Bloomberg News - Aug 5, 2011 The benefits of China's economic growth "haven't been shared equally" among rural dwellers, the Geneva-based World Health Organization said in an April report. The benefits of China's economic growth "haven't been shared equally" among rural dwellers, the Geneva-based World Health Organization said in an April report. Photographer: China Photos/Getty Images China's Health-Care Push May Curb Growth for Pfizer, Merck Chris Ratcliffe/Bloomberg
China's plans to expand efforts to make medicines cheaper for 700 million rural people have hurt companies such as Pfizer. China's plans to expand efforts to make medicines cheaper for 700 million rural people have hurt companies such as Pfizer. Photographer: China's efforts to make medicines cheaper for 700 million rural people have dragged its biggest health-care stocks down 26 percent this year. Plans to expand the program to wealthy cities may also hurt Pfizer Inc. (PFE) and Merck & Co. A new way to buy essential drugs being tested in Anhui province caused prices to fall by as much as 90 percent. The system, which encourages drugmakers to compete on price and quality for state contracts, may go national and be widened to include other medicines, according to lobbyists representing 38 foreign drugmakers in China. Foreign companies oppose that because they say it will force them to lower prices to compete with generic-drug makers. That may erode the profit earned from every prescription they sell in the world's fastest-growing pharmaceutical market, which was worth $41.1 billion last year, according to IMS Health Inc. "There is some consideration within the government to expand the Anhui tender system beyond the essential drugs list, and that would be an even worse situation for us," said Joseph Cho, who heads the Research and Development-Based Pharmaceutical Association Committee in Beijing. "We can understand if some poorer regions need to use this process. But for those regions with better finances, they should not be restricted by the government to just low-priced generics."
No. 3 Market Prescription drug sales in China have more than doubled since 2006, making it the world's third-largest market, according to Norwalk, Connecticut-based IMS Health. Wider health-insurance coverage and higher incomes have improved people's access to medical care, especially in cities including Shanghai and coastal provinces including Jiangsu and Guangdong. The government is trying to make medicines more affordable for everyone by encouraging competition among suppliers and favoring generics over brand-name treatments. Anhui, China's fourth-poorest province, started seeking bids from pharmaceutical companies in September, one of five provinces testing the system. Now, medicines on the government's essential list -- including treatments for heart disease and high blood pressure -- are 53 percent cheaper on average than the maximum retail price set by the government, said Xu Hengqiu, the local deputy director of health.
Stock Slump "We're guided by one principle: when drug prices are low, the common people benefit," Xu said. A seven-pill pack of a generic version of Merck's cholesterol-lowering drug Zocor has plunged to 2.45 yuan (38 cents) from about 25 yuan, and copies of Novartis AG (NOVN)'s Lopressor blood pressure medicine go for 4.75 yuan for 20 tablets, compared with 9.5 yuan. Shares of companies supplying products on the essential- drugs list have slumped. The MSCI China (MXCN)/Health Care Index is down 26 percent this year, making it the second-worst performer of 10 industry groups in China tracked by MSCI. Shineway Pharmaceutical Group, which sells traditional remedies, has lost half its market value on the Hong Kong exchange this year, making it the worst performer of 137 stocks on the MSCI ACWI/Health Care Index. The company, based in Hebei province, was beaten in two tenders earlier this year, said Eva Chun, a Hong Kong-based equities analyst at Kingsway Group, citing discussions with the company's management. Shineway, which earns a third of its revenue from remedies for fever and hepatitis, didn't respond to a request for comment on its sales.
Lot of Uncertainty"The policy changes have generated a lot of uncertainty," said Jason Siu, a health-care analyst with OSK (Asia) Securities Hong Kong Ltd. "The concern is that the price cuts will affect profits along the entire supply chain, from finished drugs to retail stores and drug distributors." China's central government maintains a list of 307 drugs that it deems necessary for state-run hospitals and clinics to stock. Those medicines typically generate a higher sales volume, though only account for about 10 percent of China's pharmaceutical market by value, said Du Jinsong, a health-care analyst with Credit Suisse AG in Hong Kong. The government has ordered 27 rounds of price cuts during the past decade, Du said. "Many companies had thought the essential drugs-list market would be very attractive, but are gradually moving away because the tender price is too low," Du said.
Important Task Credit Suisse describes the system as the "lowest-price- win Anhui model." It was introduced under Sun Zhigang, the former provincial vice-governor who now is director of the Office of Medical Reform, a unit of the policy-setting State Council that reports to Premier Wen Jiabao. The introduction of a new procurement system "has become an urgent and important task," and the State Council has requested that 22 provinces implement a tendering method modeled on Anhui's, Sun told the official Xinhua News Agency in June. Patients in the wealthier provinces of Jiangsu, Zhejiang and Guangdong already use foreign drugmakers' products, said Cho, who is also chairman of the Chinese unit of Astellas Pharma Inc. (4503), Japan's third-largest pharmaceutical company. "If the 'Anhui Model' is fully implemented throughout China, then even those patients would not be able to use our products," he said. Cho's group speaks for all its members on the tendering system, Xi Qing, a spokesman for Pfizer China in Shanghai, said in an e-mail.
Better Options In Guangdong, which neighbors Hong Kong, some drugmakers have threatened to boycott the tenders because of price competition, the Nanfang Metropolis News, part of the Chinese Communist Party-controlled Nanfang Daily Press Group, reported July 28, citing interviews with drug-company executives it didn't identify. "I might as well invest in funds or go buy a property -- anything is better than drugs these days," said Tang Changshou, who runs Yangcheng Pharmaceutical, a maker of generic medicines including the antibiotic cefixime and the diabetic treatment metformin. Tang's company has lost out in all the provincial tenders it has participated in, he said. After a meeting on May 24, China's six biggest pharmaceutical industry associations issued a statement urging the government to avoid focusing on price cuts.
WHO Critique Yet the measures are helping people like retired rice farmer Lin Hecai, who lives in a village at the foot of a mountain 80 kilometers (50 miles) outside Anqing, in Anhui province. Cheaper medication and a new insurance policy means he pays 10 yuan to see a doctor, compared with 30 yuan two years ago, he said. "Even for just small ailments -- flu and fever -- I can afford to see the doctor whenever I fall sick," the 64-year-old said as he waited for a consultation in the village clinic. The benefits of China's economic growth "haven't been shared equally" among rural dwellers like Lin, the Geneva-based World Health Organization said in an April report. Public-health needs should be addressed even at the expense of the pharmaceutical industry, said Xu, Anhui's deputy health director. "If there are drug companies that fail, we will let them fail," said Xu, a professor of rural medical reform at Anhui Medical University. "It's not our responsibility to help them survive."