With Theravance's $1.3 million of VIBATIV sales in the U.S. in 1Q2015, VIBATIV is well on the way to break 2014 sales of $4.5 million. Who knows, in SciClone's hands the China sales of VIBATIV, once SciClone pays for whatever trials, regulatory process, etc., in a few years could top $2 million a year. That should compensate rather little for any price reductions on Zadaxin.
Here's Bloomberg's article this weekend. http://www.bloomberg.com/news/articles/2015-05-25/foreign-drugmakers-face-more-pressure-to-lower-prices-in-china
Pricing pressure being felt in more provinces. Vice minister for healthcare reform says, "The prices at which we now buy patented drugs and unique drugs are falsely high."
Now that's a vote of confidence!
China hospitals, and doctors depending on the funding of their departments and sections, have long relied on profits (the 15% markup for hospitals) from prescribing drugs to patients to cover their operating costs and personal incomes. This is why Zadaxin, an expensive medicine with little risk of adverse reaction by the patient, was the perfect prescription medicine. The more it's prescribed, the greater the profit to the hospital without risk of a bad result to account for. Sort of like the abuse of unnecessary procedures being bilked to insurance companies or whoever can pay in the US. That's all going away now. In a direct quote from the State Council's news release, "The current mechanism whereby doctors can increase personal and hospitals' income by prescribing more medicines must be abolished and efforts made to ensure services are properly priced." The Chinese authorities are very serious about reigning in health care costs for both the hospitals and the patients. With NO profit from Zadaxin, hospitals and physicians no longer have a financial incentive to prescribe it. In fact, they will now have pressure to ensure that the 70-80% cheaper generics are used. Furthermore, it seems that the price SciClone's sole importer will pay for Zadaxin is tied to what price Sinopharm receives from hospital sales. As province tenders, like the recent one in Zhejiang, cut the price to Sinopharm, Sinopharm cuts the price it pays to SciClone. Blobel says he "expects" to change this pricing arrangement, but after putting all the cards in Sinopharm's hand it is hard to see how he will get a higher price out of Sinopharm except with some more major concessions. None of this is good news for SciClone, and they have done a miserable job managing the situation which was evident and publicly discussed by experts like Bain & Company a year ago or more.
Today China's State Council announced that the 15% hospital profit margin on pharmaceuticals will be eliminated at 100 top hospitals now and for all hospitals nationwide by 2017. Blobel's evasive conference call answer that the price reduction in Zhejiang province is "a low double-digit number" is disturbing. Is it 12% or is it 30%? Must be bad if it gets billing in the very first paragraph of the earnings press release. Zhejiang is a rich and populous province (55 million people) bordering Shanghai. Why should we expect other provinces to give Zadaxin a better price? But don't worry. Blobel says the company "expects" to offset the price reduction with even more volume and changes in price arrangements with Sinopharm. I thought the reason Blobel gave Sinopharm exclusivity was for favorable pricing. I guess the price formula isn't so favorable any more. Since SciClone is not allowed to sell to any other importer until the exclusivity deal runs out at the end of 2015, why does Blobel "expect" that Sinopharm will give a higher price? The only legitimate bargaining chip SciClone has is to extend Sinopharm's exclusivity period at less than market prices and further erode SciClone value. On top of that, China's moves make the Angiomax deal dead in the water, except for several more millions the company is obligated to pay to The Medicines Company. Blobel and other officers picked a nice day to bail out more stock. Apparently the stock purchase program is to facilitate such sales.
Don Sellers set it up the right way. The problem is that repatriation of cash to the US entails a tax issue. As long as the funds are productively employed (dividends and stock repurchases don't cut it) for offshore business purposes, like acquiring assets for China (hopefully no more NovaMed disasters) then value can be built for shareholders. Investing in more generics like Angiomax is becoming a losing proposition in China. Experience has shown that management isn't up to the task of leading the company to greater value except milking the Seller's legacy product Zadaxin which will go dry with pricing regulations like mandated zero mark-ups on hospital formularies.
