Will the Volume-Based Procurement Policy Promote Pharmaceutical Firms’ R&D Investment in China? An Event Study Approach

Abstract

Innovation is the key to the development of the pharmaceutical industry. The pilot program of China’s “4 + 7” volume-based procurement policy (“4 + 7” procurement policy) brings the drug price back to a reasonable level through trading procurement quantities for lower drug prices. The policy manages to reduce the burden of the health care system, improve efficiency, and push the pharmaceutical industry to transform and update from the era of high gross profit of generic drugs to innovative drugs. So far, few studies have investigated the influence of the volume-based procurement policy on the innovation of pharmaceutical firms. By combining the event study and Difference-in-Difference (DiD) methodology, this study finds that the abnormal return (AR) of firms with high R&D intensity is lower than that of firms with low R&D intensity during the event window period. Moreover, further analysis identifies the moderating effect of firm size and firm type. Specifically, the results show that the negative influence of high R&D intensity on abnormal return (AR) during the announcement of the “4 + 7” procurement policy is stronger in large firms and innovative pharmaceutical firms. Finally, we discuss the policy implications of our study.

Towards Sustainable Drug Supply in China: A Bibliometric Analysis of Drug Reform Policies

“…The pharmaceutical industry was substantially impacted by China's drug reform since 2009 [62] in each link of the supply chain. The accelerating paths of drug review and approval for innovative drugs and urgently needed drugs effectively encouraged and supported the R&D of enterprises [63,64], while decreased revenue caused by drug price competition in procurement necessitated an increased investment in R&D activities [65][66][67]. Additionally, generic drug consistency evaluation as the stepping-stone of centralized procurement accelerated the reshuffling of the pharmaceutical industry as several manufacturers with old registration certificates were wiped out, either because of their dissatisfactory production capability or their reluctance to take input in terms of evaluation after comparing the profit they may bring in.…”

The pan-Canadian Tiered Pricing Framework and Chinese National Volume-Based Procurement: A comparative study using Donabedian’s structure-process-outcome framework

“…The stock price of bidding loser companies, even some winning companies, tumbled about 15% on average [46,47]. This has created a paradox: the NVBP, which aimed to improve the pharmaceutical industry's ecology, has instead disrupted the market [48]. It is uncertain whether this kind of stock fluctuation will continue in the future, but the leading reason for it is likely the transfer of purchasing power, as previously mentioned.…”

“…The question is whether NVBP is still necessary if it achieves zero price reductions in the future. It is also interesting to note that some people have discussed and studied the impact of TPF or NVBP on pharmaceutical innovation [48]. However, innovation encouragement is not one of the objectives of either programme, and we will not be discussing it in this study.…”

Does China’s national volume-based drug procurement policy promote or hinder pharmaceutical innovation?

“…Huang and Tao (2020) discussed from the perspective of market size and entry barriers that the drug collection policy can enhance industry concentration, thereby achieving the goal of promoting innovation in pharmaceutical companies. Hu et al (2021) also proposed that the volume-based procurement policy will accelerate the enhancement of corporate competitiveness and provide momentum for innovation.…”