For a country whose GDP per capita is only 15% that of the U.S., consumers in China are paying remarkably high drug prices.
The U.S. isn’t famed for its low-cost pharmaceuticals – but prices of generics are on average only 55% of those in China, according to a recent Credit Suisse Group AG report. For instance, Jiangsu Hengrui Medicine Co.’s Docetaxel, a chemotherapy medication that treats a number of cancers, costs one-third less in the U.S. Or consider Levamlodipine, a cardiovascular drug. If CSPC Pharmaceutical Group Ltd. charged prices similar to those prevailing in the U.S., it would see 5% of its annual revenue gone.
(Related: How China Is Trying to Cut Its Drug Bills)
Soaring healthcare costs in China have become such a social issue that it came up at Premier Li Keqiang’s annual press conference last Friday. It’s not right that many elderly people see most of their pension benefits spent on daily doses to manage chronic diseases, and the social insurance system will broaden its coverage and raise reimbursement rates, he said.
For years, the nation’s largest drugmakers happily sold low-cost generic medicines yielding gross margins of 80% to 90% without giving much thought to consumer protection or innovation. Adding insult to injury, many of the drugs are no good. There are more than 4,000 generic drugs waiting to pass the government’s new bio-equivalence tests, and as of last November, only 40 of those drugs have demonstrated that they work as well as the original formula.
Looking at how well healthcare stocks have been doing though, it’s almost as if in the midst of a bull market, investors have forgotten the trouble they’re in. The MSCI China Health Care Index, which is dominated by drugmakers such as CSPC, Sino Biopharmaceutical Ltd., Sinopharm Group Co., and Wuxi Biologics Cayman Inc., has gained 34% since its January lows:
A price war is brewing. Already, local governments of 11 cities are taking over procurement of drugs for their hospitals. In an early December bidding round, the average tender price was 55% lower than the previous auction. The new bidding system will eventually be extended nationwide.