Because the Chinese government is engaging in an aggressive plan to reduce the cost of widely-used generic drugs, large pharmaceutical companies including AstraZeneca Plc, Pfizer Inc. and Mylan NV may have to cut their prices in half to preserve their sales to China’s largest public hospitals.
The new normal in China, which changes the rules for what used to be a lucrative market for off-patent medications, is for the government to reduce spending on generic medications by tens of billions of dollars to move funds to pay for “novel, top-of-the-line drugs” used by the growing middle class.
These global drug makers have thought of China “as a place where they could make fat margins on older products,” reported Bloomberg News. Instead, they are being “undercut by domestic drug makers in the race to supply 25 medications ranging from cholesterol treatments to chemotherapy,” according to brokerages such as Bocom International Securities.
Winning bids for drug sales this week are “a quarter lower on average than the prices set during last year’s pilot,” according to data on a website supported by the Shanghai government, the article said. Last December, a pilot plan that included 11 Chinese cities, had cut the prices of these drugs by an average of 52 percent. Upjohn, Pfizer’s older-drugs business, is combining with Mylan to form a new company and was especially affected by the new program.
Umer Raffat, an analyst with Evercore-ISI, said that the value for Pfizer’s cholesterol pill Lipitor was reduced by 74 percent, and blood-pressure drug Norvasc’s value will drop 60 percent.
As Raffat explained, “These two drugs are the most important part of Pfizer-Upjohn China business that was sold to Mylan.” That caused Mylan shares to go down 4.1 percent, after earlier falling as much as 6.9 percent. Pfizer shares were down 0.8 percent.
When the first round of the program began last December, AstraZeneca reduced the price for its cancer drug gefitinib by 76 percent to win the bid. On this round of bids, that price was not enough to make the cut, because a local firm, Qilu Pharmaceutical Co., made an offer that was about 50 percent lower.
If foreign pharmaceutical companies do not slash drug prices even further than they have, they will be shut out of supplying drugs to most of the Chinese market. Because the government will allow as many as three drug makers to share the procurement contract, as long as the other two match the winning bid price, other companies will not lose demand entirely.
As Wang Ruizhe, an analyst with Capital Securities Corp., said, “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. Firms are really squeezing their prices in a sign of intensified competition in the market.”
Chinese health care stocks took a plunge after the announcement of the expansion of the drug procurement policy across the country, even before the results were made public. Companies including Shenzhen Salubris Pharmaceuticals Co., Huadong Medicine Co. and Sinopharm Group Co. were big losers on the markets as investors worried about the coming blow to companies.