SHANGHAI - While Beijing is hosting China's National People's Congress this week to discuss and design its next Five-Year Plan, China's powerful National Development and Reform Commission announced another round of price cuts on antibiotics and cardiovascular drugs with an average price reduction of 21%, less than the rumored 30-40% cuts, but still a blow to Big Pharma.

The price cuts will go into effect March 28 and impact 35 drugs on China's Essential Drug List and 127 on the National Drug Reimbursement List with more than 1,300 dosages/formulations in total. With the cuts, NDRC estimates it can reduce public medical expense by RMB 10 billion ($1.5 billion) annually.

The latest round of cuts impacts two of the largest therapy fields in China; anti-infectives, alimentary tract/metabolism and cardiovascular were the top three therapy areas in China in terms of sales for 2009, according to market research firm IMS Health (Also see "Expansion Into China's Lower-tier Cities Could Be Growth Driver For Big Pharma" - Scrip, 24 February, 2011.).

Higher-priced drugs (based on daily cost) will suffer the most significant price cuts in this round of adjustments, while low-cost drugs will see little or no changes. Innovative drugs will see a modest price reduction to narrow the gap between "preferential pricing" for innovative products and reference pricing on generics, NDRC said in a March 7 notice.

"Drug price is not the only tool to reduce medical expenses," Alex Zuo, spokesman for the R&D-board Pharmaceutical Association Committee (RDPAC), told PharmAsia News.

The Chinese government could explore more ways to reduce medical expenses such as improving the medical insurance system, reducing patient payments, increasing government investment and promoting rational usage of drugs, according to Zuo.

In addition, the spokesman noted that costs have been increasing in China with rising labor and material costs, making a price reduction even harder to swallow.

RDPAC, which represents Big Pharma in China, called for a favorable pricing policy to encourage innovation and improve drug quality.

However, despite the trade group's position, many analysts predict that Chinese price cuts might actually be beneficial in the short run, with companies making up in volume what they will lose in price (Also see "Are Chinese Price Cut Fears Overstated? Volume Likely To Drive Pharma Industry Growth, Analysts Say" - Scrip, 23 December, 2010.).

And in general, analysts almost seemed relieved about this latest round of cuts, which had been anticipated and were not, on average, as steep as feared.

MNCs Biggest Victim Of Cuts

But RDPAC's Zuo noted that it has been only three months since NDRC's last round of price cuts, which involved several products with large sales volumes that "will have a great impact on companies."

In December, NDRC for the first time cut prices by an average of 19% on certain drugs with independent pricing power due to higher production quality. The cuts, which also focused on cardiovascular drugs and antibiotics, impacted multinational companies more than local manufacturers, with some companies like Bristol-Myers Squibb and Roche seeing price cuts of 30% and higher (Also see "China's NDRC Releases First Set Of Price Cuts; MNCs See Deepest Cuts As Expected" - Scrip, 1 December, 2010.).

At the time, RDPAC suggested that a more gradual price adjustment with more grace time was needed, and better communication to ensure the industry understood the policies and how they would be implemented.

In the latest round of price cuts announced this week, Pfizer Inc. (combined with Wyeth) took the biggest hit, with 17 products seeing prices slashed. Pfizer's leading products in China, cholesterol drug Lipitor (atorvastatin) and antibiotic Sulperazon (cefoperazone) are both on the cut list. For example, seven tablets of 10 mg Lipitor selling at around RMB 78 suffered a 30% cut in price to RMB 53.9.

Lipitor is Pfizer's top-selling product in China with annual sales of RMB 964 million and Sulperazon, with RMB 747 million in sales, is Pfizer's third best selling product. Together the two drugs accounted for one-fourth of the company's RMB 6.66 billion hospital sales in 2010, according to IMS.

Other well-known brands seeing a price cut this round include Roche's Tamiflu (oseltamivir) and Merck & Co.'s Cozaar (losartan). After Pfizer, multinationals with the biggest exposure to this week's cuts include Bristol-Myers Squibb (12 drugs), Merck (9 drugs), GlaxoSmithKline (9 drugs) and Daiichi Sankyo (9 drugs). (Click here for a full list of affected MNC drugs.)

In addition, 20 products that are not manufactured and marketed in China lost their "preferential pricing" power; AstraZeneca's anti-angina drug Imdur (isosorbide mononitrate ER) is the only China marketed drug that lost its preferential price.

However, MNCs still have a price advantage over domestic generics even after the cuts, analysts noted.

"For same dosage formats of same drugs, reduced prices for brand generics still have roughly 50-300% premium over the highest retail price for follow-on generics," Hongbo Lu, senior research analyst at Piper Jaffray, wrote in a same-day note.

Domestic Pharma Less Affected

Traditional Chinese medicine is not included in this latest round of price cuts, and domestic companies such as Jiangsu Hengrui, Simcere Pharmaceutical Group, United Labs and Sihuan Pharmaceutical Group, which already sell most of their products below the ceiling prices set by NDRC, will be less impacted from the price cuts said analysts.

"After the price cuts, the new retail ceiling prices for most drugs are still above or around the current retail prices and the impact to these companies should be limited," Bin Li, Managing Director at Morgan Stanley's Hong Kong office, said in a March 7 note.

For example, Simcere's Zailin (amoxicillin) will see a 17% price cut on the retail ceiling price from RMB 15.1 to 12.5, the analyst noted. But "Simcere is already selling the drug below RMB 12.5 in most regions and thus it does not need to adjust the ex-manufacturing price," Li said.

More Price Cuts Coming

While this round of price cuts focuses on only two therapy fields, analysts expect more cuts for drugs on both the EDL and the NDRL in the near future.

In a March 7 note to investors, Deutsche Bank analyst Jack Hu predicted additional price cuts for other therapeutic areas, including oncology, and noted that drugs recently added to the NDRL could also be ripe for cuts.

Citi analyst Richard Yeh said "Given that the price cut process is not over yet, we believe that multi-phase price cuts will be an overhang on the drug sector in 1H11."

"Considering there are a total of 24 categories of Western drugs and 6 categories of TCM drugs on the EDL list and 2,151 drugs on the NDRL list, we expect more rounds of drug cuts to come for both EDL and NDRL drugs," concurred Jaffray's Lu.

"We note this price cut is the first batch in a series of price cuts," said Morgan Stanley's Li, who doesn't expect that the same drugs will see another price cut within two years, and noted that future cuts will likely be about the same level as this round.

-Dai Jialing (j.dai@elsevier.com)

Big Pharma Takes Another Haircut As China Slashes Drug Prices In Two Largest Therapy Fields

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