China’s aggressive campaign to bring down drug prices is leading to a “vicious cycle” and will prevent the emergence of a national pharmaceutical champion, said one of the country’s biggest drug makers.
In some of the strongest criticism yet over a new policy that is likely to save China tens of billions of dollars, but has roiled healthcare stocks and led to widespread company profit warnings, Stephen Tse, vice president of Sino Biopharmaceutical Ltd., said that the program will undermine local firms’ ability to invest and grow.
“If prices are kept low, you won’t see the rise of any big pharmas on the horizon,” said Tse, who is also spokesperson for China’s third-largest drug maker by market value. “It won’t work if you don’t have a high enough gross margin to support your research and development investment.”
The controversial policy has already caused the prices of 25 commonly used drugs — ranging from cholesterol treatments to chemotherapy — to drop more than 60% nationwide, and will expand. While the plan is to re-direct the cost savings towards covering top-of-the-line drugs and treatments, the program is rapidly eroding company profits, potentially hampering China’s goal of nurturing globally competitive companies in the scientific field.
Under the system, drug makers compete for tenders to supply generic drugs to public hospitals nationwide, under-cutting one another to secure supply contracts. Although China has softened the terms of the exercise to allow for three suppliers and not just one, both local and foreign drug manufacturers are feeling the pressure.
Sino Biopharma chose not to continue to bid down the price of its own drugs in the program after the first round, said Tse. In the first round of bidding last December, it dropped prices for its hepatitis B treatment entecavir by more than 90%, only to be undercut by peers in the second round which took place last month. It could have gone lower in the latest round of bidding, but stopped short.
“We shouldn’t lead the sector into a vicious cycle, where firms won’t be financially strong enough to buy equipment or invest in research and development,” Tse said. “We did it in the first round to heed the country’s call, but for the second round we have to take the future of the sector into consideration — if we had done it again, the negative impact would have been huge.”
The company, whose ambition is to become a global pharmaceutical champion like Pfizer Inc., sees revenue contribution from innovative drugs rising above 50% in the next five to 10 years, up from about 20% now. Tse also expects the company to release 1 to 2 innovative drugs annually from 2021; it has about 38 in clinical trials.
Sino Biopharmaceutical is the best performer on Hong Kong’s Hang Seng Index this year, with shares gaining 114%. Its strategy to disengage from the national price war seems to have been cheered by investors: its stock has risen 5.3% since the bidding exercise last month, while Fujian Cosunter Pharmaceutical Co. — one of the local drug makers who won the contract for entecavir — has dropped 5.4%.
Analyst estimates tracked by Bloomberg suggest 12% more upside for Sino Biopharmaceutical over the next 12 months, with more than three quarters of analysts giving it a buy rating. Macquarie Group analysts led by David Ng earlier this month lifted the stock to outperform from neutral, betting that sales of its new drugs should drive an annual 20% growth in its earnings per share over the next three years.
“It’s a reflection that investors trust that we are doing the right thing” by focusing on longer-term development rather than cutting prices to win the bids, said Tse.