Free Pricing Of Drugs To Benefit Domestic Pharmaceutical Firms

BMI View: The pharmaceutical industry will benefit from China's new proposal to allow market pricing of common but essential drugs in short supply. Domestic firms in particular stand to gain, as market pricing will help to improve profit margins. However, we highlight that the policy may only be temporary and that the country's overall aim to provide affordable healthcare may limit its scope. Consequently, we are maintaining our forecast for China's pharmaceutical market.

Eight departments of the Chinese government, namely the National Health and Family Planning Commission (NHFPC), National Development Reform Commission (NDRC), China Food and Drug Administration (CFDA), Ministry of Finance (MOF), Ministry of Industry and Information Technology (MIIT), Ministry of Human Resources and Social Security (MHRSS), and the Ministry of Commerce and State Administration of Traditional Chinese Medicine (SATCM), have released a statement announcing a policy that will secure the supply of commonly used low-price drugs.

The statement revealed that since the second half of 2013, some patients suffering from hyperthyroidism have reported a shortage of Tapazole (methimazole). Mao Qun'an, a spokesperson for the NHFPC, stated that the essential drug system was somewhat to be blamed for the supply shortages. BMI has highlighted previously that various provinces enact their own tender system regulations, which have resulted in price wars. [1] Given the potential for increased volume sales through essential drug listings, we believe that similar price wars may have caused a fall in drug prices, making it difficult for manufacturers to produce these essential drugs, and resulting in shortages.

Strong Growth Potential
China Pharmaceutical Expenditure (CNYbn)

BMI View: The pharmaceutical industry will benefit from China's new proposal to allow market pricing of common but essential drugs in short supply. Domestic firms in particular stand to gain, as market pricing will help to improve profit margins. However, we highlight that the policy may only be temporary and that the country's overall aim to provide affordable healthcare may limit its scope. Consequently, we are maintaining our forecast for China's pharmaceutical market.

Eight departments of the Chinese government, namely the National Health and Family Planning Commission (NHFPC), National Development Reform Commission (NDRC), China Food and Drug Administration (CFDA), Ministry of Finance (MOF), Ministry of Industry and Information Technology (MIIT), Ministry of Human Resources and Social Security (MHRSS), and the Ministry of Commerce and State Administration of Traditional Chinese Medicine (SATCM), have released a statement announcing a policy that will secure the supply of commonly used low-price drugs.

The statement revealed that since the second half of 2013, some patients suffering from hyperthyroidism have reported a shortage of Tapazole (methimazole). Mao Qun'an, a spokesperson for the NHFPC, stated that the essential drug system was somewhat to be blamed for the supply shortages. BMI has highlighted previously that various provinces enact their own tender system regulations, which have resulted in price wars. [1] Given the potential for increased volume sales through essential drug listings, we believe that similar price wars may have caused a fall in drug prices, making it difficult for manufacturers to produce these essential drugs, and resulting in shortages.

The statement details that the eight government departments will essentially allow free pricing of selected essential drugs in low supply. Several mechanisms have been put forward to boost supplies of these drugs. Key proposals include:

  • Pricing: Remove maximum price ceilings, allow firms to set their own pharmaceutical prices, so that they can profit at a 'reasonable' rate. Once drug supplies return to normal, a new price ceiling will be set.

  • Procurement: Improve medical institutions' involvement in drug procurement, allowing manufacturers to directly contact institutions. Producers will be given priority to select the 'best' distribution company to ensure the proper distribution of drugs.

  • Storage: Establish a central facility to store drugs for which demand is uncertain, local storage facilities for drugs with known demand.

  • Policy Support: MIIT to provide more guidance to improve companies' technology in manufacturing these drugs, and speed up 2010 good manufacturing practice (GMP) approval. CFDA will also prioritise the approval of generic versions of these drugs. NHFPC and SATCM will jointly encourage the use of these drugs in various medical institutions and record usage details.

The proposed changes are positive for drugmakers, in particular domestic drug manufacturers, which are the majority of essential drug suppliers in the country. Due to price wars in recent years, domestic manufacturers' profit margins have been affected. An unidentified worker at Beijing Yanjing Pharmaceutical, one of the main suppliers of Tapazole, stated that the firm stopped producing Tapazole in June 2012 due to the low prices. The worker added that the cost price of each Tapazole [prescription / dosage?] was CNY2.00 (USD0.32), but the bid price was CNY1.27 (USD0.20), resulting in losses for the company.

Despite the benefits of the new policy, we highlight that it may only be a temporary measure to boost drug supply. Through medical reform, the government has been emphasizing its focus on providing affordable healthcare for the population, and has enacted a series of price reductions in line with this aim. Moreover, we highlight that while allowing free pricing of certain drugs is a key theme in this notice, enhancing cooperation between the various ministries, speeding up approvals and incentivizing the speed up of approvals are equally important, as they will showcase the government's willingness to solve emerging healthcare issues.

Consequently, we are maintaining our pharmaceutical sales forecast in China, given that we currently do not know how many drugs will be affected by the new regulation. According to Zheng Hong, the NHFPC drug administration chief, the list of the drugs is expected to be publicized by June 2014. BMI therefore forecasts that pharmaceutical sales will reach CNY610.8bn (USD99.7bn) in 2014, representing year-on-year growth of 14.7% in local currency terms. Between 2013 and 2018, we forecast that the sector will grow at a local compound annual growth rate (CAGR) of 12.4% (12.1% in US dollar terms), reaching a value of CNY955.9bn (USD152.9bn) by 2018.

Strong Growth Potential
China Pharmaceutical Expenditure (CNYbn)

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Related sectors of this article: Pharmaceuticals & Healthcare, Regulatory - Pharmaceuticals & Healthcare, Pricing/Reimbursement
Geography: China
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