Government reforms will radically change China pharma market

A policy document released alongside the Third Plenary meeting of top Communist Party leaders in Beijing will have systemic consequences for pharma manufacturing and distribution

The Third Plenary meeting of top Communist Party leaders in Beijing last November concluded with a rallying cry for reform that will have systemic consequences for pharma manufacturing and distribution. A policy document released alongside the meeting called for the acceleration of health system reform, particularly of public hospitals, while restructuring pharmaceutical prices and reimbursement procedures. At stake is a drug market that McKinsey estimates could be worth more than US$310bn in retail sales by 2020 – second only to the US – as the government attempts to make some form of affordable healthcare available to all.

The aim is to reduce the cost of medicines via a root-and-branch overhaul of the way drugs are approved, priced and distributed, while improving quality control measures applied to domestic drugmakers, which typically produce cheaper alternatives to the high-priced but more reliable drugs sold by multinational corporations (MNCs).

The drive is accompanied by a corresponding crackdown on an endemic culture of kickbacks by drugs firms to doctors and other medical professionals, which enveloped GlaxoSmithKline in a global ‘incentives’ scandal late last year.

A key element of the bid to make access to low-cost drugs more widely available is an essential-drug list (EDL) – an index of drugs used in large volumes across the healthcare system and which have no price premium over generics. The list was recently expanded to include more than 500 medicines, according to a January report from the Boston Consulting Group (BCG).

‘On the ground recently, the main thing has been the first stages of implementing the new EDL since they expanded the list to some of the top-selling drugs,’ said Rob McTiernan, healthcare analyst with Asia-Pacific at IHS Global Insight.

‘In some ways hospitals don’t need to be pushed away from using more expensive drugs because once you include those molecules on the EDL then they are pushed into EDL tendering. It’s having an influence on what hospitals are purchasing right now in terms of provincial tender bids,’ he said, adding that the lack of a premium incentive had caused companies such as Sanofi to abandon tenders for Plavix completely.

The initial impact of these measures has been slow, with the NHFPC estimating that drug prices have dropped by only 1% nationwide since 2009

The EDL implementation is being complemented by a campaign from the government’s National Development and Reform Commission (NDRC) to cut the prices of drugs on the reimbursement-drug list, particularly those that it deems lack what BCG refers to as ‘true clinical differentiation’. It plans eventually to replace caps on retail drug prices with caps on reimbursement prices, in part based on a survey it has conducted into drug manufacturers’ costs that will help determine which products are overpriced, according to McTiernan.

Yet the initial impact of these measures has been slow, with the National Health and Family Planning Commission (NHFPC) estimating that drug prices have dropped by only 1% nationwide since 2009. Some experts have told Manufacturing Chemist that the government will have to reform the reimbursement system, increasing EDL usage and promoting the use of high quality branded generics from leading domestic companies.

There are expected to be more opportunities for locally negotiated reimbursement schemes, especially for oncology drugs

The pricing reform is being enacted alongside more fundamental changes to the way public hospitals source their revenue. ‘They’re using pilot schemes on separating management from sales, changing the funding structure of hospitals so they’re getting more money from fees and they’re less influenced by the price of drugs,’ said McTiernan. ‘There are expected to be more opportunities for locally negotiated reimbursement schemes, especially for oncology drugs. They’ve had things like patient access schemes (PAS) before but now there’s proper reimbursement, especially in relatively wealthier eastern coastal provinces.’

Elsewhere, provincial authorities are experimenting with pay-for-performance reimbursement schemes, trials of which have markedly reduced antibiotic prescriptions. The message is that the market will become less wasteful and more competitive, even as China’s sheer size and the rollout of wider healthcare access ensures opportunities for growth.

The plenary resolution also ordered a ‘relaxation of investment access’ for both overseas and private capital in key sectors. In January, the NHFPC announced that investors from Hong Kong, Taiwan and Macau were open to run their own hospitals in any prefecture-level city. Investors from other foreign countries were now free to establish wholly foreign-funded medical institutions in certain regions, including the Shanghai Free Trade Zone, and approval procedures for private medical institutions would be streamlined.

The message is that the market will become less wasteful and more competitive

These changes are an important indication of how China’s drugs market could develop in future, maybe pushing MNCs into selling more innovative medicines in China, as clinical benefit becomes more important. ‘In terms of the third plenum there’s definitely encouragement for private sector involvement,’ agreed McTiernan, citing the recent insurance sector deal between Allianz and China Pacific Insurance to set up a health insurance joint venture.

On the domestic front, McTiernan expects China’s nationwide implementation of GMP to drive consolidation in the domestic generics market as smaller firms making low quality drugs are either acquired or forced out of business, while opening doors for Chinese firms with top talent and high standards in the biologics sector. ‘WuXi PharmaTech is the major player after opening an internationally GMP-compliant biologics manufacturing facility in 2012,’ he said. ‘Local firms are developing home-grown capabilities, with overseas talent looking to develop biosimilar and bio-better products to international standards.’

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