The past few days have witnessed high volatility in the stock prices of Chinese pharmaceutical companies as the government is expanding a pilot centralized drug procurement program which will drastically cut the prices of generic drugs.
After the scheme was first piloted in 11 big cities in April, 26 more provinces and regions rode onto the bandwagon Tuesday. According to statistics by the Sunshine Medical Procurement All-in-One (SMPA) online platform, 45 companies have been shortlisted from 77 bidders as providers of 60 generic drugs (a weeklong probation period is allowed to take in public opinion), whose prices have been cut by an average of 59 percent from the lowest prices of last year.
As the tradeoff for ceding a large chunk of their profits, the chosen companies are given the lion’s share of the market for certain drugs. By the end of August, statistics from the first 11 pilot cities revealed that the first batch of companies entering the contract had taken up 78 percent of the market share of the drugs for which they won bids.
The 2013 GlaxoSmithKline scandal was just a tip of the iceberg of the widespread corruption in China’s medical sectors, where pharmaceutical sales representatives live a fancy life on high bonuses for the drugs they sell and doctors are paid to prescribe expensive drugs.
The centralized drug procurement program will overhaul that situation. Patients get access to cheaper medicines which were never expensive at the factory gate in the first place, and pharmaceutical companies will save huge expenses on sales and distribution.
Among Tuesday’s bidders were such big names as Sanofi, Novartis, and Merck Sharp & Dohme, as well as Dr. Reddy’s Laboratories, an Indian multinational. While multinationals had been lukewarm in the first-round bidding for the 11-city pilot scheme last year, the second round has been received with more passion.
One of the largest generic drug markets in the world (think of China’s large population entering an aging society), the Chinese market still has huge allure for domestic and foreign players.
Generic drugs have the same active ingredients as their equivalent brand-name drugs. They also have the same effects, dosage, side effects and risks, but generic drugs are typically significantly cheaper than their brand-name alternatives. When a drug is first developed, only a brand-name version exists. When that company’s patent on the drug runs out, other companies can sell the same drug under a generic name.
While the average profit margin lies around 10 percent for generic drugmakers in mature markets, companies in China have enjoyed a whopping 40 percent profit in some cases.
The centralized drug procurement program has also generated more fierce competition between off-patent originators and local generic companies.
While the originators have to cede some profit margin, local generic companies also need to streamline their supply chain and improve management to reduce production costs to be able to turn a profit.
This may in turn start another round of consolidation in the industry.
Meanwhile, companies will be more encouraged to research their own patent drugs, which are highly profitable once they succeed. According to the FDA in the U.S., a generic drug is typically 80-85 percent cheaper than the brand name alternative. That’s fair because those companies have put billions of dollars on the line in what is clearly a risky pipeline. Government-granted patents are designed to compensate them for this risk. And when their patents expire (while the term is 20 years, it’s actually way shorter considering the long process of clinical trials and other procedures), they inevitably face competition from generics.
Like every medicine has its side effects, there are still concerns regarding this “perfect,” new procurement scheme.
While the new rules have reduced medical expenses for patients and encourage Chinese companies to innovate new drugs, there looms the possibility of certain drugs fading out of history.
As the primary bidding criterion is the lowest price — quality can be another concern, although all those entering the bids are required to pass the generic consistency evaluation (GCE) — it could push certain drugs with too small a profit margin to be dropped by manufacturers and then to totally disappear from the market.
While Americans enjoy the most advanced medical technologies and newest drugs, they spend more than 10 percent of their salaries on health insurance to help them cover their medical expenses. When we lose those really cheap generics, it will be akin to when I don’t want to buy a new iPhone, but I have to because the old version no longer upgrades or support certain apps.
(The author is a features editor at the Shenzhen Daily.)