China drug audit gives pharmaceutical groups the chills

July 4, 2013 8:20 pm

China drug audit gives pharmaceutical groups the chills

By Andrew Jack in London

After the gold rush of the past decade, the latest move this week by the Chinese authorities to probe the medicines sector has sent a chill wind through the multinational pharmaceutical groups expanding in the country. The National Development and Reform Commission in Beijing has signalled that it is examining pricing by 60 companies, including the domestic affiliates of half a dozen international groups such as Astellasof Japan, Merck of the US and GlaxoSmithKline in the UK.

Local industry executives stress that the inquiry is the latest in a regular series of audits conducted by the commission, which sets an upper “ceiling” price for all patented and generic drugs reimbursed by the government.

But some caution that the action signals an intensification of previous practice, heralding wider and deeper price cuts.

A pharmaceutical industry consultant said: “We knew prices were under review, with a new minister of health. Everyone was expecting it at some point, but this seems much more comprehensive and sooner than expected.”

In an analysis in January, Citi said that since March 2011 there had already been five rounds of price cuts agreed with the commission, averaging 15-20 per cent, on drugs for a range of different therapies. It predicted that higher-priced and imported medicines were likely to be a coming focus.

China’s large and ageing population, rapid economic growth and commitment to improved healthcare for its population had made it an attractive market for western companies’ sales even before the slowdown in other parts of the world.

 

Official statistics put total pharmaceutical sales in 2011 at $71bn.AstraZeneca alone, one of the few companies to break out its sales specifically for China, reported revenues for 2012 up 20 per cent to $1.5bn. IMS Consulting forecasts that China will move from the world’s third to its second largest drugs market by 2020.

A number of companies – from Novo Nordisk and Novartis to GlaxoSmithKline – have invested in joint ventures, manufacturing and research. Many more have conducted clinical trials in the country, reflecting regulatory demands, financial incentives and relatively low costs.

For all, growing sales have been a driver of their expansion. The rise in the numbers of relatively wealthy middle-class Chinese has made it an appealing market for “out-of-pocket” sales of expensive innovative drugs for diseases such as cancer, with pricing at or even above western levels.

But the government has also been expanding access to medical insurance and deepening the services it covers in recent years. It has issued a growing “essential drug list” of medicines that are fully reimbursed by the state, and others on which patients make a “co-payment”.

Upper prices for these medicines are set – and periodically reviewed – by the commission. Further discounting then takes place between the drug companies and regional authorities, as well as individual hospitals, in order to place medicines on local “formularies” for reimbursement.

The trade-off for the higher volume of sales that a state-backed health insurance system brings is lower prices. Furthermore, as in other markets around the world, there is growing appetite in China to apply “health technology assessment” to judge how far newer drugs offer value for money.

Angus Cole, associate director of Deloitte in China, says: “Price cuts are a general trend around the world. In China they can feel much more pronounced and actions can sometimes happen rapidly. It is a trend and also a necessity.”

IMS highlighted that the Chinese last year asked foreign companies to provide information on their drug prices in nine other industrialised countries, in a likely precursor to pegging domestic prices to those levels. “Price referencing in China could lower [multinational companies’] revenues by 15-45 per cent – with a devastating impact across portfolios,” it cautioned.