SHANGHAI - Nanjing, China's Simcere Pharmaceutical Group reported a slowdown in sales for the second quarter, pointing to intense competition from the spread of Anhui province's tender model for essential drugs and price cuts on products included in the National Drug Reimbursement List.

Total revenue for the quarter was RMB 546.4 million ($85.5 million), up 0.3% compared to the same period last year, according to the company, which is listed on the New York Stock Exchange.

Simcere's leading product, anti-infective agent Zailin (amoxicillin), suffered the most severe sales drop. Zailin's price was cut in March by the National Development and Reform Commission, which slashed prices on antibiotics and cardiovascular drugs by an average 21% (Also see "Big Pharma Takes Another Haircut As China Slashes Drug Prices In Two Largest Therapy Fields" - Scrip, 8 March, 2011.).

Zailin's sales were further reduced by an ongoing rollout across most provinces of an EDL tender system modeled after Anhui province. The Anhui model awards a single supplier for each drug on the Essential Drug List, setting up a winner-take-all bidding process that has drastically reduced prices for winning bids (Also see "China Pharma And Distributors Suffer From Essential Drug System And Price Cuts" - Scrip, 12 July, 2011.).

"This is one area of focus that we have been spending time on to essentially adjust our sales strategy for the Zailin brand to accommodate some of the external policy environmental changes," Simcere President Zhang Yehong said during the company's Aug. 6 earnings call.

Zailin is not the only product impacted by the new regulatory environment. Simcere's neurology franchise - edaravone, Bicun and Yidasheng - was also a victim, but its sales picked up in the major markets of Beijing, Shanghai and Guangzhou, due to a rollout of reimbursement in these regions.

"At the same time in some of our traditional stronghold provinces, we ran into some pretty serious challenges as well, especially in provinces such as Hunan and [Zhejiang] province, due to increasing competition, the complexity of the external market and also the tendering process," Zhang said.

With more price cuts on other therapies expected, as well as government limits on antibiotic usage, Simcere will likely face some long-term regulatory headwinds (Also see "Under Industry Pressure, China Blinks On Restricting Use Of Anti-infectives - Or Does It?" - Scrip, 12 August, 2011.).

"There's no question that the changes of the external environment, and also the pricing policy, is a long-term factor that is going to be with us," Zhang said. "But we believe that this pause is transitory. We have recently been working on adjusting our sales strategy ... to accommodate the external changes."

Partnering With Merck For Long-Term Growth

Simcere announced July 21 it would enter a joint venture with Merck & Co. to expand access to both companies' drugs across China.

The agreement will initially focus on cardiovascular and metabolic diseases and includes Merck's Zocor (simvastatin), Cozaar (losartan), Renitec (enalapril), and its blockbuster DPP-4 inhibitor Januvia (sitagliptin), as well as Simcere's Xinta (levamlodipine) for hypertension and angina, and Shufutan, a branded generic of AstraZeneca PLC's statin Crestor.

Merck will hold 51% of the JV and Simcere will take the remaining 49% (Also see "Merck, Simcere Form JV To Expand Access To Lifestyle Drugs Across China" - Scrip, 22 July, 2011.).

"This is really just the beginning. We're going to start exploring and adding a number of additional formulations on an annual basis so we can expand this platform into a true branded generic platform in China," said Zhang, who spent many years himself at Merck, including a stint as head of China for the U.S. company.

Zhang views the JV as a long-term strategic partnership that will also likely include a manufacturing component.

Importantly, the JV will leverage the strength of each company's sales teams to provide a comprehensive commercial approach. In China, Merck has 3,500 sales representatives, primarily located in the large cities, while Simcere brings 2,000 sales reps across the country from its partners and in-house sales team.

"We believe the deal is a positive growth driver in the long term, but the short-term implication remains uncertain, given that the sales and marketing costs as [a percentage] of revenue could go higher as a result of building up a new sales force for the JV," Citi analyst Richard Yeh wrote in an Aug. 9 note to investors.

Beijing Bound

Separately, Simcere is also increasing its R&D spend, which accounted for 8% of the company's total revenue in the first half.

In the coming months, Simcere plans to establish a third R&D center in Beijing's Zhongguancun Innovation Park, which will help the company triple its R&D team to 1,000 employees by tapping into Beijing's scientific talent pool (Also see "Beijing Quietly Charms Both MNCs And Specialty Biotechs In Effort To Establish China's Bio Valley" - Scrip, 15 August, 2011.).

Simcere's R&D is led by CSO Wang Peng, who was previously VP of discovery biology at China's leading CRO WuXi Pharmatech; the company's other R&D centers are in Nanjing and Shanghai.

In a regulatory milestone, China's State FDA also recently cleared Simcere's anti-tumor drug simotinib to begin clinical trials, and rheumatoid arthritis treatment iguratimod is expected to launch in China this year.

-Dai Jialing (j.dai@elsevier.com)

China's Price Cuts And Antibiotic Limits Weigh On Simcere, But Merck JV Opens Doors

More from Archive

More from Scrip