Health insurance major move is coming: Major benefits for innovative drugs! A-share and Hong Kong stock pharmaceutical sectors join forces to surge upwards.

On July 4th, the National Healthcare Security Administration updated the renewal rules for innovative drugs and solicited public opinions on the "Negotiated Drug Renewal Rules" and "Non-exclusive Drug Bidding Rules".

Among them, the "Negotiated Drug Renewal Rules" propose that drugs meeting one of the following conditions can be included in the regular catalog management:

1. Non-exclusive drugs

2. Exclusive drugs listed in the 2019 catalog, whose payment standards and payment scope have not been adjusted in two consecutive agreement periods

3. Drugs that have entered the negotiation catalog and have been continuously included in the "negotiated drugs during the agreement period" for more than 8 years (calculated from 2018 for drugs listed in the 2017 version of the catalog, calculated from 2019 for drugs listed in the 2018 version of the catalog, and calculated according to the catalog execution year for drugs listed in 2019 and beyond).

For varieties that have been continuously included in the "negotiated drugs during the agreement period" for more than 4 years, the payment standard will be halved based on the aforementioned calculation value (this was not mentioned before); drugs that have entered the negotiation catalog and have been continuously included in the "negotiated drugs during the agreement period" for more than 8 years will be included in the regular catalog (this was not mentioned before).

The "Negotiated Drug Renewal Rules" also propose that exclusive drugs and drugs whose actual expenditure during the agreement period does not exceed 200% of the budgeted expenditure (estimated by the company, the same below), and whose budgeted expenditure growth rate for the next two years is reasonable, can be easily renewed for a period of 2 years. For Class 1 chemical drugs, Class 1 therapeutic biological products, and Class 1 and Class 3 traditional Chinese medicines, when renewing, if the actual expenditure/budgeted expenditure value exceeds 110%, the company can apply for a negotiated reduction. If the negotiation fails, the drug will be removed from the catalog.

The "Non-exclusive Drug Bidding Rules (Draft for Soliciting Opinions)" propose that if a drug is included in the medical insurance catalog through bidding, the lowest bid among all companies will be used as the payment standard for that generic drug. If the company's bid is lower than 70% of the medical insurance payment willingness, 70% of the medical insurance payment willingness will be used as the payment standard for that drug.

Tianfeng Securities' pharmaceutical team interprets that from the perspective of adjustment rules, the reduction in multiple stages of drug prices will be smaller. The adjustment of this renewal rule is more reasonable and moderate in many aspects, which is beneficial to the long-term healthy development of the innovative drug industry.

Affected by this news, the A-share and Hong Kong stock pharmaceutical sectors quickly strengthened in the afternoon: Baili Tianheng surged and hit the limit, Shouyao Holdings rose sharply by 17%, and other stocks such as Maiweisen, Shenzhou Cell, and Nuocheng Jianhua followed suit with gains exceeding 11% and 10%.

CICC's pharmaceutical team interprets that:

The core gradient reduction rule for simplified renewal remains unchanged, maintaining the previous gradient adjustment range of 0-25%. However, the "Rules" have a more friendly expression regarding continuously renewed varieties, adjustment payment range within the agreement period, and negotiation details. Starting from 2025, the reference standard for gradient reduction will be dynamically changing.

1. For varieties continuously included as "negotiated drugs within the agreement period" (i.e., multiple renewals), the payment standard is halved based on the basic rule (in line with the spirit of the document, we understand this as a reduction in calculated value or a narrower reduction range).

2. Enterprises requiring price reduction for renewal (A≥110%) can apply for renegotiation to determine the reduction range, which can be lower than the gradient reduction determined by the simplified renewal rule, i.e., the reduction range can be smaller.

3. Varieties that adjust the payment range within the agreement period (expiring in December 2024) can determine new payment standards and ranges through supplementary agreements within the original agreement period.

4. For varieties with newly added indications through renegotiation or supplementary agreements in 2022, the reduction already occurred in the previous round will be deducted when calculating the renewal reduction this year.

5. From 2025 onwards, the budget for medical insurance fund expenditure will no longer be calculated based on sales revenue of 65%, but on the cost of drugs included in the medical insurance payment range. The threshold for gradient reduction will also increase from 2/10/20/40 billion yuan to 3/15/30/60 billion yuan.

6. For COVID-19 varieties that exceed the actual expenditure budget of the medical insurance fund, and in the absence of significant market changes, this renewal can be exempted from price reduction after expert certification.

Guosheng Securities stated that in recent years, the Medical Insurance Bureau and innovative pharmaceutical companies have been communicating with each other regarding payment standards. In 2019 and 2020, the reduction in PD-1 was relatively high, and subsequent pharmaceutical companies have continuously provided feedback. Last year, the simplified renewal was introduced, and this year further refinements have been made to the rules.

Guosheng Securities also stated that this simplified renewal has significant benefits for (1) expanding the budget for individual varieties, increasing it from 40 billion to 60 billion; (2) halving the reduction after 4 years; (3) deducting the previous reduction range, reflecting the intention to avoid excessive compression of profits for innovative pharmaceutical companies in the early stages and providing room for secondary innovation cost recovery; (4) inclusion of old varieties over 8 years into the regular catalog.