Essentially all of the China derived income is sheltered from US taxes by the company's Cayman structure. SciClone has a running tussle with the SEC and likely with the IRS about how the company's foreign subsidiary could send cash to the parent for things like $65 million for stock repurchases and not declare that a taxable remittance of income. The joke is SciClone's defense in a written response to the SEC, "The fact that this net offshore cash balance is significantly less than the undistributed earnings provides evidence of foreign reinvestment of those earnings in long-term assets outside of the United States, including the investment made in the acquisition of NovaMed in 2011." The $10 million wasted on Angiomax in 2014 and $20 million more in 2015 will be similar evidence of offshore investment. But using cash to pay dividends would be getting too cheeky even for SciClone. Imagine if all the big international firms who have huge overseas cash balances but can't repatriate them without incurring the tax liability simply used that cash to repurchase tons of their stock on the open market. Their repatriation problem disappears and if they ever needed more cash, they could always issue more stock. I guess these CEOs aren't as brilliant as SciClone's.
Zadaxin sales increase have pretty much stayed pace with the growth of the China pharmaceutical market except for the 2012 period of overloaded "sales" to the distributors warehouses. There have been too many screw-ups since Blobel began that the China market fortunately compensated for. In other words, it was really, really hard to mess up the opportunity in China but management frequently was doing that. Blobel continues to pursue the strategy of buying rights to branded generic products although major pharmaceutical companies have abandoned this approach as the Chinese drug price regulators are pulling the plug on the prices by actions such as prohibiting hospitals from marking up the prices of these drugs. Blobel shelled out $11 million in 2014 for the downpayment on two such drugs and, as mentioned in the conference call, will be paying about $20 million more as the next installment in 2015. The first of these drugs isn't expected to get CFDA approval until 2017 or 2018 and there already is a generic currently in the China marketplace. SciClone has had Aggrastat, a branded generic, since the NovaMed deal. But after 4 years its sales are only about $5 million. Shape of things to come.
When Blobel started with SciClone there was about 46 million shares outstanding. The company didn't raise a dime from any stock sales since then except from option exercises by management and board members. The company gave over 8 million shares (plus $25 million in cash) to the lucky sellers of NovaMed, but it covered this and then some by buying in over 11 million shares for more than $65 million over the past few years. As of March 4, 2015 there are currently over 50 million shares outstanding. So, yeah, who benefitted from the stock purchases? Not a single dime of that cash found its way to shareholders in the form of dividends and they suffer 9% dilution in their equity since Blobel began. To avoid additional dilution from this latest award to the big 3 it looks like the company will need to spend another $5 million on stock purchases. Sorry, again no dividends for shareholders.
is that DC Bead in China is approved only as an embolizing agent, NOT APPROVED to be loaded with and deliver chemotherapeutic drugs like doxorubicin. As just an artery blocker, DC Bead doesn't do anything more, and compared to some a lot less, than other currently marketed and much cheaper devices and products in China. That's why Blobel was so flat-footed when the 'approval' came, because SciClone wasn't prepared at all to market an expensive device for just TAE and not TACE. So Blobel now talks about a "pioneering" effort (as one of the posters said about the Feb 9 presentation) to get doctors to use the DC Bead. There will be a lot of resistance for any physician to risk performing unapproved chemotherapy on a patient. The doctor also would need the collaboration of highly trained hospital pharmacists who are needed to prepare the loading of toxic drug into the DC Beads for each procedure. After seven+ years in the registration process, with how many promises of 'next quarter', this is the best SciClone could get. As is, this product is a non-starter. Of course, promoting a drug or device for 'off label' use is illegal in China as it is in the U.S. and we have been assured frequently by Friedhelm "Zero Tolerance" Blobel that SciClone rigorously follows all applicable laws.
And the government writes the rules on pricing. They are removing the favored pricing for 'originator' generic products. SciClone will have to make a lot in increased volume to try to compensate for its reduced margin. At some point, with significantly higher European production costs, import fees, etc., it all becomes "uneconomic" as warned by Bain and Company and others. Got to find a new strategy and much more innovative (non-generic) products. Angiomax will enter China already facing generic competition. Its pricing will already start badly for SciClone.
What's SciClone's plan to handle the loss of product 'originator' price protection for branded generics such as Zadaxin? Merck is getting out of the business. Merck ($MRK) is bowing out of its Chinese joint venture with Simcere Pharmaceutical. Merck forged the partnership in 2011 as a way to build up in the fast-growing market, with a focus on branded generic drugs.
Merck will hand over control to Simcere, a company spokeswoman told FiercePharma, as part of a shift in strategy at the joint venture. The venture, known as SMSD, "will now focus on local innovative and mature products, serving the local market," she said in an email. "The operation will be managed by Simcere Pharmaceutical Group in this new capacity."
