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May 3, 2013
Insider Analysis From LEK On Tackling China’s EDL
Challenge: Navigating The Changes And Planning
For Success
After a review of the newly listed products on China’s Essential Drug List, LEK believes price declines
and market access can be managed and continued growth is possible for originator products added
to the EDL.
The 2013 expansion of China’s Essential Drug List (EDL)
from 307 to 520 drugs generated a flurry of news reporting
and much chagrin in the boardrooms of multinational pharmaceutical companies. Chief amongst the anxieties are the
new inclusions of more than a dozen multinational off-patent
originator products (OPOs) amongst the list, and the requirement that Level 2 and 3 hospitals use a certain percentage of
EDL drugs.
After an extensive review of the newly listed products, their
historical and current pricing levels, the past four years of
EDL experience and regulations, L.E.K.’s view is that price
declines and market access can be managed and continued
growth is possible for these OPOs on the EDL list.
Not A New List
Even prior to the 2013 national list expansion, many of the
multinational OPOs had already been listed in provincial
EDLs as each province adapted its own version of the 2009
national list. Bayer AG’s Adalat (nifedipine) and Pfizer Inc.’s
Norvasc (amlodipine), for example, were already on 16 provincial lists. AstraZeneca PLC’s Losec IV (omeprazole) and
Bayer’s Glucobay (acarbose) are on 15 provincial lists each.
Glucobay, the best-selling diabetes treatment in China, is on
the list from the wealthier cities of Shanghai and Tianjin to the
poorer cities of Guangxi and Ningxia (“China’s New Essential Drug List Adds Drugs For Major Diseases, But Pricing, Market Pressure Likely To Increase” — PharmAsia
News, Mar. 18, 2013 6:30 PM GMT).
Nevertheless, there are some new entrants on the national
list without prior provincial EDL exposure – Sanofi’s Eloxatin (oxaliplatin) and AstraZeneca’s Seroquel (quetiapine) to
name two – and some wealthier provinces such as Beijing had
not added as many of the MNC OPOs to provincial EDLs.
How these newly added drugs will fare remains to be seen.
Lower Price Ceilings Taking Place Regardless Of EDL Status
A major fear of MNCs is reduction of price-to-patient ceilings by the National Development and Reform Commission (NDRC). We compared prices in the 2010-13 period to
the pre-healthcare reform prices of the 2006-07 period, and
found that mass generics have been more impacted than originators over this four- to five-year period between the cuts:
• 88 independently priced drugs, including 54 MNC originators, had price cuts. The average price drop of MNC
originator drugs was 11%; the eight MNC OPOs did have
slightly higher drops at 15%;
• 218 mass generics saw price cuts, with drugs on the EDL
seeing an average drop of 25% while those not on the EDL
dropped 23%.
The most significant cause of originator price cuts was cancellation of independent pricing status, which originators almost
always enjoy. During this period, we identified 42 products,
both originator and domestic, which had their independent
pricing status cancelled. Only 15 of the 42 were on the EDL.
One of the limited exceptions we found was Merck & Co.
Inc.’s Zocor (simvastatin) losing its independent pricing status
during this period, likely due to government negotiations to
enter the 2009 national EDL. Most of the 15 were very mature products that companies had either stopped producing
or importing.
NDRC national ceiling price cuts are expected to continue,
but there does not seem to be any indication from the government or the market that price cuts will accelerate based on
our review.
Competitive Provincial Tendering Drives Pricing
Even in provinces where MNC products are on the provincial
EDL, they still enjoy advantages as originators. In most of the
Reprinted by PharmAsia News (www.pharmasianews.com). Unauthorized photocopying prohibited.
Multinational Originator Historical Price Trends: Case Study
•
Source: Shanghai Institute of Pharmaceutical Industry, L.E.K. analysis
provinces we reviewed, EDL drugs can still join the provincial RDL (reimbursed drug list) tenders where OPOs have a
separate tendering category and do not compete head-to-head
with mass generics for entry into core Level 2 and 3 hospital
customers.
Plan for the shifting volumes, as it
is inevitable that some provinces
may not be winnable and some
might spike up due to successful
execution.
Thus, a common and simple strategy among MNCs has been
to price their OPOs 10-20% less than the national price cap
to leave hospitals their standard 15% mark up. However,
with the potential move to zero mark ups and some provinces following the Anhui model for tenders – which awards
a single supplier for each EDL drug, setting up a winner-takeall bidding process – the tendering process is getting progressively more complex and harder to navigate with simple rules
(“How Zero Markups Work: A Closer Look At Public Hospital Reform In Shenzhen” — PharmAsia News, Jul. 5, 2012
6:44 PM GMT) and (“China Pushes Essential Drug Usage
In Big Hospitals Via Anhui; Medical Fund Bankrupt In
2016?” — PharmAsia News, Jan. 4, 2012 5:38 PM GMT).
