(Bloomberg) — The world’s largest pharmaceutical companies are facing a roadblock in China as a state-led campaign to slash drug prices has triggered a slowdown in sales growth.
One of the biggest problems: China’s government-run health insurance funds, which are struggling to keep up with an ageing population and surging incidence of diseases like cancer or diabetes. As they grapple with tighter budgets and a slowing economy, many of these funds are capping reimbursements to patients and pushing local authorities to negotiate with companies to lower drug prices.
More than $115 billion of drugs were sold in China last year, according to researcher IMS Institute for Healthcare Informatics, making it the world’s second largest market after the U.S. China’s pharmaceutical market shrank by 1 percent in dollar terms from October to November, according to Barclays PLC, a sharp contrast with the 17 percent expansion in the second half of 2013. As a result, companies from the U.K.’s GlaxoSmithKline PLC (NYSE:GSK) to AstraZeneca PLC (NYSE:AZN) and New York’s Pfizer Inc. (NYSE:PFE) saw China sales growth weaken last year.
In the latest sign of price pressures for the industry, Li Bin, director of the National Health and Family Planning Commission said at a press conference at the National People’s Congress on Tuesday that China has won price cuts of more than 50 percent in national-level bargaining with drug companies on about five kinds of costly imported drugs for illnesses including cancer. The official didn’t specify the names of the drugs or the manufacturers.
Chinese citizens pay premiums to the country’s public health insurance funds from their salaries, but those amounts are rising more slowly as the economy has expanded at the slowest pace in 25 years.
eanwhile, the insurance funds face rising costs because the country’s citizenry is aging so rapidly, said Joseph Cho of RDPAC, an industry group representing foreign drug companies in China.
“Increase in premium income cannot keep up with payment growth, so there are various kinds of measures to curb costs, and starting with medicines is the easiest way,” said Cho.
The pressures on the public health system had a particularly visible effect in the fourth quarter, when Glaxo experienced a 25 percent decline in China pharma sales. Merck’s fourth-quarter pharma revenue growth slowed to 2 percent from 13 percent in the same period a year earlier and AstraZeneca’s fell by about two thirds to 6 percent, according to Bloomberg Intelligence.
Government insurance funds decide on the reimbursement levels at public hospitals, which treat about 90 percent of China’s patients and sell 70 percent of the country’s drugs. By the end of last year, many hospitals had hit their reimbursement caps and had to curb prescriptions of more expensive drugs from multinationals while also postponing costly surgeries and inpatient stays, said Cho. About 185 of China’s 380 locally-managed public health insurance funds appear to be making losses, he said, citing research from a local academic.
Both Chinese and foreign companies have been hurt as all drug manufacturers must compete in local bidding to sell their medicines in public hospitals. Some like the Eastern Zhejiang province have asked for cuts of 10 to 20 percent as a requirement to participate in local tenders, according to consultancy McKinsey & Co. Companies can decide to take the cuts or drop their bids, essentially stopping sales of certain drugs in parts of the country.