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 in China should
be examining ways to freshen and adapt their 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. Hence as foreign investors contemplate the way forward, the key strategic
question is whether the government will maintain price incentives for the more innovative therapies.
Getty Images / Stephanie Dalton Cowan
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 Chinas 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
Making the Case
China's health regulators have already indicated that pharmacoeconomic evaluations will impact 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, hence 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.