China has lifted the country's strict pharmaceutical price controls. This signals tough times for Western pharmaceutical companies and good times for the Chinese, says DW columnist Frank Sieren.
The beginning of June marked the end of drug price caps set by the Chinese government. In the future, China, now the world's second-largest pharmaceutical market, will base its pricing policies on supply and demand. China's National Development and Reform Commission has thus implemented the changes Premier Li Keqiang announced at the National People's Congress in March.
The aim is to lower the cost of medication for people in China and to decrease government spending in the health sector. In recent years, China has supplied almost half a billion citizens with health insurance coverage and now health care expenditures have reached almost 400 billion euros ($450 billion). In 2020, they are expected to surpass the trillion euro mark. The government wants all 1.4 billion Chinese to be insured by then. As a result, it is in the government's interest for the cost of medication not to continue to rise.
Tough competition for multinationals
This is bad news for foreign pharmaceutical corporations, like Switzerland's Novartis or the US company Pfizer, which must now sell their medication for less. They have been the leading purveyors of high-quality medication, but under the new scheme, they compete directly with Chinese producers of generic products, which are much cheaper. Beijing hopes that the new pricing system will provide China's pharmaceutical companies with incentive to invest more in research and development and to produce more innovative drugs than their Western rivals.
The pharmaceutical industry is particularly important because sales accounted for an 18.5 percent higher growth rate than that of the Chinese economy itself: in 2014, the pharmaceutical industry brought in $105 billion dollars in revenue. According to estimates made by the US consultancy firm McKinsey, the health care market in China will be worth over a trillion dollars in five years. Right now, thousands of Chinese companies are active on the market. If things go the way Beijing has planned, both public and private companies in China ought to consolidate while closing the gap between them and competitors on the international pharmaceutical market. That's also a way of securing growth.
Little faith in Chinese drugs
In the past, Chinese companies lacked patents, but most importantly, they lacked the trust of their own citizens, who looked to the West for quality medication and were even willing to pay a surcharge of up to 40 percent for Western products. Drastic price differences tend to be a good breeding ground for corruption, as the British pharmaceutical giant GlaxoSmithKline had to admit last fall. Employees of the corporation ended up behind bars after they had had bribed doctors to boost sales of their products; the corporation itself was slapped with a fine of about $500 million US dollars.
Consequently, the new pricing system is a government attempt to clean up corruption among doctors and hospitals. Chinese hospitals earn nearly 40 percent of their budget by prescribing expensive medication. Hospitals themselves sell almost 70 percent of prescription drugs. The days of such monopolist market structures are numbered anyway: China's online shopping giant, Alibaba, is preparing to enter the prescription drug business. That's when prices will really drop.
DW columnist Frank Sieren has been living in Beijing for 20 years.