The key characteristics of China’s pharmaceutical market

In his latest article, Ames Gross provides an extensive overview of the pharmaceutical market in China and shares his advice on getting a drug through the Chinese approval process all the way to prescription.

As profit margins continue to drop in Western markets, multinational drug companies are looking to emerging markets like China for future growth. Currently, China's pharmaceutical market is worth $71 billion, and it is growing between 15 and 20 percent annually. If current rates hold, it will be the world's second largest pharmaceutical market by 2015.

Recent changes to China's healthcare system have made the market even more attractive for foreign multinational drug companies. In 2009, the Chinese Ministry of Health (MOH) allocated $124 billion to increasing health insurance coverage for China's 1.3 billion. By 2011, more than 95 percent of the Chinese population were covered under national health insurance plans.

Furthermore, the MOH is expected to add many novel drugs — most of which are produced by foreign multinationals — to its next National Reimbursement Drug List (NRDL) in late 2013 or early 2014. The NRDL determines which drugs are reimbursed by the national healthcare scheme and which drugs are included on most hospital formularies.

But neither of these changes guarantees success for multinational drug companies. MNCs face many unique barriers to profitability in China, from hospital listing to mandatory retail pricing. Therefore, before jumping into China's long and complicated drug registration process, you should understand some key characteristics of market access in China.

General advice

Product registration and approval can take up to three years in China. However, the average time from product approval to prescription — getting your product into the hands of Chinese patients — often takes another full year. The first piece of advice for market access is to start early.

Entry into China's drug market involves three steps:

• Retail price approval

• Provincial bidding

• Hospital listing

Each step is regulated by separate national and provincial agencies. Foreign drug manufacturers should be familiar with the key individuals at each agency with which they will be dealing. Chinese society is still relationship based: the more key players you know, the greater your chances of expediting the process and entering the market on advantageous terms.

To do this, you should build relationships with officials at China's Food and Drug Administration (CFDA), the National Development and Reform Council (NDRC), provincial-level pricing agencies and hospitals, and key opinion leaders in the medical field. By far, the most effective way to do this is to partner with a strong regulatory consultant or a local CRO. Their job is to impress regulators with your product and provide you an inside track on all negotiations.

Despite recent reforms that have brought China's regulatory procedures into conformity with international standards, drug approval and marketing remains a process of negotiation. Your China representative should take advantage of every opportunity to meet with regulators and KOLs. If you have concerns about drug classifications or retail prices, your CRO or consultant should meet with the appropriate regulators before you submit final application materials. You should turn uncertainties into opportunities, and then use them to negotiate your position.

"Chinese society is still relationship based: the more key players you know, the greater your chances of expediting the process...

Finally, because registration, price setting, bidding and listing take such a long time, it helps to start all processes at the same time. Lining up NDRC and provincial advocates in advance of product approval means that you will be on the fast track to market access as soon as you get the green light from the CFDA. If you instead proceed in a linear, step-by-step fashion, you will be chasing provincial regulators long after other companies are prescribing their products to Chinese patients.

Retail pricing and reimbursement

Pricing and reimbursement are key factors that determine success in the Chinese marketplace. Once your product has been approved by the CFDA, it can take another 15 months for that product to reach prescribing physicians. An average timeline would be: 4 - 5 months to obtain retail price approval, 3 - 5 months to win provincial bidding and 3 - 5 months to attain hospital listing.

The first phase — retail price approval — is handled jointly by the NDRC and the Ministry of Health (MOH) or the Ministry of Human Resources and Social Security (MoHRSS). The ministries first determine which drugs will be nationally reimbursed, after which the NDRC is in charge of setting retail prices.

There are two main drug lists in China: the Essential Drug List (EDL), which consists of 502 drugs fully reimbursed by the national government; and the Nationally-Reimbursed Drug List (NDRL), parts A and B. List A overlaps with the EDL, and consists of drugs 100 percent reimbursed by the national government. List B includes premium, high-price drugs partially reimbursed by national and provincial governments.

Because the NDRC has lately instituted a series of significant retail price cuts, many multinationals are now questioning whether they want their drugs even included on these lists. Unlisted drugs are not priced by the NDRC, but neither are they eligible for reimbursement. Therefore, you should carefully consider the trade-off between higher sales volume (for listed products) and higher per-unit price (for unlisted products) when developing your market entry strategy.

"...many multinationals are now questioning whether they want their drugs even included on these lists."

Pharmaceutical companies are not an official part of the price-setting process. Instead, key government officials and pharmaceutical experts meet once every four years to determine which drugs are included on the EDL and NDRL. Consultants are very important in reaching out to panel experts, who include top pharmacists, health economists, health insurance experts and opinion leaders in different disease areas. During the price-setting process, these experts are "quarantined", so reaching out to them at least one year in advance of their group examination is crucial.

Bidding and hospital listing

The second phase to market access — provincial bidding — is the process by which drugs enter Chinese distribution channels. Once or twice a year, each province calls for foreign and local manufacturers to submit bids on specific drugs. A tendering committee of pharmacists, local government officials and NDRC representatives then decides which manufacturers may distribute their products in the province.

Selection is largely dependent on wholesale price. But having an advocate who can "sing your song" to committee members will ensure that you have a strong negotiating position. The tendering and bidding process takes place on a province-by-province basis, so approval in one province does not automatically guarantee approval in other provinces.

For this reason, you should launch all bidding efforts simultaneously. At the same time, you should begin lobbying hospital physicians and administrators to list your product in their formularies.

Like the bidding process, the third phase — hospital listing — happens on an individual basis. Each large hospital forms a committee once or twice a year to approve new drugs for its formulary. These are the only products that the hospital purchases and prescribes to its patients. Therefore, you should target your efforts by knowing in advance which hospitals specialize in which disease areas. Awareness and acceptance of your product among physicians at these key hospitals is the key to getting it listed and later prescribed.

Future changes

China is currently undergoing an historic expansion in its national healthcare coverage system. In three short years, the number of patients covered by China's insurance scheme for urban residents rose from just 73 percent (2007) to nearly 99 percent (2010). In addition, rural Chinese — who can rarely afford all but the smallest of co-pays — are finally being added to the national insurance pool.

These changes mean is that China's government is under increasing pressure to bring down costs. One way they have done so recently is through mandatory retail pricing. In February 2013, for example, the NDRC issued its latest round of retail price cuts, targeting "high-cost" and specialty drugs, like Pfizer's antibiotic Zyvox and Novartis' epilepsy drug Trileptal. The cuts, which averaged 15 percent, affected 400 drugs for pain relief, respiratory ailments and other specialized uses. This was the fourth round of retail drug price cuts implemented since 2011, and it is unlikely to be the last.

"...China's government is under increasing pressure to bring down costs."

In addition to instituting further rounds of retail price cuts, the NDRC may also begin setting prices for non-RDL drugs. Another possibility under discussion is setting drug prices based on profit-margin ratios. Finally, pharmaceutical companies may face mandatory price cuts of 25 percent as soon as their drugs go off patent. This is not now the case, but it may be in the future.

These possibilities, combined with a worldwide decline in pharmaceutical sales, mean that foreign drug manufacturers must be as strategic as possible when planning their China market access strategy. In China, it pays to start work early.

About the author:

Ames Gross is president and founder of Pacific Bridge Medical, a Bethesda, Md.-based consulting firm that helps medical companies doing business in the Asian market (www.pacificbridgemedical.com). A recognized national and international leader in the Asian medical markets, he founded Pacific Bridge Medical in 1988, which has helped hundreds of medical companies with business development and regulatory issues in Asia.

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