State Council Issues Policy Boosting医药O2O Sector, Company Files IPO Prospectus

On February 9, the General Office of the State Council released the “Several Opinions on Further Reforming and Improving Policies for Drug Production, Distribution, and Use” (hereinafter referred to as the “Opinions”), which put forward new requirements on issues such as pharmaceutical innovation, consistency evaluation of generic drugs, the two-invoice system, online pharmaceutical sales, eliminating the practice of subsidizing healthcare with drug profits, and controlling medical insurance expenditures.

The Guidelines set forth general requirements to address prominent issues in the pharmaceutical sector by proposing systematic reforms across the entire chain of drug production, distribution, and use. These measures aim to improve the quality and efficacy of drug supplies, ensure timely availability, promote reasonable pricing, and refocus medications on their fundamental therapeutic purpose. The goal is to establish a standardized and orderly drug supply guarantee system that better meets the public’s healthcare needs and advances the construction of a Healthy China.

In fact, the Information Office of the State Council had already held a briefing on the “Opinions” on the morning of January 25. Wang Hesheng, Director of the State Council’s Office for Healthcare Reform and Director of the National Health and Family Planning Commission, and Wu Zhen, Deputy Director of the China Food and Drug Administration, attended the meeting and provided an overview of the relevant circumstances. Wu Zhen also offered a detailed interpretation of the reforms to drug approval policies and the regulatory changes in the pharmaceutical e-commerce sector.

In addition to the current “Opinions,” a number of other policies have been intensively rolled out in the pharmaceutical industry recently, including 《Development Plan for the Pharmaceutical Circulation Industry》、“Two-Invoice System”、Cancellation of Approval for Class B and C Licenses in Pharmaceutical E-commerce、13th Five-Year Plan for Food and Drug SafetyThe "Opinions" can be regarded as a phased summary of the aforementioned policies, reiterating key issues across the entire chain of drug production, distribution, and use to ensure the implementation of previous policies, while also opening up new opportunities for the future development of the pharmaceutical industry.

The “Opinions” set forth requirements for the pharmaceutical industry from three aspects.

Improve the quality and efficacy of pharmaceuticals, and promote the upgrading of the pharmaceutical industry structure.

The “Opinions” point out that we should accelerate the quality and efficacy consistency evaluation of already marketed generic drugs. It encourages pharmaceutical manufacturers to proactively select reference listed drugs in accordance with relevant guidelines, reasonably choose evaluation methods, and conduct research and assessments. Meanwhile, a pilot Marketing Authorization Holder (MAH) system will be implemented for newly approved drugs and those that have passed the consistency evaluation, so as to encourage new drug R&D and facilitate the integration of new products and technologies with existing production capacity.

In terms of specific implementation, national programs (including special projects and funds) such as the National Science and Technology Major Project for New Drug Innovation will be implemented to support eligible enterprises and research institutes in developing new drugs and key technologies, thereby enhancing drug innovation capabilities and improving quality and therapeutic efficacy.

To eliminate outdated production capacity, pharmaceutical companies must also undergo “supply-side structural” reforms. Efforts should be made to facilitate the exit of backward enterprises, with a focus on addressing issues such as the large number, small scale, and low standards of drug manufacturing enterprises. Support should be provided for mergers and acquisitions among drug manufacturers, and approval procedures for the transfer of product marketing authorizations across regions within corporate groups should be streamlined. This will help cultivate a cohort of large enterprise groups with international competitiveness and increase the concentration of the pharmaceutical industry. Small and medium-sized enterprises (SMEs) with advantages in branding, technology, specialized resources, and management should be guided to enhance their quality and strength through various approaches, such as industrial alliances. The level of intensive production should be improved to promote the development of a portfolio of branded drugs with high clinical value and superior quality.

Previously, Wu Zhen addressed issues such as shortages of life-saving drugs and insufficient supply of pediatric medications at a briefing. The current "Opinions" also cover these matters. It points out the need to improve monitoring, early warning, and tiered response mechanisms for drug shortages and low-priced drugs; establish and refine systems for information collection, reporting, analysis, and consultation on drug shortages; dynamically track production status of key enterprises; and coordinate measures—including designated production, drug reserves, emergency manufacturing, and negotiated allocation—to ensure stable pharmaceutical market supply.

Analysis suggests that the regulatory focus of the "Opinions" in the pharmaceutical industry sector centers on two aspects: first, “structural adjustment,” and second, “quality assurance.” Structural adjustment refers to enhancing innovation in China’s pharmaceutical production, accelerating the consistency evaluation of quality and efficacy for generic drugs, and prioritizing the elimination of outdated production capacity. Implementation measures include industrial financial support, special programs, and integration of industry, academia, and research. Quality assurance encompasses both “quality” and “quantity.” Special production plans should be established for scarce drugs, orphan drugs, and pediatric medications, with production secured through policy support and fiscal incentives. Furthermore, centralized coordination of procurement, transportation, and storage for these aforementioned drugs is required to optimize supply and demand dynamics.

