China: Business as UNusual - Pharmaceutical Executive

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China: Business as UNusual
If there is one market this year that requires a click on the refresh button, it's China. If the 'growth curve' key was pressed, it should be your first delete. Pharm Exec's local partner, General Biologic, logs on with a snapshot of what's ahead for Big Pharma in managing for long-term success


Pharmaceutical Executive


An End to Branded Generics?

Over the past decade, multinational pharmaceutical companies (MNCs) have proven able to compete on China's crowded generics playing field, and enjoy growth levels at or above the medicines sector as a whole. (Japanese pharmaceutical companies have been the notable exception for a number of reasons, including painfully slow decision-making in the boardroom.) Pharma MNC success in China has been built on the foundation of branded generic products, which have enjoyed higher prices and preferential treatment in the marketplace. Going forward, however, the branded generics space is one that will likely be increasingly unattractive for MNC players. Key factors clouding the horizon include systemic changes in China's health system in the areas of:

Pricing: In their capacity as product originators, overseas drugmakers have been granted higher maximum pricing (referred to as "separate pricing") for their branded generics compared to their domestic generic brethren, which are limited to a lower maximum price ("general pricing") by the National Development and Reform Commission (NDRC). These separate prices, which may be significantly greater than general maximum prices, have played a major role in rendering MNC-branded generics attractive to hospitals. A new price list released on Nov. 29, 2010, focusing on essential drug list (EDL) products reduced separate pricing on 49 drugs (counted by molecule name) out of the approximately 200 Western drugs (including chemical and biological drugs) on the EDL. Moreover, the edict canceled separate pricing altogether for 13 products from 10 MNC pharmas. Going forward, reports coming from the NDRC indicate that the pricing body is now considering reducing or halting separate originator pricing across the board. Specifically, the NDRC will likely set a transition period of four years, during which the government will gradually reduce differences between separate and general drug pricing.

This news has been greeted with enthusiasm from some corners of the domestic drug industry, which chafes at what it perceives as preferential treatment of overseas pharma. In fact, a significant number of local pharmaceutical companies have achieved separate pricing for their products, often via non-innovative reformulations or combinations with vitamins or other products—a stratagem likely to be snuffed out by the new regulations.

Hospital Incentives: With markups on drugs limited to an average of 15 percent by governmental regulation, hospitals have historically been keen to push higher-priced products, a position that favored the separately priced branded generics segment. The Ministry of Health (MOH) has made it clear that "profit-seeking" activities at hospitals will be curtailed, and profits on drugs (which have constituted a large portion of hospital profits) will be targeted directly. Measures being piloted by the government include prescription fee systems (in which hospitals are reimbursed a set amount for each drug, independent of price) as well as zero-markup policies in smaller community clinics.

Physician Incentives: These are closely tied to the hospital incentives. Physicians typically receive a monthly bonus on top of their (meager) salary, which is based on revenues earned for their parent department or hospital. As profit motives are eliminated at the institutional level, this will translate into disappearance of physician rewards for prescribing more costly treatments.

Hospital and Clinic Formularies: A key pillar of healthcare reform has been creation and implementation of the EDL system. Many smaller hospitals and clinics have found their formularies restricted to generic products on the EDL, which must be provided to these facilities and then sold at rock-bottom prices. Under most circumstances, supplying EDL products is an unattractive prospect for MNC pharmas.

Central Procurement: A previous column in Pharm Exec (Nov. 2010, page 18) discussed the significant changes afoot in provincial and municipal drug sourcing, including the commencement of mandatory centralized online procurement and tendering. The establishment of such systems is serving to reduce drug wholesale prices via competitive bidding processes (and evaporation of incentive payments under the harsh glare of transparency). Much attention has focused on the creation of local "drug exchanges," the most notable example being the Chongqing Medicines Exchange. These entities seem poised to suck much of the value out of the drug distribution area and, moreover, speed generic drugs in China further down the road to commoditization.


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