China's push for bulk medicine purchases a big no-no for pharmaceutical firms

Chinese drug stocks fell due to investor concerns on the average -52% drop in generic drug prices.

China’s efforts to make life-savings medications cheaper through a pilot program that urges 11 of its major cities including Beijing, Shanghai and Guangzhou to purchase medicines in bulk is raising red flags for domestic and pharmaceutical firms, according to a report by Fitch Solutions.

On average, these cities account for 30% of China’s total drug sales, the report revealed. “Since China’s greatest bargaining chip is the sheer volume of demand from its large population, the country has asked cities to combine drug procurement to procure the best prices from drugmakers,” Fitch Solutions said in its report.

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Drugmakers were invited in November to bid for contracts led by the State Medical Insurance Administration to supply 21 drugs ranging from allergy and high-blood pressure treatments to cholesterol and cancer medications.

“The intention is to award contracts to drugmakers that can sell the medicine at the lowest prices and at a consistently high quality, amongst other factors,” Fitch Solutions added. “As such, this bulk buying scheme would presumably acquire large amounts of drugs at lower costs.”

Unsurprisingly, both Chinese and multinational pharmaceutical companies opposed the plan, citing how the reliance on one supplier for each drug could potentially cause quality and supply issues in the future.

According to the report, the figures released from the tender process showed that costs for the listed drugs were cut by an average of 52% compared to those procured in 2017.

“For instance, costs for the lung cancer medicine gefitinib were reduced by 76% as compared to 2017,” Fitch Solutions highlighted. “Chia-tai Tianqing cut its price by 90% to win a contract for hepatitis B treatment entecavir, as a generic to Bristol-Myers Squibb’s baraclude.”

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As a result of China’s procurement changes, Chinese drug stocks plummeted on the back of investor concerns on the drop in generic drug prices. The report noted how drugmaker CSPC Pharmaceutical Group saw its revenues fall 13%, whilst companies such as Zhejiang Jingxin Pharmaceutical still experienced similar downtrends despite winning bids.

“Whilst domestic pharmaceuticals that rely on generics will bear the brunt of the price cuts, foreign drugmakers like Pfizer and Sanofi are also likely to see weaker demand for some of their medicines,” Fitch Solutions added.

Nevertheless, Fitch Solutions forecasts the Chinese generic drug market to increase from $76.72b (RMB518.48b) in 2017 to $124.4b (RMB840.7b) by 2022, which translates to a compound annual growth rate (CAGR) of 10.2% in local currency terms. Over the long term, generic drug sales may increase to $185.7b (RMB1.21t) by 2027.