IVD Makers Brace for Potential Impact From China Volume-Based Procurement Program on Tests, Reagents | 360Dx

NEW YORK – The Chinese in vitro diagnostic market can be difficult to enter for smaller diagnostic firms that do not have an established presence in the country, and a recently expanded program implemented by regional governments in the country may cause further difficulties.

In 2022, China unveiled its centralized volume-based procurement (VBP) program for certain types of diagnostic tests, namely biochemical and chemiluminescence tests for certain conditions, including infectious diseases like human papillomavirus and liver function tests.

Under the program, diagnostic test manufacturers submit test prices to regional governments, which then select the most favorable price and grant contracts to those companies, sourcing the majority of hospital tests through those firms. Hospitals also provide a volume commitment to ensure companies know exactly how many tests they'll be selling.

While the program for diagnostic manufacturers is in its early phases, and its impact is still playing out, experts said that once the dust settles, the VBP program could significantly change China's IVD market.

The country has previously implemented VBP programs for other types of medical products, including pharmaceuticals and medical devices like coronary stents. The key purpose of the VBP programs is to control costs to alleviate the financial burdens on the government's medical fund and improve affordability of healthcare products, said Grace Wang, a partner at LEK Consulting, based in Shanghai. The VBP programs for pharmaceuticals and medical devices, she said, "is probably so far one of the most successful initiatives implemented by the government in order to control the costs of drugs and devices and reduce excessive channel markup."

Diagnostics, however, has lagged behind other forms of medical devices when it comes to implementation of the VBP schemes. One reason for that, Wang noted, is that there are many different modalities, including immunoassays and molecular PCR tests, for diagnostic testing for many different indications, such as infectious diseases. Another barrier to implementing VBP programs for diagnostics is that for certain products, there is a closed system, meaning that some reagents must be used with a specific instrument instead of being interchangeable. If a hospital does not have the proper equipment to use with the reagents that have been selected through the VBP program, it may be difficult to perform those tests until the new equipment is purchased.

But there has also been an incentive issue to implementing diagnostics VBP programs, Wang said. In China, patients previously were charged a single test service fee while hospitals paid for the test reagents. In pharmaceuticals and medtech, the procedure fee is charged in addition to the consumable fee. Because one of the goals of VBP programs is to control medical spending for patients, implementing the program for diagnostics reagents would have minimal impact if the service cost remained unchanged, since patients didn't pay for reagents in the first place, Wang said. However, the government is now rolling out a program to separate the test reagent cost and the test services fees so that the diagnostic reagents VBP can make an impact.

Compared to other VBP programs, which were implemented either nationally or in multiregion alliances, diagnostics VBP programs have only been implemented in certain regions, including one large alliance led by the Anhui province that includes 25 provinces and only applies to diagnostic reagents, not instruments.

While there have been temporary provincial alliances for short-term tenders focused on one type of test, such as a liver function test that includes 26 analytes, the newly centralized VBP program will include more provinces and more types of tests.

The Anhui-led alliance's procurement program involves five categories: PCR-based typing tests for human papillomavirus, human chorionic gonadotropin chemiluminescence tests, chemiluminescence assays for six sex hormones, ELISA and chemiluminescence tests for eight infectious diseases, and chemiluminescence assays for two glucose metabolisms. The program will initially last for two years but can be extended.

Roche Diagnostics, Siemens Healthcare Diagnostics, Beckman Coulter Diagnostics, Abbott, Sysmex, Diasorin, Maccura Biotechnology, and Danaher's Radiometer received contracts under that VBP program.

Anhui has been a leader in procurement, previously starting the centralized procurement for routine chemiluminescence reagents for tumor markers, thyroid tests, and infectious diseases in 2021 and procuring coagulation clinical testing reagents in 2023, according to a report from the China Association of Clinical Laboratory Practice.

An immediate impact of the diagnostics VBP is that hospitals will see cost benefits as the prices of their reagents drop, Wang said. However, the larger impact will be felt by test manufacturers and distributors, who will have to lower their reagent prices, which, in turn, will lead to lower profit margins that they will then have to make up.

"The manufacturers … have to think about how to plan their distribution strategy in order to squeeze that channel margin as a result of the lowered price after VBP," Wang said.

Firms may reconfigure their distribution, sales, and marketing channels to avoid significant reductions in the base manufacturing price, she added. However, if a company wins a VBP contract, there is already a set volume commitment from each participating hospital, so the firm may be able to reduce its sales and marketing efforts and staff.

Manufacturers and distributors will also have their market share affected in the provinces that implement VBP programs, Wang said. In those provinces, typically between 80 percent and 90 percent of market share will go to the companies that were awarded VBP contracts.

"Historically, we've seen the multinational players typically have a higher price than the local Chinese companies, so we would expect that local Chinese companies will continue to have that price advantage in VBP, and we'll expect them to continue to take share from multinational companies," Wang said.

Canaccord Genuity analyst Kyle Mikson echoed Wang's comments about bias toward local companies within China's diagnostics industry. Over the past few years, China has particularly tried to favor local companies, which has served as a headwind for many US-based firms looking to enter the Chinese market, he said. It's also difficult to sell products directly in China, and the need for a distributor based in Asia can be a deterrent for companies that may want to sell their diagnostics products to Chinese customers but don't have access to an Asian distributor.

"Even though China is this big growth driver, big market … it's harder to penetrate and expand quickly in China," Mikson said. In recent years, China has also seen flatness in growth due to fewer investments in biotechnology from the government, and that flatness in combination with VBP programs that put caps on prices may put its position as a large growth market in question.

