A David Deere Advisory Alert
Nine centuries ago, wealthy Christians often made pilgrimages from Europe to Jerusalem, among the most sacred places in the Holy Land. It was, to say the least, an arduous and dangerous journey. In the twelfth century, a religious order composed of unmarried men was established to guide and protect these travelers and secure the Kingdom of Jerusalem. These protectors were known as the Knights Templar.
In gratitude, Christians bestowed land and money to the Knights Templar, making them wealthy and powerful financers before widespread banking was established. As their influence grew, the Knights Templar became a target of jealousy both within and outside of the church.
Their power came to a sudden end when on Friday, March 13, 1307, King Phillip of France had many of the French knights arrested on charges of heresy against the Church. The Pope followed with an edict dissolving the order, ending their 200-year ascendancy. The number 13, which had long held associations among different religions as having to do with bad luck, strengthened the negative perception. To this day, people around the world fear or avoid the number 13.
It seems the Chinese government has tapped into this dread of the number 13. On February 9, 2017, the Chinese government’s senior administrative body, the State Council, announced Circular 13 –Opinions Concerning Further Reforms of the Policies Governing Drug Production, Circulation and Usage. While the role of the State Council is to set broad policy and general guidance, command administrative government bodies to develop detailed guidance and oversee implementation, the breadth and degree of directives contained in Circular 13, by western standards, are breathtaking.
Similar directives over the past 18 months have resulted in wholesale changes to the way that pharmaceuticals will be clinically developed, regulatorally reviewed and approved, manufactured, and commercialized. If these directives were the first shoe to drop, Circular 13 is certainly the remaining shoe.
China’s new policy directives reflect the government’s absolute intent to mandate the manufacture and use of high-quality domestic generics, promote innovative new drugs, rationalize drug distribution, optimize drug prices/purchasing, and eliminate any commercial incentivization associated with drug selection and use; all while enhancing enforcement and providing transparency. These across-the-board changes address quality, access and accountability, specifically:
- Encourages development of innovative new drugs with easier approval via the expedited approval process. Seeks to foster domestic pharmaceutical companies to invest in new technologies, improve quality, and for large companies, to expand internationally.
- Strengthens the Chinese Food and Drug Administration (CFDA) inspection teams, improve the inspection process, provide guidance to pharmaceutical manufacturers and ensure they adhere to good manufacturing practices (cGMP), with complete data integrity and publish inspection results. Companies that refuse to meet quality standards will be eliminated.
- Prioritizes that hospitals procure and use high quality, domestically manufactured generics that are bioequivalent with the innovator drug and have been deemed interchangeable. Only the first three generics approved as high quality generics will be eligible for tender bidding and procurement for hospital use.
- Expands the new Marketing Authorization Holder (MAH) system, which allows the use of contract manufacturing of innovative new drugs to include high quality generics if they are domestically developed or manufactured in China.
- Provides for the ability to grant and enforce a compulsory license for any patented drug used to prevent or treat a critical illness.
- Rationalizes drug distribution, by encouraging integration and consolidation of drug distribution companies for faster, broader and more efficient coverage; includes both wholesale and retail channels.
- Promotes the retail sales of pharmaceuticals and on the Internet. Consumers can order pharmaceuticals online, with pickup or delivery from brick-and-mortar retail pharmacies. Also, encourages broader pharmacist participation.
Drug Pricing and Tracking
- Requires companies to make price commitments of a potential product at the time of regulatory filing of their marketing authorization application. This price will be subject to further price-volume discounts at time of collective tender negotiations.
- Mandates that the price of a drug (patented or generic) cannot exceed the price in the country of origin or in China’s neighboring countries. (Currently, informal reference pricing is based on prices in Hong Kong, Macau, Taiwan, and Japan. The State Council did not specify neighboring countries, but the prices in Vietnam, Indonesian and India are much lower.)
- Charges the CFDA with establishing an ex-factory price database for pharmaceuticals that can be used for surveillance and better intelligence for antitrust enforcement.
- Mandates improvements in national drug price negotiation/procurement system to include national price transparency.
- Mandates that a system for collecting information, analysis, and reporting on drug shortages be established and authorizes active control of companies that produced the shortage drugs.
Hospitals, Reimbursement & Pharmaceutical Promotion
- To help better rationalize the use of pharmaceuticals, the National Health and Family Commission will develop and field health economic studies to evaluate clinical outcomes and establish cost effectiveness.
