Big pharma loses out in China's latest procurement program

In a Battle of Waterloo-style defeat, off-patent drugs from big pharma firms lost major markets in China as the government adopted a novel procurement scheme to slash generic drug costs. But after steep price cuts, local firms aren't considered winners, either. 

Among the 31 drugs China’s newly formed health insurance watchdog listed for procurement in a pilot program, multinational pharmas participated in bidding to supply almost all of them, but landed only two contracts, according to multiple local reports of preliminary tender results.

The drugs all have generic versions available in China and include prominent brands such as Pfizer’s Lipitor, AstraZeneca’s Crestor, Sanofi’s Plavix, Gilead’s antiviral Viread (marketed by GSK in China), Novartis’ Gleevec and Lilly’s Alimta, among others. In the end, only AstraZeneca's EGFR inhibitor Iressa and Bristol-Myers Squibb’s heart drug Monopril won their fights against local copycats.

Just how important is the procurement?

The Chinese government is testing a bulk purchase scheme for 11 major cities, including Beijing and Shanghai. On average, these cities make up about 30% of China’s total drug sales, local media reported. Each city calculated its annual demand at public hospitals—where most prescriptions in China are filled—for each drug and allocated around 30% to 50% share of that purchasing to a bidding pool, down from the previously rumored 60% to 70%, according to a tally by brokerage firm China Galaxy Securities as cited by local publication Healthcare Executive.

The winner takes all: The successful bidder on a particular drug walks away with the entire guaranteed purchase amount from all 11 cities.

Pocketing that kind of huge market should be a huge win for drugmakers. Why, then, did the MSCI China Health Care Index fall 8.4% Thursday, its largest decline since 2009, according to Bloomberg? As with any government-led drug purchases in China, huge price cuts are expected. Not to mention this is the first time drug procurement bids carried purchase amount promises with them.

The fight on this initial round was brutal to say the least. According to local reports, for drugs with three or more bidders, the lowest tender price was automatically chosen. Chia-tai Tianqing Pharma, for instance, cut its price by 90% to win a contract for hepatitis B treatment entecavir, as a generic to BMS’ Baraclude. Shares in the Chinese company's parent firm, Sino Biopharmaceutical, plummeted 14% in Hong Kong, S.A.R., China Thursday.

While the official results have yet to be announced, the size of the price cuts appear to have gone beyond market expectations, and the example put a chilling effect on biopharma companies that didn’t even make the cut this time. Fosun Pharma saw its shares tumble 8.6% at the news. Even Chinese CRO giant WuXi AppTec dropped more than 6%. One of the few exceptions was Zhejiang Huahai Pharmaceutical, whose carcinogen-tainted valsartan API triggered a global recall recently. After it reportedly won the most tenders—six in total—its stock climbed 3%.

For all biopharma companies, foreign or domestic alike, winning such bulk purchase bids represent a dilemma. On the one hand, it means a sizeable secured market and savings on marketing efforts; but on the other, lowering prices significantly could put profits at risk.

The new procurement scheme comes at a time when China is pushing for wider adoption of generic drugs to drive down overall health spending and make room to adopt new innovative drugs in its national drug reimbursement system.

It could mean a bumpy road ahead for Big Pharma companies, which have enjoyed fast growth in China, thanks in part to some legacy drugs. For a long time, foreign pharma’s original drugs were considered better in China and were not placed in direct competition with local copycats. But those days are gone as the Chinese government inches forward with a campaign to evaluate the bioequivalence between domestically-made generics and their originators.

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