Is Pfizer's established drugs' decline in China the ‘canary in the coalmine?’

Big Pharma has been able to count on China to jack up growth for the last several years, but in the second quarter one drugmaker—Pfizer's Upjohn unit—wasn't so fortunate.

Is that an ill omen for the rest of multinational pharma? One analyst is posing the question.

During the second quarter, Pfizer’s Upjohn established medicine business—now destined to merge with Mylan—plummeted 20% in China, mainly because of a volume-based procurement system under testing in 11 major Chinese cities.

The program rolled out in March, and Upjohn’s Q2 plunge dragged the New York pharma’s overall China sales growth to a mere 2%, a huge decline from the 20%-plus increases it's posted over the previous three quarters at least, Wolfe Research analyst Tim Anderson noted in a recent report to clients.

Is this the “canary in the coalmine?” he asked; after all, almost all companies have an “Upjohn” of their own.

Yes and no. It's true the so-called “4+7“ program, which centers on off-patent drugs, is a dual-threat: It offers up a big proportion of public hospitals’ prescriptions to the winning bidder in exchange for price cuts.

And Pfizer suffered on both counts. About 40% of Upjohn's Chinese business came from the 11 cities participating in the procurement pilot, Upjohn President Michael Goettler said during a July conference call about the Mylan marriage.

Two of its top sellers in emerging markets, cardiovascular therapies Lipitor and Norvasc, were hit hard after they lost the contracts to local generic makers. Lipitor’s ex-U.S. sales dropped 23% year-over-year to $377 million in Q2, according to a Pfizer quarterly filing.

And the problem wasn't just limited to losing a major chunk of business. As the low winning prices came out last December, drugmakers had to slash prices beyond those tenders to stay in the game. By the time the pilot program launched in mid-March, Pfizer had already reported pricing pressure on those meds in its Q1 securities filing.

RELATED: Pfizer's big split is finally here, thanks to a giant generics merger with Mylan

But Pfizer’s Q2 suffering looks like an outlier compared with its peers. AstraZeneca, which lost the Crestor tender but won the Iressa race, saw its Q2 China sales jump a whopping 44% at constant currencies, to $1.17 billion. Sanofi, whose heart drugs Plavix and Aprovel also lost in the bulk purchase scheme, enjoyed Q2 China sales growth of 17%, to €709 million ($787 million).

What did AstraZeneca and Sanofi have on their side? As Wolfe’s Anderson pointed out, mature products are not all created equally.

For example, AZ’s injectables (such as breast cancer drug Faslodex) and respiratory inhalers (such as Pulmicort) are hard to copy and therefore less likely than its other legacy meds to be included in any future procurement programs, Leon Wong, AstraZeneca's EVP in charge of China and the emerging markets, said on a conference call in July.

“Therefore, each company’s near-term growth prospects will be a function not only of its mix of on- and off-patent drugs but also the mix within off-patent drugs,” Anderson wrote in his note.

The stress is on “near-term,” probably into 2020. China has recently been preparing to expand the procurement project, with bidding results expected in October. According to local reports of a Thursday meeting the procurement office had with drugmakers, the extension will just cover the 25 drugs in the current “4+7” pilot; for six of the 31 drugs originally targeted, negotiations failed after the government couldn’t reach a price-cut deal with the manufacturers.

The difference is that this time, more cities across the country will join. The message from officials is clear: Don’t even think of bidding if you don’t offer prices below the “4+7” marks.

RELATED: Copycats wanted: Pfizer, AZ and more under threat as China solicits generics

Sanofi's already forecasting slower growth for the rest of 2019. While its blood thinner Plavix and hypertension med Aprovel both held their own in Q2, they'll slip in China later this year, Sanofi CEO Olivier Brandicourt told investors on the Q2 earnings call in July.

AstraZeneca's Wong also warned the company will not enjoy the same level of growth it has in the past—even more so as it faces National Drug Reimbursement List applications for its SGLT2 diabetes med Farxiga and PARP inhibitor Lynparza.

Such national insurance coverage talks have traditionally led to huge price cuts and, in turn, pressured near-term growth. But managed well, the expanded patient reach can translate into big sales leaps instead, as Roche has seen with its trio of cancer blockbusters. And despite those headwinds, AZ still expects its overall China business will grow at double-digit rates.

Anderson also predicted that Big Pharma’s situation in China won’t be a long-term negative, now that “innovative products are being reimbursed better in China.”

RELATED: China's driving sales growth ahead of the U.S. for Big Pharma. But can it last?

Focusing on new drugs over under-threat legacy brands is the direction almost all multinational pharmas are heading. Sanofi aims to submit more than 10 new products for approval by the end of 2020, Brandicourt said. Pfizer’s remaining biopharma business—without Upjohn—grew at 26% in Q2 and it'll file up to 19 new products in the next few years in China, CEO Albert Bourla has said.

That number for Novartis, which previously lost the Gleevec tender, is 50 by 2023, CEO Vas Narasimhan has said.

Upjohn will soon no longer be Pfizer’s problem and other Big Pharma firms have made similar disposals. Eli Lilly has offloaded some antibiotics brands and a manufacturing facility to Eddingpharm. GSK recently penned a deal to unload its Suzhou factory and rights to its older antiviral drug lamivudine to Fosun Pharma.

Meanwhile, Upjohn, AZ and Sanofi have all decided to target regions outside of China's metropolises for growth. “We see strong potential in China’s counties where we have a dedicated sales force that we can leverage to drive sales outside of these cities,” Brandicourt said during the Q2 conference call.