AstraZeneca’s Nexium, GSK’s Zofran Among Latest Victims Of China Price Cuts; NDRC Plans Further Pricing Reforms To Encourage Innovation
This article was originally published in PharmAsia News
Executive Summary
China has announced another round of price cuts, this time targeting digestive drugs, which will impact AstraZeneca, GlaxoSmithKline and other MNCs.
SHANGHAI – China’s powerful pricing agency the National Development And Reform Commission slashed drug prices again March 30. This round will include 53 medicines for digestive diseases and more than 300 dosages and formulations.
The average price reduction is 17%, and 22% for higher-priced drugs, effective May 1. The Chinese government expects to trim public medical expenses by RMB 3 billion annually via the cuts.
Although price cuts are not new in China, the focus of cuts has changed since NDRC proposed a new drug price control mechanism in June 2010, with the government now targeting drugs with independent pricing power. In many cases these drugs are off-patent medications – including mature products from multinationals – that have been rewarded with higher pricing due to their quality.
In December 2010, NDRC for the first time slashed prices on drugs with independent pricing power, which impacted drugs in 17 therapeutic classes (Also see "China's NDRC Releases First Set Of Price Cuts; MNCs See Deepest Cuts As Expected" - Scrip, 1 Dec, 2010.).
Last year, NDRC announced two more rounds of price cuts in specific therapy areas. In March 2011, antibiotics and cardiovascular drugs saw prices reduced by roughly 21% on average (Also see "Big Pharma Takes Another Haircut As China Slashes Drug Prices In Two Largest Therapy Fields" - Scrip, 8 Mar, 2011.).
NDRC announced another round of price cuts on hormone and endocrinology drugs and central nervous system drugs in August 2011. Prices of these two categories of drugs were lowered by 14% on average (Also see "With Latest Round Of Cuts, China Continues March To Narrow Gap Between Big Pharma And Local Generics" - Scrip, 5 Aug, 2011.).
“As seen in previous rounds of price cuts, NDRC is fairly consistent in driving down pharmaceutical prices to narrow the gap between MNC products and domestic products,” said Ellon Xu, associate partner at the Monitor Group, a consultancy.
During the latest set of price cuts, 28 drugs or 60 dosages/formulations with independent pricing will see another haircut; among these roughly two-thirds are MNC products.
“For many multinational firms, this is cause to fundamentally rethink the China portfolio,” Xu told PharmAsia News.
MNC Products See Further Cuts On Premium Pricing
In the latest round of price cuts, 28 drugs or 60 dosages/formulations with independent pricing will see another haircut; among these roughly two-thirds are MNC products.
The digestive drug market was worth around RMB 50-60 billion and growing roughly 20% annually, according to the Monitor Group. The top category is proton pump inhibitors for treating peptic ulcers.
AstraZeneca PLC leads the sector with key products Nexium (esomeprazole) and Losec (omeprazole) (marketed as Prilosec in some markets). According to Citi’s China Healthcare Handbook, AstraZeneca controlled 13.4% of the total digestive market in the first half of 2011, while omeprazole claimed 49.1% market share of proton pump inhibitors and esomeprazole took another 12.7%.
Both of these top sellers will see price cuts as will GlaxoSmithKline PLC’s Zofran (ondansetron), which is indicated to prevent nausea and vomiting associated with chemotherapy or radiation. Other MNCs taking a hit include Abbott Laboratories Inc., Boehringer Ingelheim GMBH, Eisai Co. Ltd., Merck KGAA, Novartis AG, Roche and Takeda Pharmaceutical Co. Ltd. (See: List of affected MNC drugs (English language): MNC Price Cuts; List of all drugs impacted with independent pricing (Chinese language): Independent Pricing List; and List of all drugs impacted with uniform pricing (Chinese language): Uniform Pricing.)
This latest round also marks the first time NDRC has implemented a price reduction schedule for some drugs. For example, Zofran’s maximum retail price will be RMB 166 starting in May, but the ceiling will be further reduced to RMB 136 in May 2013.
Further Price Reforms?
Along with the price cuts, NDRC also unveiled its plan to further reform China’s drug-pricing system. The agency listed six key areas to reform:
- Examine and monitor manufacturing cost and ex-factory prices;
- Improve the pricing system by referencing to global prices and piloting uniformed pricing and pharmacoeconomic analysis;
- More severe price cuts on high-priced drugs, particularly originator products from multinational pharma companies;
- Regulate markups during drug distribution phase and promote distributor industry consolidation;
- Establish a real-time price adjustment mechanism to cope with production costs and market price fluctuations; and
- Implement a friendly pricing mechanism to encourage R&D and innovation, and price advantages for generic drugs that have reached international standards.
MNCs Still Maintain Some Premium Pricing, But For How Long?
