New pricing mechanism to support innovation in drug development
- The National Healthcare Security Administration (NHSA) yesterday (5 Feb) issued a draft pricing mechanism to support innovation in drug development.
- We think this new mechanism, coupled with last year’s modification of NRDL rules, demonstrate the government’s support for the development of innovative drugs.
- Key beneficiaries of these changes are leading-edge pharmaceutical firms, in our view. Maintain sector Overweight. Our top pharma pick is BeiGene.
NHSA issues new drug pricing mechanism draft
On 5 Feb 2024, the National Healthcare Security Administration (NHSA) issued a draft paper entitled “Notice on Establishing a New Pricing Mechanism for New Chemical Drugs to Encourage Innovation”, with the main objective being to establish a system that allows the determination of drug prices via market forces and to support innovation. The draft paper proposes that when new chemical drugs are first included in the drug procurement platform of the provincial government, pharma companies would have the option to selfassess their new drugs based on NHSA’s evaluation criteria, which include pharmaceutical science, clinical value, and evidence-based medicine. The new drugs would then be categorised into high, medium, or low, depending on their scores. The higher the self-assessment scores, the greater the innovative value of the drug and, consequently, the higher degree of flexibility accorded to the company in determining the price of the drug. Policy support could also be offered to high-scoring new drugs, including a price protection period, during which the price of the drug would be stable, the paper said.
Benefits leading-edge pharmaceutical companies
In our previous sector note (link), we highlighted that the National Reimbursement Drug List (NRDL) renewal rules were modified last year to support innovation. In 2023, a total of 57 (of 121) drugs were both approved and added to the NRDL. In addition, the new NRDL renewal rules (released in 2023) also suggested a milder price cut for NRDL renewals. In 2023, a total of 100 drugs were successful renewed, of which 70% were renewed at their previous price. The average price cut for the rest was 6.7%. We think this latest NHSA draft paper is also aimed at supporting innovation-driven drugs and pushing pharmaceutical companies towards shifting their focus to innovative medicine R&D based on clinical demand, which is consistent with the NRDL renewal rule modifications last year.
Our top pharmaceutical company pick: BeiGene
We think leading-edge pharmaceutical companies are the key beneficiaries of the government’s policy support for innovation in drug development. Our top pharma pick is BeiGene (6160.HK, Add, CP: HK$86.8). BeiGene is one of the leading domestic biotech companies by annual revenue, with a deep innovative R&D pipeline and global marketing capabilities. Our initiation report on BeiGene provides more details of this pipeline (link). Downside risks for pharmaceutical companies: 1) possibility of failure in new drug R&D, hurting revenue growth outlook, 2) unsuccessful application for a new drug, impacting net profit margins, and 3) increased competition on expiry of patent of a new drug, leading to lower drug prices and revenue. We think the new policy support from the government would be a re-rating catalyst for innovative pharmaceutical companies as the government has clearly stated that it would consider manufacturing and R&D costs when determining drug pricing.