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Wake up for drug firms: Time to sell low-profit meds to rural China
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On April 6, the Chinese government published the details of its long-awaited health care reform plan: It will spend 850 billion yuan (US$124 billion) over the next three years to extend health care both in cities and the countryside.

The government is also finalizing a National Essential Drug List (NEDL), a list of low-cost generic drugs that will be completely covered by insurance and will be reimbursed by the government.

The sweeping reforms, which will eventually provide health insurance for everyone, contain good and bad news for multinational drug companies.

On the plus side, the size of the consumer pie will grow, and firms will continue to sell high-end drugs in city hospitals. On the other hand, the plan will emphasize high-volume, low-value-added generic drugs that will be sold via the National Essential Drug List scheme.

Under the current system, hospitals earn most of their profits by prescribing high-end drugs, a system that has benefited multinational drug companies, which largely concentrate on selling innovative, expensive pharmaceuticals through big urban hospitals.

Under the new system, which de-emphasizes those hospitals in favor of an expanded medical infrastructure, multinational drug companies will need to concentrate on rural areas and low-margin drugs if they wish to grow beyond their current niche of selling high-end drugs through hospitals.

To succeed in the new environment, international drug companies will likely have to change their strategies, and follow the money to rural and community health centers.

"The broad principles contained in the Chinese government's new health care reforms are in line with what the World Health Organization (WHO) is promoting," said WHO head Margaret Chan.

Li Ling, a key adviser to the health reform plan from the China Center for Economic Research at Peking University, was similarly positive. "The plan has taken a step toward universal access to basic health care services for all Chinese citizens," she said.

The essence of the plan is its attempt to establish universal access to the already-existing Basic Health Care System by establishing a network of basic medical infrastructure in both rural and urban areas; to provide health insurance for all citizens; and to reduce the cost of medications by launching the National Essential Drug List.

"The government is providing more insurance coverage to more of the population, so affordability is going to improve," says Rachel Lee, partner and managing director of The Boston Consulting Group's Shanghai office.

Of the US$124 billion total investment in health reform over the next three years, two-thirds will go to health care service users (public medical insurance) and one-third will go to health care service providers (medical institutions), said Wang Jun, vice minister of China's Ministry of Finance.

That will create an immense market opportunity in the rural and community health centers, says Niu Zhengqian, vice general manager of China's largest privately owned pharmaceutical distribution company, the Jointown Group.

The group has already enjoyed success by targeting Rural and Community Health Centers, a niche that has traditionally been neglected by big distributors.

Jointown is now China's third-largest pharmaceutical distributor, with annual revenues of 18.8 billion yuan in 2008. "Based on the government's detailed health reform plan, a great majority of the investment will go to the rural and community health centers," Niu notes. "They will become a market too big to be ignored."

Bayer Schering Pharma China is one multinational pharmaceutical company that has taken meaningful steps to expand beyond big city hospitals and penetrate the rural and community areas. In 2007, Bayer Schering Pharma and China's Ministry of Health jointly launched a "Go West" rural physician training program, aimed at enhancing their overall capabilities in primary care and pediatrics.

The program, which began in Lanzhou, Gansu Province, involves training more than 10,000 physicians in 332 rural counties in 11 of China's less developed provinces.

The company is among the leading multinational drug companies in distributing pharmaceuticals through grassroots medical institutions.

(Reproduced with permission from Knowledge@Wharton, http://knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved.)

(Shanghai Daily April 20, 2009)

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