Maintaining Volume In Hospitals
The mandating of EDL drug usage in hospitals does not automatically mean that MNCs will lose share:
• The currently mandated EDL drug usage in community
health centers (CHCs) does not appear to be strictly
implemented and many facilities are not meeting this
requirement;
• As the mandated ratio of EDL drug usage is raised and the
EDL list expanded, the share of the reimbursement and the
share of the hospital drug budget that goes to EDL drugs
would naturally be higher as well; and
• Former Health Minister Chen Zhu said the EDL drug ratio
should be broadly raised to 25-30% for Level 3 hospitals,
40-50% for Level 2 hospitals and 100% for county health
clinics. Even as the provinces develop their guidelines on
budgets, they rarely mandate that EDL drugs have to come
from the EDL tender winners.
Under the current scheme, if Sanofi’s Plavix (clopidogrel) wins
the provincial RDL tender but not the EDL tender, its sales
in Level 2 and 3 hospitals can still be counted as EDL spend
since hospitals can still purchase RDL drugs. (Plavix is one of
the newly listed drugs on the 2013 national EDL.)
There are only a few provinces, such as Yunnan, that stipulate
that drugs on the EDL are not eligible for RDL tendering to
get into hospitals. In these provinces multinational EDL drugs
do risk their volume in the hospitals.
Continuing Branding Power
MNCs continue to enjoy strong brand preference in hospitals,
and can leverage their brand and the quality associated with
the brand to support higher-priced products once they have
won tenders and are listed in hospitals. In a physician survey conducted by L.E.K. in Q4 2012, multinational brands
had a higher satisfaction rate than domestic brands. Even an
“unknown import brand” ranked well, showing the halo of
multinationals and the faith placed in imported product quality. We expect that this will continue to hold true even if these
products are on the EDL.
Reprinted by PharmAsia News (www.pharmasianews.com). Unauthorized photocopying prohibited.
• Physician Satisfaction By Brand And Hospital Level: Case Study
Source: L.E.K. survey and analysis
In the same survey, Western multinational brands tested higher in recognition, typically scoring 4s and 5s, higher than the
best Chinese brands at 3s and 4s. Japanese brands, however,
suffered from less marketing and promotion, and ranked relatively lower.
Managing For EDL Success
The implementation of the expanded EDL will move through
the provinces in the next few years, and will undoubtedly
have an impact on the China pharma business given the high
share of originators in the mix. Under current regulations,
we believe that multinationals can rise to the challenge and
navigate through the system with success. The key is to understand where the company can exert control and influence,
and watch and plan for government changes if they occur. To
that end, companies should:
1. Collect and analyze provincial RDL and EDL tendering
requirements, scoring mechanisms and results to understand and optimize the competitive provincial tendering
process. Companies should prioritize the larger markets
where tendering policies have a higher, more explicit,
quality component vs. those based purely on price. Prioritize the RDL tendering – even for EDL drugs –for the
hospital business in provinces which allow EDL drugs
to participate in RDL tendering.
2. Plan for the shifting volumes, as it is inevitable that some
provinces may not be winnable and some might spike
up due to successful execution. The ability to shift sales
reps, commercial operations, and product inventory to
ramp up quickly in winning provinces and to adjust the
cost base in lost provinces will become a competitive
advantage.
3. Monitor the CHC opportunity and tackle the EDL-listing process, even though it is not likely to be an acrossthe-board success for MNCs given current widespread
implementation of the Anhui EDL tendering model.
Some CHCs have already adopted MNC products,
especially ones in Shanghai, Jiangsu and Zhejiang. Being selective in this EDL process can be rewarding for
MNCs that capture the needs of such customers.
4. Track, anticipate and adapt to regulatory changes, particularly RDL tender criteria on the eligibility of EDL
drugs, and the EDL drug expense qualification. The
current status quo allows for a fair amount of flexibility
in continuing to sell into the Level 2 and 3 hospital market by working around the difficult EDL-tendering process. Changes will erode the non-price advantages that
MNC originator products enjoy and may lock these
products out of the impacted hospital market.
Helen Chen is a director and partner and Samuel Han is a
consultant in the China life sciences practice for L.E.K. Consulting, focusing on practical strategies to navigate the complex and changing Chinese healthcare market. Contact the
authors at [email protected].
By Helen Chen (Contributor), Samuel Han (Contributor)
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