Pharma faces 'challenging and prolonged' reforms in China, with pricing power at risk

Big Pharma has already seen sales in China slow, thanks in part to stepped-up competition from local drugmakers. Healthcare reform there is also taking its toll.

But Fitch Ratings says pharma's troubles in China are only beginning.

In a report released Monday, Fitch says that China's moves to exclude drug sales from public hospitals' profit structure "will be a challenging and prolonged process." Currently, China's public hospitals rely on profits from drug sales to compensate for the cost of providing medical services at low prices. These hospitals account for about 80% of drug sales in the country.

And while the near-term impact on sales is "minimal," the agency said, "over the long term … pricing power could be at risk if public hospitals push for bigger rebates … to compensate for lower profits from drug sales." The Fitch report focuses on domestic drugmakers' operations, but multinationals are likely to face similar issues.

The reform plan presents a multipronged threat to drugmakers, Fitch points out. Right now, bigger hospitals typically are allowed to mark up drug prices by 15%. That gives hospitals an incentive to use higher-priced drugs; the bigger the price, the bigger the benefit off that 15%.

After the reforms, hospitals may pressure drugmakers for bigger rebates to be included in their procurement lists, Fitch posits.

When multinational drugmakers reported their China sales for the third quarter, most saw a slowdown in growth, and many said they expected that slowdown to continue as the government rolls out its reforms and works to keep a lid on pricing. The domestic pharma industry has also been stepping up its game, snatching market share in diabetes, for one, with their lower-cost insulin treatments. One bright spot, however, is the Chinese government's promise to speed up new drug approvals; drugmakers see marketing clearance for newer meds as the route back to healthy growth there.

In any case, it's unlikely that big drugmakers would bail out of China now, even with a slowdown. Novartis ($NVS) CEO Joe Jimenez recently said that Novartis plans to "live through the volatility" in China, despite a growth rate in the country that has sunk to the mid-single digits.

- see the Fitch report from Reuters

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