Jun 14, 2024 07:07 PM

In Depth: How China’s Pricing Regime Penalizes Innovative Drugmakers

For nearly a decade, China’s domestic drug pricing policy has frustrated pharmaceutical companies.

Since 2016, the national insurance regulator has haggled with companies eager to have their innovative drugs covered by state health insurance, to help lower costs for patients.

This has made profits elusive for these companies. As a result, some have expanded into foreign markets in search of wider margins.

Explore the story in 30 seconds
  • China’s drug pricing policy has pressured pharmaceutical companies, leading some to seek foreign markets, but low domestic prices impact global drug pricing.
  • Investment contraction and tightened IPO rules have further strained the industry, with many innovative drugmakers posting significant losses.
  • Experts suggest reforms to allow higher domestic prices and propose diversified pricing systems incorporating commercial insurance to support innovation and profitability.
AI generated, for reference only
Explore the story in 3 minutes

China's domestic drug pricing policy has been a source of frustration for pharmaceutical companies over the past decade. Since 2016, the national insurance regulator has aggressively negotiated with companies to include innovative drugs in state health insurance to lower patient costs. This has hindered profits, pushing some companies to explore foreign markets for better margins. However, low domestic prices are affecting international prices, as foreign markets reference a drug's price in its country of origin [para. 1][para. 4]. Notably, the U.S. has also started implementing similar price negotiation tactics [para. 5].

Additionally, a decline in investment following the pandemic, partly due to decreased demand for Covid-19 treatments, is straining drugmakers financially. The government's August tightening of IPO rules to stabilize the stock market has further impacted fundraising [para. 6][para. 7]. To support the industry, experts recommend allowing higher prices for innovative drugs and involving commercial insurance plans to share treatment costs. In response, the government has released draft changes to the drug pricing system [para. 8].

China has seen a rise in innovative drug startups over the past decade, driven by government support for novel drug development and a new listing regime in Hong Kong for pre-revenue biotech firms. However, these companies often cannot turn a profit quickly, with new drug development taking five to eight years and costing up to 500 million yuan ($69 million). Many companies are still struggling to break even, despite narrowing losses. In the first quarter of 2024, nearly 50 innovative drugmakers in mainland China and Hong Kong reported net losses, totaling 1.39 billion yuan, a 39.5% year-on-year reduction [para. 9][para. 10][para. 11].

To get on the national insurance list, drugmakers must negotiate with the National Healthcare Security Administration (NHSA), which typically cuts drug prices by more than half. Although companies can keep these negotiated prices confidential, they are often publicized on government-run procurement platforms. This transparency affects international pricing, as some countries reference the drug’s domestic price, potentially discouraging market entry abroad [para. 19].

The U.S., the world's largest pharmaceutical market, generated over $670 billion in revenue in 2023. U.S. regulators traditionally price imported drugs by comparing them to local equivalents, not considering origin-country prices. This has benefited Chinese firms, with BeiGene's Brukinsa becoming the first Chinese-developed cancer drug approved in the U.S., selling at significantly higher prices than in China. However, the introduction of drug price negotiations in the U.S., allowed by the Inflation Reduction Act, could impact international pricing, including for Chinese drugs [para. 30][para. 31][para. 32][para. 33][para. 34].

In February, Chinese authorities issued a draft guideline proposing a new pricing mechanism for new chemical drugs to encourage innovation. It suggests self-assessment by pharma companies based on criteria like clinical value, which would determine incentives such as expedited approval and initial price-setting freedom. However, this draft has faced criticism for potentially excessive government interference. Industry leaders argue that drug prices should be set by developers, influenced by global market competition. Proposed alternatives include a diversified pricing system involving commercial and medical insurance to share costs and confidential actual transaction prices to prevent international pricing issues [para. 47][para. 49][para. 50][para. 51][para. 52].

AI generated, for reference only
Who’s Who
BeiGene Ltd.
BeiGene Ltd. is a Chinese pharmaceutical company that saw its net loss narrow to $251 million in the first quarter of 2024, from $348 million a year earlier. It made history in 2019 with the approval of its cancer therapy, Brukinsa, in the U.S. Brukinsa’s high pricing in the U.S. contrasts sharply with its significantly lower price in China after inclusion in the national insurance list.
Shanghai Junshi Biosciences Co. Ltd.
Shanghai Junshi Biosciences Co. Ltd. is a Chinese pharmaceutical company listed on the Shanghai Stock Exchange (688180.SH). As of the first quarter of 2024, the company reported a net loss that shrunk nearly 50% year-on-year to 283 million yuan. Its drug Toripalimab, used for treating nasopharyngeal cancer, is included on China’s national insurance list and is sold in the U.S. at significantly higher prices than in China.
Hutchmed China Ltd.
Hutchmed China Ltd. is a Chinese biotech firm involved in the development and commercialization of innovative drugs. Its colorectal cancer drug, Fruquintinib, is sold in the U.S. at a price 24 to 30 times higher than in China. The drug is included on China’s national insurance list, contributing to the company's efforts in both domestic and international markets.
AI generated, for reference only