Hisun-Pfizer Split: What Went Wrong And What Next?

The breakup of the Hisun-Pfizer JV typifies an unhappy marriage between Chinese and MNC pharma firms in the generics segment in recent years, although the two companies will continue to work as commercial partners under a new framework. Scrip delves into the reasons for the split and also outlines why, China is, nevertheless, expected to see more joint ventures for innovative drugs.

Two weeks after suspension of trading, Zhejiang Hisun Pharmaceutical Co. Ltd. officially addressed enquiries from the Shanghai Stock Exchange regarding the split-up of the Hisun-Pfizer Pharmaceuticals Co. Ltd. joint venture.

On Nov. 29 Hisun revealed the new framework agreement with Pfizer Inc. on the ongoing product technology transfer, which could potentially accelerate the local development for nine branded generics licensed from the latter, while the venture and Pfizer will maintain a collaborative commercial partnership.

Hisun said that Pfizer’s sale of 49% stake to Sapphire I Holdings Limited is a strategic imperative based on its global considerations and priorities. After a three-year lock-in period, Hisun gave up the preemptive rights to purchase the shares in order to protect the interest of investors and reduce the impact on the JV and Hisun’s own operations.

After Pfizer’s exit, production localization and product supply will be carried out under a new framework that was signed on Nov. 10 between Pfizer and the venture and includes the intellectual property license agreement, technology transfer agreement and supply agreement for nine products.

The new framework clearly set outs a seven-year time frame for the venture to finish the technology transfer, during which Pfizer will continue to supply those products for a smooth transition.

The secretary of the board at Hisun said in a response that the new agreement is actually a continuation of the previous one, but the specific timetable for localization can subsequently accelerate product development at the new venture.

Reasons Behind The Split-Up

Pfizer and Hisun launched the JV in 2012 in Hangzhou city to develop, manufacture and commercialize off-patent pharmaceutical products, including 10 products licensed from Pfizer, such as Caduet (amlodipine besylate/atorvastatin calcium), Glucotrol XL (glipizide), Minocin (minocycline), Rapamune (sirolimus), Solu-Medrol (methylprednisolone sodium succinate), Medrol (methylprednisolone), Tazocin (piperacillin and tazobactam), Pristiq (desvenlafaxine), Celebrex (celecoxib) and Dynastat (parecoxib sodium injection). (Also see "Pfizer Looks To Ramp Up Branded Generics Via MOU With China's Hisun" - Scrip, 2 Jun, 2011.)

To date, most products have not made any solid progress; the JV has only completed transfer for local sub-packing and manufacturing of Caduet and Minocin. Hisun also has in-licensed the rights of Dynastat to develop a generic version and filed a drug application with China FDA.

A production line is, however, under construction for Tazocin, a single product that contributed greatly to Hisun’s revenue raking in CNY308m ($46.56m) in 2014. But since 2015, the supply of Tazocin had decreased by 90%, as a result of which Hisun saw a 95.6% drop in its net profit year-on-year. Pfizer paid Hisun a total of $25m as compensation for the supply shortage of Tazocin in 2016.

According to Pfizer’s SEC filing for the third quarter 2017, the company determined that it had other-than-temporary declines in the value of Hisun Pfizer last year, which recognized a loss of $211m for the first nine months of 2016, primarily as a result of an increase in risk due to the continued slowdown in the Chinese economy and changes in the expected timing and number of new product introductions by the JV. Pfizer noted that it would evaluate strategic alternatives with Hisun for carrying the investment.

“I expect that Pfizer’s China business plan does not anticipate the losses and continued investments the JV requires,” Helen Chen, head of China practice and Asia life sciences at L.E.K Consulting, told Scrip.

“As established multinational pharmas in China are now measured on both the top and bottom line, it’s no longer just revenue growth.”

