HONG KONG – Looking to cope with an aging population and a rising disease burden, the highest levels of government in China are now focused on upgrading the country's health care industries with pharma and medical devices at the top of the list.

The push is likely to be a defining priority for the government during the coming year. During the last meeting of the Central Leading Group for Deepening Overall Reform of 2016 held on Dec. 30, Chinese President Xi Jinping set the tone for the New Year. He said that the health industry is a key sector among the group's priorities.

Xi created and leads the group, whose primary task is to oversee the overhaul of the country's political and economic systems. The health care industry was the first sector highlighted.

"Official regulation on drug manufacturing, delivery and usage will be strengthened, with stricter approval systems for new drugs, speeding up implementation of drug quality and effectiveness equivalence assessments, orderly rolling out the marketing authorization holder (MAH) scheme and improving supervision over product safety and quality. The purchasing system of drugs and medical devices should be further improved," said policymakers in a statement after the meeting.

"There should be a further push for the new two-invoice system in drug trading to reduce intermediate links and cleanse the delivery environment. The situation wherein a hospital subsidizes its medical services with overly expensive drug prescriptions should change. Medicine markups need to be revoked and a proper medical service price system established."

The remarks from the central leading group clearly sketch out major loopholes in the current health care industry and express the government's push to crack down on practices within the industry that cut corners and to upgrade the industry with high-quality innovative drugs and medical devices.

China's pharma and med-tech regulatory framework have evolved over the past decade as part of an effort to foster innovation and more sustainable long-term growth.

STREAMLINING THE SECTOR

"Overall, regulations in health care sectors are much stricter. It might be short-term pain, but will upgrade the industry in the long term," said Zhu Min, a partner at Han Kun Law Offices, who likened the push to "cleansing toxins."

In April 2016, China's State Council sent out the "Notice of the General Office of the State Council on Issuing the Major Tasks in 2016 in the Deepening of the Reform of the Medical and Health Care System," which requires public hospitals to implement a two-invoice system in central drug procurement operations, a key effort to eliminate corruption within the system.

The aim of the two-invoice system is to more strictly dictate that only three parties are allowed in drug sales, from a drug manufacturer to a distributor and then from a distributor to a hospital.

The involvement of any other parties would incur at least one more tax invoice.

The approach led to a rapid destocking of inventory among distributors and a drop in drug sales. The approach also put pressure on the pharma industry, especially for companies engaged in indirect sales such as Sihuan Pharmaceutical Holdings Group Ltd., CSPC Pharmaceutical Group Ltd. and Shanghai Fosun Pharmaceutical (Group) Co. Ltd. Hong Kong-listed Sihuan noted in its 2016 interim report that "the aforementioned factors led to the group's first negative growth in history with revenue and profit decreasing by 21.8 percent and 49.3 percent year-on-year."

Another major regulatory change in China's health care industry is an ongoing crackdown on weak clinical trials and the strengthened focus on the quality of trials.

On July 22, 2015, the CFDA requested applicants of 1,622 drug registration applications to conduct self-inspections and verifications of their clinical trial data to ensure authenticity and reliability. By the end of June 2016, the deadline set by the authority for self-investigation, 1,193 applications had been withdrawn by their companies. (See BioWorld Today, Oct. 26, 2016.)

"While improving the safety and quality of made-in-China drugs, it is also a good initiative that can reduce bad applications in the backlog. This, together with new regulations on quality and efficacy requirements for generics, aims to accelerate the approval procedure and encourage innovation," said Shi Lichen, director of the Dingchen Pharmaceutical Management Consulting Center.

Under the pilot MAH program launched in 10 Chinese cities or provinces by the State Council in June 2016, domestic drug manufacturers, R&D institutions and individual researchers of Chinese nationality can obtain regulatory approvals to commercialize pharmaceuticals and outsource the manufacturing to contract manufacturing organizations. In effect, this separates the drug manufacturing licensing regime from the marketing authorization.

"The MAH system has been adopted for many years in developed countries. This is definitely good news, also a big one for us," said Samantha Du, chairman and CEO of start-up biotech company Zai Labs Ltd. "Scientists do not need to sell their research findings to pharmaceutical companies too early. This could largely encourage the development of innovative drugs."

Industry players believe that the message from the central leading group signals that more reforms will be rolled out this year, further targeting quality controls, price reductions and the encouragement of innovative products.

"The health care industry has seen its growth rate dip to the bottom in 2015 and 2016 with constant regulation updates and supervision system reforms; yet, it is in the right direction of development," according to a report from Everbright Securities. "2017 will be a critical year as the industry will enter into a new planning phase. . . . Innovative drugs will see opportunities while large amounts of approvals for lower-end generics will not be the case anymore."