Hepeng Jia/Beijing, China 

The imminent radical reform of China's healthcare system may provide a much-needed shake-up in the pharmaceutical industry, encouraging research into new drugs. 

After several years of debate, the final plans were passed by the State Council, China's cabinet, on 21 January. The scheme will establish a national basic medicine system, increase support for provincial hospitals and extend public medical insurance to cover the majority of the population. The government has pledged 850 billion yuan (US$124.6 billion) over the coming three years to support the medical insurance network. 

Under the basic medicine system, the government will compile a catalogue of the most essential drugs - mostly cheap generics - which it will bulk-buy and distribute to hospitals at a fixed price. These drugs will then be sold to patients under a unified pricing scheme. 

'This will bring dramatic changes to generics manufacturers, dealing with a single body instead of individual hospitals,' says Hou Dakun, president of Beijing-based pharmaceutical consultancy KevinKing, 'but if their products are not listed in the catalogue, they are destined to fail.' China has over 4000 pharmaceutical companies, predominantly generics producers, making for fierce competition over products to be included in the catalogue. 

The reform is expected to end the practice of hospitals boosting their income by charging higher prices. Rural hospitals will also be subsidised by the government. 

It is unclear yet whether price will be the dominant factor for generics to be included in the basic medicine catalogue, but with universal government purchasing, profit margins will be lower. This will push companies to develop innovative drugs, which will not be limited by the catalogue and can therefore command premium prices. 

Xin Dongsheng, president of Elite Consulting in Beijing, adds that the medical reform will have little impact on China's more innovative drug companies. By spending less time selling generics, they can concentrate on developing and promoting new drugs, through academic conferences and training of doctors. 

But Xin worries that China's rampant regional protectionism could cause local governments to favour companies in their own jurisdiction, affecting fair judgment in choosing basic medicines. Hou agrees that the government's universal purchase of basic drugs could foster corruption if not carefully supervised.  

Nevertheless, China's pharmaceutical sector seems to be winning. According to the State Information Centre, the value of pharmaceutical outputs is expected to grow by 20 per cent to 960 billion yuan in 2009 
despite the economic woes.