Analysis on the Development Strategy of China’s Pharmaceutical Enterprises under the Background of Volume Procurement

Chen Yuan,Chen Yuwen

(School of Business Administration,Shenyang Pharmaceutical University,Shenyang 110016,China)

Abstract Objective To provide reference for the development strategy of China’s enterprises under the current policy background of generic drug consistency evaluation and volume procurement.Methods China’s current policies on generic drugs and market environment were analyzed and the development paths of international top pharmaceutical enterprises were studied as well.Results and Conclusion There are four transformation and upgrading paths for China’s pharmaceutical enterprises.First,they should invest more in innovation to realize the globalization of new drugs.Second,overseas patented new drugs should be introduced actively.Third,they must focus on the research and development of high-end generic drugs.Lastly,the transformation from active pharmaceutical ingredients into pharmaceutic preparation should be carried out quickly.Under the background of volume procurement,the pharmaceutical market pattern will be completely changed.The research and development capability and patented drugs will become the core competitive advantages of enterprises.

Keywords:volume procurement; generic drug; pharmaceutical enterprise

1 Introduction to policy on volume procurement

1.1 Policy background

The “4+7” volume procurement policy is an important step in China’s medical reform[1].In 2018,the State Council reformed the three major institutions in the field of medicine and health,namely,National Healthcare Security Administration (NHSA) (in charge of medical insurance),National Health Commission of the People’s Republic of China (in charge of medical institutions) and National Medical Products Administration (in charge of drug production,research and development).Among them,National Healthcare Security Administration is a newly established department,which will push forward the participants structural adjustment of the prices of medicines and medical services.Besides,it also coordinates the reform of medical treatment,health insurance and medicine,and undertakes three major functions of payment,pricing and supervision.The volume procurement refers to the joint procurement in 11 pilot cities led by the NHSA to establish the relationship between procurement quantity and price on the premise of consistent quality and efficacy of drugs in the Chinese market.Exploring the implementation of medical insurance payment standards is the main purpose of the NHSA after establishment.The“4+7” at the end of 2018 is the first pilot centralized procurement of drugs led by the NHSA,and is a new measure in unifying the national medical insurance payment standard and establishing a centralized drug procurement system.

1.2 Policy characters

1.2.1 Price associated with procurement quantity

The procurement quantity is about 60%-70% of the total annual consumption of drugs in the pilot cities,and the price is associated with the quantity.Namely,quantity is used to negotiate for a low price.Finally,the procurement cycle is 12 months from the date of implementation of the contract[2].

1.2.2 Mechanism of integration of bidding and procurement

After winning a bid,the manufacturer is bound with the distribution and circulation enterprises in a unified way,thus combining the bidding and procurement processes into one.The exclusive distribution or contracted distribution should be included in the contract,and even manufacturers are encouraged to carry out distribution.

1.2.3 Mechanism of prepayment

In order to reduce the financial costs of enterprises,medical insurance institutions shall pay more than 30% of the procurement budget in advance before the pilot work is officially started.

1.3 Future development trend of policy

In the future,volume procurement of drugs will become normal in China,and its range will also expand.Currently,it has covered 25 provinces and cities.On December 29,2019,Shanghai took the lead in the latest round of volume procurement,with a total of 33 varieties,including acarbose,glimepiride,azithromycin,metronidazole,and moxifloxacin.In addition to the “4+7” pilot cities and Fujian and Hebei provinces,the scope of volume procurement has expanded to 25 other provinces and Xinjiang Production and Construction Corps[3,4].Volume procurement is also closely related to the reform of payment mode[4,5].The guarantee measures for volume procurement also include encouraging hospitals to use the varieties in volume procurement,improving the enthusiasm of medical personnel,and establishing a supervision mechanism.

2 Impact after policy implementation

2.1 The quality of generic drugs will be improved

The implementation of the policy on consistency evaluation of generic drugs will improve the standards for all generic drugs in China.The quality standards for generic drugs used to be lower than the international ones.The policy on consistency evaluation of generic drugs requires that the quality standards for generic drugs should be improved.Besides,generic drugs can be marketed only after they pass the bioequivalence tests.This policy will definitely improve the quality and efficacy of China’s generic drugs.Meanwhile,the improvement of quality standards also puts forward higher requirements for enterprise research and development than before.In order to pass the consistency evaluation of generic drugs,enterprises must increase input for research and development and enhance their capability.In turn,the research and development capability of the pharmaceutical industry and the quality and efficacy of generic drugs in China will be greatly improved.

2.2 The market share of generic drugs will increase

The policy on the consistency evaluation of generic drugs and volume procurement will increase the market share of generic drugs in China.In the pilot cities that carry out the volume procurement,the varieties of generic drugs have achieved an overall increase in the market share.But the share of sales of the original drugs in the Chinese market still takes up higher proportions than that of generic drugs.The market share of most generic drugs has been increasing over the past five years.Among the drugs in volume procurement,14 original drugs with expired patents still take up more than 50% of the market share.In some developed countries,however,generic drugs often account for more than 80% of the market share.The reason is that generic drugs in those countries have passed bioequivalence tests,and their quality has been recognized with low prices.It is foreseeable that China’s prescription volume and sales of generic drugs in the future will keep up with those of developed countries.The increase of the market share of generic drugs in the pilot cities is mainly due to the contribution from those brands that have passed the consistency evaluation.Volume procurement will have a great impact on the pharmaceutical enterprises and circulation enterprises.Therefore,the market share of generic drugs will overtake the original drugs soon.

