Multinational pharmaceutical companies are under increasing pressure. Especially when the US market, the world's largest pharmaceutical market, has undergone tremendous changes due to the Inflation Reduction Act, the importance of the Chinese market has once again been highlighted. However, all signs indicate that it is becoming increasingly difficult to get a bigger piece of the pie in the Chinese market. In recent years, the reform policies introduced by the state at the pharmaceutical level have exceeded the changes in the previous decades. The continued advancement of medical reform policies such as medical insurance negotiations and national centralized procurement, coupled with the epidemic, anti-corruption, capital winter, local generic drugs, and the rise of innovative forces, have intensified the challenges of the entire industry.

Therefore, we see that the past two years have become a strategic turbulence period for MNCs in China. While tapping the potential of the domestic market, they are also re-evaluating risks and opportunities and adjusting their business models in China. Large MNCs may close or merge business units, or "outsource" mature products and increase their innovative businesses; some small and medium-sized MNCs are more radical, either selling their business lines in packages or choosing to "withdraw" from the Chinese market.

This is just the beginning of a series of changes. In the future, MNCs that lack absolute product competitiveness will face increasing pressure in the Chinese market. As time goes by, the Chinese pharmaceutical market will continue to undergo new changes. Even multinational pharmaceutical companies must regain their spirits and formulate new strategies that conform to the laws of the Chinese market.

It is said that medicine is an industry that will always be in the future, but its close relationship with people's livelihood also determines that it is an industry with deep regulatory involvement and high policy sensitivity. On the one hand, we need to encourage innovation and realize the growth of the biopharmaceutical industry from large to strong; on the other hand, we need to "constrain" innovation, because drug prices determine the burden of medical treatment for ordinary people and the upper limit of the scale of the industry.

Therefore, in the policies of the past few years, we can see both "encouraging" policies such as innovative drug approval reform and breakthrough drug review, and "constraining" policies such as DRGs and medical insurance negotiations. For industry participants, whether local or multinational companies, the pressure is bound to escalate. At the same time, due to the high operating costs of multinational pharmaceutical companies themselves, they have to make choices, or change their commercialization strategies, seek cooperation with local companies, reduce costs, or directly withdraw some original old drugs from the Chinese market.

With the normalization of centralized procurement and the continuous advancement of DRG/DIP, the "disappearance of imported original drugs" has also become a phenomenon that everyone is paying close attention to. This "disappearance" is nothing more than several reasons. On the one hand, imported original drugs have passed the patent protection period and are still the original price, and the Medical Insurance Bureau is comprehensive and pays attention to cost-effectiveness; on the other hand, imported original drugs need to maintain global prices, and some can only withdraw from the Chinese market.

In addition, after centralized procurement, the operating costs of some original drugs cannot be covered, including production, transportation, and academic promotion. Under cost pressure, some multinational pharmaceutical companies choose to abandon part of their business in the Chinese market and focus on other markets or products. For various reasons, the market tends to pull "original drugs" and "generic drugs" into opposing discourse systems, and even equate "original drugs" with "good drugs" and "generic drugs" vice versa. But in fact, whether in the United States or Japan, the proportion of generic drugs is extremely high. In 2022, the substitution rate of generic drugs in Japan will be 79%.

The reason is that generic drugs are beautiful and cheap. According to statistics from the WHO, generic drugs, which account for 85% of the market, only account for 12% of medical expenses. With the further deepening of domestic medical reform, the intensity of medical insurance cost control will only increase, and generic drugs may go further. This also means that the era when multinational pharmaceutical companies can "make money lying down" in the domestic market by relying on expired original research drugs as in the past is long gone. Entering 2024, the pressure of supervision is still escalating. On the one hand, the wind of medical anti-corruption has blown from hospitals to pharmacies, from hospitals to the market outside the hospital, and bribery and corruption are investigated together.

