How China’s New Drug-Buying Program Is Causing Pain

(Bloomberg) -- China is overhauling its health-care system with the aim of providing broader access to quality drugs for its enormous population. The result: Drug prices are tumbling and eroding the once-high margins of drugmakers, both local and foreign. For manufacturers, the pressure on prices in the world's No. 2 pharmaceuticals market is set to intensify as China hones its strategy of extracting mega-discounts in exchange for access.

1. What exactly is China doing?

It has a two-pronged campaign. The first approach is to add top-of-the-line new treatments to its national insurance coverage list only if drugmakers agree to dropping their prices. That's a bitter pill to swallow for pharmaceutical companies that have spent billions of dollars developing treatments. In November, manufacturers agreed to a 61% average price drop for the 70 drugs added to the reimbursement list. This, according to China's National Healthcare Security Administration, made the imported drugs the cheapest in the world.

2. And the other approach?

This is aimed at generic drugs, medications whose patents have expired and are made by multiple low-cost manufacturers as well as the original developer. China has initiated a nationwide program that requires drugmakers to submit bids to supply commonly used generic drugs to public hospitals. Some have seen price cuts of more than 90%. The pilot plan in December alone saved as much as 5.8 billion yuan ($820 million).

3. So this is bad news for pharmaceutical companies?

Not entirely. The price reductions will inevitably hurt the bottom line of both Chinese and multinational drugmakers. On the other hand, the program potentially opens up access to a vast patient population, at least for companies that make the reimbursement list. China's 2.34 trillion yuan national medical insurance fund covers 95% of the 1.4 billion population, and the drugs on that list are almost entirely paid for by state funds.

4. What about generic manufacturers?

There's no such consolation, especially for domestic companies that were previously reliant on cheap production to drive revenue. Nearly 70% of China's 65 listed drugmakers have flagged slower profit growth citing, among other reasons, the procurement plan.

5. How are multinationals faring?

They're counting on the Chinese government to usher their novel treatments in at a fast enough rate to justify the price cuts. China's regulator has reformed its drug approval process and is already greenlighting some drugs faster than in the U.S. AstraZeneca Plc expects new and innovative treatments to contribute 60% of its China revenue by 2024, up from just a fraction currently, as it pivots away from the generics business. Local drugmakers and biotech startups such as Jiangsu Hengrui Medicine Co. and BeiGene Ltd. are also trying to accelerate their development of new drugs with the goal of competing with western pharmaceutical giants on the global stage.

The Reference Shelf

• China is building the world's best and cheapest health-care system.
• China's drug buying plan drags down drugmakers' sales.
• Policy overhaul triggers a flood of profit warnings.
• Companies cut prices to get into the national insurance fund.
• A QuickTake on how faulty vaccines sparked panic.

To contact the reporter on this story: Rachel Chang in Shanghai at wchang98@bloomberg.net

To contact the editors responsible for this story: Rachel Chang at wchang98@bloomberg.net, Grant Clark, Jeff Sutherland

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