Bayer Sees Product Mix As Key To Growth In China – Emerging Market Earnings Roundup (Part 2)

In a recurring feature, PharmAsia News combs through quarterly earnings reports to bring you highlights on emerging markets.

In Part 1, PharmAsia News covered earnings for AstraZeneca PLC,Eli Lilly & Co.and Novo Nordisk AS (Also see "AstraZeneca, Lilly, Novo Look To China Growth Despite Pricing Headwinds – Emerging Market Earnings Roundup (Part 1)" - Scrip, 1 May, 2012.). In this edition, we take a closer look at Bayer AG,which reported rather flat sales in China that looked favorable, however, compared to several peers. Interestingly, Bayer also highlighted the upcoming leadership transfer in the Chinese government as a source of uncertainty among customers, which has impacted frontline decision making.

Bayer saw a cooling down in the Chinese market in the first quarter, although the German company still reported 15% growth in China for its pharmaceutical business.

In comparison, China’s fourth-largest drug maker grew 24% in China in the first nine months of 2011. Bayer previously had announced a large expansion plan to triple its sales in China over five years, to €2.5 billion by 2015.

Even so, that 15% growth rate beats what Bayer has seen overall in emerging markets, which was only 6% in sales growth in the first quarter. Already drawing one-third of its group revenues from emerging markets, Bayer said its worldwide pharmaceutical sales rose by 2% in Q1 to €2.5 billion, with growth mainly from emerging markets, especially China.

And even more surprising is that growth was achieved against a backdrop of four rounds of price cuts. In particular for Bayer, China’s National Development and Reform Commission last August enforced price cuts on hormone and endocrinology drugs and central nervous system drugs, including Glucobay (acarbose), with an average cut of roughly 14% (Also see "With Latest Round Of Cuts, China Continues March To Narrow Gap Between Big Pharma And Local Generics" - Scrip, 5 Aug, 2011.).

“We had a Gluco negative impact last year in terms of pricing, which does impact on this year's performance in China” - Bayer CFO Werner Baumann

In the recent rounds of price cuts, Bayer has also taken a haircut on other mature primary care products with preferential pricing, including Avelox (moxifloxacin), Adalat (nifedipine) and Cipro (ciprofloxacin). But Bayer especially felt the pinch on its oral anti-diabetic drug Glucobay, which accounts for about a quarter of the company’s pharma sales in China (roughly two-thirds of Glucobay’s global sales come from China).

“We had a Gluco negative impact last year in terms of pricing, which does impact on this year's performance in China,” noted Bayer CFO Werner Baumann during the company’s April 26 earnings call.

Adding to that pain is potential further pricing pressure from Chinese regulators. As China continues to take measures to contain medical costs, either through expanding the Essential Drug List or encouraging import substitution for high-priced drugs and devices, a price gap between drugs made by foreign makers and domestic brands will continue to shrink, analysts say.

Bayer had the foresight to keep price cuts in mind during its decision-making process. “Regarding China, you always need to consider potential price cuts in the future,” said Baurmann.

Another challenge in China, Baurmann added, is an uncertainty in product development. “It’s very, very difficult to predict the development for each individual product there.”

Indeed, China’s large bureaucracy in pharmaceutical policy making and execution has drawn public complaints from top executives, who have said that regulations fall under the purview of different ministries that have conflicting priorities (Also see "China’s Drive For Innovation Stymied By “Nightmare” Pharma Policies" - Scrip, 23 Mar, 2012.).

That failure has resulted in unfavorable market access for innovative products. Recent regulatory approval data from China’s State FDA show that while new approval applications for imported drugs increased 20% in 2011, the approvals backlog also increased from 951 to 1,584. The average time to obtain an approval for an imported drug is now about three to five years, according to an April 30 investment note from Cowen & Co.

Product Mix Is Key

Facing the double heat from a tough pricing environment as well as regulatory challenges, multinationals need to have the right product portfolio to win in China, said Bayer’s CFO.

Indeed, Bayer has overcome both price cuts and uncertainties in product development by having a diverse product mix in China.

Known for Glucobay and Aspirin, Bayer said its Aspirin Cardio revenue grew by 16% for the quarter, due to a marketing ramp-up in China. The company may also be benefiting from a decision to move its primary care headquarters from Berlin to Beijing, which allows its decision makers to be closer to the customer in Bayer’s most important primary-care market (Also see "Could "Calculated Risks" In China Help Solve Global R&D Challenges? Bayer Thinks So" - Scrip, 18 Oct, 2011.).

In addition to its primary care products, Bayer has an oncology portfolio centered on Nexavar (sorafenib). The first approved systemic therapy for hepatocellular carcinoma patients in China has been doing well, said the company. In the first three months, Nexavar sales reached €16 million in China, just behind the U.S. (€48 million) and Japan (€26 million). Nexavar sold €5 million more in China than in France, and more than doubled the sales in Spain.