On the other hand, as the drug price management tentacles of the medical insurance department extend from the online listing to the retail end, the old drugs of multinational pharmaceutical companies seem to be narrowing in the retail market. Under the power of the "four same" drug price management, the online listing prices of non-selected drugs, including original research drugs, are approaching the centralized procurement products; medical insurance bureaus in various places have achieved convergence of drug prices across the country by launching "price comparison systems" or encouraging outpatient coordinated pharmacies to sell drugs at prices not higher than the online listing prices.

But in fact, whether they are included in the medical insurance or not, or whether they are included in the centralized procurement, some original research drugs cannot escape the fate of declining sales. It is an indisputable fact that in the Chinese market, companies that lack absolute product competitiveness will face increasing pressure. Class II vaccines are a good variety to observe because they do not involve centralized procurement.

In October last year, GlaxoSmithKline handed over the Chinese rights of the shingles vaccine to Zhifei Bio; in November, Pfizer handed over the Chinese rights of the 13-valent pneumococcal vaccine to Beijing Keyuan. Both vaccines are large varieties with considerable market scale. For this reason, many domestic pharmaceutical companies are vying to deploy research and development, hoping to get a share of the pie by relying on the cost-effectiveness advantage of "domestic substitution".

In this case, multinational pharmaceutical companies that can neither roll nor lie flat can only change their strategies and playing methods. Take Pfizer as an example. The 13-valent pneumococcal vaccine Prevnar was once the king of vaccines in the world. In the domestic market, Prevnar has been sold out several times, but in recent years, the situation has long changed. In 2019 and 2021, the 13-valent pneumococcal vaccines of Watson Bio and Minhai Bio were launched one after another, and the market changed from Pfizer's dominance to a three-way competition. In 2022, Watson Bio's 13-valent pneumococcal vaccine has occupied more than 50% of the market share; looking to the future, the competitive pressure faced by Prevnar will be further intensified. Because there are many players in China, such as Aimi Vaccine and CanSino, waiting in line to enter the 13-valent pneumococcal vaccine market.

Therefore, it is not surprising that Pfizer decided to disband the Chinese vaccine sales team and hand over the sales of Prevnar to local partners. Pfizer's "layoff" was a representative event in the tense market sentiment at the time. These large pharmaceutical companies have transformed centralized procurement or mature products into "light assets" through outsourcing strategies, and the companies themselves have devoted themselves to localized innovation and research and development.

For some small and medium-sized multinational pharmaceutical companies, if centralized procurement is involved, the siege of domestic generic drugs on original drugs will be more intense. For this reason, in addition to shutting down a single business unit, or laying off or selling the entire business line, they even choose to "withdraw" directly from the Chinese market. For example, Baxter, which is famous for its intravenous infusion products. Recently, it announced plans to gradually stop the commercial operation of intravenous infusion products in the Chinese market.

Infusion therapy and technology are Baxter's core business. In the first half of 2024, the business's global revenue reached US$1.045 billion, a year-on-year increase of 4%; in the US market, its share exceeded 55%, but it was losing ground in the Chinese market. Baxter said that in the past few years, it has actively explored and tried various business transformation plans to find strategies suitable for the long-term sustainable development of the infusion business. However, its strategy has not kept up with market changes, or it can't keep up with the drastic changes in the Chinese market.

On the one hand, the current domestic large-scale infusion market as a whole faces the challenge of overcapacity, and the oversupply in the market has led to intensified competition among enterprises; on the other hand, about 8 provinces and regions across the country have carried out price linkage and volume-based centralized procurement of basic infusions, which has led to a decline in the terminal price of products. As a foreign-funded enterprise, Baxter is under great pressure in terms of market share and price competition.