- All public hospitals are required to use Basic Medical Insurance (BMI) drugs and prioritize the use of essential drugs.
- By 2020, all Tier III and Tier II public hospitals will be required to publish their formal pharmaceutical procurement process, detailing drug prices and all sales information for each tinder season.
- BMI fund reimbursement will be calculated based on Disease Related Groups (DRGs), number of patients or total number of days in the hospital. The costs for drugs and consumables will not be separately reimbursed, thus a capitation.
- The performance review of public hospitals will be closely tied to the change in healthcare costs.
- Prohibit hospitals from obtaining any type of income compensation from pharmaceutical companies; this will require a new reimbursement system for public hospitals.
All medical representatives will be required to register with the CFDA (or provincial equivalent), their names will be published, and they can only engage in academic-based professional promotion or technical consulting. Sales promotion is prohibited and violations will impact the individual’s credit rating.
Prepare Yourself – Here’s What It All Means
While the first wave of directives transforming China’s pharmaceutical environment are still being implemented, this second wave will likely be addressed relatively quickly, since discussion and targeting of many of these policy changes were already identified and occurred at the beginning of the reform process.
In fact, speaking before the State Council on February 27, CFDA Director Bi Jingquan outlined his agency’s priorities for the New Year, addressing some of the previously announced policy directives/mandates regarding generics, inspections and enforcement, enhancement of the Drug Master File (DMF) database, establishment of an electronic Common Technical Document (eCTD). HE also set as the CFDA’s intent to target international harmonization of eCTD worldwide and undertake mutual recognition of domestic and international clinical trial data.
Implementation will demand multi-agency involvement. In addition to the CFDA, the National Health and Family Planning Commission, the Ministry of Human Resources and Social Security, the Ministry of Commerce, National Development and Reform Commission, State Administration of Industry and Commerce, and the Ministry of Public Security will all be involved in implementing these new directives in the coming months.
While last year’s policy changes predominately dealt with fostering innovative drug development via a wholesale reform of the drug regulatory approval system, much of this new series of directives drills down to one thing:
The Chinese government’s intent to break the stranglehold that western pharmaceutical companies have maintained on hospital sales of older, branded pharmaceuticals and replace them with domestically produced, high-quality generics and thereby addresses the single largest healthcare cost driver in the institutional setting.
These changes represent the most comprehensive changes to China’s regulatory and commercial policy governing pharmaceuticals since the revision of the Drug Administrative Law in 2001,and arguably, since the original adoption in 1984.
Suffice it to say, the impact on the global pharmaceutical industry will be profound.
This time last year, many affiliates of Western multinational corporations (MNCs) skeptically greeted the CFDA reforms as “another round of announcements from Beijing” that soon would pass. As cGMP compliance enforcement kicked in and voile after voile of new directives cumulatively transformed the way pharmaceuticals are to be developed, reviewed, made, and sold in China, there were few were doubting Thomas’s by year end.
With less than 10 percent of corporate sales attributable to China, very few C-suiters in global MNCs appear concerned with the transformation of the Chinese market, even though it’s the second largest drug market in the world and will be the largest within a decade.
This attitude will change; however, as the biosimilar tsunami washes ashore in the United States and sweeps away billons of dollars of global profitability just as the U.S. government finally begins to address the predatory pricing practices by many global companies. For the first time in decades, actual sales growth will become necessity and corporate management will start to pay attention to what their Chinese affiliates have been informing them of – i.e., the need to establish a new China Strategy, assuming their company wants to participate in the single market that will drive the global industry.
Was the “13” in China’s sweeping new policy directive a symbolic gesture on the part of the Chinese government? Probably not. Unlike Jacques de Molay, the last Grand Master of the Knights Templar burned at the stake after his arrest on that fateful Friday the 13th, the Chinese do not want to punish anyone.
Rather, they are beginning to understand the importance drugs play in their healthcare system and why adopting global standards will not only lower costs as generics becomes de riguer in hospitals, it’s also the first step toward achieving a world-class domestic pharmaceutical industry. Accordingly, the reforms have created unprecedented opportunities for all companies that offer high quality, innovative, cost effective pharmaceuticals, who seek to expand their footprint in the Chinese market, and perhaps most important, understand and operate within these new policies.
Chinese State Council (A brief, general summary in English)
Similar directives over the past 18 months
CFDA Director Jingquan’s Agencies Priorities