In fact, Bayer is rumored to be looking to buy a company, and some have speculated that either Onyx Pharmaceuticals Inc. or Warner Chilcott PLC are targets. Onyx is the original developer of Nexavar (Also see "Deals of the Week: Watson/Actavis, Pfizer/Nestle, Celgene/Epizyme" - Pink Sheet, 30 Apr, 2012.).

Like several oncology peers including Roche and Pfizer Inc., Bayer offers a patient assistance program in China to widen access to Nexavar for those who cannot afford it. The program provides free drugs for patients who are on China's nationally certified low-income list. Other patients have to buy a certain amount of drugs and then get them free for the rest of their lives.

Meanwhile, Bayer also introduced new products such as Xarelto (rivaroxaban) to China. The anti-clotting drug was the first novel product in memory approved in China ahead of the U.S. Now, Bayer expects to market the blood thinner in China within two years to prevent strokes and not just treat them (Also see "How Bayer Secured The Top-Spot In China: An Interview With Liam Condon" - Scrip, 26 Feb, 2010.).

Bayer also launched Xarelto in Japan in late April. “We got a price that is at par with dabigatran [Boehringer Ingelheim GMBH’s Prazaxa, known as Pradaxa in the U.S.]. We are actually quite okay with the price. Obviously, it's too early to make any projections, but the first initial uptake and the response from the market has been very good,” said Bayer Healthcare CEO Jorg Reinhardt.

“Our performance in [emerging markets] is to a large extent still driven by performance in China, and that has been strong again, which may have to do with the portfolio mix which is very favorable for us,” summarized Baumann.

To that end, Bayer is pulling out all the stops in China. An expanded sales force and focus on China’s urbanization is paying off for the company, said CEO Marijn Dekkers in March. He noted that 350 million Chinese are expected to move from rural areas to the cities over the next few years, and more sales are needed to serve them.

In 2011 alone, the company added 1,000 sales reps and significantly grew its field force in China’s inland Western provinces. Bayer is also working with the Chinese government to train 10,000 doctors in Western China (Also see "Could "Calculated Risks" In China Help Solve Global R&D Challenges? Bayer Thinks So" - Scrip, 18 Oct, 2011.).

The firm also tapped into the large talent pool in Beijing and extended a research agreement with Tsinghua University in March (Also see "Bayer Taps Deeper Into Beijing’s Biotech Potential, Renews Partnership With Tsinghua" - Scrip, 29 Mar, 2012.).

China Leadership Transfer Uncertain

Although the growth in China to date continues to be strong, Bayer also sees signs of darkening clouds, especially amid an upcoming leadership transfer in the Chinese government, which will take place later this fall (Also see "With Leadership Changes On The Horizon, Chinese Vice Premier Sheds Light On Future Of China Healthcare Reform" - Scrip, 2 Dec, 2011.).

A “wait and see” attitude among Chinese officials has impacted frontline decision making and even created a credit line crunch.

Offering observations from customers in China, Bayer Material Science CEO Patrick Thomas said there exists an uncertainty about the final results of the leadership transfer in October, and a “wait and see” attitude among Chinese officials has impacted frontline decision making and even created a credit line crunch.

“The credit lines are still quite difficult, interest rates are quite high, there's a shortage of cash. And generally, people are unwilling to make decisions,” said the CEO, calling the situation “very complicated at the moment.”

“So that means very low inventory levels in the Chinese supply chains and project decisions. So government project decisions are getting deferred at the moment. Everybody is concerned about whether they're going to spend money on infrastructure or not because they don't know who's going to be in the top job. So there's this unusual uncertainty mode,” he added.

According to Thomas, while the U.S. elections usually boost the economy, “Chinese elections create uncertainty and I think that will probably characterize the feeling of the market.”

That feeling of uncertainty helps explain one assessment made by Bayer CFO Baumann, who described the current Chinese market situation as neither accelerating nor showing signs of slowing down. “But still we see a more or less not accelerating but also not slowing down performance in China, which compensates to a large extent what we see in some of the other emerging markets.”

Emerging markets as a whole have been a mixed picture in 2012 for Bayer, which noted that a number of countries didn’t perform well in the first three months, including South Korea.

For the time being, Bayer CFO Baumann said he is optimistic about the Chinese market. “We still feel confident that our strong growth that we have been showing in China for the last few years will continue for the foreseeable future.”

“So I believe a certain slowdown for the majority of the market, compensated by a still strong China is what you're seeing there,” summarized Baumann.

In an April 26 research note Deutsche Bank noted Bayer results were 1% above consensus expectations. “Healthcare was solid (as expected), and Xarelto sales reassured that the launch is on-track to near management’s €270m 2012 aspiration,” analysts wrote. “HC delivered underlying EBITDA growth of 3.6% on sales growth of 2.1% (ex FX, M&A) as growth in emerging markets and Consumer Health more than offset the impact of generic competition.”

[Editor’s note: This article was updated after its initial publication to correct sales figures for Glucobay in China.]