The Race To The Bottom In The Chinese Pharmaceutical Market Reinforces The Need To Market In The United States

For years, the Chinese government has subsidized its burgeoning pharmaceutical industry through direct subsidies for the scale-up of domestic firms that show the potential to become global leaders. Estimates are that public funds account for 25 percent of total industry investment, and state development banks supplement these grants with low interest loans. Tax credits for investment in research and development, an effective policy instrument originally developed in the US, now are several times more generous in China.

The impact of Chinese subsidies was evident during multiple trips I made to emerging biotechnology companies in China prior to the COVID pandemic. Some Chinese biotech companies built their own expensive manufacturing facilities prior to even beginning clinical trials, a rarity in the rest of the world where even commercial drugs are frequently manufactured by third parties. Akin to the current state of the Chinese residential real estate market, where housing sales continue to fall and developers continue to run out of capital to complete projects, many of these manufacturing facilities remain underutilized testimonials to false expectations of the robustness of the Chinese pharmaceutical market.

Not surprisingly, these newly formed companies had expectations of robust profits based on accessing the Chinese pharmaceutical market, now the second largest in the world after the US. The expectation was that while drug prices might be lower, the 1.4B Chinese population (about five times larger than in the US) would allow larger sales volume that would compensate for lower profit margins. However, the dynamic in China has become one of limited profit margins compared to those in the US. Chinese pharmaceutical companies have since been forced to recalibrate their marketing strategies.

Unlike the US where no national agency caps drug prices, China’s National Reimbursement Drug List (NRDL) dictates drug prices. While out-of-pocket/patient assistance schemes have typically been the first reimbursement routes utilized by Chinese drug manufacturers and present a sizeable opportunity paid for by affluent patients, inclusion on the NRDL means that products will be fully or partially reimbursed at a national level and in general are the only products prescribed from public hospitals that treat the majority of Chinese patients.

On one hand, the NRDL benefits Chinese pharmaceutical companies. It protects domestic brands in the case where foreign and domestic drugs target a similar mechanism. For example, the NRDL excluded imported global blockbuster checkpoint inhibitors like Opdivo® (marketed by Bristol-Myers Squibb) and Keytruda® (marketed by Merck Sharp and Dohme) following the approval of domestic checkpoint inhibitors like BeiGene’s Baize’an®, Shanghai Junshi Biosciences’ Tuoyi®, and Jiangsu Hengrui Medicine’s AiRuiKa®.

However, NRDL pricing pressures are severe, with discounts typically being 50-70% versus the out-of-pocket cost of the drug in China (which already represents a deep discount compared to the US wholesale price). For example, in 2019 Tuoyi, the least expensive checkpoint inhibitor available in China at the time, cost about $15,000 a year after patient assistance programs, versus about $45,000 for Keytruda in China at that time. The current NRDL Tuoyi price is even lower¹. Contrast that with the cost of Keytruda in the US of about $150,000 a year.

Typical branded oncology drugs in the US have a profit margin of about 80%. So while there is still a significant cost to manufacture and market the drug, a drug like Keytruda has become one of the most profitable drugs of all time based largely on US revenues. However, it’s hard to imagine how checkpoint inhibitors in China will achieve even a modicum of that success at $15,000 or lower annual reimbursement per patient, regardless of sales volume—the margins are just too small given the substantial cost of manufacturing and marketing.

One solution for Chinese pharmaceutical companies forced to reckon with punitive reimbursements from the NRDL is to access the US market. However, that has been problematic since the clinical trials that were the basis for the approval of Chinese checkpoint inhibitors almost exclusively enrolled Chinese patients, and the FDA has made clear that China-derived data is insufficient to allow access to the US market. Rather, a drug approved in the US must have been studied in a population that is representative of the US population demographic. That’s hard to do for a checkpoint inhibitor these days: study designs used by Keytruda for its initial approvals, that added a checkpoint inhibitor onto chemotherapy and compared to chemotherapy alone, are now unethical in the US, because Keytruda and other checkpoint inhibitors are a standard of care for most common cancer types. Denying patients access to these checkpoint inhibitors, including in the control arm of a clinical trial, would be considered malpractice. The few Chinese checkpoint inhibitors submitted for approval that included patients in the US have therefore focused on very rare cancers (e.g., nasopharyngeal cancer) with limited market potential.

All this indicates that early access to China’s rapidly growing pharmaceutical market – the second-largest in the world – by no means translates into healthy profits. Looking ahead, domestic drug competition in China is expected to grow rapidly, thanks to the rapid approval of homegrown treatments. But while new drugs may be approved in China, unless they have unique mechanisms of action, they may simply join a race to the bottom in terms of domestic reimbursement. Hence the increasing trend for Chinese pharmaceutical companies to pursue collaborations with US partners, which will entail a focus on drugs with attributes that make them desired by US patients and payers.