ACCORDING to an analysis by IMS Health, the pharmaceutical market in China was valued at around RMB 1.1 trillion in 2015. More telling is the fact that over the last two years, the growth rate has decreased by 80 per cent, reflecting the perfect storm of a slowing economy, healthcare budget constraints, anti-corruption/anti-abuse measures, and the transformation of the generic industry. The market is still growing, however, and is forecast to do so at the rate of nearly 7 per cent per year through 2020. The sales value of the Chinese hospital market reached RMB 645.3 billion in 2015. This represents a 4.9 per cent increase over the previous year.
The slower growth in the pharmaceutical market is part of a larger picture which may get worse before it gets better. Growth in the Chinese GDP has slowed to 6.5 per cent with an ever increasing level of debt reaching 250 per cent of GDP. A flood of liquidity in the market has led to large bubbles in the housing and stock markets.
At the same time, the country's Basic Medical Insurance (BMI) system is strained to cover a rapidly ageing population and a shrinking labour force. Now in its seventh year, the new healthcare reform efforts have made very limited progress. With the implementation of "zero mark-up" for drug prices at hospital pharmacies, many hospitals are now forced to demand additional discounts from pharmaceutical manufacturers to finance hospital operations.
Multinational companies (MNCs) also face heavy competition from the 4,600 local companies in China producing generics. It is especially hard for MNCs to compete when they must contend with a multi-tiered system of 13,000 distributors and their attendant markups. The transformation to "premium generics" began in 2015, and forced channel consolidation has begun in 2016.
Three emerging trends are likely to impact the growth of China's pharmaceutical market during the next several years.
Trend 1: Tougher tendering policies force price cuts
As a result of new tendering policies, MNCs and local pharmaceutical companies alike will face dramatically increased pricing pressure.
To stay in the game, manufacturers will have to yield on price, and making such concessions will limit their opportunities for growth.
IMS Health foresees that:
- Shorter bidding periods will drive frequent price cuts, but will bring more market opportunities for innovative medicines;
- Price cuts will be more significant, requiring a new approach to the price/volume tradeoff;
- Extending reference pricing to the national bid price will introduce a significant challenge. Prices will be set according to the lowest price in the country, rather than in a smaller, more relevant area.
Trend 2: Healthcare reforms constrain pharma's opportunities
There is a growing urgency to contain costs in order to balance the BMI budget. In 2016, up to 100 public hospitals have been listed as pilot locations for a reform initiative focused on controlling both the volume and price of medicines used. By 2017, the drug expenditure as a percentage of overall expenditure is to be reduced from 45 per cent to 30 per cent, and payment based on diagnosis related groups (DRGs) will be implemented in pilot cities. Increasingly, the mature products marketed by MNCs will be competing directly against generics in tendering, and tendering and hospital listings will involve multiple rounds of price cuts. A regulation is currently in draft that would require new product prices to be set no higher than in reference countries, as a condition of market approval.
Trend 3: cGMP and bioequivalence requirements restructure generics market
As a major effort to improve the quality of domestic pharmaceutical products, Good Manufacturing Practices (cGMPs) and bioequivalence requirements are being implemented. The goal is to establish interchangeability between generics and branded off-patent products. It is widely anticipated that up to two thirds of 4,600 local manufacturers of inferior products will disappear in the next 3-5 years.
In time, high-quality generics are expected to enjoy the same privileges as products from MNCs in terms of market access, prescription preference, and acceptability. The establishment of a quality assurance system for generic products will improve the quality of generics and elevate their standing in the market. In effect, the concept of "originator" will no longer exist; MNCs will compete directly against generics with increasing price pressure.
The future of the healthcare market in China will be a complex mix of opportunities and challenges. A range of new policies are poised to exert significant pressure on domestic and multinational firms alike. IMS Health forecasts that the pharmaceutical market in China will grow by 7 per cent year-over-year from 2016 to 2020 - a rate that compares favourably to mature markets.
Positive factors bolstering this growth include:
- Expanded coverage of healthcare insurance;
- The launch of new medicines;
- Improved basic healthcare facilities and services;
- High incidence of chronic disease;
- Expensive drugs listed in the reimbursement system;
- Private investment in healthcare.
Negative factors tamping down growth include:
- Stricter controls on the medical insurance budget;
- Tough bidding processes;
- cGMP and Bioequivalence requirements;
- Reasonable drug use practices;
- Decrease in the drug/expense ratio.
RESPONDING TO CHALLENGES
One possible strategy for MNCs is for them to shift their focus from mature products to innovative products as well as those that maximise synergies within the portfolio. Another is to consider mergers and acquisitions or other local partnerships that can broaden market access and mitigate risk.
Local pharmaceutical companies will also need to think through their options for responding to new market realities. For local pharmaceutical companies, the first requisite for market success will be to win tendering against generics. This can be accomplished by focusing on high-quality generics, bio-similars, and by partnering with MNCs to market their mature branded off-patent products.
They also should consider increasing their investment in R&D pipelines, gradually expanding from limited innovation in "me too" or "me better" products to full innovative first-in-class medicines. Another possible strategy would be to expand in diversified directions: that is, globalisation, medical technology, consumer health, and healthcare services.
For the next few years, growth in the pharmaceutical market in China will be sound, but will be tempered by the general economy, tendering policies, healthcare reforms, and the strength of generics. Rather than continuing to pursue "business as usual", manufacturers are urged to re-evaluate their entire approach to the Chinese market. They will need to assess their business models, their strategies, their portfolios, and their R&D pipelines. This effort, while sweeping, will be key to continuing to thrive in the Chinese market.
- The writer is president, China and South-east Asia, IMS Health, People's Republic of China