Centralized Procurement of Drugs with Target Quantity in “4+7 Pilot Cities”

By Shijun Zhu, MSQ Healthcare Investment Analyst

On Oct 15, 2018,  in order to lighten the burden of national basic medical insurance, the General Office of the State Council, National Healthcare Security Administration, National Health Commission, and National Medical Products Administration together established the Joint Procurement Office – published the Paper on Centralized Drug Procurement in “4+7 Cities”. The former four cities are Beijing, Tianjin, Shanghai, and Chongqing, and the latter seven cities are Shenyang, Dalian, Xiamen, Guangzhou, Shenzhen, Chengdu, and Xi’an, adding up will account 20-30% of the China’s drug market. The paper clarifies the names and target procurement quantity of 31 drugs. Most of the drugs are for chronic diseases, 10 of which are for cardiovascular diseases.

Qualified drug candidates for participating in the procurement should be either the original drugs or the generic drugs which already passed the therapeutic equivalence evaluation. The procurement was conducted in a form of bidding, where companies who offered the lowest price of certain drugs got the bid with one-year validity starting from 2019. The successful bidder of each drug is given 60-70% of total prescription shares in all of the public hospitals in those pilot cities. During execution, all of the public hospitals in those cities are asked to preferentially prescribe the drug manufactured by the successful bidder. 

On Dec 7, 2018, the Joint Procurement Office announced the result of procurement. 25 of 31 drugs were finalized in the procurement, and only 2 of them are original drugs. The finalized price of these drugs dramatically declined compared with their lowest price in 2017, with a 52% decrease on average, and a 96% decrease of the highest. For the two original drugs, the finalized prices of Gefitinib and Fosinopril dropped by 76% and 68% respectively.

In the long term, the influences of the drug procurement are divided into three parts - 1) replacing the expensive original drugs; 2) selecting on the superior generic medicines and eliminating the inferior ones; 3) changing the situation of covering hospital expenses with drug sales. In the past, China was the only country where the sales of original drugs did not significantly decline after the patents expired. The reason is that there weren’t many high-quality generic drugs in the market. More importantly, the hospitals could make profits from prescribing expensive original drugs. Since 2016, the NMPA started a new round of therapeutic equivalence evaluation on generic drugs and significantly increased the standard of the evaluation. All of the generic drugs were forced to pass the evaluation, otherwise, they would not be prescribed by the public hospitals. Combining the internal reform of the generic drugs with procurement policy, the patent cliff of off-patent drugs occurred in China just as what has happened in other countries. Due to the procurement policy, the best player who is capable of manufacturing high-quality generic drugs at a relatively lower price takes the majority of the market share in these pilot cities and many of the generic drug manufacturers will disappear due to lack of competitiveness. Hospitals are restricted to make profits from the drug sales when they are required to prescribe 60-70% of those drugs manufactured by the successful bidder at a pre-set price. Therefore, the grey zone between pharmaceutical companies and hospitals/physicians will be narrowed.

Although the procurement policy is only carried out in public hospitals within 11 pilot cities, the reductions of related drug price will also display in local pharmacies as well as surrounding cities since all other pharmaceutical companies who didn’t win the bid will have to fight for the rest market share. In conclusion, the centralized procurement of drug with target quantity in 11 cities shows the determination of the Chinese government to reduce the burden of the medical expense. In the future, an increasing number of off-patent original drugs will be replaced by high-quality generic drugs, with a more centralized generic drug industry.

Source: MSQ Ventures Research