China’s healthcare reforms will shake up the country’s pharmaceutical market

Pills in blisters
The Chinese drug market will grow to $167 billion by 2020, but currently 85% of the market is controlled by low-quality domestic generics.

The Chinese pharma market remains one of the fastest growing, with forecasts that it will reach $167 billion by 2020. But with the Chinese government continuing to change the rules as it tries to keep rising costs in check, it will remain a challenge for Western drugmakers and domestic players alike, a couple of new reports suggested.

China remains a country that relies mostly on generics, which currently account for about 85% of national drug sales, a recent Fitch Ratings report found. That helps its domestic industry. But China’s state council has also released a recommendation that suggests tougher standards for generic drugs, a move that may thin the domestic landscape.

The council also has suggested a speed-up of the approval process for innovative drugs, which will surely benefit Western drugmakers.

Overhanging all of this is China’s intent to take away from public hospitals the ability to profit from drug sales, a factor that is believed to enable the kind of bribery scandal that engulfed GlaxoSmithKline’s China operations and led to the U.K. drugmaker paying a nearly $490 million fine.

In an effort to improve the quality of Chinese drugs, the China FDA (CFDA) has issued a tentative new rule requiring all oral administered solid generic drugs to be tested for equivalence by the end of 2018, and all other generics by 2021. The decree is expected to remove not only low-quality drugs, but many small-sized domestic companies from the market.

Less competition from cheap, underqualified generics could help international pharma companies snatch a larger share of the Chinese market, but in order to do that, they also need to overcome what’s—in Fitch’s words—a “prolonged” and “opaque” drug-approval process.

“Approval delays for pharmaceutical products have become the most pressing impediment to market access for foreign companies, creating enormous uncertainty over product launches and chipping away years of patent validity,” a report (PDF) from the International Trade Administration said.

The report estimated that the accumulated backlog of applications is now at around 17,000, and it can take more than seven years for a drug to be approved by the CFDA. The good news is, the CFDA is slowly but gradually trying to improve the new drug approval process and make it easier to navigate for innovators.

Potentially offsetting some improvements for patented drugs, however, is China’s intent to reform its healthcare system and the way it markets drugs.

In 2015, China started reforms experimentally in public hospitals that are supposed to become all-inclusive next year. One of the new system’s most eye-catching features—and most important to pharmas—is to cut the linkage between drug sales and hospital profits.

A new administrative decree intends to ditch the 15% markup on drug prices that public hospitals now enjoy based on tender prices reached in each province. That markup used to generate about 50% revenue for public hospitals, the ITA report showed.

The country’s healthcare system also has been widely criticized for underpaying doctors. This trend has led to some relying on grey incomes like prescribing drugs that are sometimes more expensive or completely unnecessary. Adding to the problem has been corruption cases involving government healthcare officials who have taken bribes to buy more of a company’s drugs. Indeed, this is one of the allegations in the GSK case.

Some of these changes may slow growth in China’s pharma market. The Fitch report perceived that the year-over-year growth rate of China’s drug sales has slightly fallen back to mid-teens from a high of 26% in 2008. And the rate has become even slower for international drugmakers.

But even so, China is still the second largest pharmaceutical market, and its size is forecast to hit about $167 billion by 2020, from $108 billion in 2015. That amount has largely been boosted by an aging population and wider insurance coverage, the ITA report found, keeping an essential market for pharma.