A recent article in the New England Journal of Medicine reports that since China’s modern founding in 1949, the Chinese government has undertaken three distinct phases of reform of their healthcare system reflective of their economic orientation at the time: a Soviet-inspired government run socialist approach, a more market-economy driven style, and now, an attempt to offer broader access to their 700 million rural population while reining in excess incentives wrought by a financial reliance on free-market pricing and limited government subsidies.

These new reforms are being implemented employing a combination of strategies and tactics, including expanding insurance coverage, allowing private competition in the hospital sector and a rebalancing of the funding sources for hospitals that currently achieve more than 40 percent of their operational revenue from the sales of pharmaceutical products to their patients. At approximately 80 percent, hospitals are the dominant source of ethical drugs in the country. Public hospitals receive less than ten percent of their funding from the government.

So what specific changes are being implemented to bring about these reforms?

In order to expand access, the Chinese government has taken two concrete steps that can be interpreted as a tacit indication of current deficiencies in the system:

  • Foreign companies can how have 100 percent ownership in for-profit hospitals and clinics, and public insurance has been extended to include certain medical services at these facilities.
  • Broader insurance coverage, especially in the area of serious illness, has been extended.

In order to re-balance, create more transparency,, and better administer the funding sources for hospitals, the government has taken steps to reduce hospital dependency on profit margins of expensive, branded western pharmaceutical products. This is being accomplished by:

  • Elimination of the 15 percent mark-up that hospitals impose on drug sales to their patients.
  • Ceasing the exemption extended to foreign branded drugs, which are multi-sourced (generic) from participation in the competitive bidding tender process used by hospitals.
  • The Chinese FDA (cFDA) is taking steps to increase GMP compliance among domestic pharmaceutical manufacturers in order to ensure quality and product integrity.

So what does this mean for western pharmaceutical companies?

Current drug therapy costs will be much less for patients and public insurance companies, and the corollary, as chronicled by Bain & Company:

“Success for foreign multinational drug firms will require a fundamental reinvention of their commercial model……..or an exit strategy may become necessary.”

For the foreseeable future, the largest and most promising global pharmaceutical market is China and addressing the new demands required by China’s rapidly evolving healthcare system will dictate strategic creativity and resourcefulness on the part of western drug companies.

Some of the key avenues that companies will employ to achieve this include:

  • Approval and access to newer, cost effective products to address China’s aging population; who will pay for true innovation,
  • Professionalization of the company-physician educational relationship,
  • Increasing access and reach beyond the large tertiary hospitals, and
  • Maximizing cost efficiencies.

In essence, a deeper and broader commitment and footprint in China is required by multinationals who seek to participate in this burgeoning market: “Capitalism With Chinese Characteristics.

PaizaBio stands ready to serve as a portal to help western companies that want to expand their presence into China with their injectable product portfolio.