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The majority of China's provinces, autonomous regions, and municipalities under the central government have either partially or totally completed their initial procurement rounds. In most cases, procurement for products on the EDL was undertaken in advance of non-EDL pharmaceuticals. Both distributor limitations and price pressures resulting from this process have generated significant opposition. For example, attempts to reduce distributor numbers have already been dealt a serious setback. In response to heated accusations of local favoritism, the Beijing municipal government recently reversed its previous plan to restrict centralized drug procurement to 10 authorized distributors, and has now allowed more than 240 commercial enterprises to again participate in drug distribution activities within the city.

In Chongqing, regulators have been successfully sued by a (well-connected) pharmaceutical operator claiming that the Chongqing municipal health bureau does not have the authority to organize and direct centralized procurement. On the pricing front, industry insiders have claimed that pharmaceutical companies are tendering artificially low prices, in some cases below cost, to simply win regional bidding processes, and that actual prices are later raised via additional agreements with local governments. Regional healthcare procurement authorities are said to be complicit in the process, as they may use the initial low price results as evidence of success in reform implementation.

The changing landscape of procurement and distribution will impact global pharmaceutical companies participating in the Chinese drug market in a number of ways:

» Access to hospital formularies may be reshuffled. Small local distributors with preferential relationships may be pushed aside or acquired by larger operators. Formulary access may become more open, and these larger players may be just as likely to control it. A relevant example is Tiantan Hospital in Beijing, which has ceded responsibility for pharmacy inventory management and control to Beijing Pharmaceutical.

» Preferential pricing for selected novel drugs will be harder to secure. Centralized online procurement is injecting increased transparency into wholesale pricing and the accompanying markups; along with other elements of healthcare reform, this will reduce the profit-making opportunities for hospitals from the sale of medicines. Drugs awarded separate (higher) maximum retail prices by China's pricing body, the National Development and Reform Commission (NDRC), will be an increasingly important avenue for sidestepping the falling prices of commodity generics. However, rumblings from the NDRC suggest that preferential pricing for originators, branded generics, and even patented products will be facing downward pricing pressure of their own as health reform is phased in.

» Regional government affairs teams will become more important, as will the ability to forge close relationships with key distributors. Consolidating control of drug bidding and purchasing in the hands of provincial drug/commerce regulators will necessitate increased government relations efforts at this level from pharma companies. Managing the relationship with larger commercial distributors, as these players continue to gobble smaller competitors as well as drug retail chains by the handful, will also be a major priority.

» Market access managers and their teams will need to stay nimble. Pharmaceutical tendering may ultimately be rendered a less chaotic beast, but there is no doubt that the near/mid-term will see rapidly changing drug bidding protocols and requirements. Managers will need to make sure that they have access to timely and accurate information surrounding local procurement policies and procedures.

The Bottom Line

Drug procurement and wholesaling is one of the most convoluted and problematic areas of China's pharmaceutical value chain, so efforts to build more transparency and fairness into the system must be seen—at least in principle—as a welcome development in moving China toward a 21st century healthcare market. The new regulations will likely, in the long term, do much to thin the ranks of the myriad of small, hard-to-regulate players in the area, increasing the overall efficiency of the drug supply process. In the near-term however, stakeholders ranging from manufacturers and distributors to hospitals and medical consumers can expect a period of uncertainty, likely plagued with uneven implementation of procurement guidelines and regionally fluctuating prices.

Jon Zifferblatt, MD/MPH, is managing director of Shanghai-based General Biologic (GBI). He can be reached at jziff@generalbiologic.com