China’s Removal of Imported Drug Tariffs

China’s Removal of Imported Drug Tariffs

In the face of high tariffs, multiple layers of distribution, and monopoly supply, imported drugs have been extremely expensive in China. And this issue especially affects imported anticancer medications, which, compared with their counterparts abroad, are normally priced 2–3 times, sometimes even five times higher in China. An increasing number of Chinese patients are forced to give up treatments at local hospitals and seek solutions from overseas black drug markets. To address this problem, the Chinese government has stepped up its efforts to reduce the high drug prices. On May 1, 2018, it eliminated the tariff on 28 categories of imported drugs.
Before May 1, the actual tariff rate of imported drugs was about 5% to 6% in China. The total market value of current Chinese anti-cancer drugs is around $22 billion; about one third is contributed by imported drugs. Thus, it is estimated that removing the tariff can help to save around $312 million annually for Chinese patients.
But what does this mean for international and Chinese pharma companies? How should they position themselves in the wake of this new policy?

The impact on overseas pharma companies

In the short term, the price of imported drugs remains higher. In the long run, it will be beneficial for foreign companies to expand their territories in China. Removing the tariff will lead to the reduction of imported drug prices, giving foreign pharmas a better shot at sharpening their edges in the competitive Chinese market. However, the impact will not be significant in the near future. The market structure is not going to change dramatically, not least because of two factors.
First, among the list of drugs in the Provisional Tax Rate Adjustment Form for Imported Medicines, antibiotics have been dominant. With regard to anti-cancer medications, only chemotherapies made the list. The most widely used small-molecule targeting drugs are not included. Furthermore, before May 1, the tariff for penicillin V preparations and anti-cancer drugs containing alkaloid and its derivatives were already low, 6% and 5% respectively.
At present, R&D of penicillin drugs is relatively mature in China. Local pharma companies have dominated the market. In the anti-cancer sector, the overall capabilities of Chinese providers still lag behind that of leading international companies. Imported anti-cancer drugs have taken over a significant portion of the market. Only a few Chinese domestic companies are producing self-developed anti-cancer drugs. Because of the small proportion of domestic penetration, the implementation of zero tariff on imported anti-cancer drugs will have little effect on market structure in the short term.
Second, although the removal of the tariff could reduce the annual expense by $312, the large number of cancer patients in China makes the impact minimal for the individual patient. Currently, about 4.3 million new cancer patients are diagnosed in China every year. The saving, then, is only about $100 per patient per year.
In the long run, however, the tariff reduction will benefit foreign pharmas. Eliminating the tariff signaled the change of attitude: the Chinese government is opening its gates to overseas competition. Additionally, on May 1, while the tariff was reduced to zero, the value added tax for imported anti-cancer drugs, including 103 preparations and 51 raw material, was also significantly reduced, from the original 17% to a mere 3%. Undoubtedly, this will further decrease the price of imported anti-cancer drugs and strengthen the stance of foreign companies in China. In future, if foreign pharmas want to compete with domestic companies and further expand their territories, the price reduction will be a key consideration.

The impact on Chinese pharma companies

The zero-tariff decision has the biggest impact on China’s generic drug providers. In the past, thanks to the very long approval process for foreign medications and the low-price advantage of domestic drugs, China’s pharma companies were protected from overseas competitions. But to a certain extent this also killed China’s innovative spirit. As a result, the current Chinese pharmaceutical market is very segmented and full of small, low-quality providers.
However, the situation is changing. In the past two decades, riding on the booming Chinese economy, investment into new drug development in China has been increasing steadily. In the case of Beijing and Shanghai, where the majority of Chinese pharma companies are based, the salary of a scientist is comparable to the United States. Furthermore, the administrative and operational expense is not much higher. In future, innovation will be key. A pharma company without its own IP could not survive the fierce competition.
The zero-tariff policy has also reflected the Chinese government’s dedication and effort to catch up to the leading countries in the path to innovation by reducing entry barriers, increaing domestic competition, and eliminating inferior products. This will serve to “clean” the Chinese market and pave the way for positive and balanced development.
So the game is changing. It is predicted that in the Chinese generics sector, the quality and price of different providers will gradually converge. Ultimately, dozens of pharmas with a good balance between quality and cost will become the major players and share the market. Their drugs will likely dominate the chronic disease field and be covered by the national healthcare insurance.
On the other hand, in the innovative medication sector, both China’s domestic and overseas pharma companies have to compete fairly on the grounds of product innovation and quality. Chinese Medicare will pay for a portion of them, after national drug negotiations. Eventually, high-risk innovative drug R&D will bring in about 80% to 95% gross profit to a company.

Drug negotiations reduce the price

To completely reduce the price of imported drugs and eliminate the economic burden on its vast patient population, China has implemented a series of comprehensive policies. Tariff reduction is only the first step.
On April 12, 2018, China’s State Council’s executive meeting specified a range of measures to speed up the process, including reducing the tariff, accelerating the import and listing of innovative medications, strengthening the intellectual property protection, and improving quality control and supervision. This series of initiatives is dedicated to rapidly decreasing the price of imported drugs through multiple links and channels, and will benefit Chinese patients.
Yixin Zeng, Deputy Director of China’s Health Committee, commented: “On the basis of lowering the tax rate, we will also apply a number of steps to improve the supply of anticancer drugs, including centralized procurement, medical insurance payment, rational drug administration, R&D, etc. Foreseeably, with their implementation one after one, these policies will work together and create a synergy effect, paving the way for deepening the structural reform of medicine supply and stimulating the market vitality. Eventually, this will help to reduce the heavy burden on China’s cancer patients.”
In order to allow the masses access high quality and low-price medicines, the former State Health and Family Planning Commission has since 2016 organized and conducted pilots of national drug price negotiations to include a number of patented and exclusive drugs in the National Health Insurance Directory. A total of 17 anti-cancer drugs have benefited from the negotiation and dropped in price by 70%. The saving has been about $655 million annually. After price reduction, the drugs qualified for inclusion in the national medical insurance list, which helped to further cut down the price. Thus, the total saving has amounted to around $1 billion per year.
In addition to reducing the anti-cancer drug price to allow more patients access to affordable drugs, the Chinese government is also stepping up its efforts to accelerate the review and approval process of innovative medications. Previously, when a foreign drug entered the Chinese market, it required a very long approval process, and so reached patients at a slower pace. New drug listing in China was as much as 7 or 8 years behind that of countries such as the US, Europe, and Japan. From 2001 to 2016, a total of 433 innovative drugs were launched in developed countries, but only 100 hit the Chinese market. In the past two years, China has recognized this dilemma and is now actively promoting the reform of its review and approval process. Slowly, the problem of foreign drugs entering the Chinese market is being tackled.
The new policy proposed to speed up the process to bring imported innovative medications to patients. In particular, it changed clinical trial application from the approval system to the default expiration system. For imported chemical drugs, it implemented corporation inspection instead of the old batch-by-batch inspection.
Meanwhile, Chinese FDA has released a series of related policies to step up its game. China has opened up a “green channel” for all imported innovative drugs. It states that if a foreign medication has conducted international, multi-center clinical trials in China and is in compliance with the relevant requirements for the Chinese drug registration, it can be listed directly after the completion of clinical trials. This has led to a slew of new drugs developed by foreign pharmas reaching the Chinese market. According to incomplete statistics, a total of 20 were approved in 2017, including drugs from pharma giants Bayer, Novartis, and Sanofi. They cover a range of therapeutic areas, including cancer, hepatitis C, diabetes, and Parkinson’s disease.

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