How China Is Getting Drug Companies to Slash Prices
(Bloomberg) -- China has been overhauling its health-care system with the aim of providing broader access to quality drugs for its enormous population. The result: Drug prices are tumbling and the once-high profit margins of drugmakers, both local and foreign, are eroding. For manufacturers, the pressure is set to intensify as China hones its strategy of demanding mega-discounts in exchange for access to the world’s No. 2 pharmaceuticals market.
1. What exactly is China doing?
It has a two-pronged campaign. The first approach is to add top-of-the-line new treatments to its so-called National Reimbursement Drug List only if drugmakers agree to drop their prices. That’s a bitter pill to swallow for pharmaceutical companies that have spent billions of dollars developing treatments. New medicines developed by giants including Pfizer Inc. and AstraZeneca Plc as well as domestic biotech companies, treating everything from cancer to autoimmune diseases and dementia, have made it to the list in recent years. In 2021 it expanded again to add drugs for rare diseases developed by companies including Biogen Inc. -- but only when the companies agreed to more than halve the price charged in China, effectively making them among the cheapest anywhere.
2. And the other approach?
Basically bulk buying of generic drugs, which can be made by low-cost manufacturers as well as the original developer, and medical supplies. China has initiated a nationwide program that requires drugmakers to submit bids to supply public hospitals, which has led in some cases to price cuts of more than 90% as cheap generics replace Western brands such as Lipitor, Viagra and Pulmicort. Five rounds of bulk buying since 2018 have helped save 260 billion yuan ($40.8 billion) in medical insurance costs and patient expenditures as of September 2021, according to the government.
3. So this is bad news for pharmaceutical companies?
Not entirely. The price reductions inevitably hurt the bottom line of both Chinese and multinational drugmakers. On the other hand, the program is designed to open access to a vast patient population, at least for companies that make the reimbursement list. China’s 2.34 trillion yuan national medical insurance fund covers 95% of the 1.4 billion population, and getting the drugs on that list means they are available for far more people. Medicines that were previously prohibitively expensive suddenly become more affordable as they are mostly covered by the state medical insurance, and volume increases help offset lower margins. The expanded coverage is in part enabled by much-lower prices.
4. What about generic manufacturers?
After the initial pilot round in 2018, nearly 70% of China’s 65 listed drugmakers flagged slower profit growth citing, among other reasons, the procurement plan. The bulk buying is driving consolidation in what has been a very fragmented industry in China. Many drugmakers are ramping up research spending on new products to support their bottom line because the days when they could easily reap profits from making generic copies of brand name medicines are gone. Local drugmakers and biotech startups such as Jiangsu Hengrui Medicine Co. and BeiGene Ltd. are also trying to accelerate drug development with the goal of competing with Western pharmaceutical giants on the global stage.
5. How are multinationals faring?
They are seeing some of their off-patent drugs being replaced by ultra-cheap domestic generics one by one, but they are also seeing many of their top-of-the-line therapies being launched in China faster and getting state medical insurance coverage sooner. Some see lower prices of their new drugs being offset by an explosion in demand. China’s regulator has reformed its drug approval process and is already greenlighting some therapeutics faster than U.S. regulators. AstraZeneca has said it expects new treatments to contribute 60% of its China revenue by 2024, up from just a fraction currently, as its business pivots away from generics.
The Reference Shelf
- China is building the world’s best and cheapest health-care system.
- How foreign drugmakers are losing in China’s drug-bidding war
- China’s drug buying plan drags down drugmakers’ sales.
- Policy overhaul triggers a flood of profit warnings.
- Companies cut prices to get into the national insurance fund.
- A QuickTake on how faulty vaccines sparked panic.
©2022 Bloomberg L.P.