2.3 The prices of original drugs are under unprecedented pressure

The policies on consistency evaluation of generic drugs and volume procurement will bring great price pressure to all original drugs with expired patents and generic drugs with the same molecular names.Before the implementation of this policy,there was an obvious price difference between most of the original drugs and generic drugs in China.The unit price of over 70% of the original drugs was two times as much as the bid price.The price difference between the original drugs of the vast majority of varieties and the bid-winning drugs makes the original drugs face great price pressure.In the future,with the fierce competition among generic drugs in China’s market,original drugs with expired patents will withdraw gradually.The principle of volume procurement is that the lowest bidder wins,which will lead to low-price competition among enterprises.First,the number of enterprises that pass the consistency evaluation will increase.Therefore,more enterprises will pass the consistency evaluation in the next 1-2 years.Then the original drugs with expired patents will further lose their market share.Those domestic pharmaceutical enterprises whose generic drugs have passed the consistency evaluation with low prices will replace some foreign-funded enterprises that have obtained the big market share through expired-patent drugs.

3 Countermeasures of China’s pharmaceutical enterprises

It is predicted that not only original drugs have to cut their prices,generic drugs also will reduce their prices.Both multinational and local pharmaceutical enterprises are facing the test of life and death,but opportunities and challenges coexist[6].

For many years,generic drugs of local pharmaceutical enterprises have been unable to compete with original drugs due to their quality standards.In the face of volume procurement,pharmaceutical enterprises that have passed the consistency evaluation are in a dilemma.The good news is that the national centralized procurement brings opportunities for their products.The bad news is they have to reduce prices of drugs,but the costs of raw materials are still rising.The policy of volume procurement will differentiate Chinese local enterprises.The large innovative enterprises with strong cost control ability will be further strengthened.In contrast,small enterprises will be eliminated if they do not have countermeasures.Local pharmaceutical enterprises can take countermeasures from the following aspects.

3.1 Focusing on drug innovation and globalization with the new marketing mode

In order to avoid the fierce price war of products with low technical barriers,innovative enterprises can make more reasonable product positioning for patented drugs after fully evaluating their own technical capabilities.Besides,they can expand the field of innovative drugs based on their business.Takeda Pharmaceuticals,Japan’s largest pharmaceutical enterprise,has gradually developed its main business from original drugs to generic drugs.Relying on the profits from generic drugs to invest in new drug research and development,it eventually becomes one of the top pharmaceutical enterprises in the world.At present,the representative enterprise in China is Hengrui Medicine.It has 5 patented innovative drugs that had been approved for marketing by the end of 2019.It is expected that this enterprise will have more than three innovative drugs to be approved each year in the future,thus realizing the transformation from a generic drug enterprise to an innovative drug enterprise.

In addition,under the volume procurement mode,the “sales with commission” mode will undergo fundamental changes.The NHSA has used various measures to ensure the smooth implementation of volume procurement,and the winning enterprise has to change its marketing mode in order to save costs.With stricter supervision,it is difficult to continue the“sales with commission” mode that prevailed in the past.Therefore,the local pharmaceutical enterprises should learn a compliant marketing mode from global pharmaceutical enterprises,which is also a preparation for future globalization of their products.

3.2 Acquisition of patented new drugs from other enterprises

Due to the long research and development cycles,innovative drugs have high risks.It usually takes more than 10 years for pharmaceutical enterprises to transform their research and development.It is possible that the self-developed patented drugs are not yet on the market,but generic drugs of the same variety are no longer profitable.Faced with this dilemma,China’s enterprises can learn from the introduction strategies of the world’s top pharmaceutical enterprises to pay the agency rights of new patented drugs in China.“Newly established pharmaceutical enterprises making innovation,and large pharmaceutical enterprises making acquisition”has become a common development model for the world’s top pharmaceutical enterprises.For example,Keytruda of PD-1 with the sales of US$ 11 billion in 2019 came from Merck Sharp & Dohme’s acquisition of Schering Plough.And OPDIVO of PD-1 with the second largest sales in the world also came from Bristol-Myers Squibb’s acquisition of the American company Medarex.

3.3 Mastering high-end technology of generic drugs and producing generic drugs with barriers

The first generic drug approved for marketing can often take the lead in the market and gain profits.Although the advantages of the first generic drug will be gradually reduced with the advance of volume procurement,the high-end generic drugs with barriers can still snatch the huge market share of the original drugs of state-owned enterprises.For example,Mylan Pharmaceuticals,a leading international generic drug manufacturer (now merged with Pfizer Upjohn),is the first manufacturer to reproduce GlaxoSmithKline’s classic inhalant product Seretide,gaining a head-start in the market.

3.4 Reducing costs and realizing the integration of bulk drugs with preparations

Once generic drugs pass the consistency evaluation,the main competition for volume procurement lies in price and sufficient supply.Pharmaceutical enterprises with production lines of bulk drugs can significantly reduce costs of drugs and obtain certain advantages.Therefore,pharmaceutical enterprises need to consider whether they can form cost barriers through price reduction on the premise of maintaining the leading technological quality.However,the degree of price reduction depends on the share of products in public hospitals and retail channels within the range of volume procurement,and the price difference between original drugs and generic drugs.Besides,the price difference after price reduction must be compensated by quantity to guarantee enterprises’ profits.For example,Huahai Pharmaceutical has its own production line of bulk drugs.Many of its products that pass consistency evaluation can win the bid at a low price and get some market share.

In the long term,the pharmaceutical market pattern will change completely.With a large number of high-end generic drugs,innovative drugs and patented drugs going on the market,pharmaceutical enterprises can cope with price pressure of generic drugs through new product lines.Meanwhile,as the profits of generic drugs keep falling,enterprises can only earn social average profits.The research and development capability and patented drugs will become the core competitive advantages of enterprises.Therefore,those pharmaceutical enterprises with strong research and development capability or patented drugs will become new market leaders.