11 Chinese cities last December, had pared the prices of these same drugs by an average of 52%.

Pfizer’s older-drugs business, called Upjohn, is being combined with Mylan to form a new company and was hit particularly hard by the new program. The price for Pfizer’s cholesterol pill Lipitor went down 74%, and blood-pressure drug Norvasc’s price will drop 60%, said Umer Raffat, an analyst with Evercore-ISI.

“These two drugs are the most importand part of Pfizer-Upjohn China business that was sold to Mylan,” Raffat said. Mylan shares were down 4.1%, after earlier falling as much as 6.9%. Pfizer was down 0.8%.

Representatives for the two companies didn’t immediately respond to requests for comment.

Changing Landscape

Global drug makers are having to adjust to a new normal in China, which was once a lucrative market for their off-patent medications. The Chinese government is on an ambitious campaign to cut spending on generic medications by tens of billions of dollars so that it can shift funds to paying for the novel, top-of-the-line drugs sought by its growing middle class. The move is already affecting sales and profits among top pharmaceutical companies.

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In the first round of the program last December, AstraZeneca dropped the price for its cancer drug gefitinib by 76% to win the tender. That wasn’t enough to stay on top this time around, as a local firm Qilu Pharmaceutical Co. bid a price about 50% lower.

Foreign pharmaceuticals now face a dilemma: slash drug prices further or be shut out of supplying to the bulk of the market. Since the regulator will allow up to three drug makers to share the procurement contract -- provided the other two match the winning bid price -- other firms won’t lose demand completely.

“Even foreign makers, the originator of these drugs, tried to submit prices in this round of bidding that’s close to the level of their peers,” said Wang Ruizhe, an analyst with Capital Securities Corp. “Firms are really squeezing their prices in a sign of intensified competition in the market.”

The expansion of the drug procurement policy across the country sent Chinese health care stocks plunging on Tuesday even before the results were made public. Shenzhen Salubris Pharmaceuticals Co. dropped by as much as the 10% daily limit on Tuesday, while Huadong Medicine Co. and Sinopharm Group Co. lost more than 2.3%, as investors fretted over the coming blow to companies.

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--With assistance from Riley Griffin.

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net;April Ma in Beijing at ama112@bloomberg.net

To contact the editors responsible for this story: Rachel Chang at wchang98@bloomberg.net, ;Sofia Horta e Costa at shortaecosta@bloomberg.net, Bhuma Shrivastava

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With assistance from Bloomberg