News & Insights Checking up on China’s healthcare system

Checking up on China’s healthcare system
Ten years on from China’s landmark reforms to establish a basic healthcare system, and with much of the regulatory infrastructure now in place, the prognosis for the sector is positive. However, one area still requiring urgent treatment is the cost and quality of medication. 

From the establishment of the State Medical Insurance Administration to the introduction of new cutting-edge therapies, 2018 has already proved to be a year of continuous developments that bode well for the outlook on China’s healthcare system. But arguably the most significant event this year was the release of the film ‘Dying to Survive’ in July, which told the story of a business man with leukaemia who imports cheap drugs from India to save himself.1

The film resonated with audiences because the cost of drugs is a vexing issue in China for both the government and for patients. To give a sense of the scale of the challenge, drug expenses accounted for 32% of China’s medical expenses in 2016, far more than the 14% in the United States (US).2

China drug sales and other healthcare expenses vs US drug sales and other healthcare expenses

Sources: Admin of Southern Medical Economics Institute, NHFPC, Statista.com, IMS, Credit Suisse, China Healthcare Sector Report 2018

Why so much? Well the medical system is weighed down by the cost of using original drugs, rather than generics. This is despite the fact that China’s domestic drug market is growing fast and is dominated by generic medication. According to McKinsey & Company, 95% of the drugs approved by the China Food and Drug Administration (CFDA) are generic.3

However as Credit Suisse analysts point out:

“The quality of these generics is not consistent, including low efficiency and unqualified data, resulting in original drugs still accounting for a large market share, even after generics have been in the market for more than five, and in some cases, even 10 years.”4

China drug sales market is expected to grow at an 15% CAGR in 2019-21

Sources: IMS, Credit Suisse estimates, Credit Suisse, China Healthcare Sector Report 2017

A generic problem

It’s a problem recognized by Mr. Zhu Hengpeng, Deputy Director of China Academy of Social Science (CASS) Institute of Economics and Director of CASS Centre for Public Policy Studies in Beijing, and an adviser on healthcare reforms to China’s Ministry of Finance and the Ministry of Human Resources and Social Security. As well increasing costs for the government, the lack of high-quality generics is also hampering development of China’s domestic pharmaceutical industry.

“It might sound a bit awkward, as China hasn’t been doing a great job on pharmaceutical innovation and the quality of generic drugs is often considered below the bar. So far China has only a handful of generic drugs that have received approval from the US Food & Drug Administration (FDA) and been exported to the US in meaningful amounts. China has only 30 generic drugs that can be exported to the United States, while India has about 300,” he said.  

About Hengpeng Zhu

Hengpeng Zhu is Deputy Director of the Institute of Economics and Director of the Public Policy Research Center at the Chinese Academy of Social Sciences (CASS).

Mr. Zhu, who has been conducting field research into Chinese healthcare reform for more than a decade, says cost is one factor holding back the development of better generics.

“China has production capacities and a generic drug production history similar to those of India. However, better quality indicates higher cost and thereby reduced commissions. The question is not the ability to manufacture generic drugs of better quality but the impact on sales from an improvement in quality,” he explains.

In terms of numbers, private hospitals have outnumbered public ones and there are also quite a number of private clinics, which indicates a notable progress in the engagement of private equity in the healthcare sector. Mr. Zhu Hengpeng

Supporting innovation

However, Mr. Zhu, who will be giving a keynote address at the 2018 Credit Suisse China Investment Conference on healthcare reforms, says government policy towards pharmaceutical innovation has been very supportive. He points out that pharma was one of the first industries China opened to foreign investment in the 1980s and policymakers have established a vision to make China a leader in the field.

And the country is well positioned to take advantage of future innovations, according to Credit Suisse research. For example, it is catching up with the most advanced technologies and therapies, in terms of both accelerating imported drug approvals and domestic research and development (R&D).

“For example, the CFDA approved the first Hepatitis C Direct-acting antiviral (DDA) treatment Daclatasvir and Asunaprevir from US pharmaceutical company Bristol-Myers Squibb. Before this, China patients could only seek cross-bound consultation or buy parallel goods, which are both expensive and risky,” said Serena Shao, Head of Credit Suisse’s China Healthcare Equity Research.

Meanwhile, Mr. Zhu has been encouraged by the rise of private equity investment into the system. According to the Asian Venture Capital Journal, private equity investments into China’s healthcare industry reached USD2 billion in 2017, up from USD686 million in 2016.5

“In terms of numbers, private hospitals have outnumbered public ones and there are also quite a number of private clinics, which indicates a notable progress in the engagement of private equity in the healthcare sector,” he said.

Furthermore, he expects future changes in the industry to be driven by new technologies and business models such as the rise of internet-based healthcare, the growth of clinic chains and the development of specialist healthcare providers.

In short, the prognosis for China’s healthcare sector is one of growth, innovation and greater investment.  

Sources: 
1. Bloomberg, Dying to Survive, China Shows the Way on Drug Prices, 2018
2. Credit Suisse, China healthcare sector report, 2018
3, 4. Ibid.
5. The Government of the Hong Kong Special Administrative Region - Press Releases, Speech by SFST at 17th HKVCA China Private Equity Summit, 2018