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New Healthcare Reform in a New Era Challenges for Multinational Pharmaceutical Companies and Corresponding Countermeasures to Be Taken February 2018

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New Healthcare Reform in a New Era Challenges for Multinational Pharmaceutical Companies and Corresponding Countermeasures to Be Taken February 2018 New Healthcare Reform in a New Era Challenges for Multinational Pharmaceutical Companies and Corresponding Countermeasures to be Taken February 2018 跨国药企的挑战与应对 Growth of MPCs’ sales in China has slowed down 4 Brand-Name Drugs have lost the advantage of high premium 6 “Trade price for market” negotiations have failed to 7 achieve desired results Looming trend towards replacement of imported drugs 9 with home-made drugs Operating pressure pushes pharmaceutical companies to 10 adjust their business arrangements A strategic transition has become essential 12 Conclusion 18 02 New Healthcare Reform in a New Era Introduction The pharmaceutical industry, is considered by China's 13th Five Year Plan as a pillar industry that will fuel economic growth in the future, and is expected to maintain medium to high growth rates due to the increasing medical demand. At the same time, with a slower growing domestic economy and deep reforms into China's social protection system, Beijing has been focused on medical cost control through a policy mix that includes tendering and medical insurance, encouraging the usage of cheaper domestically- produced drugs over higher priced imported ones. As a result, multinational pharmaceutical companies (MPCs) will face a more challenging environment going forward, as described in greater detail hereafter. 3 New Healthcare Reform in a New Era Growth of MPCs’ sales in China has slowed down MPCs have experienced a less robust more than 100 beds) grew at the rate only three MPCs performed better sales growth in China. According to of 8.5% in 2016, while the growth than the average growth rate of data from QuintilesIMS, the total sales rates in 2012 and 2013 were 11.5% all the domestic and multinational volume of MPCs from hospitals (with and 12.2% respectively. Furthermore, companies (8.1%) in 2016. Pharmaceutical sales in Chinese hospital market and top 20 players in 2016 (RMB, billion) (%) Average = 8.1% 600 16 Pfizer RMB 17.2 bn 530 Yangtze River 14.0 491 14 AstraZeneca 500 467 12.2 Qilu 419 12 SihuanPharm 400 11.5 10 Fosun Group 11.5 8.5 Heng Rui 300 8.0 8 Sanofi 5.1 Kelun 6 200 167 Chiatai Tianqing 132 148 154 4.5 4 Bayer 100 Shanghai Pharma 2 Novartis MPC 0 0 Roche Domestic company 2013 2014 2015 2016 SinoPharm Growth in 2016 Merck Sales of domestic company CSPC Sales of MPC Buchang Pharma Novo Nordisk Sales growth of domestic company (right axis) Reyoung RMB 6 bn Sales growth of MPC (right axis) Source: QuintilesIMS, Deloitte Research The decreasing growth rate of of GDP, with a growth rate exceeding adopting a series of policies to control MPCs’ sales is closely related to the one of the economy. The rapidly drug prices, reducing hospitals' China’s healthcare reform focused rising health expenditure has put reliance on drug sales as well as on cost control. Currently, China’s pressure on the healthcare insurance imposing more rigorous compliance basic healthcare insurance system fund, resulting in a policy focus of the requirements on the entire healthcare covers more than 95% of the total current healthcare reform on cost industry. population. Furthermore, China’s control. The priority measures taken health expenditure represents 5.9% by the Chinese government include: 4 New Healthcare Reform in a New Era 5 New Healthcare Reform in a New Era Rapidly rising health expenditure has put pressure on healthcare insurance fund The growth rate of health expenditure Increasing income and expenditure of has exceeded the one of GDP basic healthcare insurance fund in urban areas （%） （%） （%）（%） 40.00 40.00 30.00 30.00 35.00 35.00 25.00 25.00 30.00 30.00 20.00 20.00 25.00 25.00 20.00 20.00 15.00 15.00 15.00 15.00 10.00 10.00 10.00 10.00 5.00 5.00 5.00 5.00 0.00 0.00 0.00 0.00 2006 20072006200820072009200820102009201120102012201120132012201420132015201420162015 2016 Health HealthExpenditure Expenditure Growth Growth Rate RateGDP GrowthGDP Growth Rate Rate IncomeIncomeExpenditureExpenditure Data: National Bureau of Statistics, National Health and Family Planning Commission, Deloitte Analysis Brand-Name Drugs have lost the advantage of high premium MPCs’ profits are mainly generated by a negotiated price was too low, that have passed the evaluation can their brand-name drugs (i.e. imported pharmaceutical companies would theoretically take part in the bidding drugs whose patent protection periods in be forced to abandon the bidding in process alongside brand-name drugs, many cases have actually expired), which order to secure their bids in other resulting in further downside pressure are being sold at premium prices. The provinces. In 2015, during Hunan’s on brand-name drugs’ profit margins. Chinese government introduced several measures, trying to reduce drug prices centralized procurement for drugs, and resulting in downward pressure on the overall bid price dropped Over the past ten years, brand- brand-name drugs’ profit margins. significantly, achieving