SciClone Pharmaceuticals: Selling Specialty Drugs in China

US-based SciClone Pharmaceuticals has built its business around selling specialty drugs in China. Companies like Sanofi and Pfizer, despite their own in-country resources, have partnered with SciClone and are achieving better returns, according to SciClone CEO Friedhelm Blobel.

Successfully commercializing a proprietary drug in China can be a Kafkaesque affair. The all-important hospital listing, a prerequisite to sales detailing, in turn requires first a national price from the central government, followed by an acceptance onto the tender in each province where the drug will sold. Before the product can be listed at a given hospital – which requires a committee meeting – it must first get on the tender in the province where the hospital is located.

“After SFDA approval, it takes about one and a half to two years to really get to a point where you are 80% commercial in the country,” says Blobel. “That’s a big difference” from the US, for example, where the PDUFA date is a pretty reliable marker for anticipating commercialization of a new drug – assuming the product in question receives approval.

The second major challenge, according to Blobel, is that drug patents and IP don’t prevent local generics from emerging. “In China, [IP] doesn’t do anything to keep competitors away.” On the flip side, though, IP expiries don’t necessarily lead to a sharp patent cliff. “You aren’t depending on the protection from IP, so the life cycle continues growing,” says Blobel, adding that SciClone grew revenues faster for Zadaxin (thymalfasin), a treatment for hepatitis B and C, liver cancer and other cancers, and as a vaccine adjuvant, after the patent expired.

IP is beneficial in China, however, because it allows a company to fetch a better reimbursement price. “If you are the originator and have IP, it allows you – for a long time, even after the patents expire – to enjoy preferential pricing,” says Blobel. Measured by revenue, Zadaxin is one of the largest imported products in China, earning roughly $100 million in 2011, and $30.4 million in 2Q 2012, according to company reports. Although Zadaxin is approved in 30 countries, 97% of sales come from China, where the product was first approved in 1996. The product is listed on the Reimbursement Drug List – which is distinct from the Essential Drug List – and receives government reimbursement as a result. Last month, SciClone announced a government-mandated 18% cut to Zadaxin’s retail price, but the company says the ultimate impact of the price cut will amount to roughly 5%, as SciClone’s importation and distribution network will shoulder the majority of the percentage decrease.

SciClone’s sales force numbers around 850. Sanofi, on the other hand, employs multiple thousands of sales reps in China. So why does it make sense for Sanofi to pay SciClone to market Depakine, a broad-spectrum anticonvulsant? “Sanofi focuses its four or five thousand reps on Plavix and Lantus,” says Blobel. “When they were promoting Depakine, they grew it bys eight or nine percent a year, topline. Since we took over in 2008, we have grown the brand by 30% every year.” Blobel says one of the reasons SciClone is able to be more effective is due to the company’s focus on fewer products. “It’s very difficult to focus an organization on 10 products and get the same power behind them,” says Blobel. “At SciClone, the business unit that handles Depakine, that’s the prime product they’re selling. For Sanofi, it would have been an also-ran. That’s the key difference.” Blobel says another important element of professional promotion in China is an expertise in the hospital system, and its myriad departments. “If you want to sell Depakine as an anti0epilepsy drug, you need to go to the people who are treating this. For bipolar disorder, it’s another department. Focusing [reps] on specific departments within the hospital” is crucial to generating new sales, says Blobel.

Like several companies operating in China, SciClone is currently under investigation by the SEC and the DOJ for potential violations of the Foreign Corrupt Practices Act (FCPA). Last November, the company hired a VP of compliance – Min Yin – based in Shanghai, and has conducted it’s own investigation to determine what practices were violative, and what needed to change. Based on the internal investigation, Blobel says the problem boils down to three issues.

First, Chinese physicians visiting the US for medical meetings like ASCO took side trips on the way home, stopping over in Disneyland, for example, which is “not okay,” says Blobel. Secondly, the policies and training put in place by the company were not intensive or explicit enough, admits Blobel. Lastly, the finance team in China was “too independent and was run on too long of a leash.” Now, the financial team reports directly to the US-based CFO, and new training programs and other compliance practices have been put into place, and shared with the SEC and DOJ. The SEC investigation was launched in August 2010, and Blobel is hopeful – based on guidance from his legal representation – that “maybe later this year, or maybe in Q1 2013” the investigation will be concluded.

One of the particular challenges with respect to the FCPA, according to Blobel, is that “in the definition of the SEC and the DOJ, every doctor in China is a government official,” since just about every hospital has at least some equity participation from a municipal or provincial government entity. “In the eyes of the SEC, since every doctor is a government official, if you give them four mooncakes in a year, that’s already too many,” says Blobel.

On the question of whether China’s Essential Drugs List (EDL) will be expanded to include specialty drugs, especially cancer drugs, Blobel says its likely to happen late this year or early next year. But the big question, according to Blobel, is what the government will do to ensure acceptable quality. Since the prices on the EDL are so low, manufacturers can feel forced to take shortcuts. “With these rock bottom prices, the government pushes too aggressively, which causes some companies and many local manufacturers to cut corners,” which is unfortunate, says Blobel.

While health insurance is expanding to include much of the country, it’s mostly at a low level – around 200 renminbi per person, per year – at least relatively speaking. “A consultation at a university hospital might cost only two or three renminbi, so in this context, 200 is a pretty decent amount,” says Blobel. “But most originator drugs, including Zadaxin, an injection might cost five or six hundred renminbi, so two hundred doesn’t last very long.”

Blobel says that China’s economy is likely to change so that more and more people will be able to afford innovative medicines, but that change will take time. “The government realizes, and most economists agree, that the Chinese economy needs to be switched from an exporter model to a more consumer-driven model. The people have the money, they have the savings, but they will only use it to consume more if two fundamental concerns are solved: health insurance, and a pension plan, or what happens when they grow old.”

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