China's pharmaceutical companies need to align themselves with the national goal of high-quality development by improving the quality of drugs and optimizing their management and cost control methods, industry experts said.

That is an inherent requirement of the ongoing reform of the drug regulations and the healthcare system.

The reform aims at encouraging genuine innovation to enhance the quality of healthcare products and services while lowering the costs of disease treatment, they said.

They made their comments after Shanghai-listed North China Pharmaceutical became the first company to be banned this week for nine months from China's centralized drugs procurement program, after it breached a contract to supply ibuprofen sustained release capsules to Shandong province.

China launched the national volume-based drug procurement mechanism in late 2018, which requires drugmakers to significantly cut prices to win bids for enrollment in large-volume procurement led by the government.

The company won the contract in a third-round bulk-buying bid about a year ago to provide the medicine for seven provinces and cities for three years. But, it stopped supplies to Shandong recently, and blamed the lack of capacity due to COVID-19 disruption and improper internal management.

The nation's centralized drug procurement office then decided to ban the company from the program for nine months until next May.

The authorities concerned also said they will take more punitive measures against the company if it fails to honor the supply obligation for other regions.

Ju Zhao, deputy director of research of market consultancy iResearch, said: "The Chinese authorities are determined to solve problems like unreasonably high sales costs and drug prices in the healthcare sector, to lower treatment costs for the public. That's of great importance for improving people's lives and is going to reshape the sector."

Most tender winners in the national bulk-buying bidding process are earnestly implementing the contracts, and the action against North China Pharmaceutical has shown the authorities' attitude toward breach of contracts, Ju said.

China has conducted bulk-buying bids five times so far. Data from the nation's centralized drug procurement office showed winners of the first three bids have supplied much more than the contracted drug amount.

The office also said drug prices are unreasonably high in China, as many common drugs are priced two to three times that in other key economies, while sales expenses of mainstream pharmaceutical companies account for nearly 40 percent of their sales revenues, posing a significant burden to the nation's public medical insurance fund and hindering healthy growth of the healthcare industry.

Among the four enterprises that won the bids to supply ibuprofen sustained release capsules, North China Pharmaceutical won a contract in spite of quoting the highest price, which was also close to the price at which it had sold the capsules in some other provinces and cities.

Before centralized bulk-buying of drugs, North China Pharma's sales revenue from the pills was only about 500,000 yuan ($77,168) in 2020, the office said, adding winning the bulk-supply bid would have ensured annual sales of over 20 million yuan.

Honoring the agreement is the foundation of a market economy, and it is a bid winners' obligation to fulfill an agreement based on the agreed prices, according to the office.

According to Shi Lichen, founder of medical consulting firm Beijing Dingchen Consultancy, Chinese pharmaceutical enterprises must become innovative, upgrade their sales approach, optimize their product portfolio and operations, and pay more attention to non-hospital drug buyers, to nurture competitiveness as the centralized drug procurement is expected to cover more drug titles in the future.