China's driving sales growth ahead of the U.S. for Big Pharma. But can it last?

If you follow Big Pharma companies’ investor updates, you’ll notice China popping up frequently these days. The world’s second-largest pharmaceutical market has been turning up sales increases that continuously surpass those in the U.S. and other developed regions.

In the first quarter, emerging markets growth averaged 13.3% among the Big Pharmas followed by Wolfe Pharma analysts, including AstraZeneca, Eli Lilly, Pfizer, Roche, Sanofi, Merck & Co. and GlaxoSmithKline. And in China, that number was 29%—versus 8.2% in the U.S.—a growth rate that has been ticking upward since the start of 2017, Wolfe’s Tim Anderson noted in a Thursday report.

Now that China's increasingly important to Big Pharma, investors are naturally tracking it closely—and they wonder just how long that kind of growth can last. For good reason, too; though all of those top companies see big opportunities in China, at least four of them warn growth could be uneven in the quarters ahead.

Merck’s China business grew most in Q1, at 58%, but AstraZeneca’s 28% hike is perhaps "the most meaningful" because of its sheer presence in the country. China chipped in 23% of the company's first-quarter sales, several times higher than the industry average, Anderson noted.

For Merck, the driving force is HPV vaccine Gardasil and immuno-oncology star Keytruda, which recently launched in the country. There's some debate about the market for Merck’s PD-1 king in China, what with several heavily discounted domestic rivals and a high rate of lung cancer mutations, which put more patients in line for targeted therapies. But Keytruda’s "wall of data," along with its first-mover advantage in previously untreated lung cancer, could help it do well, chief commercial officer Frank Clyburn argued on the company’s April earnings call.

The company has "pivoted to more of the innovative products" that now constitute about 60% to 70% of Merck’s business in China, Clyburn said. That kind of portfolio positions Merck well against pricing headwinds for some of its older products, he said.

Traditionally, off-patent legacy blockbusters have enjoyed growth in China, even as they give up market share in developed markets. But lately, as the Chinese government speeds up new innovative drugs, it’s clamping down on drug prices to help pay for them. And where better to cut than generics.

For instance, the Chinese government is testing a so-called "4+7" tendering process in 11 major cities to slash generic drug costs. Basically, public hospitals—where most prescriptions in China are filled—offer up a big, guaranteed chunk of business in exchange for lower prices.

Multinational pharmas lost out big in the bidding—and that’s exactly why AstraZeneca CEO Pascal Soriot warned its China growth will slow down a bit.

The bidding process was brutal: For drug classes with three or more competitors, the lowest tender price automatically won. To beat out local copycats, AstraZeneca cut the already-discounted price of its cancer drug Iressa—one of only two original brands among about 30 to win the first round—by nearly 80%, according to local reports.

Like Merck, AstraZeneca is also steering toward innovative drugs. Its lung cancer drug Tagrisso, a follow-up to Iressa, quickly won coverage on China’s National Reimbursement Drug List, That nod already helped deliver the company’s 28% Q1 growth in China, Soriot noted, and AZ's looking to expand that third-generation EGFR-targeted med in newly diagnosed Chinese patients. The company aims to push Lynparza, its ovarian cancer drug and China's first approved PARP inhibitor, into breast cancer, and it's seeking a go-ahead for its IO therapy Imfinzi. Meanwhile, it's revving up to launch roxadustat, its FibroGen-partnered anemia drug first approved in China.

But Crestor's setback in the "4+7" program is already dragging on sales. The cholesterol fighter's first-quarter revenue in China sank 6%, even ahead of the program's official rollout. In comparison, in 2018, Crestor generated a 22% sales increase in China, to $456 million, as its U.S. sales plummeted 54% to $170 million.

For Pfizer, which has reliably enjoyed 20%-plus growth in China for at least four quarters according to Wolfe’s Anderson, the "4+7" pain is coming for cholesterol drug Lipitor. For Sanofi, cardiovascular drugs Plavix and Avapro might have just topped out in Q1 with best-ever Chinese sales increases of 9.1% and 22% respectively; its overall China growth is "not expected to repeat" for the full year, CEO Olivier Brandicourt said on its earnings call in April.

Both Pfizer and Sanofi recently went through some organizational changes that renewed their interest in China, though. Pfizer is lumping its off-patent drugs and generics together and moving some top managers in that Established Medicines unit to China, while Sanofi recently created a new business unit called China & Emerging Markets.

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