Recent regulatory initiatives and impact in LSHC Industry

Since 5 January 2023, when China’s Central Commission for Discipline Inspection (CCDI) published a resolution saying it would fight a tough and protracted war against bribery and corruption, deeper “special rectification work” on corruption has begun in several sectors of the economy including healthcare, social security and elderly care services. A few months later, 14 Government departments including the National Health Commission (NHC) issued the Notice on the Key Points for Correcting Unhealthy Practices in the Field of Pharmaceutical Purchase and Sales and Medical Services in 2023, which strengthens investigations of all forms of bribery committed by pharmaceutical companies, distributors, sales representatives, hospitals, and other participants in pharmaceutical and medical services.

Nation-wide rectification work under the Notice has four phases with various highlights in each phase.

This rectification work has now been in progress for several months and its key features are now clear: Ambition and focus, alliances and coordination and long-term impact. Deloitte focuses on the market responses and trends, proposes key execution points and profound analysis on the establishment of compliance mechanisms, to help industry players establish full and effective compliance systems.

The following are excerpts from the key points of the article:

1. Market responses

In August, outpatient volume decreased by a slight 8%, medical consumption fell by 16%, and there was a 12% decline in surgical procedures, indicating a drop in national clinical volume since the start of the rectification period. The volume of marketing events, a typical promotion activity for pharmaceutical and medical device companies, fluctuated between July and October.

Based on the analysis of industry marketing activities, notable trends can be found:

• Varied flexibility and demand in therapy areas, while oncology witnessed the most substantial declines in meetings held by companies and clinical medicine consumption.
  
  Changes in marketing events by therapeutic area
  
  
  
• The volume of events has varied from region to region.

• A more agile approach to meetings. By focusing on sharing knowledge, a higher proportion of meetings have not had healthcare professionals present. From June to August, there was a decline in the average number of meeting participants, although this recovered steadily from August to October.
• More robust technology integration. Across company-held meetings and sponsored events, imbedded technology has become the primary mode of medical promotion, surpassing onsite and hybrid activities.

2. Market trends and key execution points

• Adherence to compliance
  This latest anti-corruption initiative is an in-depth rectification project followed by rigorous and regular enforcement. Given these conditions, an increased emphasis on compliance has become inevitable for healthcare companies operating in China. To mitigate the risk of penalties for commercial bribery, healthcare companies should take proactive measures to improve their compliance systems and stay alert to changes in policy, market needs and demands.
• Decline in “sale expense to revenue”
  As regulatory reinforcement intensifies, pharmaceutical companies have made efforts to optimize their cost structures. Overall, marketing expenses are anticipated to gradually decrease.
• A call for “product power”
  In the second half of 2023, pharmaceutical companies increased their spending on R&D. The relevance of technology-driven innovation cannot be overstated.
• Accelerated digital transformation
  Digital transformation can be a practical strategy for companies to meet this objective, particularly with a shift in focus from traditional marketing to academic research and R&D.
• Model and strategy innovation
  To seize new opportunities and overcome challenges arising from these changes, companies must adopt a proactive stance towards innovation. Innovation can unfold in numerous forms and three common methods are emerging, including Innovative R&D (collaborative projects, artificial intelligence (AI) and drug re-use), innovative marketing models (digital and social media marketing including live-streamed promotions) and other innovative models (integration of diagnosis and treatment, also drugs and medical devices).

3. Upgraded compliance at pharmaceutical and medical device companies

The acceleration of centralized anti-corruption rectification has raised higher requirements for the compliance mechanisms, including:

Comprehensiveness (Breadth)
When working with partners in the pharmaceutical ecosystem and value chain, companies should comprehensively monitor and timely review compliance risks. They should also strengthen monitoring and prevention of key risks in different partnership models.

On the other hand, companies should strive for more comprehensive internal compliance systems and embed compliance requirements into their business systems through measures such as setting up compliance committees and establishing compliance monitoring responsibilities for business processes.

Professionalism (Depth)
Companies should formulate special mechanisms for self-checking, self-training, self-monitoring, and rectification based on their business models and strategies.

Accuracy (Precision)
Risk prevention and self-correction through accurate risk location can improve the efficiency and efficacy of compliance. On top of comprehensive, dedicated, and effective compliance controls, companies should use digitally enabled big data to establish effective behavior indicators and build prediction models to monitor abnormal behavior accurately and effectively.

Compliance and resilience are key to long-term development. With tightened pharmaceutical regulation, pharmaceutical companies must urgently construct comprehensive and effective corporate systems to facilitate compliant business operations.