Although price cuts on higher-priced drugs will be more severe, MNC products may still hold a higher price over domestic companies at least in the short term.
For instance, after price adjustment, GSK’s Zofran has a maximum retail price of RMB 166, while the other two domestic companies’ ondansetron, also with independent pricing power, are priced at only RMB 55.8. This will still be less than half the price of Zofran’s ceiling price of RMB 136 in 2013. The uniform price for ondansetron is RMB 28.4.
“MNC pharmas will be able to maintain their pricing gap until either the government mandates a uniform price or the physicians and patients no longer need to be concerned about the domestic production quality,” Justin Wang, senior manager in L.E.K.’s Shanghai office, said in an interview with PharmAsia News. The government is attempting to address both issues, he said, noting that the latter issue of domestic quality is a key tenet of China’s 12th Five-Year Plan.
For example, the State Council released Feb. 13 its Five-Year Plan for Drug Safety, which raises quality standards for 6,500 drugs. Furthermore, the new head of China’s State FDA is also emphasizing drug safety (Also see "Meet Yin Li: China’s New SFDA Chief Has A Public Health Background, And International Ties" - HBW Insight, 29 Feb, 2012.).
Still, facing the patent cliff and decreasing pricing power, some MNCs are looking to branded generics to drive volume increases to offset pricing pressure.
“In branded generics, an MNC may not be able to rely on its originator status and will need to use its quality and branding to get higher prices” - L.E.K.’s Justin Wang
“In the past, firms have been able to drive growth by leveraging those premium-priced branded generics; going forward we will likely see firms do two things: (1) accelerate the launch of their patent-protected innovative pipeline assets, which will allow exclusivity and pricing power; and (2) embrace the generic business in China given that this is largely a basic healthcare market as of today,” said Monitor’s Xu.
“In branded generics, an MNC may not be able to rely on its originator status and will need to use its quality and branding to get higher prices,” LEK’s Wang concurred. “Whether that will work is still debatable, though many companies are all planning to do so.”
For instance, Pfizer Inc. is forming a $295 million joint venture with Zhejiang Hisun Pharmaceutical Co. Ltd. to explore faster growing off-patent generic products in China and globally (Also see "Pfizer And China’s Hisun To Explore Branded Generics JV For China And The Globe" - Scrip, 22 Feb, 2012.).
Likewise, Merck & Co. Inc. also signed an memorandum of understanding to establish a JV with Simcere Pharmaceutical Group to market the companies’ cardiovascular and metabolic drugs in China – a deal that focuses mostly on branded generics (Also see "Merck, Simcere Form JV To Expand Access To Lifestyle Drugs Across China" - Scrip, 22 Jul, 2011.).
And AstraZeneca recently said it would acquire privately owned generics play Guangdong BeiKang Pharmaceutical Co. Ltd. to produce and market antibiotic injectables for the Chinese market (Also see "As AstraZeneca Cuts Back In The U.S., It’s Full Steam Ahead In China" - Scrip, 8 Dec, 2011.).
“We see the growth in the China market mostly being driven by volume, as indicated by the direction of the healthcare reform and the continued expansion of public health [expense] in the 12th Five-Year Plan. So, price reductions should be expanding the usage,” LEK’s Wang said.
Does It Really Hurt?
An important nuance is that maximum retail prices set by NDRC are often higher than the actual average retail price given that companies must also bid to win provincial tenders.
For example, according to Shanghai Pharmaceuticals Holding Co. Ltd.’s online drug wholesale website (http://www.nayao.com
), seven tablets of AstraZeneca’s 20 mg Nexium sell for RMB 93.1. Following the price cuts, that price will be reduced to RMB 90. However, Shanghai Pharmacy Online (www.818shyf.com ) sells the drug at RMB 88.5.
“Generally speaking, MNCs want to maintain price integrity across the country. They sell at the same average selling price to every distributor, but will inevitably have some slight variance in tender prices across the region, which results in a slight variance in hospital retail prices,” Monitor’s Xu pointed out.
The pharmacy retail price is usually lower than the hospital retail price, which commends a higher mark-up. In addition, the pharmacy retail price is generally more difficult to control, according to Xu, while the hospital retail price is often close to the ceiling price set by NDRC.
“The price ceiling adjustment will inevitably affect hospital retail prices and thus tender prices. Whether it will go all the way back to manufacturer ASP will depend on the negotiation power between supplier and distributors. Most likely, everyone takes a bit of the pain, and manufacturer ASP will have to be reduced to some extent as well,” Xu concluded.
Looking ahead, additional NDRC price cuts are expected soon, with analysts predicting respiratory disease drugs, immune-modulators and oncology drugs as likely targets.
“Given that the price cut process is not over yet, we believe that multi-phase price cut will continue to be an overhang on the drug sector in 1H12,” said Citi analyst Richard Yeh in a March 30 note to investors.
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