China’s pilot drug procurement program, covering 11 major cities, will cause pharmaceutical companies to adjust their strategies but will prove beneficial to the sector in the long run, said industry insiders.

Chen Qiaoshan, a medical analyst at Beijing-based market consultancy Analysys, noted: “The pilot procurement will force enterprises to optimize their businesses in technology, research and development, operations and marketing, to lower production costs and improve quality.

“On the whole, it will stimulate domestic pharmaceutical enterprises to make progress.”

Compared with 2017, the prices of 25 generic drugs fell by an average of 52 percent thanks to the pilot procurement in 11 major Chinese cities, the organizer said on Saturday. The highest price drop was 96 percent.

The pilot program is a major reform of the current centralized procurement system. It calls on participating cities to specify the quantity of each purchase, to give the manufacturers a clearer expectation. Previously, the bidding only usually determined the price, but not the amount.

“For the short run, the bid winners in the pilot procurement will see their net profit increase next year. Not only will their market shares go up, but the profit contribution per drug will also increase,” noted a report from Ping An Securities Co Ltd.

“On the whole, the price drop resulting from the pilot procurement will squeeze the profits of midstream companies along the industrial chain.

“However, for a single company, if it can raise its sales volume to a large extent through pilot procurement, to offset the influence of the price drop, it can consolidate its market position,” it said.

Long term, the report forecasts large generic enterprises will rely on low-cost and multi-variety production.

Shenzhen-listed Jiangsu Nhwa Pharmaceutical Co Ltd, said during a Q&A section with investors that “the pilot procurement will promote pharmaceutical companies to optimize their product structure, increase investment in R&D, lower production costs, and increase product added value.”

The impact of the pilot procurement has also been seen on the stock market. Since last Thursday, a sub-index tracking pharmaceutical shares had fallen 7.4 percent by the end of trading Tuesday, according to the financial information provider Wind Info.

Tian Jiaqiang, chief medical analyst at CITIC Securities, said that the average price drop “won’t influence the long-term development of pharmaceutical enterprises. Many enterprises will begin to reflect, and invest in the R&D of innovative drugs.”

Xu Jiaxi, chief medical analyst at Industrial Securities, was also optimistic, saying: “We should be confident in the pharmaceutical industry, which has good growth.”