By James J. Shen

When compiling a chronology of the most important news for the Chinese pharmaceutical sector in the third quarter, we were overwhelmed with the number of heavy-weight events taking place during the period. 

On the subject of healthcare reform, which everyone has been holding their breath for some news to come, developments continue to be slow-motioned, like the weeping willow trees in the height of Beijing’s summer. But don’t be fooled by the peace on the surface, the wrestle between relevant government agencies over the healthcare financing model and reform direction intensified in the last quarter. Judged by the signs we have seen, the Ministry of Labor and Social Security (MOLSS) have won an upper hand over its chief competitor, the Ministry of Health (MOH).

In late July, the State Council approved a plan for the new Urban Resident Basic Medical Insurance Program to be put in trial in 79 Chinese cities from September. Principles of the plan are in line with the healthcare financing model supported by MOLSS, which calls for government funding of the basic medical insurance programs that contract medical institutions as service providers. The National Development and Reform Commission (NDRC) later announced in September its readiness to publish an initial draft of the healthcare reform plan for public comments and it is reported this document tags along the similar lines of the above trial plan.

Despite losing some ground, the MOH does not appear to be ready to back out of the fight just yet. The agency has been airing its concerns, to local media and through public events, over the future hospital financing scheme and even put forward its idea for a prescription fee system.

I almost felt sympathetic to the understaffed SFDA for having to churn out so many new and corrective measures and regulations in the third quarter, then it struck me that it is the pharmaceutical industry in China that will ultimately pay the heavy price for such regulatory turbulences. The new measures and regulations introduced by the agency have affected and will continue to affect a wide range of pharmaceutical industry activities including registration, manufacturing and GMP, packaging and advertising, licensing, retailing, product recall, and import & export.

In the meantime, SFDA announced on September 3 the targets of its national reform campaign for the pharmaceutical industry which covers pharmaceutical registration, production, distribution and consumption. The agency said it aims to overhaul the entire pharmaceutical distribution market by the end of the year.

Another overhaul? I don’t even recall when the last overhaul ended. Let’s hope it is the last one in the sleeves of the SFDA.

Backed by a recent study that found Chinese drug prices to be lower than many foreign countries/regions, NDRC officials recently revealed their willingness to consider factors other than production costs when developing and approving drug prices in future. The vaguely termed "clinical value" of drugs was highlighted among other factors the agency said it would take into consideration.

But there is also discouraging news on this front. NDRC approved in July the plan of Guangdong provincial price control authorities for regulating prices of all prescription drug products circulating in the province as an experiment. What is NDRC up to? Does it have the intention to expand the experiment nationwide if it turns out to be “satisfactory” in Guangdong?

This quarter sees an array of marching activities on the part of multinational pharmaceutical companies (MPCs) with AstraZeneca, GSK, Eli Lilly and Sanofi Aventis announcing major investment plans and new deals in the R&D arena. Baxter finalized its JV deal with Guangzhou Baiyunshan, while UK’s Co-op Group decided to jump into bed with Tianjin Tasly to manufacture generics for the UK market. Merck Serono and Bayer Schering completed their business integrations in China with ambitious new plans, as other leading MPCs touted their plans for new product launches in the country.

While the Chinese pharmaceutical market environment is generally quite favorable to the MPCs at the moment, some leading companies have suffered some setbacks recently in the area of IP legal lawsuits. In the third quarter, Boehringer Ingelheim lost a patent fight against Chaitai Tianqing for its formulation patent on Tiotropium Bromide, while Sanofi Aventis had to re-initiate a lost battle against Jiangsu Hengrui over its patents for Docetaxel.

Wuxi PharmaTech’s IPO on the New York Stock Exchange was a big success with its shares climbing 91% in just a few weeks. This has obviously inspired other successful Chinese companies like Jointown, which forked in US$60 million in September from seven institutional investors in preparation for an anticipated IPO in Hong Kong.

With money from IPOs and venture capitalists, companies like Jointown are likely to jump right on the acquisition fast train for rapid growth. This obviously has put considerable expansion pressure on some old-school conservative local companies such as SinoPharm Group, which rushed to announce recently that it would seek faster growth through proactive M&As.

On our last note, former SFDA boss Zheng Xiaoyu was executed promptly after China’s Supreme Court denied his appeal in July, while Cao Wenzhuang, former drug registration head at the SFDA and other corrupt former drug regulators were sentenced to death with two year reprieve and various prison terms respectively.

By punishing them severely, Premier Wen’s government sends a clear message to the domestic public and the world that it is determined to clean up and restore its drug regulatory system.

While this is good news for the pharmaceutical industry, widespread turbulences are expected in the short term from consequential regulatory corrections.