According to the "2023-2029 China Large Infusion Industry Development Status and Investment Strategy Report", Baxter's share of China's large infusion market is about 4%, ranking in the second echelon. Kelun, Shijiao and China Resources Double Crane have surpassed and have jumped into the top three in the market. In addition to generic drugs, the rise of local innovative forces in China can now compete with multinational pharmaceutical companies to varying degrees. In fact, the Chinese pharmaceutical market environment has undergone tremendous changes, making it difficult for many multinational pharmaceutical companies to adapt in a short period of time. Since this year alone, there have been many cases where multinational pharmaceutical companies have "exited" or significantly adjusted their businesses and products. From a global perspective, the scale of China's pharmaceutical market has become the world's second largest pharmaceutical market, second only to the United States, and market demand is still expanding.

But if you focus further on certain segments, you will find that market demand is decreasing or peaking. In addition to regulatory and competitive pressures, this uncertainty in market demand has also caught some multinational pharmaceutical companies off guard. In this regard, Merck and its 9-valent HPV vaccine should be deeply touched. According to the third quarter financial report, Merck's 9-valent HPV vaccine had sales of $2.306 billion in the third quarter of this year, a year-on-year decrease of 10%. This is mainly due to the decrease in demand in the Chinese market. The product has achieved double-digit growth in other parts of the world outside of China. To this end, Merck reduced Zhifei Bio's HPV vaccine shipments this year, and it is expected that the shipments in the fourth quarter will be the same as in the third quarter, but Zhifei Bio's vaccine inventory is still higher than historical levels.

According to Merck's conference call, China's shipments and sales declines are expected to continue until 2025. This is equivalent to telling the market that the 9-valent HPV vaccine, which was hard to get a shot at the beginning, is not selling. This trend is also reflected in Zhifei Bio's financial report. In the third quarter of last year, its revenue was 14.826 billion yuan and its net profit was 2.27 billion yuan; in the third quarter of this year, its revenue was only 4.528 billion yuan and its loss was 83.7 million yuan. Due to the shrinking demand for HPV vaccines and oversupply, Zhifei Bio's inventory has increased significantly. In the third quarter, its inventory reached 20.7 billion yuan, an increase of 32% month-on-month and an increase of 130% compared with the beginning of the year. It took only one year for such a transformation. No wonder even Merck said frankly that it did not expect the change to come so quickly. The root cause behind this is that the HPV vaccine has greatly overdrawn the market in the past few years and has now entered a bottleneck period.

According to Guojin Securities' speculation, by the end of 2023, the cumulative vaccination rate of HPV vaccines in China (based on women aged 9-45) will be close to 20%, and the vaccination rate of women of appropriate age in first-tier cities will be higher. Three years ago, this figure was less than 3%. Compared with the 40% vaccination rate in developed countries, the domestic vaccination rate is still low, but it has exceeded the average level of middle- and low-income countries. According to the "HPV Vaccination and Inclusion in the National Immunization Program", the vaccination rate of the first shot of women in middle- and low-income countries is only 16%, and the proportion of completing all immunization injections is only 12%. This means that domestic women of appropriate age have basically been vaccinated, while those who have not been vaccinated are restricted by economic and other reasons, and the incremental and stock markets are shrinking rapidly.

Such changes exceed market expectations, and the domestic 9-valent HPV vaccine has entered the sprint stage. For Merck, the days ahead will be more difficult. For this reason, it places new growth hopes on the level of male HPV vaccines. In the long run, under the guidance of the goal of eliminating cervical cancer, the vaccination rate will continue to rise, but it is still unknown how big the market will be and who will share the cake.

At a time of global change, how can we do well in the Chinese market? Regarding this question, multinational pharmaceutical companies are looking for their own answers. Since last year, they have frequently adjusted their strategies. Although the actions and directions are different, the goals are the same: to seize opportunities more quickly and respond to challenges more flexibly. Obviously, multinational pharmaceutical companies have deeply realized that the Chinese market is no longer a market where "anything can produce results". Judging from the performance of multinational pharmaceutical companies in China in the first half of this year, half of the MNCs have returned to the growth track, which shows that the adjustment is working.

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