Similarly, Chen cited the example of the split between Merck & Co. Inc. and Simcere Pharmaceutical Group. The two companies forged a JV in 2011 with a focus on developing branded generic drugs in China. Merck contributed its diabetes blockbuster Januvia, its now-off-patent statin drug Zocor and cardio medicine Cozaar to the JV. As part of Merck's overall restructuring, it handed over control of the JV to Simcere in 2015.

“The continued unequal investments were one of the reasons that the Merck-Simcere JV was unwanted by MSD,” Chen explained.

She explained that in general, multinational pharmas in China are rationalizing their investments towards their innovative pipelines and finding outsourced partners for their long-established branded generics, called off-patent originators in China. “AstraZeneca PLC, MSD and GlaxoSmithKline PLC have all made these deals with Chinese pharmas, contract sales organizations (CSOs) or distributors.”

However, in the case of Hisun-Pfizer the reasons for the breakup could be more complicated. A company source with knowledge of the matter told Scrip that the “big thing” was the delivery problem of the Tazocin active pharmaceutical ingredients (API), which accounted for almost 20-30% of Hisun’s revenue. The unavailability really made people at Hisun “angry”, the source said.

At the same time, Pfizer was concerned about Hisun getting warning letters and its quality issues, the source added. In September 2015, Hisun received a warning letter from the US FDA and was put on import alert for 15 APIs. The warning letter came just three months after a quarantine request from Health Canada for a similar problem caused by data integrity concerns. (Also see "Hisun Braces For Hit From US FDA Import Alert" - Scrip, 21 Sep, 2015.)

The conflicts were also due to “political” issues between Hisun and the JV. “All the vice presidents were envious of the performance of the JV. And Hisun-Pfizer was under a very different benefit plan than Hisun,” the source continued. “But these are small things that just added up.”

Hisun Moving On

Hisun said the exit of Pfizer would not have a significant impact on its business; it will keep the exclusive rights to those products in China and Pfizer is not entitled to sell them in this territory. During the process of setting up the timetable, the two companies worked together to evaluate the possibilities of changes at different APIs production sites for the next five years, and formulated response measures accordingly.

To ensure the transfer is completed in time, the two partners also formed a special team with experienced members from various departments, including production, technology, supply chain, registration and commercialization, to conduct project investigation, technology transfer and personnel training with detailed plans.

Meanwhile, Sapphire’s investment came from a $4bn fund called Hillhouse Fund III, L. P., under management of Hillhouse Capital Group. Hisun said Hillhouse also made efforts to help production localization through tech-transfer. Hillhouse’s investment portfolio covers healthcare and medical services, which could bring complementary and synergistic effects for Hisun. A few high-profile investments that Hillhouse has made include BeiGene (Beijing) Co. Ltd.’s $97m financing and WuXi PharmaTech Inc.’s $3.3bn go-private deal. (Also see "Wuxi PharmaTech Pushing Ahead with $3bn Go-Private Deal" - Scrip, 28 Aug, 2015.)

Hisun noted that at the current stage, the two partners have no follow-up plans yet to establish more collaborations.

In a previous response to the Shanghai Stock Exchange’s enquiry regarding whether the company lacks in-house developed products and is heavily dependent on Tazocin, Hisun outlined its ambitions to develop new drugs for growth. It claimed to have built 45 technology platforms, 12 of which are for developing innovative pharmaceuticals for treating hyperlipidemia, cancer, hyperglycemia, Alzheimer's, fatty-liver and hepatitis C. In 2016, it has received 66 approvals for clinical trials, including approvals for innovative drugs and biologics. (Also see "Nascent Deal Helps Hisun Advance Innovation Goals" - Scrip, 2 Aug, 2016.)

More JVs in China?

Forming JVs with domestic companies was a way for multinationals to tap a wider market in China, but it did not always have happy endings.

Besides the Hisun-Pfizer and Simcere-MSD breakups, Bayer AG also expressed difficulties in merging the OTC business with Dihon Pharmaceutical Group Co. Ltd.. The company told investors last year that it was experiencing "stronger business disruption than anticipated during the integration of Merck Consumer Care and Dihon in China" as it wrestles with lower-than-expected growth for its consumer care business in emerging markets. (Also see "Game Of Thrones: Bayer Looks To Lead China’s OTC Market" - Pink Sheet, 5 May, 2014.)

