AstraZeneca in China: Opportunities and Challenges [2/2]

Healthcare Author: Fuller Wang, Yuanxi Ma Editor: Fuller Wang Jul 12, 2022 03:10 PM (GMT+8)

AstraZeneca is a British pharmaceutical company founded in 1999 that focuses on discovering, developing, and commercializing prescription medicines in oncology, rare diseases, and biological medicals for cardiovascular, renal, metabolism, respiratory and immunology diseases.


Despite AstraZeneca's increasing reliance on its expanding China business, we think that this model carries some downside risks – even though it has produced a sizable amount of top-line revenue. To forecast the future of big foreign pharma companies in China, we must take a deep dive into the vast ocean of China's healthcare industry and identify the key drivers of its growth and the challenges that must be addressed. In this section, we will discuss the problem that has arisen in the Chinese pharmaceutical market and AstraZeneca's strategy of entering the sinking market.

Traditional Chinese medicine has been used in China for over a thousand years; however, the modern Chinese healthcare industry has recently seen an acceleration, particularly in the drug industry. Before the liberation, 90% of active ingredients required to make drugs was imported, and China's active ingredient production capacity in 1950 was only 50 tons. China aimed to create a pharmaceutical industry specializing in creating active ingredients and necessary medications like antibiotics. To achieve this, several state-owned businesses have been established. Since the 1970s, the introduction of several guidelines to develop drug manufacturing and the establishment of some local pharmaceutical companies that have grown into significant players in the market have stabilized this drug shortage. 

The Chinese drug industry experienced dramatic changes during the 1990s. Taking the tailwind of economic reform and trade opening, multinational pharma companies entered China, bringing cutting-edge R&D expertise and business models that significantly impacted local pharma companies. Due to low levels of competition and strong policy support, foreign businesses did well in China. However, recently, foreign big pharma companies such as AstraZeneca have struggled to adapt to the changing business landscape and are now facing more fierce competition from local counterparts due to the policy's shift toward local businesses.

Fierce competition

Today, there is more competition than ever before in the healthcare industry. Due to their strong research and development capabilities and top-line revenue, which can provide adequate budgets for R&D and business development, big pharma companies such as AstraZeneca and Roche, could in the past develop a variety of pipelines simultaneously to cover a broader range of diseases and biological targets and thereby migrate the risk if one of them failed. Aside from that, big pharma has a larger selling reach, general and administrative budget, giving them significant leverage to carry out more clinical trials and have more effective marketing.

Due to these advantages, international big pharma companies have led the lucrative development of new drugs for decades, while local companies have continued to focus on generic and over-the-counter medications, which are, in fact, less expensive and have a low entry barrier. However, the Opinions of the State Council on Reform of the System of Evaluation, Review, and Approval of Drugs and Medical Devices, a policy introduced in 2015, became a game-changer. The opinions outlined the objectives of promoting independent research and development of new drugs and enhancing the quality of generic drugs, which resulted in numerous innovation-focused local pharmaceutical companies, including BeiGene, Hui-Gene, Hengrui, and Junshi, and increased competition between them and foreign drug manufacturers.

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This battle has intensified recently, especially over biological targets, which are crucial for developing new drugs. For instance, the price for PD-1 medicines has significantly lowered due to the increase in the number of PD-1/PD-L1 drugs still in the underdevelopment stage. This trend has also spread to various disease areas and targets. Although there are still gaps in R&D and budget capabilities between domestic and foreign pharmaceutical companies, the competition does create pressures that require foreign pharmaceutical companies to adjust their strategies.

Government procurement pressure

On the other hand, the government's drug purchase scheme has continually put pressure on big pharma companies' bottom-line profit. Foreign big pharma companies have undoubtedly faced a dilemma: centralized procurements can increase the volume and presence of their medicine in the market. However, the average 53% discount on the price of patent drugs is too harsh for big pharma companies because of the huge upfront cost and the long time invested in developing new drugs. In centralized procurements, losing the bid will reduce big pharma companies' market dominance, but winning it will result in a slim profit margin. Some big pharma companies would rather sell their mature pipeline and reinvest in R&D in a scenario like this than reduce the price.

In the centralized procurement in May 2021, AstraZeneca got bid out by local companies, including Chia Tai-Tianqing and Join Care, on the Budesonide Suspension for Inhalation contract. AstraZeneca's best-selling product in the Chinese market, Pulmicort Respules, alone accounted for 90% of the market share for Budesonide Suspension for Inhalation. Due to value-based procurement, Pulmicort Respules's sales in 2021 decreased by 9% to USD 770 million. AstraZeneca claims that they are accelerating the R&D and commercialization of its current pipelines while also growing its sales through other channels to address the impact of centralized procurements.

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Rural markets offer opportunities

We believe that AstraZeneca’s strategy, which includes targeting the rural market, will be a significant growth driver. AstraZeneca announced in 2011 that it would expand into rural China, a region previously neglected by its rivals and had less access to effective medications. AstraZeneca benefits from being first to market when compared to its competitors. By 2020, the company will have its product and services in over 1850 counties in 28 provinces. Therefore, the China market revenue increased by 14% in 2020, and AstraZeneca provided evidence that the rise in sales significantly influenced the company's success in the rural market.

The market for pharmaceutical terminal sinking was approximately CNY 312.4 billion in 2020 and is expected to reach CNY 392.5 billion over the following five years. As a result of the implementation of a policy that aims to strengthen and improve disease prevention and control in rural areas, as well as the plan to create a primary healthcare system, the market is predicted to continue to decline and eventually reach CNY 1000 billion in size. Even though the market is lucrative, big pharma companies find it challenging to seize the opportunity without altering their business development strategy because a more down-to-earth approach is needed for marketing in rural areas.

Aside from going to the rural market, AstraZeneca has actively sought to collaborate with local institutional investors. The Healthcare Industrial Fund, which AstraZeneca and CICC jointly founded, announced the conclusion of a round of financing totaling more than CNY 2.2 billion in March 2021. This money will be used to research and develop new medications and biotech, medical devices, and Aipharma. The fund has invested in four companies, including ZZ Medical, a chronic disease management solutions provider, and Abbisko Therapeutics, a manufacturer of novel drugs. AstraZeneca states that one of its objectives is to fund one hundred companies.

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Even though AstraZeneca appears to have taken a different direction from its competitors, we remain optimistic about the company's operations in China. Looking back on its 30-year history in China, AstraZeneca has consistently demonstrated an exceptional understanding of the shifting environment, first-rate adaptability, and vision. For example, it was the first company to recognize the strategic importance of the rural markets and moved quickly in front of its competitors; it is one of the few companies to have established a fund that focuses on investment in the expanding local pharmaceutical companies; it actively expands its pipeline to keep up with the trend by utilizing M&A, such as the Alexion acquisition earlier this year. 

The biggest threats to AstraZeneca include late-stage clinical trial failure, a scenario that no pharmaceutical company wants to experience; tighter regulations surrounding the China NDA and INA; the inclusion of more of its world-class products in the upcoming round of centralized procurement; and the threat of an increasing number of big pharma companies entering the rural market. We will continue to monitor AstraZeneca’s activities and those of other foreign corporations in the future.