The changes are designed to "better meet challenges posed by the rapidly changing external environment," the spokeswoman said.
Under the 2011 deal, each company handed over pharma assets to the JV, with Merck holding a majority 51% stake and Simcere claiming the rest. Among the drugs Merck contributed were its diabetes blockbuster Januvia, its now-off-patent statin drug Zocor and cardio med Cozaar.
Dividends don't help those who don't own the stock, such as management and board directors that hold options. Stock buybacks raise the value per share by simply decreasing number of shares outstanding. That improves the value of management's and board's options. Dividends only go to actual investors. Safe to always figure management and board will do what's in their personal best interest first.
The Dec 18 announcement of licensing Angiomax for China runs into the same generic pricing problem that the company is facing with Zadaxin - prices will be compressed to "uneconomical" for branded products being sold at a premium to generics in China. Angiomax (bivalirudin) is already available as a generic in China. Salubris sponsored an important trial in China, the BRIGHT trial, and reported results at the Transcatheter Cardiovascular Therapeutics (TCT) 2014 in Washington DC in September. Clearly Salubris is no slouch and is already in the market. The presenter at TCT was Dr. Yaling Han of General Hospital of Shenyang Military region. As reported by Medscape, "asked by Heartwire about the cost differential in China, Han agreed that the cost of a bivalirudin strategy would be "much more" than a heparin-monotherapy strategy, but would not be as expensive as it is in countries where bivalirudin is sold as Angiomax (the Medicines Company). In China, bivalirudin is sold by Salubris, which was also a cosponsor of the trial." Medicines Company has faced Angiomax patent challenges in the U.S. and has made concessions. In Europe, bivalirudin is sold as a generic and Angiomax sales in Europe are inconsequential. SciClone is bound to face economic problems with Angiomax in China with Salubris and probably other generic competition and with regulators pushing down prices. SciClone will suffer because of cost disadvantage of buying the product at Western manufacturing costs, import duties, license payments and royalties to Medicines Company. An indicator of success is SciClone's insignificant (maybe $1 million per quarter) in selling Aggrastat (Medicines Company 10-K says Angiomax competes with Aggrastat for the same hospital dollars for cardio treatment). The Angiomax deal isn't anywhere as bad as the NovaMed deal that created SciClone's cardiovascular "franchise", but it is just more of the same ineffective, wasteful pursuit of an obsolete strategy.
That's what they have to do. It will take time and money, a lot more than the $650K that SciClone spent on R&D in the third quarter. They also will have to be a lot smarter. The $100 million and 2-3 years wasted on NovoMed were not an encouraging start of a transition.
ChinaBio Today is very reputable. The loss of preferential pricing for 'originator' drugs like Zadaxin has been on the horizon for several months. Here's another source, Bain & Company, a top-tier international consulting firm: "The Chinese government is instituting a zero drug mark-up policy in hospitals across the country, and its vigorous response to ethical compliance lapses is accelerating reforms that will affect drug sales and pricing.
The net impact for MNCs is that the business model based on a large and expensive sales force, marketing lucrative originator drugs directly to hospitals and doctors, will cease to be economical before the decade is out, Bain's research predicts.
"Pharma profit pools in China will be rapidly drying up," said Philip Leung, a partner in Bain's Shanghai office who leads the firm's China Healthcare Practice."
The Bain report was issued back in June. The rate of profitability decline to "uneconomical" depends on how fast the zero mark-up policy is implemented. Apparently from the ChinaBio Today report, it's going to happen sooner rather than later.
publication date: Dec 24, 2014
Starting next month, China is expected to change the way it sets drug prices, a change that could have a profoundly negative effect on the China revenues of multinational drug companies. For years, MNCs have enjoyed premium pricing in China on drugs that have lost their patent protection elsewhere in the world. The class of preferred generics constitute as much as 70% of MNC drug revenues in China. But in January, China will most likely remove the price differential of these drugs, forcing MNCs to price these drugs at the same level as comparable China generics. More details....
- See more at: http://www.chinabiotoday.com/articles/20141225#sthash.FFNjYVF5.dpuf
Why not offer it to the appropriate GMO at cost for those at obvious risk in Liberia? Maybe offer to do good rather than just do good PR.