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12:00 AM
 | 
Dec 22, 2014
 |  BioCentury  |  Regulation

Drug price changes loom in China

How China's pricing policy poses quandaries for multinational drugs

Already facing a long runway to get innovative drugs on the market in China, multinational pharma companies will see their "independent pricing" power removed on mature drugs under sweeping reforms the government is expected to implement in January.

In a nutshell, reimbursement would be fixed by class of drug. While the concept may seem obvious under Western models, the stakes are high for multinational companies (MNCs) in China, where roughly 70-80% of their sales come from off-patent "mature" drugs that enjoy premium pricing compared to domestic generics.

Mature brands also drive 70% of MNC growth in China, according to a report from McKinsey & Co. released at the BioCentury China Healthcare Summit in November.

The Chinese government has been using the so-called "independent pricing" model to reward higher quality products and to compensate for the fact that China did not grant patent protection to pharmaceutical products before 1992.

Under the current system, China'sNational Development and Reform Commission (NDRC) sets maximum retail prices for drugs on the country's National Reimbursement Drug List (NRDL), while deals to win access to local hospital networks under the provincial tendering system lower prices further, particularly on undifferentiated generics forced to compete on price.

By contrast, the government-sanctioned independent pricing privileges allow MNCs to enjoy significantly higher retail ceilings for their off-patent medications than local generics, and keep them insulated from pricing competition via separate bidding categories in provincial tenders.

Indeed, according to a January 2014 report by Richard Yeh, head of China healthcare research of the Citi Research unit of Citigroup Global Markets, a basket of 25 leading off-patent MNC drugs have been priced roughly 50% higher in China than local generics.

Moreover, Chinese hospitals profit from pharmaceuticals by charging a markup, so...

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