China Healthcare: A Blank Slate

The business environment in China has changed dramatically over the past two years as the government prioritized the increased availability of innovative medicines. This process started in 2016 with national price negotiations focused on the addition of dozens of products available outside China on provincial reimbursement lists in exchange for sharp price cuts. The central government conducted the negotiations and the provinces, which are notoriously slow, actually followed through swiftly. Last year’s update of the National Drug Reimbursement List, the first in nine years, effectively modernized the list by adding numerous monoclonal antibodies and other drugs that, again, have been widely available elsewhere. Further, a revamping of the drug approval process; a multi-year crackdown on giving “hongbau” to physicians; the removal of markups on hospitals’ pharmaceutical revenues; and restrictions on the use of drugs with questionable efficacy all have contributed to changing the pharmaceutical market’s supply-demand dynamics.

Historical Data Probably Understates the Market Opportunities

Historical sales data, which are of questionable reliability, are now even less relevant in the wake of these changes. Prescribing decisions reflected distorted incentives and the lack of good therapeutic alternatives. The removal of these incentives and availability of newer treatments will more closely align the Chinese biopharma market with the rest of the world, albeit with “Chinese characteristics”. In addition, the product launch process for innovative drugs could accelerate sharply. Previously, obtaining reimbursement required going through a multi-year process of bidding for a spot on each province’s reimbursement list. Now there are signs that the launch curves for innovative drugs could be much steeper compared to those of several years ago.

Several Case Studies Confirm That the Landscape is Changing

We highlight the experience of four products to illustrate the magnitude of these changes: 

FiercePharma recently published a story about Roche’s cancer treatment Herceptin in China that caught our attention. The company received approval in May from the National Drug Administration of China (CNDA) to move manufacturing to a site with more capacity (amount and location undisclosed) because of reports of drug shortages. Last year the government added Roche’s Herceptin, Avastin, Rituxan, and Tarceva to the National Drug Reimbursement List (NRDL) in exchange for price cuts of 50-70% (66% in Herceptin’s case). This change moved these products from China’s “cash pay” market to the mass market where volume growth can potentially offset the price reductions. The “upside surprise” in demand suggests that Roche made a good business decision with Herceptin, and possibly with the other three.

AstraZeneca’s Iressa also went on the NRDL last year after participating in the national negotiation in 2016. Revenue in 2017 was $144 million, a 28% increase, after a 50%+ price cut (resulting in a 10% decline in revenue for 2016). Iressa’s sales have increased further in Q1:2018 to $44 million (+21%), a $176MM annual run rate compared to 2016 revenue of $160 million.

AstraZeneca’s Tagrisso was approved in China in March 2017 as the first AstraZeneca medicine under the China FDA’s Priority Review pathway. The product generated sales of $23 million in H1:2017 (actually three months) “with a better-than-expected number of patients initiating treatment”. China has a relatively high prevalence of patients with an EGFR T790M mutation, which is spurring demand. Sales in Q3:2017 increased to $30 million. AZN hasn’t published subsequent China-specific data, but the implied annualized run rate of $100MM+ several months post-launch is very impressive.

AstraZeneca and FibroGen’s roxadustat for anemia in chronic kidney disease has received priority review from CNDA. Most notably, if approved (expected later this year), China will be the first country in the world to do so, marking a complete reversal from the past.

Implications: Success Draws Capital and Creates New Opportunities

The investment implications of these changes are significant. The companies mentioned here are multi-nationals, but Chinese companies with innovative products will reap the rewards too. Trade-offs between price and access remain, so focusing exclusively on the “cash market” will be more appealing in some cases. These success stories help to “de-risk” investments in China’s biopharma sector by confirming that the policy changes are real. With the Stock Exchange of Hong Kong opening a pathway for pre-revenue biotechnology companies to list, the range of investment options (both China-focused companies and globally-ambitious companies) should increase significantly.

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