On March 15th, according to UBS research, the reform of medical insurance and drug pricing system is the main theme of 2016-2017, which will lead to a slowdown in the growth rate of the pharmaceutical industry and a long-term decrease in gross profit margin.

Due to the government's intensive release of healthcare reform policies, 2016-2017 was known as the year of medical governance. Industry summary: Healthcare reform policies mainly focus on medical insurance and pricing systems, which will have a profound impact on the pharmaceutical industry.

On March 13th, UBS held a special study on this matter, and the conclusion was that controlling medical insurance fees will lead to a slowdown in the growth rate of the pharmaceutical industry; The reform of drug prices will lead to a long-term decline in the industry's gross profit margin.

But this profound impact has not yet been apparent. In 2016, the revenue of China's pharmaceutical industry was 2.8 trillion yuan, a year-on-year increase of 9.7%; Profit of 300.2 billion yuan, a year-on-year increase of 13.9%.

The starting point of this reform is structural adjustment, not a significant increase in investment as before, but rather a situation where some people benefit, some people are neutral, and others may suffer, "said Zhao Bing, a pharmaceutical industry analyst at UBS Securities

Cost control leads to a slowdown in industry growth

The emergence of medical insurance cost control began after 2010, and since 2011, some regions such as Shanghai's medical insurance have shifted from open source to cost saving. In 2013, the medical insurance fund experienced a situation where the income growth rate was lower than the expenditure growth rate, facing a narrowing of surplus or even "income cannot cover expenses". By 2015, the income and expenditure growth rates of the medical insurance fund had decreased to 15.55% and 14.48%, respectively. At the same time, bidding price reductions and medical insurance cost controls have become the norm in the industry.

The control of medical insurance fees will lead to a slowdown in the revenue growth of the pharmaceutical industry, "Zhao Bing explained. Since 2009, the main achievement of medical reform has been the government increasing expenditure, driving the growth of the pharmaceutical industry, and establishing comprehensive coverage and affordable medical expenses.

The new contradiction lies in the increasing pressure on the pharmaceutical industry to continue investing after the decline in GDP growth rate. Zhao Bing believes that "in the situation where the growth rate of medical insurance expenditure is higher than the growth rate of financing, in order to maintain the balance of income and expenditure of the medical insurance fund, cost control will become the core of medical insurance reform in the long run. Currently, the pharmaceutical industry and medical insurance reform are essentially controlling the growth of medical expenses through demand side structural adjustment

From 2011 to 2015, the pharmaceutical industry achieved a compound annual growth rate of 15% in revenue. However, we expect that the revenue growth rate of the pharmaceutical industry will slow down to 10% in the next three years, "Zhao Bing added.

In addition, the dividend brought by the increase in the number of drugs in the new version of the medical insurance catalogue is not as big as expected. On February 23, the Ministry of Human Resources and Social Security issued the Catalogue of Drugs for National Basic Medical Insurance, Industrial Injury Insurance and Maternity Insurance (2017 Edition). Western medicine and traditional Chinese patent medicines and simple preparations have a total of 2535 drugs, 339 more than the 2009 version, an increase of about 15%.

But under the constraint of medical insurance payment prices, most varieties will not experience the surge in volume after the implementation of the 2009 version of the catalog, "Liu Qian, founder of Unicorn Studio, told 21st Century Business Herald reporters." The expansion of the new catalog implies that structural adjustments and cost control measures will continue to be implemented, and the biggest beneficiaries of the medical insurance catalog are patients rather than pharmaceutical companies

Drug price reform leads to long-term decline in gross profit

On January 6th, Li Bin, Director of the National Health and Family Planning Commission, stated at the "National Health and Family Planning Work Conference" that drug markups will be completely abolished in 2017. Wang Hesheng, Director of the State Council Medical Reform Office, reiterated this policy at a press conference on March 11th.

Wang Hesheng said, "This means that China's public medical institutions will completely bid farewell to the era of 'using medicine to supplement medicine'. Before the reform, public hospitals were subsidized through three channels: service fees, drug markups, and government subsidies. After the reform, we abolished drug markups and became two channels: service fees and government subsidies

The above reforms will directly affect drug prices. In addition, the reform of bidding and medical insurance payment systems will also have a huge impact on drug prices.

UBS research report analysis shows that hospitals and medical insurance departments will be more involved in the process of drug pricing; The medical insurance payment price will replace the bidding price; There will be more adjustments to the bidding price before hospital procurement.

The consequence of the decline in drug prices is a decrease in the gross profit margin of the pharmaceutical industry. Zhao Bing said, "The purpose of drug price reform is to form a pricing system that ensures affordable drug prices and takes into account the enthusiasm of pharmaceutical companies. Currently, drug pricing is increasingly adopting a binary pricing system, where prices are jointly determined by bidding and medical insurance payments

According to the above report, the lowest prices for drugs have generally appeared in 2015 and 2016, which means that the bidding prices have shown a significant downward trend in recent rounds. The gross profit margins of the first three 5-year periods in the Chinese pharmaceutical industry were 35% (1999-2003), 31% (2004-2009), and 29% (2010-2015), respectively. The overall gross profit margin is showing a downward trend, mainly due to rising labor and production costs, as well as further decline in drug prices. UBS expects that the downward trend in gross profit margin will continue in the next 5-year period.

Recently, there has been a heated discussion about the medical insurance payment settlement price limit in Fujian and other places, which will have a great impact on the original drug manufacturers. "This is not necessarily a bad thing. Many of the original drugs used in China are expired, and only the expired original drugs will have such concerns and concerns." Zhao Bing told the 21st Century Economic News reporter, "The high price occupies a large proportion of medical insurance funds, usually in the field of major diseases such as diabetes and hypertension. But in fact, there are already very good generic drugs on the market in China. Why do we need to set a higher price for the expired original drugs?"