China’s aggressive efforts to lower drug costs are unnerving some investors. Just consider AstraZeneca: The largest multinational pharma in China is projecting a mid-single-digit percentage decline in 2022 revenue from the country. But one group of analysts argue the good days of growth are not over yet.
Despite pricing headwinds, global biopharma companies can continue to enjoy robust growth in China, Jefferies’ analysts predicted in a Sunday note.
China’s branded drug market grew a significant 19% year over year in 2021 to $31 billion, according to Jefferies’ calculation. In the next few years, the Chinese sector could see a 12% compound annual growth rate to reach $85 billion in 2030, ranking as the third-largest market behind the U.S. and the five largest European economies combined, Jefferies estimates.
Questions over the sustainability of the Chinese drug market mainly come from the country’s national reimbursement drug list (NRDL), an aggressive price-cutting scheme that offers novel therapies national coverage. In the latest pricing negotiation round that wrapped up in December, 67 drugs entered the list for the first time at average discount of 61.7%. Existing drugs also took various price cuts to include expanded labels or simply for renewal.
The NRDL program did drive more aggressive price cuts, but access to innovative drugs remains relatively low in China, Jefferies noted. Only half of the new drugs approved in developed countries are available in China, “so there is a lot of runway left,” the analysts said.
Typically, a product's sales grows by 111% at median in the year following inclusion in the NRDL, the Jefferies team wrote. But growth can be much smaller—or even decline—after relisting.
Further, it’s worth noting that drugs are getting onto NRDL much faster these days, often in the year after an approval. For example, Innovent Biologics and Eli Lilly’s PD-1 inhibitor Tyvyt, which officially launched in March 2019, earned an NRDL spot in 2020 with a 64% price cut.
Under the NRDL program, huge revenue spikes after inclusion might be the result of an acceleration that would have otherwise taken much longer. And the lack of significant growth after NRDL renewal—namely, a while after the initial launch craze—invites questions about the NRDL’s impact on a drug’s long-term growth potential.
AstraZeneca serves as one example. With $6 billion in 2021 China sales, the British drugmaker is the largest foreign pharma in China. The company had previously enjoyed double-digit sales growth partly thanks to quick NRDL inclusion of its top product, EGFR lung cancer med Tagrisso. As Jefferies noted, Tagrisso sales jumped nearly 10 times after its initial inclusion on NRDL in 2019 for previously treated lung cancer despite a hefty 71% price cut.
But after its inclusion for the front-line treatment setting and renewal for the second-line indication in March 2021, the drug has lost its momentum—at least temporarily. Combine the Tagrisso slowdown with generic pressure for asthma drug Pulmicort, AZ posted a rare 9% revenue decline for its China business in the fourth quarter last year.
Still, after the NRDL expansion, Tagrisso’s volume growth has already been able to offset the price discount, Dave Fredrickson, AZ’s oncology chief told investors during a call in February. Unfortunately for AZ, revenue growth from Tagrisso and other NRDL-covered launches won’t be enough to compensate for generic competition to older products in China this year, executives have warned.
“The volume uptake really takes time,” Leon Wang, AZ’s China and emerging markets chief, said of the NRDL placement during the call. “In the next five years, I still believe China will be at least a single-digit growth case.”
On the bright side, China does appear to have more room for drugs in its budget. China’s healthcare expenditure relative to GDP was 7.1% in 2020, versus 19.7% for the U.S., Jefferies pointed out.
Outsides of concerns for off-patent drugs, Big Pharma executives have also shared their positive outlook for their China business on the novel drug side.
Novartis registered a 10% sales growth at constant currencies in China last year to $2.8 billion. The Swiss pharma is targeting over $4 billion in sales in China by 2025 as it reaps the benefit of NRDL listings for heart drug Entresto and anti-inflammatory biologic Cosentyx and introduces new therapies.
“The one thing I'll say about China is that, going forward, and giving the fact that the country is now so open to innovation, we are now thinking about China as we think about any other country,” Marie-France Tshudin, president of Novartis Pharmaceuticals, said during a conference call in February.