‘’Access to pharma and healthcare remain a key issue in China’’

MNC pharma is under scrutiny in China over claims of corruption and bribery. However, it remains a strategic market for pharma companies and collaborative partnerships are on the rise. Cher Boon Piang, Pharmaceuticals & Healthcare Analyst, at Business Monitor International reveals more details in an interview with Shalini Gupta

How much is the China pharmaceutical market worth in 2013 vis-a-vis that in 2008? What is the CAGR? How does this compare to India?

Cher Boon Piang

Between 2007 and 2012, China’s pharma market grew by a compound annual growth rate of 23.9 per cent in local currency terms (28.6 per cent in US dollar terms), higher than India (17.3 per cent in local currency, 11.4 per cent in US dollars terms). We expect this outperformance to continue over the coming decade. By 2022, we forecast that the Chinese pharma market will reach ($198 billion), far larger than India’s figure of Rs 2,330 billion ($41 billion).

China remains a dream market for MNC pharma, most of whom are already seeing double digit sales growth.Why? Compare this with India.

A key reason for China’s superior growth story is the government’s commitment to healthcare. Latest data from the WHO showed that the proportion of government expenditure reached 55.9 per cent in 2011. In India, government health expenditure as a per cent of the total has remained rather consistent since 1995, with the highest proportion in 2011 at 31 per cent, significantly less than that of China. From a more macro perspective, government health expenditure as a percentage of GDP reached 2.9 per cent in 2011 for China, more than double the 1.2 per cent seen in India. The disparity in health commitment has far reaching effects, largely due to the interdependence of the pharma and healthcare sector.

The attractiveness of the Chinese pharma market is also reflected in their revenues. In the case of AstraZeneca, the firm generated $431 million in Q2 2013 (quarter ending June 30, 2013) but in India, it only generated $22.3 million in the same quarter. Similarly for Merck & Co, revenues generated in China ($297 million) were eight times greater than those generated in India ($37 million). For Novo Nordisk and AstraZeneca, meanwhile, sales in China represented 8.3 per cent and 6.9 per cent respectively of their total revenues in Q2 2013.

Stringent enablement requirements imposed in different State Intellectual Property Office (SIPO) guidelines remain a concern for big pharma companies. Compare this with the IP scenario in India.

The Indian government has revoked and/or rejected patents and this is negative from a multinational pharma company’s perspective. While there may be delays in getting patent approved, an issue not unique to China, we have yet to see a trend of such IP revocation/ rejection in China.

China’s economic planning agency is also investigating the costs and prices of foreign drug makers, specially those on an approved list that are subsidised and purchased in bulk by local government with drugs such as Lantus by Sanofi added to the list in March. Which other drugs have made to the list?

Note that China has two lists: National Essential Drug List (NEDL) and National Drug Reimbursement List (NDRL). Due to the more expensive nature of their drugs, MNCs’ drugs are listed in NDRL. China has revised the NEDL in 2013, but the last revision of NDRL was in 2009.

In such an environment, do you see more MNCs follow suit with GSK and announce price cuts? What kind of marketing reforms and strategy would companies have, moving forward?

We believe that such corruption is unlikely to be completely eradicated, unless the country offers a better operating environment for its hospitals (potentially at the expense of patients). More importantly, one of the GSK detainees publicly admitted that bribes were also offered to government officials in addition to hospitals, highlighting that systemic faults continue to exist in the government, despite the 2007 execution of the former director of the State Food and Drug Administration (SFDA), Zheng Xiaoyu, for his role in accepting bribes.

Following the investigation, GSK announced that it will reduce its drug prices in the country. This was rather similar to the infant formula sector in which the government’s investigation into the pricing and competitive practices of the country’s leading infant formula producers prompted a wave of price cuts across the infant nutrition segment, involving companies like Mead Johnson, Nestle, Danone, Biostime and Meiji.

Despite this similarity, we do not believe that other MNC pharma firms will follow suit in lowering prices. The infant formula sector was largely investigated for a potential breach in anti-monopoly law, a law which is difficult to prove in the pharma sector, owing to the highly varied products that the sector manufactures. In addition, there has not been much evidence that pointed to corrupted practices in other pharma firms. Therefore, by reducing their prices prematurely, these firms run the risk of being perceived as guilty of corruption.

Nevertheless, we believe that government will increasingly use cost containment to reduce its financial burden in healthcare provision. Therefore, over the long-term price reductions of drug prices will be imminent. Over the short term, pharma MNCs will see a negative impact from these pricing investigations. With such uncertainties, we expect companies to cut back on sales visits to medical professionals or other marketing activities such as conferences. The lower numbers of outreach to the medical professionals may potentially lead to a slowdown in sales. Companies may also look into stepping up pharmacoeconomic studies to better justify the costs of their drugs should they be put under the spotlight, particularly for drugs that are listed on the National Reimbursement and/or Essential Drug Lists.

More importantly, longer-term optimism in the healthcare sector continues to exist in the country, therefore pulling out of the market will be detrimental to MNC pharma firms, some of which are facing slow or negative growth in developed markets due to various reasons including austerity measures and/or patent expirations. Access to pharma and healthcare remain as a key issue in the country, despite the government’s consistent effort in weaving the world’s largest universal health safety net, and pharma firms should therefore continue to market their products into lower tiered cities where there are larger unmet medical needs.

China’s health spending is projected to rocket from $357 billion in 2011 to $1 trillion in 2020, according to a McKinsey report. Despite barriers and the continuing investigation, what opportunities currently exist for collaborations in the future?

BMI notes that collaborative partnerships involving small biomedical companies/institutions from China and similar entities from developed states are increasingly common. More are expected to emerge, primarily due to the strong growth potential of the Chinese pharma market, which itself is being positively influenced by the country’s 12th Five-Year Plan over the period 2011-15.

The Chinese government intends to boost innovation and development of the biological industry through various projects, such as building databases of genetic information and constructing research and development bases for biopharmaceuticals. The country’s plan to transform its biotechnology sector will mean better support for companies focusing on this high-growth sub-sector which will, over the long term, increase the sophistication of the biotechnology industry.

The government is also encouraging Haigui ‘sea turtles’ (the Mandarin term for overseas-educated Chinese who return from abroad) to move back to China. The return of these scientists will mean the industry continues to attract R&D commitment from local companies, as they are equipped with skills learnt in developed countries as well as having knowledge of Chinese culture and the work ethics. Therefore, we continue to expect foreign firms to partner local firms in biomedical R&D, making use of the increasing local research expertise. Most ‘sea turtles’ come from the US and the majority of the recent partnerships are between US and Chinese firms.

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