a maximum name drugs experienced rapid price reduction of 50% after two growth, partly owing to a favorable In the second half of 2015, increased bidding rounds and consequently government policy. However, pressure on the “price ceiling” at the forcing Bayer, AstraZeneca and other decreasing drug prices and strict bidding stage, forced most MPCs to MPCs to abandon their bids. regulations will make it difficult for substantially lower their prices. At the brand-name drugs to maintain the same time, since most provincial biddings Moreover, the government has high premium – requiring a change referred to the national minimum- launched an evaluation of generic of MPCs’ traditional, brand oriented winning bid, companies hesitated drugs’ consistency. Generic drugs business model. to adopt low-price strategies. If 6 New Healthcare Reform in a New Era “Trade price for market” negotiations have failed to achieve desired results In addition to a centralized However, during the implementation negotiations, it is up to the Ministry of procurement process, the process, achieving a “trade price for Human Resources and Social Security government has organized national market” turned out to be easier said to decide if the drugs can be included price negotiations with regard to than done. As of December 23, 2016, in the healthcare insurance system. certain brand-name drugs. In May only 23 provinces had included the Furthermore, the fundraising capacity 2016, the National Health and Family negotiated drugs in the coverage of varies from province to province. Planning Commission announced the the healthcare insurance system. However, for MPCs to accept a results of the first series of national Different management structures considerable cut in their profit margin, drug price negotiations, resulting into over the healthcare insurance system an inclusion of their negotiated drugs prices reduction for products such make it difficult to achieve agreement in the healthcare insurance system as Tenofovir Disoproxil, Ekotinib and over drug price negotiations is key, allowing an increase in sales Gefitinib (see graph) and health insurance. While the that can potentially compensate the National Health and Family Planning effects of the price reduction. Commission leads the drug price Results of National Drug Price Negotiations in 2015 RMB 6000 5000 4000 55% 3000 54% 2000 1000 67% 0 Tenofovir Disoproxil Ekotinib Gefitinib (GlaxoSmithKline) (Betta Pharmaceuticals) (AstraZeneca) Before Negotiation After Negotiation Data: National Health and Family Planning Commission, Deloitte Analysis 7 New Healthcare Reform in a New Era 8 New Healthcare Reform in a New Era On the other hand, the scope of the implemented reform of the payment method, i.e. payment according to DRGs (Diagnosis Related Groups), is expanding. The payment according to DRGs, as a method of payment in advance, is more efficient in controlling healthcare insurance costs –compared to the original Looming trend method of payment in arrears, such as payment according to projects. This new payment method will effectively towards replacement restrain hospitals from prescribing more expensive medicine, thus encouraging medical institutions to of imported drugs use domestic products with similar curative effects but lower prices. with home-made All these abovementioned measures are likely to restrict hospitals’ use of expensive brand-name drugs and drugs drive doctors to domestic generic drugs that are more cost-effective. However, price considerations Against the background of stricter are not the only matter related to cost controls, many regions are generic drugs, since assuring drug encouraging the use of less expensive quality is crucial. Therefore, the domestically produced generic drugs Chinese government is taking multi- over imported brand-name and pronged approaches to enhance generic drugs. the competitiveness of domestic pharmaceutical companies as well as Furthermore, two major measures to improve the quality of domestically were implemented to reduce hospital produced generic drugs by adopting prescriptions of expensive brand- consistency evaluation and a new name medicine, which had resulted edition of GMP (Good Manufacturing from a malfunctioning incentive Practice). Thus, the quality difference mechanism for medical institutions. In between products of domestic May 2015, the Government published pharmaceutical companies and those the “Guiding Opinions on Urban Public of MPCs will gradually be reduced. Hospital Comprehensive Reform Pilot”, with the aim to lower the percentage of medicine sales in revenues of pilot public city-level hospitals to around 30% by 2017. This measure will have a significant impact on sales of imported drugs that are sold at premium prices. 9 New Healthcare Reform in a New Era Operating pressure pushes pharmaceutical companies to adjust their business arrangements The main focus of the healthcare has also declined. Due to the high Bristol-Myers Squibb – under its reform is price reduction. Therefore, cost structure of MPCs, keeping all mature product life cycle management MPCs are facing a challenging low-profit projects is not suitable strategy – has successively divested environment, potentially slowing down anymore.
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