Chinese drug maker’s stocks plunged by $46 billion in December 2018. Chinese government is planning a shift in its drug pricing policy by undertaking bulk procurement of drugs as part of its new program. The move is significant as it will bring down prices of drugs as a major step towards universal and cheaper access of drugs to its citizens.
Generic drugs are a class of drugs whose patents have been expired, Chinese domestic pharmaceutical industry relied mostly on manufacturing generic drugs. After serving inflated profit margins to the industry, governmental policy shift has raised concerns about the efficacy of generic drugs profitability in the long run.
The central procurement program of drugs launched by Chinese government buys drugs for a city in bulk, as contracts are placed in competitive bids by pharmaceutical companies the prices of drugs have fallen forcing the fragmented industry into consolidation. This is only the beginning as the government plans to expand the program to all major cities in near future. One such bidding, drove down the price of the drugs by 55% and the other by as much as 90%. This radical shift in governmental policy has forced pharmaceutical companies into introspecting its business model.
According to fresh data gathered by Bloomberg, of the top 100 generic drug makers, Chinese companies with a gross and profit margin of 74% and 18% respectively, outran the global average of 55% and 9.5%. The oversized profit margins owe their existence to regulatory privileges enjoyed by many. The domestic generic drug makers swiftly acquired government approval for copying drugs, while foreign multinationals had to wait for years to get government’s green signal. This along with the absence of any regulatory quality control gave domestic companies to rapidly expand in the market.
But now many companies are planning to reverse this overdependence on generic drugs driven business model by investing more on Research and Development. The new landscape will favor companies who have already invested heavily in R&D. The companies with impressive R&D investment are Jiangsu Hengrui Medicine, Yipinhong Pharmaceutical and Chengdu Kanghong Pharmaceuticals with 16%, 8.4% and 8% of R&D investment of their total revenues respectively. Jiangsu Hengrui has 20:80 novel to generic drugs revenue ratio, the company wants invert this by focusing on new research.
Launching any novel drug is a many-year-long process, Chinese pharmaceuticals will find it hard to compete with global giants with vast talent pool and deep pockets. However, experts believe that with generic drugs revenue in shock, the transition to R&D and novel drugs won’t be easy.