Market access: China and international reference pricing

Cyrus Chowdhury explores the impact on market access if China adopts a pricing scheme referencing India, South Korea, and the Philippines.



Cyrus Chowdhury explores the impact on market access if China adopts a pricing scheme referencing India, South Korea, and the Philippines.



China may be at the top of the priority list for most multinational pharmaceutical companies.


However, speculation has recently surfaced that indicates Chinas pricing authority (NDRC) will adopt a pricing scheme that references India, South Korea, and the Philippines.


Such a move would likely imperil commercial success of new medicines, and may introduce restraint to MNC investment in China. 


China should consider very carefully how association with these markets will be interpreted by the pharmaceutical industry, as well as global health organizations. 


Regardless, international reference pricing will change the contours of new product launches in the Asia-Pacific region and, like all China issues, these strategic decisions will impact the rest of the world, too.


The China opportunity


By popular consensus, China is forecasted to be the third largest pharmaceutical market in the world by 2013. 


In many ways, China is shaping up to be the model of opportunity that the pharmaceutical industry had envisioned for the emerging markets. 


The country offers both a comparable degree of security and significant potential for innovation. 


Relatively speaking, Chinas IP policies respect pharmaceutical patents more than that of the other BRICs. 


More importantly, they bring a tenacious discovery and manufacturing capability unmatched in the rest of the world.


Chinas evolution has also inspired domestic acceleration of growth in the breadth and quality of access to care. 


Goals for 2020 include hospital financing reforms, rural and suburban community healthcare facility development, and disease prevention. 


All of these reforms will significantly improve the public health of Chinas population. 


Its an added benefit that these improvements in access to care will assist the continued growth by volume of the pharmaceutical market.


Pricing policy


The less predictable event in Chinas breakneck pharmaceutical industry growth is the sudden possibility of international reference pricing as a mechanism for controlling budgetary expenditure on pharmaceuticals. 


Traditionally, China has controlled pricing of generic and some original branded products. 


The calculation for price setting was based on a cost-plus formula, including data reporting from manufacturers, wholesalers, and hospital tenders. 


The plus portion of this formula allowed some degree of freedom based on innovation and availability in other markets.


In May 2010, speculation began circulating that Chinas pricing agency, the National Development and Reform Commission (NDRC), is developing international reference pricing guidelines to improve transparency and rationale for pricing decisions.


Perhaps the most surprising aspect is which countries are being discussed by Chinese officials for referencing: India, South Korea, and the Philippines.


India


Patient population size is one of the few similarities between China and India: both are considered high potential markets based on patient potential, but the lack of access to healthcare facilities, impotent insurance schemes, and routine-intellectual property violations are seriously encumbering the countrys pharmaceutical industry development, and the willingness of multinational corporations to launch products. 


This fact alone limits the value of India as a market for price referencing.


How is it possible to reference a market where the global patent holder cannot securely launch the original molecule?  


South Korea 


Close geographic proximity seems to be the basis for this selection, as well as the faade of choosing a developed market. 


Despite the adoption of pharmacoeconomic assessment protocol, South Korea is hardly removed from the policies of general price cuts that are often the preferred budget control measure of less developed markets. 


South Korea has achieved universal care, but still lacks control of pricing and prescribing incentive economics.  


The Philippines


Under the Cheaper Medicines Act, the Philippine government has the power to impose price controls, and has done so twice during just the past year alone.


China may be considering the Philippines due to its own reliance on international reference pricing to inform these price cuts. 


However, one considerable difference between the two countries is impossible to ignore: The Philippines has a limited pharmaceutical reimbursement scheme, meaning most medication cost is fully out of pocket. 


If China is setting its target on universal coverage, the Philippines may be a poor choice for a reference market.


These markets are a step behind China in innovation, public health, and intellectual property domains. 


Rather than choosing reference markets on price-level and proximity alone, China should consider markets that emulate its own aspirations as a global leader in innovation and healthcare.


If China is committed to implementing an international reference scheme, several items must be considered.


Choose innovative markets


Markets that possess a successful pharmaceutical research and development industry have continued to receive foreign direct investment from MNCs because of pricing allowances. 


By aligning itself with other innovation-friendly markets, China will continue to receive financing and economic stimulation from the pharmaceutical industry.


Choose markets that pursue shared healthcare goals


China has made pronounced statements about its goals to achieve universal care by improving rural and suburban access to care. 


Changes in hospital financing and investment in disease prevention are important steps to this end. 


These goals can be aided by aligning itself with countries that have achieved, or are closer to achieving, those goals.


Use reference pricing as a baseline for negotiation


Governments that effectively achieve efficient pharmaceutical expenditure through reference pricing use the reference pricing technique as a baseline for negotiation. 


These governments are effectively stating to the industry, These are the countries we consider to be peers, so we deserve the same pricing on your drug.


By following these principles, China can raise itself out of the developing world and into the realm of economies making positive contributions to global innovation, while receiving pricing commensurate with the countrys ambitious healthcare goals.


Implications for pharma


If China does implement an international reference pricing policy, and focuses that policy on India, South Korea, and the Philippines, MNCs should reassess their approach to the Chinese market.  


MNCs must reconsider their timing and launch sequence within Asia.


A decision to not launch in India may have significant impact on pricing in China by limiting the availability of data-points for reference. 


A lengthy or negative review by the South Korean pharmacoeconomic assessment committee, HIRA, may mean a protracted review with China or sole reliance on the Cheaper Medicines Act in the Philippines both of which are dangerous outcomes.  


MNCs must assess the impact of price-volume discounting in the region.


The fashionable strategy is selective price-volume discounting in many of these Asian emerging markets. 


The doomsday scenario is when China references a market where the brand is part of a price-volume agreement. 


Or worse, a competitor has pursued a steep-discount approach, and dropped the price-floor for the entire competitive set.  


MNCs must evaluate how China influences the global value assessment of their new products.  


Typically, when markets adopt international reference pricing, the next step is adoption of a health technology assessment process which could further erode the value perception of a new brand, particularly when the assessment comes from the third largest pharmaceutical market in the world.  


Further, if the proposal moves forward, MNCs should consider reapportioning their financial investment among top emerging markets.  


While Russia has also recently adopted reference pricing, they chose 20 geographically and socioeconomically diverse markets, many of which have achieved ambitious public health agendas: Germany, France and Italy.  


Brazil chose a more diverse mix of high- and low-priced markets that range from the US and France to Portugal and Greece.


Still, the mere fact that they did not rely upon their neighbors was testament to their leadership position within the region as a destination for foreign direct investment.


Taiwan adopted international reference pricing, but again, they chose developed markets that reflect an innovation-friendly environment: US, UK, Switzerland, Germany, and France.


The developments in China are still ongoing and the result could steer away from India, South Korea, and the Philippines.


But if it does not, the Chinese market will likely require a reassessment of the global emerging market priority list of investment.


Cyrus Chowdhury is vice president, global market access for Insight Strategy Advisors, a strategic decision-making support and consulting firm on healthcare and life science issues.


For more on China, see Cracking the Chinese pharma market.


For more on other emerging markets, see Reassessing Russia's pharma market, Breaking into the Brazilian pharma market, and The Middle East: A pharma market in the making.


For more on the pharmerging markets as a whole, see How to get ahead in 'pharmerging' markets.


You can contact Cyrus on cyrus.chowdhury@insightstrat.com.


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