In today’s Asia Times, I have a column on what MNC pharmaceuticals in China are facing. Generally, their are two macro trends impacting these companies: the need to expand healthcare to China’s masses (most of whom have deplorable access today) under extraordinary cost controls and, the maturation of specific policies China agreed to decades ago that are not currently sustainable. Operating under these two macro issues are three more specific considerations that are related: the impact of the Anhui Model, the loss of differential pricing, changes to China’s pharmaceutical patent law which make room for compulsory licenses.
The Anhui Model, something I have written about earlier here and here, is problematic for three reasons. The most obvious is the pricing pressure it puts on pharmaceutical companies. The other two reasons are only now becoming more obvious. Specifically, that pharma is going to have to do a better job at working with, lobbying and managing China’s healthcare policies at the level of both the local and Central Government. This brings with it all sorts of costs that previously were not a consideration. In addition, pharma will need to be watching for the organic means by which local government goes about trialing policies that allow it to meet KPIs set by the Central Government. The pressure to innovate is only going to increase as the mandate to expand coverage also grows.
The second specific consideration MNC pharmaceuticals are going to have to face is the change Beijing is implementing related to what has been called “differential pricing.” As I write in my column today:
In addition, Beijing is moving to change the prices the government pays on about 100 drugs that had differential (or what the industry calls “preferential”) pricing, which were all manufactured by Western and European multinationals. The drugs covered under this preferential pricing scheme were protected by the Chinese government almost 20 years ago in an attempt to address concerns pharmaceutical companies had about intellectual property (IP) theft. In many cases, the patents on these drugs have run out, but the Chinese government has stood by its commitment to protect these products from domestic competition. Cumulatively, all of these changes have pharma worried that China’s healthcare reform process is going to leave them in the cold through a combination of brittle pricing and the sort of forced technology transfer they have seen take place in other high-tech industries eager to access the Chinese market.
The most recent announcement that has pharma concerned is that around changes to China’s patent law which make compulsory licenses a near-eventuality. This is a move that many in the pharma community have long resisted, even if it remains something most anticipate China will use carefully. From my column,
The question now is two-fold: what did China have in mind when it changed its patent law to accommodate compulsory licenses, and what will American industry and the politicians who watch China’s policies make of this change? China did not make these changes to its IP regimen carelessly. This was a deliberate adjustment that more than likely had a specific portfolio of drugs in mind. In the short term, Beijing is likely to find it has gained the upper hand in negotiations with its pharmaceutical suppliers because of this move; but, in the long term, if multinationals see China over-use compulsory licenses it will be very bad for US-Sino relations.
Cumulatively, these changes all add to a growing sense within industry and the policy community that China’s healthcare reform process may well work at cross-purposes with the sort of incentives business needs to continue investing in the domestic Chinese healthcare market. Because few sectors of China’s economy are more in need of outside investment, yet more sensitive to political actions, popular discontent or perceived inequality, the line between what the state will do of its own volition, regardless of its impact on industry, and what the state will do to attract industry’s involvement will be very gray for some time to come.
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