How China Is Trying to Cut Its Drug Bills

The majority of Chinese drugmakers rely on the cheap production of generic medications to drive revenue, which means their profit margins are already slimmer than global pharmaceuticals with research and development capabilities. Chinese healthcare stocks have gone into deep sell-offs every time new information about the plan has emerged.

4. Are multinational pharmaceuticals also in trouble?

Yes and no. Global drugmakers are less impacted because they rely for revenue on their pipeline of novel drugs, which have not yet been matched by generics or are still on patent. No novel drugs are in the list of 31. However, in a Chinese market quirk, foreign pharmaceuticals still do big business with Chinese hospitals on their blockbuster drugs, like Pfizer Inc’s cholesterol medication Lipitor — even though these drugs have gone off patent.

According to Bocom International analysts led by Kelvin Chen, Pfizer supplied 74% of Atorvastatin, the generic name for Lipitor, to Chinese hospitals prior to the bidding — even though other Chinese makers produce generics of it. Pfizer also still supplied 84% of its blood pressure medication Amlodipine to hospitals, and Novartis AG provided 81% of cancer treatment Imatinib.

5. What’s going on?

Domestic generic manufacturers are generally unable to match foreign makers on quality. That means overseas pharmaceuticals still win the lion’s share of individual hospital tenders, despite higher prices. This business is likely to disappear, though, after the tender results are announced, as the foreign pharmaceuticals are unlikely to bid low enough.

But it’s not all bad news for Big Pharma: The Chinese government has reformed its drug approval process. That’s allowing novel drugs of multinationals in at a rapid pace — sometimes faster than in the U.S. — and creating vast new revenue streams.

— Read Starbucks Extends China Health Coverage to Workers’ Parents, on ThinkAdvisor.

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