China's expanded drug-buying policy is likely to crowd out international drugmakers from the generics market as price pressures and competition to be included in the preferred drugs list intensify, experts said.
As a result, companies will be pushed further towards tweaking business strategies to focus more on novel and innovative drug releases in China's $137 billion pharmaceutical market — the second largest in the world — they said.
Under the revised purchasing policy, the deadline for new bids from companies is Sept. 24.
The procurement policy is part of the Chinese government's ongoing efforts to broaden public healthcare and improve access to off-patent drugs at lower prices.
"The policy gives multinational drugmakers less room to expand in China," said Chen Hao, a China healthcare policy researcher at Huazhong University of Science and Technology, adding that it is unlikely many international companies will win against local and usually cheaper generic drug makers.
Under the policy introduced in December 2018, hospital procurement contracts were awarded in 11 cities for 25 generic or off-patent drugs to the lowest single bidder. Prices were slashed by up to 90% in some cases.
In exchange, companies could command up to 60% of market share for these drugs in the 11 cities.
The scheme was expanded nationwide in September and the revised tender process will see three of the lowest bidders supply each drug.
Only two drugs by non-Chinese drugmakers were included in the initial list — AstraZeneca PLC's lung cancer therapy Iressa, which is off-patent in China, and Bristol-Myers Squibb Co.Bristol-Myers Squibb Co.'s blood pressure therapy Monopril.
AstraZeneca lowered Iressa's price by 76% to 547 Chinese yuan per pack following its inclusion in the list, according to a report by Chinese government-run media outlet Xinhua News Agency.
The rest of the drug contracts were awarded to Chinese generic drug manufacturers, such as Jiangsu Hansoh Pharmaceutical Co., Ltd. and Zhejiang Huahai Pharmaceutical Co. Ltd.
Industry experts do not expect the outcome to be very different this time around.
Generics competition
Chen estimates that for big Pharma, up to 70% of China-based revenue can come from selling generic or off-patent drugs.
Inclusion in the preferred drugs list usually means the selling price of a drug will be reduced significantly. However, lower prices could lead to higher patient usage, and volume gains could mitigate the price cuts on these drugs, said Zhang Jialin, a Hong Kong-based healthcare analyst for ICBCI.
But it also places pressure on companies whose drugs are not on the list to do the same if they want to compete against lower-cost domestic rivals, he said. He believes international drugmakers could face further downward pressure on off-patent drug prices in China.

In July's second quarter earnings call, Pfizer Inc. CEO Albert Bourla said revenue from its established drug division, Upjohn, fell 20% from a year ago in China, driven primarily by volume-based procurement reforms. Pfizer announced the sale of Upjohn to Mylan NV the same month.
Meanwhile, Chen said Sanofi is a company that could struggle in the future. In its earnings call in July, the French drugmaker noted heart disease therapy Plavix and blood pressure drug Aprovel lost out in the procurement program as local companies won contracts to provide generic alternatives.
Both drugs accounted for about 40% of Sanofi's China sales in the second quarter, according to its earnings presentation. Sanofi expects sales of the two drugs to decline in the country for the rest of 2019.
AstraZeneca CEO Pascal Soriot |
Earlier this year, AstraZeneca CEO Pascal Soriot also noted the new procurement policy is creating headwinds for the company's older products.
"We won the Iressa tender ... but we have lost the Crestor tender," he said in April. China's Zhejiang Jingxin Pharmaceutical Co. Ltd. won the contract to supply hospitals with a generic alternative of cardiovascular drug Crestor.
"I expect that within the next two to three years and half of our sales will come from new products and the majority of the growth will be coming from new products," Leon Wang, China president and executive vice president of international, said in a second quarter earnings call in July.
Greater diversification
With growing price and competition pressures in the generics segment, international companies will need to focus on innovative drugs to boost China-derived revenue.
A shorter regulatory approval period is encouraging pharmaceutical companies to release more innovative drugs in China, said Chen. Such drugs previously took years to win approval but are now approved by regulators in four months or so.
In 2018, 45 innovative drugs by multinationals got the regulatory thumbs-up from China, up from just three in 2016, according to data compiled by McKinsey & Co. Le Deu said foreign pharmaceutical companies have a long pipeline of innovative drugs they hope to launch in China.
Zhang also said he expects the trends in the generics market to continue and international pharmaceutical companies will need to introduce more new and innovative drugs to compete in the changing Chinese marketplace.
As of Sept. 19, US$1 was equivalent to about 7.10 Chinese yuan.

