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China’s Pharma Boom

By: Janus Henderson Investors
Harvest Exchange
August 24, 2018

China’s Pharma Boom

Ethan Lovell, portfolio manager of the Global Life Sciences strategy, discusses how China is becoming a fast-growing market for biopharmaceutical companies.

Key Takeaways

  • During the second quarter, global biopharmaceutical companies reported accelerating sales in China.
  • Already, China is the second largest pharmaceutical market in the world. Demand could rise as the government introduces reforms to improve the country’s health care system and as China’s aging population accumulates more wealth.
  • Such changes could lead to further growth for companies, especially those with innovative products that address high unmet medical needs in the country.

In looking at recent earnings reports for biopharmaceutical companies, one trend stands out: an explosive rise in sales in China. During the second quarter, UK-pharma giant AstraZeneca reported a 24% sales jump in China during the first half of the year. Merck & Co., one of the leading developers of immunotherapies, saw a 50% climb in the second quarter alone. And within Pfizer’s Essential Health business, operational sales rose 24% in China for the same period. Such growth is exceptional – and a trend that we believe could continue.

China Expands Health Care Access

For one, China’s swift economic growth is leading to an improved standard of living for much of the country’s aging population. This increased wealth has spurred demand for health care services and, consequently, government initiatives to expand access to affordable care. Last year, for example, Beijing updated the country’s National Reimbursement Drug List (NRDL), a group of therapies approved for reimbursement in the country’s government-run health insurance schemes (which cover nearly 100% of China’s population). It was the first update since 2009, and it resulted in 339 new medicines being added to the list, of which 40% are manufactured by non-Chinese companies.

Drug makers typically have to make significant price concessions in order to get a product added to the NRDL. But because 60% of the Chinese pharmaceutical market – the second largest in the world – is reimbursed through government insurance schemes, volumes can quickly make up for the lower price. AstraZeneca, for example, lowered the price of Iressa by more than 50% to get a place on the NRDL early last year. But in less than 12 months, the company reported that total revenues for the drug, a targeted anti-cancer therapy, had eclipsed prior levels.

Medicines listed on China’s National Reimbursement Drug List (NRDL) tend to enjoy faster market growth than drugs that are not.

Exhibit 1: With Government Support, Drug Sales Rise (By Disease Category)


Source: IQVIA, "New Drug Listing & Pricing Policies in China," Issue 8, 2018

New Growth for Drug Makers

Going forward, the government plans to update the NRDL with more frequency. In addition, regulators are speeding the review process of new therapies. So when Keytruda, an immuno-oncology drug from Merck, was approved in China earlier this year, the review took only five months, versus a more typical 18 to 24 months. And in recent years, China has started to participate in global clinical trials, as well as accept data of foreign patients when considering a drug for regulatory approval.

It all adds up to potentially faster sales growth for biopharmaceutical companies in China. The biggest risk is an economic slowdown in the country. Should China’s growth stall, the government could demand steeper price discounts or temporarily rein in the number of new drug approvals. But long term, Beijing has signaled its commitment to supporting health care spending. In 2011, biomedicine was named as one of seven strategic priorities for the country. And in 2016, the government rolled out Healthy China 2030, with goals that include reducing the population’s high morbidity for non-communicable diseases, such as diabetes. This focus could potentially mean greater demand for pharmaceuticals in China and, in turn, a new and significant source of growth for global biopharmaceutical companies.

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The health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.

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