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2009-11-25

Chinese health care reform to help create new national champions?

This text is from Springtime's China issue tracker. The China issue tracker is a monthly report covering issues ranging from developments in public opinion and relations between China and other countries to company crises and hot media topics. We provide insight and analysis to help foreign businesses in China stay on top of important developments, as well as ad hoc updates on important events.

Chinese health care reform to help create new national champions?

The Chinese health care system is currently undergoing reforms with the goal to make basic health care accessible to every citizen by 2020. The reform seeks to expand health care coverage as well as correct some serious problems in the current system.

Many aspects of the reform have yet to be finalized, such as how a separation of hospitals and pharmacies will be implemented. So far the most developed part of the reform is implementation of the Essential Drug List (EDL), a list of drugs that will see tougher price controls and centralized procurement in order to keep costs down.

For companies with products on the EDL, the changes to how business will be done will be profound. But the consequences will reach even further.

The EDL, in its original incarnation, contains 307 drugs seen as essential to the grassroots level of health care in China. Local Health Bureaus can add to the list, as is the case in for example Chongqing where the list has an additional 43 drugs on it.

Procurement will be done on the provincial level. Companies will be able to submit their bids to provide drugs on the list though a web site and winners will be awarded contracts between six months and a year.

China has had many strong local pharmaceuticals providers, but few strong players on a national level. One of the objectives of the new system, according to local officials we have met, is to make it easier for companies to compete in other markets than their home provinces, making China “one market” for pharmaceuticals.

To help this, local governments will take steps to boost their local pharmaceutical companies, encouraging them to compete in other provinces. It is easy to see this becoming a government-backed arms race in the pharmaceutical sector, with each province wanting to promote their champions.

Companies also get help from the financial markets. In September, China’s largest pharmaceutical products distributor Sinopharm successfully raised more than one billion dollars in its Hong Kong IPO.

While the Chinese market is large, it won’t be enough, and companies will want to expand outside of China. And this is where the consequences of the health care reform will spread to other markets. As China upgrades its health care system, governments boost their local companies, and investors flock to provide the financing, China will be on its way to create a new set of national champions ready to take on markets abroad.

That will be a more important strategic development for foreign pharmaceutical companies than being on the local EDL or not.

If you're interested in receiving the full report, please contact Patrik Lockne at Springtime's Beijing office at patrik.lockne@springtime.nu.

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