Effects of Volume-Based Procurement Emerge as Multiple Pharmaceutical Companies Reduce Marketing Expenses
The third round of national volume-based procurement (VBP) is about to enter the implementation phase. According to incomplete statistics by an Economic Information Daily reporter, 26 provinces and cities, including Beijing, Shanghai, Hubei, and Fujian, have confirmed that they will implement the results of the third round of national VBP in November. Among them, seven provinces—Shanxi, Jiangsu, Gansu, Guizhou, Liaoning, Chongqing, and Qinghai—have confirmed that implementation will officially begin on November 1.

As the selected varieties of VBP are being implemented, many localities have made it clear that non-selected varieties will undergo tiered price reductions. Additionally, pilot retail pharmacies and medical institutions are encouraged to sell selected drugs at the procurement prices. Against this backdrop, in addition to lower drug prices, the effects of centralized procurement on the transformation of corporate sales models have become evident, with a large number of well-known pharmaceutical companies striving to reduce their sales expenses.

Third Round of National VBP to be Implemented in November
Recently, the Qinghai Provincial Medical Security Bureau issued a notice on the implementation of the results of the third round of national organized drug centralized procurement and the 2020 provincial organized drug centralized procurement. It clarified that starting November 1, 2020, the results of the third round of national VBP and the 2020 provincial VBP will be fully implemented. For the third round, the annual contracted procurement volume will be 50%–80% of the procurement volume reported by medical institutions across the province, as determined by the Joint Procurement Office. For provincial-level procurement, the annual contracted volume is set at 70% of reported volume, and for antibiotics, 50% of reported volume (excluding selected varieties that are listed with a price limit but no volume commitment). The procurement cycle is generally no less than two years.

The Ningxia Medical Security Bureau issued a notice confirming that the results of the third round of national VBP will be implemented on November 9. It also pointed out the need to properly manage the transition in the procurement and use of selected drugs, avoiding a "one-size-fits-all" approach, and to plan drug consumption before the implementation of selected drugs. For continued drug use after the contracted volume has been met, priority should be given to Ningxia’s selected drugs and drugs with prices lower than those in Ningxia that were not selected for the region. For drug use beyond the contracted volume, the procurement volume of non-selected drugs should not exceed that of selected drugs.

Fujian will implement the third round of national VBP online starting November 13. All public medical institutions in Fujian and military medical institutions in the province are required to participate. Socially-run medical institutions and retail pharmacies designated for medical insurance may participate after improving inventory management and ensuring timely payment of drug procurement costs.

At the same time, Fujian noted that selected drugs must be sold with zero markup. If they are included in the medical insurance catalog, the sales price serves as the medical insurance payment standard. For products in non-competitive categories under the same generic name that are not selected, if their actual procurement price is lower than or equal to the original maximum sales price, they will be sold with zero markup based on the actual procurement price. If the actual procurement price is higher than the original maximum sales price, they will be sold at the original maximum sales price. For drugs sold at a price higher than the selected drug price, the medical insurance payment standard will be determined by reducing the sales price by 30%. If the reduced standard falls below the selected drug price, the selected drug price becomes the payment standard. If the sales price is not higher than the selected drug price, the sales price becomes the payment standard.

In Henan, the results of the third round of national VBP will be implemented starting November 20, 2020. The notice clarifies that the implementation scope includes all public medical institutions in the province, and social-run medical institutions and retail pharmacies designated for medical insurance are encouraged to voluntarily participate. Regarding procurement volume, the notice states that the first-year contracted volume and the procurement cycle will be determined according to relevant rules. When renewing procurement agreements, the contracted volume for the following year should generally not be less than the contracted volume of the selected drug from the previous year. If the contracted volume for the year is completed ahead of schedule during the procurement cycle, the selected enterprise must continue to supply the drug at the selected price until the end of the procurement cycle.

Changes to Listing Rules for Non-Selected Drugs
In fact, in addition to selected drugs, many places such as Jiangsu, Chongqing, Shanghai, and Beijing have issued notices requiring price reductions for drugs not selected in the third round of national VBP. The reductions are generally aligned with the lowest national prices.

Many regions are adopting tiered price reductions. On October 13, the Liaoning Provincial Drug and Medical Consumable Centralized Procurement Network issued a notice on tiered price reductions for non-selected drugs from the third round of national VBP. For the 55 drugs involved, other non-selected drugs already listed on the Liaoning network are required to undergo price reductions, covering a total of 662 drugs.

