As part of its ambitious plan to reform the country’s healthcare system and lower drug costs, China has begun rolling out a centralized drug procurement system. The system rewards the cheapest price tag, with drug makers competing for contracts to supply generic drugs to the nation’s public hospitals and the government choosing the winners.

Two years into the program, it’s already clear who the losers are: global drug makers like Pfizer, Merck and Eli Lilly. The vast majority of contracts for commonly used generic drugs have been won by Chinese drug makers. Out of the 291 winning bids in the two rounds of procurement this year, for instance, only seven were won by foreign pharmaceutical firms, according to GBI Health, a healthcare intelligence provider.

“It’s a very large change from what the system was before,” says Helen Chen, head of the China life sciences and healthcare practice at L.E.K. Consulting, a global strategy advisor. “It’s making winners and losers.” 

To bolster its healthcare reforms, Beijing has pushed to fast-track approvals of innovative foreign drugs that have already won approvals in other countries, such as the U.S. and Japan, while demanding that pharmaceutical firms slash the prices of more commonly used generic drugs.

The procurement system only applies to generic, off-patent drugs that the government has decided are critical to provide at a low cost to patients. First launched in 2018, the system began as a pilot program called ‘4+7’ — for the 11 test cities — and has since been expanded nationally. In order to even be eligible to bid, all drugs must go through a standardized quality test, which has been in place since 2015.

It’s a very large change from what the system was before. It’s making winners and losers.

Helen Chen, head of the China life sciences and healthcare practice at L.E.K. Consulting

Although many countries, especially in Europe, have implemented national drug procurement systems in order to lower prices for drugs that are considered essential, no country has gone as far as China in the scale and magnitude of price cuts. In the latest round of bidding, for instance, the average price cut was 72 percent, according to GBI Health. 

“It puts American companies in a difficult situation — either they have to implement price cuts that are unsustainable in the long run or risk getting shut out of the huge public healthcare system,” says Jacob Parker, senior vice president at the U.S.-China Business Council, a trade group that represents about 200 American firms doing business in China. Many of the pilot programs, he adds, were rolled out without sufficient notice for American companies. 

Most American and European pharmaceutical companies contacted by The Wire declined to comment on the procurement process, but a spokesperson for PhRMA, the leading trade group for the American pharmaceutical industry, said in an emailed statement that the evaluation process should be more transparent. “It appears that the negotiation process for these new medicines has lacked transparency and has diverged from global best practices that support sound government pricing and reimbursement systems.” 

Pfizer, however, issued its own statement about the process, saying: “We support the Chinese government’s efforts to enhance the quality and affordability of medicines through their drug procurement system. Pfizer is committed to work with the government and all relevant stakeholders in China to further expand the accessibility of our medicines.”

In the most recent August procurement round, according to GBI Health, three foreign companies won contracts: Pfizer secured a bid for Zyvox, an antibiotic used for pneumonia and skin infections; Eisai, the Japanese pharmaceutical company, won a bid to provide the anemia therapy drug Methycobal; and UCB, a Belgian company, won a bid for Keppra, an epilepsy drug. Eisai and UCB both implemented a price cut of more than 70 percent, while Pfizer cut its price by more than 90 percent. 

On the Chinese side, the recent round’s big winners, both with eight winning bids, were CSPC Pharmaceutical, a state-backed drug giant whose listed shares trade in Hong Kong, and Qilu Pharmaceuticals, which took sole control of Viagra — originally developed by Pfizer — with a 92.6 percent price cut. The biggest winner was Jiangsu Hengrui Pharmaceuticals, one of China’s biggest drug makers, which in the most recent round won contracts valued at $35 million.

The drug procurement program has upended the business of some global drug makers operating in China. One reason is that global pharmaceutical companies have mostly sold off patent drugs in China, according to a report in the Wall Street Journal. But now, even with faster approvals of so-called innovative drugs, global firms are scurrying to rethink their position in the world’s second-largest drug market, after the United States. 

While the U.S. pharmaceutical market is valued at close to $500 billion a year, China’s market, fueled by rising household incomes and an aging population, is expected to top $160 billion by 2022, up from $123 billion in 2017, according to L.E.K. Consulting. 

Analysts say that because of the sheer size of China’s market, foreign pharmaceutical companies will likely still pursue bids in the procurement system, despite the low odds of winning and the resulting price cuts. “Most of the companies are still trying to bid for the simple reason that if you make a penny on a billion sales, that is still a lot of money,” says Rob Atkinson, the president of the Information Technology and Innovation Foundation (ITIF) and author of an ITIF report on China’s biopharmaceutical strategy.

Even if they lose out on the centralized procurement bids, there are other avenues to pursue the Chinese market. “If they fail to win the bidding, that is not the end of the story for them,” says Yanzhong Huang, a senior fellow for global health at the Council on Foreign Relations. “They could still compete against the other losers for the remaining market share in the private hospitals,” though Huang adds that the private hospital market is not nearly as big. 

Another option for overseas companies is to focus on providing innovative, non generic drugs to Chinese patients. Famous brand name pharmaceutical companies from America and Europe, experts say, are still attractive to Chinese patients who are willing to spend more. “With significant unmet need, China will remain an important market for innovative medicines,” a PhRMA spokesperson said in a statement to The Wire. “PhRMA member companies are committed to providing innovative medicines to patients in China.” Innovative drugs still have to go through an approval process to access the public Chinese market, but there are no dramatic price cuts, due to the lack of competition from local Chinese firms — though experts caution that this may change as more Chinese firms pursue the innovative drug market.

Even companies that did secure winning bids, like Pfizer, will pursue the innovative drug market, says Mike Ward, the global head of thought leadership at Decision Resources Group, a healthcare research and consulting firm. “The volume-based procurement policy had a big impact on the performance of Pfizer’s off-patent drugs unit Upjohn,” says Ward, adding that China is Pfizer’s second largest market, with 9 percent of global revenue in 2019. “Pfizer’s strategy going forward is to double down on delivering innovative medicines to the Chinese market.”

There is also room for adjustment in the procurement system itself. “This is still a pilot approach, and it’s still very new at the national level,” says Xiaoqing Boynton, a vice president at Albright Stonebridge Group, where she focuses on healthcare and life sciences. “There is still space for the American and European industries to be heard.” Boynton added that the government has already changed the system since the first round of procurement, including expanding the number of winning bidders from one company to eight.

But even if future policy adjustments do not explicitly help overseas companies secure more bids, there may still be reason for optimism. “The pharma companies will adjust to it. Every time there’s a shock for Western pharmaceutical companies in China, the press says the multinationals will have to withdraw from China. But I don’t think that’s true,” says L.E.K.’s Chen. “It’s just that the rules of the game have changed, and they can’t rest on their laurels.”

---