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China's healthcare reforms generate uncertainty for its domestic pharmaceutical market.
China's market for pharmaceuticals is undergoing a wrenching transition that so far has revealed one basic truth: The days of making easy money off a predictable stable of high-priced branded generics are over. Every multinational firm in China should be examining ways to freshen and adapt its product offerings, with particular emphasis on the consumer health and patented innovative segments of the market. The change is paced by systemwide public health infrastructure reforms that will greatly expand public access to low-cost essential medicines. As foreign investors contemplate the way forward, the key strategic question is whether the government will maintain price incentives for the more innovative therapies.
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To date, the government has sent mixed signals about the role of novel, patented drugs in the new universal healthcare system it aims to have in place by mid-decade. Programs sponsored by the Ministry of Science and Technology (MOST) and Ministry of Health (MOH), as well as portions of China's new 12th Five-Year Plan, actively support innovation as a means to boost the capacity for domestic drug discovery. Recent reorganizations at the State Food and Drug Administration Center for Drug Evaluation, which include new, dedicated staff for the fast-tracking of novel drug applications, are expected to make approval times for such therapies significantly faster. At the same time, however, healthcare authorities stress that high drug prices are firmly in the cost-containment crosshairs, and that even newer on-patent drugs may be subject to mandatory price limits. While the full picture remains unclear, it is possible that much of China's new public health system will be unable or unwilling to accommodate the price points required by novel, patented drugs and new therapies.
Thus, making a strong case for innovation in drug policy should be a critical element in any short-term strategy for foreign drug investors in China. The issue is how to create the traction that will convince the government to recognize a new drug's value. Two possibilities that hold promise are: 1) pharmacoeconomic strategies that can demonstrate superior cost-effectiveness; and 2) leveraging potential opportunities in a parallel, for-profit private healthcare system to support the basic public service.
China's health regulators have already indicated that pharmacoeconomic evaluations will affect decisions on market access. For example, in the recent round of revisions to national and regional reimbursement drug lists, therapies for chronic indications that result in a higher cost burden when left untreated received increased coverage and reimbursement. In particular, many cardiovascular preparations, including angiotensin receptor blocker combination products, were added to provincial reimbursement drug lists. It is highly likely that this trend will continue, and pharma companies that are able to advance well-articulated cost-effectiveness arguments in support of higher-priced new products should find a receptive audience at the municipal, provincial, and national governmental levels. Pharmacoeconomic strategies are well known to foreign manufacturers from their experience in other markets. Companies would do well to bolster functional capabilities in this area as part of their China operations.
In contrast to the pharmacoeconomics tool, the likelihood of a private health system continuing to serve the discretionary upper-income market, which will presumably be open to using premium-priced innovative therapies, is less clear. Pharmaceutical companies, like everyone else, are left guessing at future scenarios. Given the potential importance of this setting, investors must understand the current state of private healthcare and monitor developments in this area so that, at such time that a legitimate and sizable private medical market emerges, pharma is ready to greet it.
China's healthcare reforms, drafted over the course of the past two years and now entering a phase of national and regional implementation, are fundamentally changing the structure of medicine and its delivery across many levels. Many have speculated about the role of private healthcare, including foreign-invested private healthcare, under this new medical system. Although the original language of the healthcare reforms does mention private healthcare (and commercial insurance), it is only within the past several months that regulators have begun to more fully articulate their position on private medical facilities. There are strong signs that the government is preparing for a relaunch of private healthcare. This has been attempted in the country before, but, with a few exceptions, was seen as a complete failure. This time, however, the government intends to get it right.
Jon Zifferblatt is managing director of General Biologic.