According to the notice, for original drugs, reference-listed drugs, and generic drugs that have passed quality and efficacy consistency evaluations, if they have already undergone tiered price reductions in Shanghai, they may declare their price reductions based on a price not higher than the reduced price in Shanghai. For other non-selected drugs not covered by the Shanghai tiered reduction, they must undergo tiered reductions based on their current listed prices before they can remain listed. Those with large price gaps must undergo further reductions. The procurement price for other generic drugs must be lower than the selected drug price for the same variety to remain listed.

The notice states that if a drug fails to declare a reduction or the reduction fails to meet requirements within the specified timeframe, its listing in Liaoning will be cancelled.

Jiangsu requires that for selected drugs in the third round of national VBP, the selected price in Jiangsu serves as the payment standard. For non-selected drugs, the provincial medical security department will adjust the medical insurance payment standard in batches following the principle of "progressive steps, categorical guidance, tiered adjustments." In principle, if original drugs, reference-listed drugs, or generic drugs that have passed consistency evaluation have undergone tiered reductions in other provinces, manufacturers must proactively apply to adjust the listed price based on the lowest price after reductions in other provinces. Generic drugs that have not passed consistency evaluation must adjust their listed prices to a ceiling that is the lower of the current lowest price in provinces (autonomous regions, municipalities) and the selected price for the same variety in the third round of national VBP (Jiangsu selection results table). If three or more manufacturers of the same drug have passed consistency evaluation, generics that have not passed consistency evaluation will be suspended from listing.

In Ningxia, original drugs, reference-listed drugs, and generic drugs that have passed consistency evaluation but were not selected for the same variety are required to proactively submit price adjustment information by October 25. Their prices must be aligned with reductions in other provinces. The price of drugs that have not passed quality and efficacy consistency evaluation must not exceed the selected price of the national VBP drugs.

Qinghai has linked VBP prices. Provincial-level selected varieties must align with national VBP selected prices and the lowest prices from other provinces. The procurement volume that has not yet been fulfilled will be executed at the national VBP selected price or the new winning bid price.

Additionally, the Beijing Medical Procurement Service Center recently issued a notice on price matters for non-Beijing selected drugs in the third round of national VBP. It clarified that based on the results of tiered reduction negotiations from the Shanghai Joint Procurement Office, it will publish reference prices for products in the city’s open procurement database. Specifically, for drugs within the scope of national VBP, other reasonably priced non-Beijing selected drugs are allowed as supplements. For original drugs, reference-listed drugs, and generics that have passed consistency evaluation under the same generic name that were not selected, the price will be based on the non-selected drug price from the Shanghai negotiations. This price will be compared with the current national minimum price, and the lower will be the reference price for Beijing. For generics that have not passed consistency evaluation, the Beijing selected drug price will serve as the benchmark and be compared with the current national minimum price, with the lower serving as the reference price for Beijing.

Transformation of Pharmaceutical Companies' Sales Models Under VBP
Data shows that China has successfully completed three rounds of national organized drug centralized procurement, covering a total of 112 drug varieties, with an average price reduction of 54%. According to estimates by the National Medical Security Administration, the 112 varieties under centralized procurement have reduced annual drug costs from 65.9 billion yuan to 12 billion yuan, saving 53.9 billion yuan. Based on a 60% reimbursement rate, this could save patients 21.6 billion yuan and save the medical insurance fund 32.3 billion yuan.

As drug prices drop, patient access to medication has significantly improved. According to statistics, there are nearly 30 million patients with chronic hepatitis B in China, with only 11% receiving standardized treatment. There are about 245 million hypertension patients, with only 17% having their blood pressure under control. Following significant price reductions due to VBP, sales of the hepatitis B drug entecavir in 11 pilot cities increased from 68 million tablets to 207 million tablets, nearly tripling the number of patients receiving treatment. Sales of hypertension drugs such as amlodipine, irbesartan, and losartan generally increased by about 1 fold.

On one hand, sales are increasing; on the other hand, the "one-invoice system" under national VBP has significantly reduced the demand for sales links for pharmaceutical companies. Cash-for-prescription practices are becoming a thing of the past.

In this regard, industry insiders suggest that it is an inevitable trend for pharmaceutical companies to reduce their sales expenses. With the accelerated progress of VBP and the deepening of anti-corruption efforts in hospitals, cash-for-prescription practices are no longer sustainable, and a transformation of sales models is imperative.

The era of high gross margins for generic drugs has passed. Going forward, generics will achieve volume-for-price reductions through centralized procurement, becoming low-margin products. As China’s generic drug market gradually aligns with international markets, pharmaceutical companies must continuously improve their product development and quality to adapt to the trend of industrial transformation and upgrading if they are to secure a better future.