Sanofi and Minsheng Pharmaceutical formed a JV focusing on vitamin and mineral supplements in 2010 to expand reach in China’s consumer-drug market. But the marriage ended in Jan. 2017, as Minsheng bought back 60% shares of the JV from Sanofi.

However, the breakup with Minsheng didn’t stop Sanofi seeking a new Chinese partner. In Dec. 2016, Sanofi inked a framework agreement with China Resources Sanjiu Medical and Pharmaceutical to establish a strategic partnership to jointly explore the opportunities in the consumer healthcare market in China. The strategic partnership involves the formation of the JV company which will focus initially on pediatric and gynecological OTC products.

Back in 2016, the Japanese ophthalmic care company Santen Pharmaceutical Co. Ltd. and the state-owned Chongqing Kerui Pharmaceutical Group signed a multi-year collaboration under which they established a manufacturing joint venture in Chongqing to develop generic lines in various areas including infection and glaucoma. (Also see "Santen JV To Become China’s ‘Largest Ophthalmic Site’" - Scrip, 22 Mar, 2016.)

Tsumura & Co. also entered a JV agreement with Shanghai Traditional Chinese Medicine Co., Ltd., a subsidiary of Shanghai Pharmaceuticals Holding Co. Ltd., to develop Chinese medicine compound granules.

Most recently, the chairman of Guangzhou Pharma Chuyuan Li said in an interview with Bloomberg that Teva Pharmaceutical Industries Ltd. is pursuing a joint venture with his company. The Chinese firm is known for its traditional Chinese medicine and a generic of Viagra, Jinge. Li said Guangzhou Pharma is awaiting approvals for some Teva drugs in China as well. (Also see "China Generic Sildenafil Market Growing But Challenges Ahead" - Scrip, 27 Aug, 2015.)

Teva acquired Ivax Pharmaceuticals Inc. years ago, through which it gained 50% shares in Kunming Baker Norton Pharmaceutical Co. Ltd., a JV between Kunming Pharmaceutical Factory and Ivax. But Kunming Pharma purchased 49% of the shares back in 2015, leaving Teva with only the remaining 1% in the JV.

That said, the rumored Teva-Guangzhou Pharma JV could be significant. “The 2018 Generics Quality and Efficacy Evaluation deadline will shake up the market, given that generics still represent the majority in China,” L.E.K.’s Chen said.

“This could be a good time for a foreign company like Teva to make a play for the China market. First generics is aligned with innovation in China’s regulatory framework – they are eligible for expedited CFDA reviews and are often in the same provincial tender category as the originators.”

But overall, Chen predicts that China is more likely to see more innovative rather than generic JVs.

“China’s policy direction is towards innovation, and pharma is no exception. Just look at the ‘Made in China 2025’ goals.”

The trend, in fact, is already visible. Kite Pharma Inc. and Shanghai Fosun Pharmaceutical Group Co. Ltd. announced a JV in Jan. 2017 to develop, manufacture and commercialize axicabtagene ciloleucel in China with the option to include additional products, including two T cell receptor (TCR) product candidates from Kite. (Also see "Fosun Kite Bets On Cell Therapy Despite Approval Pathway Lag In China" - Scrip, 20 Oct, 2017.)

AstraZeneca recently established a new drug development JV with a state-backed private equity firm Future Industry Investment Fund (FIIF) in Nov. The new company called Dizal Pharmaceutical is equally owned by the two parties.

Under the deal, AstraZeneca will transfer the R&D capabilities of its Innovation Center China to the JV, including exclusive rights to three preclinical drugs in oncology, cardiovascular and metabolic diseases and the respiratory segment, while FIIF will provide funding and expertise in establishing strategic partnerships in China.

From the editors of PharmAsia News.