SHANGHAI - China's essential drug system will hasten the consolidation of the generic industry while a measure for drug pricing will encourage innovation, according to a Frost & Sullivan report on the impact of China's healthcare reform, released May 18.

The essential drug system aims to reduce drug prices and improve medical access for underserved populations by instituting a drug bidding and government procurement system. Under that system, the central government will release a price guideline for drugs on the list and the provincial government will then set the final prices for those essential drugs. All retail drug stores and medical institutes will then stock up on listed essential drugs. The usage rate for necessary drugs for medical institutes will be defined by the Ministry Of Health and will be dependent on what level of care they provide.

The three-year goal for drug price reform consists of measures to perfect the drug-price management policy, adjust both drug prices and medical service fees and step up monitoring of drug prices, National Development and Reform Committee Director Zhang Ping said.

In 2009 the main task of China's healthcare reform is to establish the essential drug system and reform in the public hospitals. The first step will be to set a retail price guideline for essential drugs. The second step will be to cancel drug adjustment fees in hospitals, and then issue a new scheme for drug-price reform and medical service fees (Also see "China’s Central Government To Invest $17 Billion In Healthcare Reform In 2009" - Scrip, 26 April, 2009.).

All essential drugs will be distributed by a designated company in each province. "According to current rules, distribution will be the responsibility of one winner in the province, which will require a highly qualified and large-scale distributor," Frost & Sullivan China Pharmaceuticals Consulting Manager Kitty Lu told PharmAsia News. She said this would be a challenge for small distributors.

Big Pharma will benefit from increased sales from being on the essential medicines list, but drug prices will be reduced around 20-25 percent, according to report author Lu.

However, this is bad news for smaller companies, she said, because small companies targeting smaller markets will not see robust sales increasing, and therefore will see its markets shrink further due to reduced prices. One-third of small generic drug makers are expected to be filtered out of the market in the next three to five years by the implementation of the new system, according to the report.

"In fact, the new MOH administration pays more attention to the role of Traditional Chinese Medicines than ever in the management of treatment [in the essential drug list]," said Lu.

TCMs will take up half of the list, Gao Huijun, director of Shanghai FDA's Institute for Food and Drug Safety, said in an earlier interview (Also see "China Establishes Essential Drug List Committee To Deal With Conflicts Of Interest" - Scrip, 14 May, 2009.).

Innovative Drugs, First-to-market Generics To Benefit

Patented drugs and first-to-market generics will benefit from an individual pricing policy, according to the report.

"Based on our understanding, 'individual pricing policy' basically means a certain rate of increase based on the guided price of the same category. The rate is expected to be set by the government. In some cases, companies can apply for a higher pricing if they think the increase rate is not applicable to certain drugs," said Lu.

The first draft of the pricing policy has been completed, and it does allow a higher price for innovative drugs and first-to-market generics by the individual pricing policy.

This will encourage drug makers to invest more in R&D and to focus more on innovative drugs, according to Lu.

"Whether the pricing differential suggested is sufficient to encourage innovation or discourage rampant copying is up for debate, but conceptually these are [going] in the right direction," Shanghai-based L.E.K. Consulting Director Helen Chen said. Chen prepared a paper for the Pharmaceutical Research and Manufacturers of America that calls on the Chinese government to encourage innovative medicines to support China's healthcare reform (Also see "PhRMA And Beijing-based RDPAC Call For Innovative Medicines To Support China’s Healthcare Reform" - Scrip, 18 May, 2009.).

- Dai Jialing (j.dai@elsevier.com)

China’s Essential Drug System Expected To Consolidate Generic Industry, Promote Innovative R&D

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