Big Pharmaceuticals Seek New Prescription for China Sales

(Beijing) — Multinational drugmakers are pouring hundreds of millions of dollars into new production and research operations in China to expand their foothold in the world’s fastest-growing health care market, even as the government demands sharply lower prices.

In mid-November, German drug giant Bayer AG said it would invest 100 million euros ($104 million) to double its drug packaging capacity in Beijing, creating the largest such Bayer plant in the world. Two weeks earlier, Germany’s Merck Group agreed to invest 170 million euros in a drug factory in Nantong, Jiangsu province. By 2021, it will be Merck’s largest facility outside Europe, producing 10 billion pills a year.

The same month, Switzerland’s Roche started construction of an 863 million yuan ($124 million) research center in Shanghai that will be the largest research and development center built by a multinational drug company in China. According to the R&D-Based Pharmaceutical Association Committee, as of December, 38 multinational pharmaceutical companies have opened 49 plants and 30 research and development centers across China.

The world’s biggest drugmakers are racing to get in on the world’s fastest-growing health-care market. China's demand for pharmaceuticals has climbed by more than 10% annually over the past several years as the global market slowed. By 2020, China will overtake the U.S. as the largest pharmaceutical market on the planet, accounting for 7.5% of global sales, according to the consulting company IMS Health.

“China is still the largest and fastest-growing market that no company can give up,” said a source from a foreign pharmaceutical company. “So the multinationals have to compromise” on prices.

China is an increasingly important contributor to sales of global drugmakers. Major companies, including Bayer, Novartis International AG, Pfizer Inc. and Johnson & Johnson, reported 2015 sales growth of more than 15% in China, higher than it was in other markets. Bayer’s sales in the China region reached 4.5 billion euros in 2015, the most among Asian markets. Roche and Merck & Co. of the U.S. in 2015 reported sales growth in China while global demand fell.

The investment rush comes as regulators step up pressure to cut drug prices while encouraging the development of the domestic pharmaceutical industry. Foreign drugmakers have enjoyed easy profits for years thanks to patent protection and rising demand among Chinese consumers for brand-name drugs.

The National Health and Family Planning Commission has been demanding since 2015 that multinationals lower prices on drugs for major ailments, including cancer. At the same time, some local authorities have set limits on the amount of money that public hospitals can spend on drugs from multinationals.

In 2015, the National Development and Reform Commission terminated a decades-long preferential policy for multinationals to price their brand-name drugs independently, which had led to much higher prices of imported drugs than domestic products. The NHFPC also held negotiations with major multinationals demanding price cuts on several types of drugs. As a result, companies including GlaxoSmithKline PLC and AstraZeneca PLC agreed to lower prices by more than 54% on certain types of medications.

“The Chinese government has shown an unprecedented firm stance, leaving no choice to multinationals,” said a source from a foreign pharmaceutical company. The tougher policies on prices have significantly squeezed drug profit margins over the past two years, the source said.

However, China’s pressure on drug prices isn’t out of line with the position of governments in Japan and the five biggest European markets, according to research by Pharmagellan LLC, a U.S. biotech consulting firm based in Milton, Massachusetts. A Pharmagellan analysis of drug-price studies found that pharmaceuticals in those six countries cost half as much as they do in the U.S., where there is no price regulation. Some of those governments require price reductions over time, while in the U.S., costs of some medications surge 10% or more annually.

Thinner margins

Opening plants in China will help the multinational drugmakers’ profits in the lower-price environment, according to a drug executive.

“Building factories and setting up a supply chain in China can save at least 20% of costs compared to imports,” the executive said. Although labor costs in China are rising, local authorities have offered preferential policies on land, taxation and loans, helping drugmakers to reduce costs, the executive said.

In addition, having domestic operations will allow multinationals to react faster to opportunities in the expanding market, said a source from the China Medical Association. Investments will also strengthen companies’ ties with local governments to win support for market expansion, the source said.

Merck’s Nantong plant is designed to produce drugs covered by China’s government-backed medical insurance system, which are mainly cheap medicines for common illnesses.

Merck and most other major multinationals have highlighted affordability in their China business strategy since 2016, responding to the government’s call to widen public access to medical treatment through lower drug prices.

This year’s investment surge follows moves in recent years by the French drug maker Sanofi S.A., Switzerland’s Novartis and AstraZeneca to set up plants in China. In June 2015, Pfizer, the world’s largest drugmaker, invested $95 million in its fourth China plant to produce popular over-the-counter drugs. The new plant, scheduled to start production in the first quarter of 2018, is expected to generate 2 billion yuan in annual revenue.

GlaxoSmithKline CEO Andrew Witty told Caixin that the company has started making its popular HIV drug Dolutegravir and hepatitis B treatment Viread in China. GlaxoSmithKline plans to invest more in China to produce more types of drugs, Witty said.

Changing strategy

China’s food and drug authority requires drug importers to conduct local clinical trials before entering the market. That usually takes five to eight years, much longer than in most other countries. To shorten the procedure while developing more products to meet Chinese demand, multinational drugmakers are expanding research and development in China.

To grow in China, multinationals must localize products starting at the R&D stage because of ethnic differences in health and health care, said an executive at a foreign pharmaceutical firm. For instance, diabetics in China are usually thinner than they are in the U.S., and the hepatitis B infection rate is higher in China than in Europe, where hepatitis C is more common, the executive said.

In June, Novartis announced a $1 billion investment in an R&D center in Shanghai, which is among the company’s top three R&D centers worldwide. The center will develop drugs for cancer and liver disease that are suitable for Chinese patients. Novartis said it plans to roll out 100 new products in China between 2014 and 2018 and expects a shorter application process for the locally developed products.

In March, GlaxoSmithKline announced plans to invest 187 million yuan over the next three years to set up a health care research center in Beijing, focusing on drugs for infectious diseases. GlaxoSmithKline has registered eight new drugs and 24 health products that were developed by its research facilities in Shanghai. The company said it plans to develop more than 20 new drugs and vaccines in China by 2020.

Contact reporter Han Wei (weihan@caixin.com)