PHARMACEUTICALS, March 15 (Reuters) - UBS Research believes that the reform of health 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 reduction in gross margins.

Because of the government's intensive release of health care reform policies, 2016-2017 is known as the big year of health care policy. The industry summarizes that the medical reform policy is mainly focused on health insurance and pricing system, both of which will have a profound impact on the pharmaceutical industry.

On March 13, UBS held a special study on this, concluding that health insurance control will lead to a slowdown in the growth of the pharmaceutical industry; drug pricing reform will lead to a long-term decline in industry gross margins.

However, this far-reaching impact is not yet apparent, in 2016, China's pharmaceutical industry revenue of 2.8 trillion yuan, an increase of 9.7% year-on-year; profit of 300.2 billion yuan, an increase of 13.9% year-on-year.

“The starting point of this reform is structural adjustment, not the previous drastic increase in inputs, but a part of the population will benefit, a part of the population will be neutral, and another part of the population may be damaged.” UBS Securities pharmaceutical industry analyst Zhao Bing believes that “the pharmaceutical industry will not be like the beginning of the health care reform when there is an annual growth of 20 percent or 30 percent, and is now in a downward step.”

Fee control to slow down the industry growth rate

The first signs of health insurance fee control began in 2010, from 2011, some areas such as Shanghai health insurance from open source to cut costs. 2013, the health insurance fund revenue growth rate is lower than the expenditure growth rate of the situation, facing a narrowing of the balance or even “not enough to cover expenses”. 2015, the health insurance fund revenue and expenditure growth rate fell to 15.55% and 14.48%, respectively. 15.55% and 14.48% respectively. At the same time, the bidding price reduction, medical insurance fee control into the industry norm.

“Health insurance fee control will lead to a slowdown in revenue growth in the pharmaceutical industry.” Zhao Bing explained that since 2009, the main achievement of healthcare reform has been the government's increase in spending, which has driven the growth of the pharmaceutical industry and established comprehensive coverage and affordable healthcare costs.

The new contradiction lies in the increased pressure on the pharmaceutical industry to continue to invest after the decline in GDP growth. According to Zhao Bing, “In a situation where the growth rate of health insurance expenditure is higher than the growth rate of financing, in order to maintain the balance of income and expenditure of the health insurance fund, fee control will become the core of health insurance reform in the long term. At present, the pharmaceutical industry, health insurance reform is essentially to control the growth of medical expenses through demand-side structural adjustment.”

“From 2011-2015, the pharmaceutical industry revenue achieved a compound annual growth of 15%. However, we expect the revenue growth of the pharmaceutical industry to slow down by 10% in the next three years.” Zhao Bing added.

In addition, the dividends brought by the increase in the number of drugs in the new version of the health insurance catalog are not as big as imagined. On February 23, the Ministry of Human Resources and Social Security issued the “National Basic Medical Insurance, Workers' Compensation Insurance and Maternity Insurance Drug Catalog (2017 Edition)”, which contains a total of 2,535 drugs in western and proprietary Chinese medicines, which is an increase of about 15% compared with the 2009 version of the catalog, which added 339 new drugs.

“However, under the constraints of the price paid by health insurance, most varieties will not see the situation of the 2009 version of the catalog after the implementation of the release of the surge.” Liu Qian, founder of Unicorn Studio, told the 21st Century Business Herald, “The expansion of the new version of the catalog implies that structural adjustment and cost-control measures will continue to be implemented, and the larger beneficiaries of the health insurance catalog are patients rather than drug companies.”

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

On January 6, Li Bin, director of the National Health Planning Commission, said at the “National Health and Family Planning Work Conference” that in 2017, all drug markups should be canceled. He Sheng, director of the State Council's Office of Healthcare Reform, re-emphasized this policy at a March 11 press conference.

He Sheng said, “This means that China's public medical institutions will say goodbye to the era of ‘medicines for doctors’. Before the reform, public hospitals were subsidized through three channels: fees for services, income from drug markups and government subsidies. After the reform, we've abolished the drug markup and turned it into two channels: service charges and government subsidies.”

The above reform will directly affect the price of drugs, in addition, bidding, health insurance payment system reform will also have a huge impact on drug prices.

UBS research report analyzes that hospitals and health insurance departments will be more involved in the drug price development process; health insurance payment price will replace the bidding price; hospitals will have more adjustments to the bidding price before the purchase.

The consequence of the decline in drug prices is to reduce 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 showing a binary pricing system, where prices are jointly determined by bidding and health insurance payments.”

According to the above report, previously lower prices for drugs generally appeared in 2015 and 2016, which means that prices in recent rounds of bidding have shown a clear downward trend. The gross profit margins of China's pharmaceutical industry in the previous three five-year periods were 35% (1999-2003), 31% (2004-2009) and 29% (2010-2015). Gross profit margins have shown an overall downward trend, with the main