#1‣ Clarivate™ China In-Depth™ Volume-Based Procurement in Mainland China: Key trends and planning future strategies Analyst: Karan Verma, M.Sc., Principal Analyst, Clarivate Published: June 2021#2Volume-Based Procurement in Mainland China: Key trends and planning future strategies Volume-based procurement is consolidating generic drug procurement and reducing drug prices at the national level Started as 4+7 pilot program in 11 major cities (4 municipalities [Beijing, Tianjin, Shanghai and Chongqing] and 7 provinces [Chengdu, Xi'an, Shenyang, Dalian, Xiamen, Guangzhou and Shenzen]), and later was extended to the national level. Parameters Tender date Product negotiated Geographic scope Procurement contract duration 4+7 Program December 8, 2018 25 products (only GQCE-passed) 4 municipalities and 7 provinces 12 months VBP Round 1 September 24, 2019 Drugs included in the 4+7 program National¹ ≤2 bid winners: 1 year 3 bid winners: 2 years VBP Round 2 VBP Round 3 VBP Round 4 January 17, 2020 32 products (non-NRDL / GQCE-approved drugs) National August 20, 2020 55 products (non-NRDL / GQCE-approved drugs) National 1 or 2 winners: 1 year 3 winners: 2 years 1 winner: 1 year 2-3 winners: 2 years ≥ 4 winners: 3 years ≥ 4 winners: 3 years February 04, 2021 45 products (non-NRDL/ GQCE-approved drugs) National 1 or 2 winners: 1 year 3 winners: 2 years ≥ 4 winners: 3 years Output Average price reductions 52% 59% 53% 72% 65.4% Total value of procurement $0.3 billion $0.6 billion $1.3 billion $2.2 billion $3.6 billion Total volumes² 1.6 billion 4.6 billion 12.4 billion 15.2 billion 6.8 billion ‣ Clarivate™ 2#3Volume-Based Procurement in Mainland China: Key trends and planning future strategies Infectious disease and nervous system therapies comprise most of the drugs contracted through VBP ‣ Clarivate™ Overview of drugs negotiated successfully, by therapeutic area 13% 18% 4% 8% 157 drugs as of 9% April 2021 18% 14% 16% ■Infectious disease ■Cardiovascular disease ■Cancer and immuno-modulators ■ Blood products ■Nervous system disease Digestive/metabolic diseases ■Respiratory system ■ Others* Source: GBI analysis, Clarivate 3#4Volume-Based Procurement in Mainland China: Key trends and planning future strategies Domestically-developed drugs continue to dominate the VBP programs as domestic companies offer high price cuts Number of winning bids Import drugs VBP Round Off-patent brands "4+7" pilot scheme 2 Round 1 Generics 0 Domestic drugs 23 23 6 2 51 Round 2 4 96 Round 3 3 0 188 Round 4 3 2 153 ‣ Clarivate™ With uniform pricing across the nation, both domestic players and multinational companies have now been offered a common platform to participate and sell drugs to public medical institutions. Source: GBI analysis, Clarivate 4#5Volume-Based Procurement in Mainland China: Key trends and planning future strategies Substantial healthcare savings through rounds one - four; however, extreme price reductions likely to lead to supply disruptions Contracted value of VBP rounds (USD million) Round 4 507 449 Round 3 246 Round 2 522 Round 1 638 209 "4+7" pilot scheme 275 1,274 2,788 3,681 With estimated savings of $2 billion in healthcare spending through VBP, the Chinese government is expected to channelize bulk of this healthcare spending towards other key initiatives such as the NRDL. This lowers the healthcare cost for the government and reduces the strain on the country's GDP. 0 1000 2000 3000 4000 ■Contracted value Original market value ‣ Clarivate™ Source: GBI analysis, Clarivate 5#6Volume-Based Procurement in Mainland China: Key trends and planning future strategies Qilu Pharma remains at the top with most winning bids; MNCs remain less visible Top 10 companies by VBP winning bids Hisun Pharma 3 2 Hengrui Medicine 1 3 Hansoh Pharma 2 1 5 4 4 3 4 2 3 1 Huahai Pharma 7 Kelun Pharma 1 5 4 Fosun 2 CSPC 1 3 Yangzi River 2 Sino Biopharm Qilu Pharma 4 5 4 4 3 4 8 5 7 0 5 10 Round 1 Round 2 Round 3 Round 4 ▸ Clarivate™ 7 4 8 6 6 6 6 6 15 20 20 25 The VBP has prompted a sharp decline in prices of generic drugs, which in turn has led to considerable pricing pressure and diminishing profit margins for the concerned companies. Several MNCs have reported a decline in revenues for their products included in the VBP. Some of the companies are doubtful of their plans for participation in future VBP programs. Source: GBI analysis, Clarivate 6#7Volume-Based Procurement in Mainland China: Key trends and planning future strategies The early wave of reforms for the generic drug sector is yielding benefits but also raising profitability concerns for manufacturers Bayer: 40% increase in volume sales of Glucobay after VBP inclusion; possible return to positive sales performance in future. Glucobay accounts for approximately 95% of Bayer's global acarbose sales; VBP inclusion was paramount to garner volume sales. Eliminating drug manufacturers with uncertified generics Most small-sized