Order Rectification and System Reform

China’s nationwide “Two-Invoice System” has just been implemented; although room for implementation was left for the industry, the Guidelines still served as a precautionary measure for the sector.

The “Opinions” specify that pilot provinces (autonomous regions and municipalities) for comprehensive healthcare reform and pilot cities for public hospital reform shall take the lead in implementing the “Two-Invoice System,” while other regions are encouraged to adopt it, with the goal of nationwide rollout by 2018. Pharmaceutical distribution enterprises and medical institutions shall establish complete purchase and sales records for pharmaceuticals, ensuring consistency among invoices, accounts, goods, and payments, with packing slips accompanying the pharmaceutical shipments. Enterprises shall issue invoices and sales vouchers in accordance with relevant regulations when selling pharmaceuticals. Efforts shall be actively made to promote standardized and electronic management of invoices for pharmaceutical purchases and sales.

Implement the policy of classified drug procurement to further increase the participation of medical institutions in centralized drug procurement. Encourage cross-regional joint procurement and joint procurement by specialized hospitals. In regions where healthcare insurance payment method reforms have been fully implemented or where payment standards for insured drugs have been established, allow public hospitals to conduct joint volume-based and budget-constrained procurement on provincial-level centralized drug procurement platforms (provincial public resource trading platforms). Improve the national mechanism for drug price negotiations, gradually expand the scope of drugs subject to negotiation, and ensure effective coordination with healthcare insurance and other related policies. Strengthen the standardized development of the National Comprehensive Management Information Platform for Drug Supply Assurance and provincial-level centralized drug procurement platforms, and improve the mechanism for sharing drug procurement data.

Another issue of greatest public concern is “pharmaceutical e-commerce.” The Guidelines emphasize that, with a focus on meeting the public’s needs for safe and convenient access to medications, we should actively leverage the advantages of “Internet + pharmaceutical distribution” in reducing transaction costs, improving distribution efficiency, promoting information transparency, and breaking monopolies. We will guide the standardized development of “Internet + pharmaceutical distribution,” support strengthened cooperation between pharmaceutical distribution enterprises and internet companies, advance the integrated development of online and offline channels, and foster emerging business models. We will regulate online retail services provided by retail pharmacies and promote new delivery models such as “online ordering with in-store pickup” and “online ordering with home delivery.” Regions with the necessary conditions are encouraged to leverage existing information systems to provide pharmaceutical care services, including online prescription review by licensed pharmacists and guidance on rational drug use. Food and drug regulatory authorities, commerce departments, and other relevant agencies shall establish and improve regulatory frameworks for online pharmaceutical transactions and strengthen routine oversight.

Following the announcement, industry insiders told VCBeat (WeChat: vcbeat) that the pharmaceutical e-commerce sector may see significant positive developments. This includes B2B pharmaceutical distribution, consumer-facing B2C models, and the few existing on-demand medicine delivery O2O platforms currently on the market. Reviewing previous policies such as the “13th Five-Year Plan” for pharmaceutical circulation and the removal of B and C certificate approval requirements for pharmaceutical e-commerce, it is evident that the “Internet + Healthcare” channel is gaining national recognition. Although challenges remain—including restrictions on online sales of prescription drugs, the conclusion of pilot programs for third-party retail platforms, and difficulties in obtaining electronic prescription qualifications—the pharmaceutical e-commerce sector may experience substantial growth in the short term.

Furthermore, the issue concerning pharmaceutical sales representatives has returned to public scrutiny following exposure by China Central Television (CCTV), with the transformation of the million-strong workforce becoming a focal point of industry debate. In this regard, the "Opinions" state that food and drug regulatory authorities must strengthen the management of medical representatives, establish a registration and filing system, and promptly disclose filed information. Medical representatives are permitted to engage only in activities such as academic promotion and technical consultation; they are prohibited from undertaking pharmaceutical sales tasks, and any acts of dishonesty will be recorded in their personal credit files.

Industry insiders state that returning pharmaceutical sales representatives to the core functions of drug promotion and technical consulting will drive changes in pharmaceutical companies’ sales strategies and facilitate their transition from sales-driven to R&D-focused models. On the other hand, if pharmaceutical sales representatives are no longer assigned sales targets, pharmaceutical corruption may be curbed, which would be beneficial for the industry; however, this transition will be arduous, and “gray” practices are unlikely to disappear in the short term. Nevertheless, this development is favorable for pharmaceutical sales outsourcing and internet-based pharmaceutical marketing, potentially spurring rapid growth in these two sectors.

Abolish the practice of subsidizing healthcare through drug sales, and strengthen cost containment by medical insurance.

