China’s drug lords

Foreign pharmaceutical firms gain a victory in critical Shanghai market

China’s drug lords

A $50 billion market?

Big pharma’s growing presence in China is proving to be a bitter pill for local medicine-makers. Concern is rising among the fragmented incumbents that they will soon be ‘outmarketed’ by their cash-rich multinational rivals. If that happens, they’re warning officials, drugs will become too expensive for government insurance to afford adequate healthcare for China’s massive population.

The multinational giants won the latest skirmish. Last week they succeeded in convincing the Shanghai municipal government to delay publishing its ‘essential drugs list’. That gives them more time to lobby for foreign drugs to be put on the all-important document.

Government efforts to expand healthcare coverage for its 1.3 billion citizens have made it one of the fastest growing medical markets in the world.

The country currently spends just 4.6% of its GDP on healthcare (versus 16% in the US) – something policymakers are determined to change quickly. The idea is that bringing down people’s medical costs will help boost domestic demand. And to do that successfully, containing costs is key.

The market for drugs in China is expected to hit $50 billion next year – and experts say it will become the world’s second biggest drug market by 2015.

The vast majority of the country’s citizenry have their medical needs met at government-run hospitals using state-provided insurance. The prices of key medicines are set centrally in an effort to make China’s ‘medical dollar’ stretch as far as possible. (The first ‘national essential drugs list’ was published in August last year.)

And the sheer size of the China market means that officials have a serious amount of negotiating power. They have already cut the price of most drugs on the central list between 20-50% since it was introduced, and just last month slashed the price of more than 60 medicines by an average of 19%. (That number rose to about a third for Roche’s antibiotic Rocephin and Bristol-Myers’ blood pressure drug Capoten).

Those steps are expected to save the Ministry of Health hundreds of millions of dollars every year.

Right now, foreign firms have around 30% of the China market (though their share is thought to rise to 70% in top-tier hospitals). The country’s importance to these companies is only expected to grow.

Getting on the list goes a long way to accessing the China market (the government reimburses roughly 60% of the cost of medicines on it). Although the central list is already set, the foreign pharmaceutical companies have one last chance to lobby their way into the mass market by getting on the soon-to-be-published provincial additions.

Shanghai, home to 19 million people, is one of the more lucrative markets still deciding its additions to the list.

“It’s difficult to predict the results of the negotiations between foreign pharmaceutical companies and the Shanghai government,” an insider from the Shanghai Municipal Health Bureau told the Economic Observer, “but if they want to take part in and win the bidding, they may consider lowering their prices.”

“Until the list of suppliers is published, there is always a possibility for change,” Chen Yufei, the worried manager of a domestic medicine company told the magazine, “[the multinationals] are the best lobbyists… With their abundant financial resources, foreign companies [will leave] no place for Chinese-made medicine in the market.”

The struggle for China’s drug market is still far from resolved, but Shanghai is an important test case of the multinationals’ ability to expand their presence in the country. If negotiations are successful there, the likely prognosis for local suppliers will be grim indeed.

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