"These sorts of programs really limit or handicap the growth that we once thought was so robust," Mikson said.

While the VBP programs tend to be biased toward larger companies that can afford to cut their prices, smaller firms may not be completely shut out. Under the diagnostics VBP program, there is a specific price cut level listed, meaning if a company is willing to cut their prices by that amount, they can participate in the market. However, the largest market share will still go to the firm or firms with the largest price cuts, and those price cuts can be significant: Some VBP programs have set the minimum at a cut of 50 percent, Wang said.

"As long as they are willing to meet that minimum threshold of price cuts, [smaller firms] can stay in the game," Wang added. For smaller companies with high cost of goods, however, the price cuts may be prohibitive enough to shut them out of the competition entirely.

The VBP program's impact on a company depends largely on its existing position within the Chinese diagnostics market, Wang noted. For firms already with a leading position in China's IVD market in certain test categories, such as infectious diseases, the program is unlikely to seriously affect its market position in the country if they bid to win.

Based on previous VBP programs in the medical technology sectors, "those with a very major presence in China in specific product categories would typically choose to stay in the game," Wang said. However, "for some companies with just a minor presence, it's going to be very painful for them to make such large price cuts."

The VBP program may also serve as a deterrent for companies without a presence in China already that may be considering expanding to the country. Before the existence of the programs, China was typically seen as a "premium pricing market," with prices that were generally higher than other international markets, excluding the US, making the difficulties of selling in China worth the effort, Wang said. But post-VBP, some of that pricing has dropped dramatically, which may give pause to firms aiming to enter the market.

Yun-Fu Hu, chief medical officer at Chinese diagnostics firm Genetron, noted via email that a prerequisite for joining a VBP program is regulatory clearance from Chinese authorities, which may also be a deterrent for some companies, particularly those outside of China. "Considering that regulatory science is still evolving in China, [the] regulatory pathway could be especially challenging for the 'first person to eat the crabs,' as we say in Chinese."

Diagnostics companies who want to join the VBP programs "would have to adjust their product strategies to ensure whatever products they develop must have a reasonable chance to receive regulatory approvals," Hu added.

In addition, to join the VBP programs, diagnostics companies must work with local hospitals to establish their tests' clinical utility and health economics before they can enlist their approved products with a regional authority and become eligible for VBP, Hu said. This could be challenging for companies without expertise in government affairs, especially firms that are based abroad.

However, Tycho Peterson, an analyst at Jefferies, noted that thus far the impact of VBP is "fairly limited" and focused on companies with "more traditional diagnostic exposure," since the tests included in current VBP programs are routine, and those markets are mature. It's a headwind, but one that has so far been manageable for large companies like Danaher, Revvity, and Bio-Rad Laboratories, he added.

"These are markets that … have largely consolidated," he said. "I'd say for the kind of high volume, more mature assays, it's largely in the hands of the bigger companies."

In a conference call to discuss Revvity's Q1 2024 financial results earlier this year, CEO Prahlad Singh said that the firm assumes and has seen mid-single-digit price declines on an annual basis related to VBP. He added that the firm will "continue to have some volatility related to VBP" in its diagnostics business.

Peterson added that the impact of VBP will largely be felt in Revvity's reproductive health business, and that 1 percent of its revenues have already been affected by VBP.

Danaher CFO Matt McGrew, meantime, said in a conference call to discuss the firm's Q3 2023 financial results last year that the company expects a headwind of about $50 million per year related to VBP, largely from its subsidiary Beckman Coulter Diagnostics. Peterson noted that even with the VBP headwind, Danaher is still above pre-COVID-19 pricing trends.

Positive outlook

Many large diagnostic companies either did not respond to requests for comment or declined to speak on the record, but among those that agreed to comment, some expressed optimism that the impact from VBP programs and government pricing aren't necessarily negative. A spokesperson from Siemens Healthineers said via email that the pricing impacts from the VBP initiative are expected to continue and accelerate, "turning from a case-by-case provincial approach into a national program."

The spokesperson added that Siemens sees this "as an opportunity in the long run, as VBP prompts customers to redirect their focus from cost considerations to product quality and service excellence."

In a conference call discussing the firm's fiscal first quarter 2024 results in February, Siemens CEO Bernd Montag said that China makes up about 10 percent of the firm's global business in its diagnostics division, and that VBP affects about 20 percent of that business. He added that VBP "gives you a more direct access to customers" because it is intended to "cut out the middlemen and all the margin stacking, which is currently still happening within the Chinese healthcare system." It also "gives you the opportunity to get to firm volume commitments."

"While we are a market leader in the US in diagnostics, we are not in such a strong position in China, so … we have potentially more to gain than to lose," Montag said.

Abbott, another beneficiary of the Anhui alliance's VBP program, has also mentioned the benefits of the initiative, although it has largely seen those benefits in its medtech business. In a conference call to discuss the company's fourth quarter 2023 financial results in January, CEO Robert Ford said that, while there were price challenges throughout the year with VBP in the firm's electrophysiology segment, the volume and market share the company picked up "more than offset" the pricing concerns.

Ford previously said he expected the diagnostics VBP to impact about 20 percent of Abbott's core laboratory business.

Haibo Song, chairman of the China Association of In Vitro Diagnostics and founder of the China Association of Clinical Laboratory Practice, said via email that "the transparent price positioning from the government to control the overall selling price of the manufacturer from China" is a "healthier way to make the market more reasonable in price positioning."

The Chinese IVD market is "far from mature," he added, and in addition to new hospitals that are being built, existing hospitals will soon need to upgrade their instruments and consumables, so there is "space for new markets, and also for the existing market."