China's drug price reforms: Much of the same?

A series of pricing reforms have taken place in China's pharmaceutical sector. On May 6, the National Development and Reform Commission (NDRC) and six other departments issued the Opinions on Promoting Pharmaceutical Price Reform (Opinions), which lift price controls for most drugs. They took effect on June 1.

But despite the hype, most pharmaceuticals are in fact subject to new pricing mechanisms that still involve the government.

“This shows the back and forth nature of China's healthcare reform,” said Lewis Ho, who leads Dechert's Asia life sciences practice. “The government wants to liberalise the market but at the same time retain control. It has a goal in mind but doesn't know how to achieve it yet.”

Under the Opinions, all pharmaceuticals except narcotics and top-class psychotropics are now subject to new pricing structures, all of which involve the government. Prices of drugs on the government's reimbursement list will be set by the authorities and insurers. Patented drugs will be priced through a multiparty negotiation involving stakeholders of the industry. Blood products, vaccines, HIV/AIDS treatments and birth control drugs will undergo bidding or negotiation. The rest are market-set – but how many drugs fall under this category?

Companies should not expect to have the upper hand in the negotiation and bidding processes designated for patented/innovative and blood products. “Foreign pharma clients feel that the burden is on them, as they have to give discounts during two rounds of negotiation, first at the provincial level and then at the hospitals,” said Ho.

The Opinions also give more freedom to local officials to exert control, he said. Discrepancies between the provincial and central drug lists mean that market manipulation may still occur.

“Previously, you could negotiate with the NDRC to settle at a higher price on a case-by-case basis,” said Nicolas Zhu, head of China life sciences at CMS. “There was lots of room for corruption, even at the hospital level.” While the new rules aim to fix this system, “we still need to see what the concrete procedures are, and how exactly the government aims to supervise the process,” he said.

The government will also set the standard for prices of drugs covered by insurance programmes, “but what the mechanism is and what the standards are remain unclear,” said Qiushi Guo, also of CMS. “We haven't seen any details, explanation or even trends on how this will work.”

Reform objectives

The goal of the price reform is to counter problems that have long plagued China's healthcare system. Small profit margins for both pharmaceutical companies and hospitals, relatively low salaries for local doctors and increasing market competition have made the structure vulnerable to corruption. The country's notoriously long drug registration process also meant that Chinese patients could not get access to the latest innovative products.

The first step of the reform was the amendment of the PRC Law on the Administration of Pharmaceuticals on April 24, specifically Article 55, which removed the old provision that drugs must be subject to pricing by the government. It now expressly states that the “market-regulated” pharmaceuticals must be priced based on fair and reasonable principles.

On a broader scale, the NDRC issued its draft Central Pricing Catalogue on May 4, which reduced the number of industries subject to government pricing by 80% compared with the 2001 edition. Only 25 items remain on the list, including natural gas, water supply, electricity, specialised services and, of course, special pharmaceuticals. The Opinions were released two days later.

Importing vs producing locally

Lessons learnt from China's legal environment has led foreign pharmaceuticals to rethink their strategies.

When international companies introduce a drug to China, they usually go through the imported drug route, where they can declare higher prices for CIF [cost, insurance and freight] and brand value. But the regulatory regime and long CFDA [China Food and Drug Administration] approval process can suppress innovation and limit the entry of new products.

“For imported drugs, you have to start from the very beginning by applying for a new drug registration – even if you have all the data and documentation from overseas exercises,” said Guo. “It's very likely that the CFDA will require you to conduct all four phases of clinical trials to introduce it into the Chinese market. The trial process may take 18 months to two years.”

Drugs already launched in the West typically experience five to seven years of delay before hitting the shelves in the mainland, and the approval for testing a new drug on humans takes only weeks in the US as opposed to the months/years in China. According to Forbes, over 80% of the Chinese drug market is generics, which are dominated by domestic firms. Also worth noting is the CFDA's limited resources and manpower, though it recently raised its application fees by several times to address the backlog.

Since 2006-7, China has seen a wave of multinational firms' R&D operations coming in. Global pharma giants like GlaxoSmithKline, Roche, AstraZeneca, Bayer and Eli Lilly all have R&D or clinical trial centres in the country. The regulatory process of manufacturing and releasing drugs in China is easier than that of importing, although the margin is larger for imported drugs due to the foreign brand label.

Foreign drugmakers have tried to maximise profit by attempting to get their drugs included on the reimbursement list in order to strike larger sales volumes, which involved converting their imported drugs into domestic drugs by manufacturing locally. The original plan was to use the low developing costs in China and the high quality of the product to get higher margins, but price controls made them realise it doesn't work that way, said Zhu.

Even though they had some leeway to price their branded generics slightly higher than local counterparts, foreign pharmaceutical firms found it challenging due to the low ceiling (or maximum retail) prices set by the government.

Hospitals, which are heavily subsidised (but not enough, experts say) and mostly state-run in China, have also found it hard to get by from selling cheap generics and so focused on innovative drugs. But many patients could not afford these more expensive labels, and there were a limited number of them due to delayed entry. “The market had some good generic drugs but hospitals didn't want to use them as they weren't profitable. This led to difficulties for the manufacturers themselves,” said Zhu.

“Even if a generic drug works well, the increased labour and manufacturing costs meant that pharmaceuticals could no longer survive,” he said.

Since the drugmakers couldn't get by on selling generics, patients couldn't be properly treated. The market ended up short of pharmaceuticals and consumers had to pay higher prices, Zhu continued. “The government wanted to resolve this issue.”

Need to focus

The new regime may further encourage foreign pharmaceuticals to manufacture new products locally. “In future, international companies may try to make their blockbusters and best selling drugs on the ground,” said Guo.

But the priority is for drugmakers to specialise their operations as most are facing problems regarding the lack of products in the pipeline. “Productivity isn't as good as they hoped for, so China operations won't be a one-stop R&D shop,” said Ho.

“Companies now want to diversify and optimise their portfolio, and foreign firms should focus on a specific model to increase market share,” he added. For instance, some have turned to only doing early stage chemical synthesis as it is relatively cheaper in China. Domestic companies, on the other hand, still tend to focus on generics as innovative drugs are riskier and more capital intensive.

Beware and be aware

The NDRC also pledged to step up scrutiny over the pricing process as the reform is tied to both the anti-monopoly and anti-corruption and bribery campaigns.

Over the next six months, it will intensify enforcement against illegal conduct by targeting behaviour such as falsifying information to increase prices, colluding or manipulating market prices, selling at unreasonably high prices through abuse of dominant market position, fabricating costs and price tags and raising prices of drugs already included in the centralised procurement programmes.

“In the past, regardless of whether global or domestic, the manufacturer had to submit their costs themselves so that the government could evaluate and fix a price cap for the product,” said Guo. “Many tended to submit a very high price and leave in the margins and PR costs in their application. They will have to be careful with that from now on.”

Companies need to be cautious as the NDRC is also equipped with experiences such as that gained from the GSK scandal. It also conducted a pricing survey exercise from the manufacturing, sales and distribution to hospital levels, and has kept tabs on the revenue of pharmaceutical companies.

“It has quite a clear understanding of the pricing structure and negotiation process, as well as who the key players are,” said Dechert's Ho. “The new regime presents both opportunities and threats. Pharmaceutical companies will have to prepare for these campaigns and investigations.”


By Katherine Jo