Whether they have wanted to or not, over the past month, multinational pharmaceutical companies (MNCs) in China seem to be taking a roller coaster ride.
On one side, the new policies expressed in the new NDRL and management of Import Drug Registration do bring positive inspiration to MNCs. On the other side, when thinking about Fujian, where the Sanming Model was created and has since built up credibility and a unique political position shaping China’s healthcare reform, Fujian’s newest PRDL has brought forward stronger signals around the tightening of the essential drug market for multinationals. Fujian’s approach is much more aggressive pushing drug prices down, which is the bitter pill that the Chinese government has forced MNCs to swallow.
Yes, it is true, since June 1st, 2015, China National Development and Reform Commission issued the regulation to end the premium pricing on MNCs’ products. In order to maintain their footprint in the China market, MNCs have struggled to bear the market control and the high pressure around price reductions by centralizing the bidding procurement (CBP). At the same time, with the slowdown of China’s economic growth and the coming patent cliffs, MNCs have found that some of the China-specific advantages are eroding.
But, these price pressures should not be the only way in which MNCs understand the China market. Once we dig out the truth around the so-called bitter pill and the current China market, we are optimistic that China market will continue to be a strong market for innovative MNCs.
The price -cutting regulations target off-patent brand-names from MNCs.
The off-patent names from MNCs have a special name in China: Yuanyanyao. Since 2000, China’s government has allowed Yuanyanyao the unique right on “separating pricing.” This right meant that, although Yuanyanyao were priced much higher than the domestic generics, they can be listed in NRDL and reimbursed fully by public medical insurance, Yibao. Aspirin, as one particularly ridiculous example, was a Yuanyanyao. It was created more than 110 years ago but still enjoyed the unique right around “separating pricing.” So in China market, although the domestic generic was priced as 1.5 Yuan, Aspirin by Bayer was 18.8 Yuan, 12 times higher than the domestic products.
The protection specific to off-patent brand-names by the China government was the result of multiple historical factors, such as attracting foreign investment, bringing in good medicine for Chinese patients, and the hope that accommodating this would stimulate the development of domestic pharma industry via the competition from foreign competitors. However, 15 years since this policy was adopted, the results have not been as good as the Chinese government wanted. Over two thirds of the China market were dominated by multinationals. The domestic innovation capacity hadn’t grown much. The fast exhaustion of the public medical funding is no longer able to afford to pay for the over-valued drugs. Worst of all, with the high price and profit, multinational drugs were become the lucrative target for bribery or drug kick-back, which resulted in many astonishing scandals.
Under these scenarios, China government began to cut the price of off-patent medications. For MNCs, the price cutting pain they met in China should be no different than what they knew in other countries. The direct reason to lead multinationals’ complaint was, in China, MNCs did enjoy at least 10 years of easy money harmony period with their off-patent drugs. But now, those days are gone.
China’s government is making China a more open market for new drugs.
The landing of CFDA’s policy, Priority Review and Approval Procedure for Innovative Drug, provides the market a big dose of excitement. In the first three months of 2017, FIVE new drugs from MNCs already got the entry tickets for China market. The reasons behind the fast approval by CFDA should be seen as government’s more realistic attitude on new drugs:
First, for the new drug with solid clinical effective evidence, both from foreign and local clinic trials, China’s government will offer green light for entering local market without waiting multiple years. Tagrisso from AstraZeneca PLC (AZN) is the good case. Tagrisso broke the record of China government’s approval speed for imported chemical drugs since 2007. AstraZeneca only waited for 7 months, rather than 48 months as usual, to get CFDA approval certificate since the formal registration application was submitted. The key factor to speed up the approval was the recognition from Drug Evaluation Center for Tagrisso’s clinic results. Another factor is, as the third generation oral, irreversible selective EGFR mutation inhibitor for non-small cell lung cancer treatment, Tagrisso can be the life-saving solution for over 3.6 million Chinese patients.
Second, market control on the new drug pushed Chinese patients to take risk on illegal smuggling of India generics. In 2014, a couple in Nanjing was arrested for their smuggling anti-cancer generics from India. Surprisingly, the legal prosecution ended in a public debate on right to live, in which no access to legal new drugs in domestic market was one of the excuse. In the previous years, smuggling India generics to China became a big business in the black market. At the same time, because of the high demand and the high profit on India generics distribution business, the fake products were born as the side effects. The market control of new drugs finally was recognized to lead to un-tracked medical risks, higher medical burden, and stronger public complains.
Third, preventing MNCs’ new drugs step in China do more harms than benefits on local pharma industry’s development. With the administrative protection, the local companies can run their business easily by working on the low-end and low value-added copy-cat business. Worse of it, lots of local companies put their sources on accessing and penetrating the market just by competing on the amount of bribery rather than marketing and selling the qualified drugs, not to mention R&D.
Fourth, preventing or limiting important drugs also reduces a big amount of import taxation income for China government, which is 23% of the drug price. China imposes two kinds of tax on imported drugs: value-added tax and tariffs. All the imported drugs are required to pay for value-added tax at a rate of 17%. In addition to anti-AIDS drugs, China imposes tariffs on imported drugs at the rate of 5% -8%. For the tax income purpose, government has no incentive to refuse the imported drugs.
It is a long way to go on bridging the huge need-supply gap between Chinese patients and domestic pharma.
On one hand, it was well recognized that the booming of China’s huge middle class and their strong consuming capability suggests good things for the China pharma market. Although China is called the manufacturing factory for the world, Chinese consumers have preference for imported products whether this is cold syrup or toilet seats! As a report said, even if the product was Made-in-China but sold abroad, Chinese customers believe in it because they trust the strict supervision of the foreign countries. Different from the household good, the bad quality medicine could result in serious life-threaten harm. The vaccine scandal in 2016 ignited the public angers against the bad quality of domestic medicine and once again, ruin the public faith in government’s supervision network. A market research also showed the Chinese patients are willing to pay for better quality drug by out-of-pocket. If we linked the data in Yibao reimbursement, we estimate that at least 20% of the medical cost was used on non-essential drugs, the majority of which are multinational products.
On the other side, despite of years of experience and strong government incentive, domestic pharmaceuticals are not moving up their quality and innovation as fast as expected. Currently, there are over 4,500 pharma companies in China. Among them, “only three big companies, Sinopharm, Shanghai Pharmaceutical and Fosun International, have the capacity to upgrade from generics producer to brand name creator” the Caixin reports. From quality consistency evaluation pilot results in 2014, less than 5 drugs from the 75 evaluated drugs past the evaluation, which evidenced the poor quality of Chinese generics. Except the quality issue, lacking innovation is another fatal weakness for most Chinese pharma. In a 2016 report that from the 13 domestic new drugs which were recommended for CFDA’s priority review, 9 of them are Me-Too.
As a result of the un-treatable gap, if a Chinese patient can afford the higher payment for a better drug, the inquiry will be ended in a multinational’s product, whatever it is an off-patent or OTC.
The recently policies change showed us that although price cutting will be the main theme in China essential drug market, the government welcomes the innovative new drugs, and the wealthier China patients are willing to pay for qualified drugs. With the market more open and a huge group of patients willing and able to pay more, MNCs with great new drugs and great localized marketing strategies can offset the bitter pill of pure price reduction pressure from the Chinese government.