Authored By: Vincent Duan, Principal Consultant, China
Late last year, China launched a pilot program to cut costs and centralize a fragmented system by transforming the pricing and procurement of generic drugs. Under the new scheme, generics manufacturers bid for the right to supply 60%–70% of the quantities of 31 pre-specified generics purchased by public hospitals in 11 large cities.
As a result of the bidding war, manufacturers slashed prices by an average of 52%—with one company shaving more than 90% off a drug’s cost. In return, they were guaranteed the entire allocated purchase amount from all 11 cities (including Beijing, Shanghai, Guangzhou, and Shenzhen), which together make up about a third of the Chinese drug market.
With more than 2,000 companies churning out generic drugs, China’s generics market is overcrowded and flooded with inferior quality products. Chinese regulators have upped the quality requirements and hope to squeeze out low-quality manufacturers. For example, firms that can’t pass the new generic drug consistency evaluations designed by the National Medical Products Administration (NMPA) cannot sell products in any of the 11 cities in the pilot program.
Another driving factor behind the government’s so-called “4+7” bulk-buying policy is to substitute generics for brand drugs. Under China’s longstanding two-tier tendering system, innovators often did not need to compete with generic manufacturers of their products directly. The success of the pilot program changes the game for global pharma companies: marketing and sales strategies that worked under the two-tier system are no longer feasible. Change is required.
As bulk-buy policies gain momentum, companies need a strategy
China’s Vice Premier Sun Chunlan recently confirmed the pilot would expand to cover more drugs and more cities, albeit conceding “this reform involves multi-interest adjustment and will inevitably encounter some resistance.”
On Feb 28, 2019, the State Medical Insurance Bureau published new guidelines on medical insurance prepayment, payment standards, and hospital incentives. The payment standard will require hospitals to purchase products from companies that win supply contracts through the bidding process, thus ensuring implementation of the pilot program. Suppliers that don’t win contracts are encouraged to lower their prices to match those of the winning bidders.
Global pharma companies with branded off-patent products that currently claim a majority stake in the China market may face increasing downward pressure on prices and the risk of losing market share to generics. As bulk-buy policies gain momentum, companies need a smart strategy. Here are four considerations:
1. Cut prices to gain a firm foothold in the market
International companies that cut prices and win bulk supply contracts can reduce marketing costs to zero and still be able to forecast their Chinese production demands with pinpoint accuracy. However, if they don’t lower prices sharply enough, local generic drug makers—assuming they can pass recently enacted bioequivalence and quality tests—have a good chance to wrest away market share because contracts will automatically go to the lowest bidder. In this setting, the cachet of a globally recognized brand name won’t trump lower prices.
In the past, multinationals hesitated to get into China due to the complexity of the local reimbursement system and the lack of local resources. But bulk-buy bidding wars for generics makes it easier to break into the China market: Now all you need to do is lower the price.
Guaranteed sales volume can offset the impact of price cuts and help companies consolidate their market position.
2. Understand how brand loyalty works in China and develop more high quality generics
Recent regulatory reforms in China demonstrate that the NMPA is willing to introduce quality drug products into China as early as possible by promoting greater regulatory flexibility and speeding review times. As well, the guidance on acceptance of overseas clinical data published by NMPA means foreign companies can get their generic drugs approved faster and with data from clinical trials not conducted in China.
Global pharma companies may want to consider expanding their portfolios to include more generic drugs to leverage their strengths on product quality and consistency. Lowering marketing and sales costs will allow them to showcase their potential advantages in drug product quality and manufacturing capacity while building brand loyalty among healthcare providers and patients.
Brand loyalty is a motivating factor for wealthy Chinese who are willing and able to pay more for what they perceive to be a higher-quality product; it’s also a factor for less-affluent Chinese consumers, who view foreign-branded drug products as superior to those produced by small local generics manufacturers. The 11 cities in the pilot program represent some of the most economically developed areas in China, with average incomes among the highest in the nation. By saving money in marketing and sales, global pharma can invest more resources on strengthening relationships with healthcare providers, educating patients, and fostering brand loyalty.
3. Introduce more complex generic products to China
Due to the limitations in technology and manufacturing capabilities, most domestic generic companies focus on relatively simple generic products. Developing complex generic products will help build a technology barrier that can fend off competitors and ensure a higher price point.
For example, in the centralized procurement pilot, for products with the same active pharmaceutical ingredient (API), the price for more complex formulations could be higher than for regular formulations.
4. Introduce new drug products to China earlier
As the cost of generic drugs plummets, there theoretically should be a more substantial budget available in China’s national reimbursement system for new drugs. Bulk purchasing rules will not apply to novel drugs with patent protection, which will still be able to command a significant premium (albeit a lower one than in Western countries).
Foreign firms can leverage their advantage against local firms with less experience in developing and commercializing novel drugs. To capitalize, global pharma may need to move China further up in the sequence of global marketing application filings.
Bulk-buying rules present an opportunity
The China market is changing fast, continually challenging the pricing and return on investment (ROI) model of the global pharmaceutical industry. But the sheer size of the market makes it impossible to ignore. There are big opportunities for global pharma companies that understand and play to China’s new rules.