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China’s pharmaceutic industry after ‘Dying to Survive’

Jean Wu

Consultant

Health 16.07.2018 / 15:17

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The sudden success of 'Dying to Survive' has brought in 2 billion yuan box revenue. What changes will it bring to China's drug industry? What strategic reviews foreign companies need to have?

Starting from June 30, the Chinese movie “Dying to Survive” became THE social topic of China. The movie is based on a true story of how Chinese leukaemia patients struggle to buy generic drugs from India, because they couldn’t afford patented drugs. Starring Xu Zheng, a famous Chinese director and actor, the movie got a rating of 8.9/10 on Chinese review website Douban – the fourth highest score for a domestically made movie. By July 13, the 116-minute movie has collected nearly 2 billion yuan (US$300 million) box office revenue within eight days.

It has dominated the social conversation not only because of its roller-coaster emotional ride from comedy in the first half to tragedy in the second half, but also because the affordability issue of Chinese patients and their families – it has never been so clearly presented to the public before the movie.

The impact of the movie is so huge that it will definitely contribute to the changes of China’s pharmaceutical industry that are already happening.

Take generic drug sector as an example. With Indian generic drug being at the heart of the movie, many people can’t help wondering how about Chinese generic drugs.

There are three types of drugs on the market:

1. Innovative patented drugs that are invented by a pharmaceutical company and protected under its patent for 20 years. It can be produced only by the patent-holding company;

2. Original drugs whose patents have expired but still produced by the original patent-holding company;

3. Generic drugs that have the same active chemical substance and therapeutic effect as the patented drugs whose patents have expired, and are produced by pharmaceutical companies other than the patent holders.

China has surpassed Japan to become the world’s second largest drug market only after the United States. Generic drugs account for 65% of total China drug sales. Among the 170,000 Drug Approval Numbers and Import Drug Licenses, more than 95% are generic drugs.

However, compared with western countries, Japan or India, China hasn’t had a sophisticated quality standard and regulatory scheme to oversee the generic drug sector until recently. This meant that many generics were poor in quality and didn’t have exactly the same effect as the brand-name drugs. Also, the homogenization is serious for most generic drugs in China. In some extreme cases, one low-level generic drug has hundreds of Drug Approval Numbers and can be made by hundreds of pharmaceutical manufacturers. This practice has significantly driven down profit margins of every drug maker involved. Without enough profits, these pharmaceutical companies cannot reinvest into R&D or upgrade their manufacturing capacities.

Quality Consistency Evaluation for Generic Drugs will reshuffle the industry

The Chinese government has begun to correct the course in the sector by launching the Quality Consistency Evaluation for Generic Drugs process. By May 22, 2018, four batches of 41 varieties of drugs have passed the evaluation. Now these drugs can market themselves with the blue consistent logo in their marketing materials, packages and drug label. This will help support the value of these generic drugs and build brand advantages of these drug makers. (See logo picture on top of the web page)

However, the cost of generic drug R&D and evaluation is very high: it will cost 5 million yuan on average. For some anti-cancer drugs and drugs with special delivery routes, the cost could surpass 10 million yuan. For most Chinese generic drug companies, it is an attempt too expensive to afford.

The Quality Consistency Evaluation for Generic Drugs process will accelerate the upgrading and merger of Chinese pharmaceutical industry. Low-level and small scale generic drug makers and distributors will be driven out of business. The market landscape of China will evolve to become more similar to that in the developed markets: leading pharmaceutical companies will be able to earn high profits from patented drugs, and reinvest into the next round of R&D for the next cash cow. After the patent expired, generic drugs will quickly occupy the market by selling at much lower prices. It will result in much higher volume of prescriptions, but given its lower cost, the total drug spending will go down. Though generic drugs carry much lower profit margins, in developed countries, this sector is dominated by fewer but large scale generic drug companies, so they can still remain profitable.

In 2016, 11% prescriptions in United States (500 million) were filled with branded drugs (including innovative patented drugs and original drugs), according to Generic Drug Access & Savings in the United States, Association for Accessible Medicine. However, in dollar terms, branded drugs accounted for 74% (US$333.9 billion) of total spending.

Challenges for multinational pharmaceutical companies

For foreign pharmaceutical companies, after nearly 40 years of fast growth since China opened up to the world in 1978, many advantages are disappearing or being eroded, such as the inevitable arrival of “patent cliff” and increasing competition from both domestic and international competitors.

At the same time, the growing pressure of lowering drug price from the government and from the competition of Chinese generic drug makers is calling for multinational companies to review their Chinese strategies.

But, there are also positive changes. Even though they have to cut drug prices to be included in National Drug Reimbursement List (NDRL), given the large patient population base in China, the inclusion will significantly increase the sales volume of their drugs. In fact, the net result will be growth in sales.

Since 2017, Chinese government has accelerated the approval of imported drugs. In 2017, the average time for an imported anti-cancer drugs in China was 111 days, 309 days shorter than in 2014. In the same year, 19 imported anti-cancer drugs were approved, compared with only five in 2014.

For some drugs, the government has also begun to acknowledge clinical trial data in other countries. This will shorten the time-to-market period by another one to two years. The cancellation of on-shore check for chemical drugs will shave another two to three months off the approval procedure.

Furthermore, starting from May 1, China has cancelled all customs tariff for anti-cancer drugs. In addition, China has also cut import value-added tax on imported anti-cancer drugs to 3%. Combined, the two moves will lower the cost of imported drugs by 20%.

Facing this new set of challenges and opportunities, it is probably the right time for foreign pharmaceutical companies to rethink their strategies in China.

From the product portfolio perspective, they might need to rethink:

* New drugs that are now suitable for Chinese market;

* Trend of epidemiology and disease diagnosis level in China;

* Therapeutic advantages of new drugs as well as their market potential and size;

* Understanding the new imported drug approval procedure;

* Understanding the new drug R&D progress in China;

* Competitive landscape of the category/disease/drug.

From the investment perspective, they might need to think:

* Whether to split or sell non-core business units;

* Whether to work closer with Chinese partners in drug sales and distribution channels;

* Revisit the resource allocation across its R&D, market access, medical team, marketing and sales departments in China.

Source: Kantar Health

Editor's notes

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