Multinational Pharmaceutical Companies Feel Cool in China

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The past decade can be considered a gold rush for multinational pharmaceutical manufacturers in China. But the latest investigation by Chinese officials into the pharmaceutical sector this week is no different from a cold wind for these companies.
The National Development and Reform Commission said it was investigating drug pricing at 60 pharmaceutical companies. These companies include the Chinese subsidiaries of six multinational groups, including Japan's Astellas (Astellas), the US's Merck (Merck) and the UK's GlaxoSmithKline (GlaxoSmithKline).
Local Chinese pharmaceutical industry executives stressed that the investigation was the latest in a series of audits launched by the NDRC. The NDRC is responsible for setting price caps for all patented and generic drugs covered by China's health insurance.
However, some people warned that this move may mean that the trend of drug price reduction in China will accelerate, and there will be a wider range and greater reduction in drug prices in the future.
A consultant to the pharmaceutical industry said: "We know that drug prices are being reviewed when the new health minister takes office. It was expected that such an investigation would come at some point. But this action has come earlier and broader than expected."
Citi (Citi) pointed out in an analysis report in January this year that since March 2011, the National Development and Reform Commission has lowered the prices of a variety of clinical drugs five times, with an average reduction of between 15% and 20%. Citi expects that higher-priced drugs and imported drugs are likely to be the focus of the NDRC next.
China's large aging population, rapid economic growth and the Chinese government's determination to improve medical and health services have made China an attractive market for Western companies before the growth rate of the rest of the world slowed down.
Official statistics show that drug sales in China totaled $71 billion billion in 2011. AstraZeneca (AstraZeneca) is one of the few pharmaceutical companies to list sales in China separately. The company's sales in China rose 20% to $1.5 billion in 2012. Emex Market Research (IMS Consulting) predicts that China will jump from the world's third largest drug market to the second largest drug market by 2020.
A number of drug companies-from Novo Nordisk and Novartis to GlaxoSmithKline-have invested in joint ventures in China for drug production and research. For all pharmaceutical companies, sales growth has been the driving force for business expansion. With the growth of the relatively affluent Chinese middle class, expensive innovative drugs to treat diseases such as cancer have found an attractive market in China; these drugs have to be paid for by patients themselves, and their prices in China are equal to or higher than those in Western markets.
However, the Chinese government is also expanding the coverage of medical insurance and enriching the types of medical services covered by medical insurance. China has been expanding its "essential drugs list", which contains medicines that are fully reimbursed by health insurance and many other medicines that are shared by the state and individuals.
The price ceiling for essential drugs is set by the NDRC and adjusted periodically. Pharmaceutical companies are also required to give further price discounts to local governments and individual hospitals in order to bring their drugs into the "health insurance drug catalogue" established locally.
If you want to enter the government-backed health insurance system and get higher sales, you have to accept lower sales prices. In addition, as in other markets, there is a growing tendency in China to use "health technology assessment" to determine whether a new drug is good value for money.
Angus Cole, deputy director of Deloitte (Deloitte) China, said: "The downward adjustment of drug prices is a global trend. Cole (Angus Cole) said:" In China, the feeling of drug companies is more obvious, sometimes drug price adjustment occurs very quickly. Drug price reduction is a trend and a necessity."
Amex stressed that last year's request for foreign drug companies to provide information on their drug prices in nine other countries is likely to be a prelude to the Chinese authorities to bring drug pricing in line with the level of other regions. Amex warned: "China's reference to drug pricing in other regions may lead to a 15% to 45% drop in sales revenue of multinational pharmaceutical companies-which will constitute a major blow to the global operating performance of multinational companies."