companies are struggling to gain GQCE certification, which led to the decline in total number of generic drug manufacturers from more than 5,000 in 2015 to 4,300 in 2018. Significant reduction in overall healthcare cost The Chinese Government has saved an estimated $1.5 billion in healthcare spending following the third VBP round in August 2020. Greater visibility of highly genericized therapeutic segments 40% of the total VBP drugs are from anti-infective and cardiovascular therapies. ‣ Clarivate™ Sanofi 7.7% decline in overall sales; Plavix and CoAprovel sales declined by 52.5% and 33.4%, respectively Bayer: Unit sales of Avelox declined 8.8% Pfizer: Net loss in revenue after VBP inclusion of Zyvox (linezolid) AstraZeneca: Negative sales for Iressa (gefitinib) MNCs de-prioritize VBP due to reduced profitability Bayer, Sanofi, Novartis and Pfizer reported declining revenues for the VBP products, affecting profit margins for these firms. Fear of long-term survival among domestic firms Reduced profitability will hinder domestic firms to optimally invest in R&D. Companies losing bids may find it hard to sustain through retail channels only. Unclear roadmap Recently, VBP reform has been split into provincial and national VBP, which may lead to confusion around the drug's accessibility from province to province. Source: GBI analysis, Clarivate 7#8Volume-Based Procurement in Mainland China: Key trends and planning future strategies Biosimilars of insulin and monoclonal antibodies are expected to feature in future VBP updates as authorities shift focus towards biologics Potential entries for VBP Insulins (detemir, degludec, glargine, aspart, lispro) Therapy area Digestive metabolic diseases IgG1 monoclonal antibodies (such as trastuzumab) Oncology Anti-CD20 monoclonal antibodies (such as rituximab) VEGF inhibitors (such as bevacizumab) Oncology, Immunology Oncology . • The authorities are planned to expand VBP to include as many as 500 molecules that have high quality GQCE-certified generics available in Mainland China. Round five of VBP, expected to take effect in June 2021, will include 58 molecules-the highest in any VBP round so far-and will include 12 digestive tract and metabolic disease therapies, 9 systemic anti-infectives and 8 immunomodulators. MNCs make up most of the companies that lose out on bids in the VBP or prefer not to participate in the tendering process. Most of these MNCs will continue to focus on maximizing their product sales based on patient loyalty, especially in non-hospital channels. Up to eight tender winners in a VBP round are allowed to supply up to 80% of the public hospital network in Mainland China, leaving only 20% of the entire network for non-winners. Based on experience of previous VBP rounds, MNC participation continues to decrease as they prefer to offer premium pricing and cater to the available 20% market, rather than compete with local generic firms by offering steep price cuts. ‣ Clarivate™ Source: GBI analysis, Clarivate 8#9Volume-based Procurement in Mainland China: Key trends and planning future strategies Reforms will allow Mainland China to achieve its objective of high quality and affordable healthcare for its citizens Robust access and reimbursement environment Uniform pricing across the nation High quality and certified generic drugs of international standard Elimination of bureaucracy and corruption Increasing push for innovation in Mainland China Rising focus on high performing off-patent molecules Success of GQCE and VBP - benchmarks for future national access and reimbursement reforms Less expensive drugs for patients and lower healthcare costs for the government ‣ Clarivate™ 6#10Volume-Based Procurement in Mainland China: Key trends and planning future strategies Both domestic and MNC players are considering robust strategies to survive in this highly competitive market space ‣ Clarivate™ Penetrate untapped rural retail pharmacy markets that present a potential opportunity for MNCs as healthcare goes digital. Boost R&D and manufacturing capabilities to foster innovation and develop high quality generics while maintaining low manufacturing cost. With guaranteed volume- based contracts, realign the sales force model to maximize the profit margins. Leverage past experiences to cash-in the $90 billion segment with the extension of GQCE and VBP program to injectables. Adapt omnichannel strategy to also focus marketing efforts on non-hospital channels such as retail, direct-to-patient and online pharmacies. Source: Clarivate 1 10#11China In-Depth Insights provided in this article were developed by Clarivate analysts, using data and analysis from China In-Depth, which covers patient populations, access and reimbursement environment, treatment paradigms, pipelines and drug-level forecasts. Gain access to intelligence on Mainland China's healthcare market and disease-specific trends here. ‣ Clarivate™ 11 14