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Big pharma hopes rule change will ease China sales pain

Customers browse merchandise at a pharmacy in the Sheung Shui district near the border with mainland China, in Hong Kong, China.
Billy H.C. Kwok | Bloomberg | Getty Images
Customers browse merchandise at a pharmacy in the Sheung Shui district near the border with mainland China, in Hong Kong, China.

The world's largest pharmaceutical companies, which are struggling with pricing pressures in China, are hoping that wider access to drugs and a faster approval process will boost sales.

China is the world's second-largest pharmaceutical market with sales worth $116.7bn in 2016, according to QuintilesIMS, the health research company.

But the spread of public health insurance has handed provincial governments greater power over prices.

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A range of companies has reported slowing or even falling sales in China, with Merck saying that its sales there fell 3 per cent in the first quarter.

GlaxoSmithKline blamed a 5 per cent drop in first-quarter sales of its "established" products partly on competitive pressure on its hepatitis drug Zeffix in China. That came after a 12 per cent decline in its China sales last year that the company blamed on "healthcare reforms including price reductions".

Sanofi said that its sales in China had grown 9 per cent in 2016, about half the rate of the previous year.

At the heart of the multinationals' struggle is the breakdown of a status quo established in the early 2000s that allowed overseas companies to sell at a premium branded drugs that had lost patent protection, in many cases three to five times the price of comparable generic medicines.

But that market began to shrink after 2011 alongside the rollout of public health insurance, which covers up to 80 per cent of the cost of selected drugs.

The system includes a tendering process in which companies and provincial governments negotiate prices. Since then, prices have fallen as each province uses the lowest price established elsewhere as the starting point in negotiations.

Xu Ming, vice-president of China's chamber of commerce for import and export medicines, said: "In the past, different companies have enjoyed special status. If you have off-patent drugs you can have room to manoeuvre in pricing. But that's gone." Foreign companies should "forget about the special status they have enjoyed", he added.

In the past year, Beijing has rolled out policies banning state hospitals, responsible for more than 80 per cent of China's pharmaceutical sales, from padding the price of the drugs they distribute.

Underfunded hospitals make up that lost revenue by seeking to buy drugs for less than the prices set by provinces, making the policy "an incentive to negotiate the price to go downward", said Gordon Liu, a healthcare economics expert at Peking University.

The reform does have a bright spot for the drug companies — the state co-payment cuts costs for patients, making drugs covered by the programme affordable to a wider group of patients.

In February, China added 130 new compounds to the roughly 1,200 eligible for reimbursement.

The update was heralded by multinationals, nearly all of which had at least new two drugs that became eligible, as a way to boost the reach of their products in China. Sellers of branded drugs tend to receive reimbursement priority over Chinese generics, which have faced questions about quality.

But joining the covered list comes with price pressure. To gain placement on the updated list, GSK slashed the price of its hepatitis drug Viread in China by two-thirds last year, and AstraZeneca halved the price of cancer drug Iressa, leading to a 16 per cent decline in sales values.

Li Bin, China's health minister, announced in March that "this year, through a range of methods, including national-level negotiations, we will continue to reduce drug prices".

Sales by most multinationals outpaced the overall market last year in China, which saw just 1 per cent value growth. That is partly because their portfolios are more adapted to a new wave of chronic conditions hitting China as it ages and becomes richer. Sanofi says that its oncology division was the star performer in the country last year.

Drug companies are also pinning their hopes on draft regulations that could dramatically speed up the approval process for new medicines, which now can take up to five years longer in China than in Europe and the US.

The regulations propose abolishing a requirement that overseas trials be at an advanced stage before the approval process in China starts.

The proposed rules will mean that drugs can be launched in China "almost at the same time" as in advanced economies, said Olivier Charmeil, Sanofi's head of emerging markets. "As the middle class get richer . . . they want to ensure access to the most innovative drugs."

New treatments approved in recent months include AstraZeneca's lung cancer drug Tagrisso, Pfizer's arthritis drug Xeljanz and a Bristol-Myers Squibb oral hepatitis treatment.

But here, too, the companies will face pricing pressure: China's State Council has insisted that new drugs will be approved only on condition that "the price is not higher than the country of origin or comparable prices in countries near to China".

China's health ministry says that 45 mostly on-patent drugs are targeted for price-reducing negotiations this year.