The "Opinions" specify that the coordinated reform of medical care, health insurance, and pharmaceuticals ("Three-Medical Linkage") must be continuously deepened. Reforms such as abolishing drug markups, adjusting prices for medical services, and encouraging patients to purchase medications at retail pharmacies should be advanced in a coordinated manner. Government funding responsibilities must be fulfilled, and a new compensation mechanism for public hospitals should be established promptly. The separation of prescribing from dispensing shall be promoted. Medical institutions are required to issue prescriptions using the generic names of drugs and proactively provide these prescriptions to patients. Outpatients may freely choose to purchase their medications either within medical institutions or at retail pharmacies; medical institutions shall not restrict outpatients from filling their prescriptions at retail pharmacies. Where conditions permit, the outsourcing or separation of outpatient pharmacies from medical institutions may be explored. Efforts should be made to achieve interconnectivity and real-time sharing of data among medical institution prescription information, health insurance settlement information, and retail pharmaceutical consumption information.

We’ve highlighted the key points for you: prescription outflow and specialty pharmacies.

Industry insiders state that the outflow of prescriptions should be absorbed by retail pharmacies. Currently, China has 440,000 retail pharmacies, a number far exceeding that of hospital pharmacies. Retail pharmacies undoubtedly hold advantages over hospital pharmacies in terms of drug variety and pricing. If prescription restrictions are fully lifted, the scale of retail pharmacy sales will expand further, also promoting the professional development of pharmaceutical care services in pharmacies. With the implementation of the new Good Supply Practice (GSP) standards, pharmacies, especially large-scale chains, have basically equipped themselves with licensed pharmacists. Many pharmacies are also actively collaborating with internet healthcare enterprises to introduce services such as remote diagnosis and treatment and micro-consultations, making positive attempts to enhance professionalism and functionalize medical services. As the market scale expands, the retail pharmacy sector will continue to upgrade.

Regarding medical insurance cost containment, the Opinion points out that the role of medical insurance in standardizing practices and controlling costs should be strengthened. The full potential of various medical insurance schemes should be leveraged to control and supervise medical service behaviors and pharmaceutical expenses, gradually extending regulatory oversight from healthcare institutions to the clinical practices of medical personnel. Exploration should be undertaken to establish a credit rating management system and a blacklist management system for designated medical insurance institutions. The National Reimbursement Drug List should be revised in a timely manner. Budgetary management of medical insurance funds should be strengthened, and reforms in medical insurance payment methods should be vigorously promoted. A composite payment model, primarily based on diagnosis-related groups (DRGs) and supplemented by capitation, per-diem payments, and other methods, should be fully implemented. Medical insurance payment standards should be reasonably determined, transforming expenditures on drugs, consumables, tests, and laboratory examinations from revenue sources into costs for healthcare institutions, thereby incentivizing them to proactively standardize medical practices and reduce operational costs.

Industry insiders point out that the pressure on medical insurance payments will persist in China for a long time. The rapid growth of residents' medical expenses has exceeded the payment capacity of medical insurance funds, resulting in a funding gap. To address this challenge, efforts can be made from two aspects: total amount control and structural control. Specific measures include implementing diagnosis-related group (DRG) payment systems and promoting health management. For instance, the recently introduced family doctor system represents a proactive attempt in this direction.

Previously, we published an article titled “The Hidden Pain Points of Healthcare Reform: When Will Pharmacists’ Prescribing Authority Be Unlocked?” article discussed the role of pharmacists, and this “Opinion” also mentioned the intelligence of pharmacists. It stated that we should “actively leverage the role of pharmacists.” Implement the rights and responsibilities of pharmacists, fully utilizing their role in rational drug use. When advancing medical service price reforms, regions should comprehensively consider, based on actual conditions, the work carried out by pharmacists such as prescription review and dispensing, clinical medication guidance, and standardized medication practices. Explore reasonable compensation mechanisms and ensure alignment with policies such as medical insurance. Strengthen training for pharmacists in retail pharmacies to enhance pharmaceutical care capabilities and standards. Accelerate the legislative process for the Pharmacists Law. Explore multi-site practice opportunities for pharmacists. Rationally plan and allocate pharmaceutical talent resources, strengthen digital identity management, and bolster the development of the pharmacist workforce.

The above is a review of the current "Opinions." Viewed holistically, the "Opinions" primarily serve a "patching" function, addressing long-standing issues. As healthcare reform enters a critical phase, these issues will be gradually resolved, bringing new opportunities to the industry. We anticipate investment opportunities will emerge in innovative drugs, pharmaceutical distribution, consolidation and upgrading of chain pharmacies, pharmaceutical e-commerce, O2O pharmaceutical services, sales outsourcing, and digital pharmaceutical marketing. Industry professionals may consider focusing on these areas.