(Yicai) Oct. 24 -- China's innovative drug industry developed steadily in the past decade but is now faced with difficulties brought about by incredibly low prices.

The Chinese government gradually became the biggest buyer in the pharmaceutical market after the launch of its centralized drug procurement program in 2015. Even though the Chinese innovative drug sector received large amounts of funds, requirements on affordable prices have tampered with companies' profitability.

In the past five years, the average price of drugs included in the negotiation for the catalog of medicines fully or partially covered by the country's health insurance scheme plunged more than 56 percent, according to data from the research institute under Sinohealth Holdings.

"The dilemma is that the program cannot afford expensive medicines, and the firms cannot survive if their medicines are too cheap," Su Weiguo, chief executive officer of innovative pharmaceutical firm Hutchmed China, told Yicai.

China should stop reasoning based on manufacturing costs, according to Wang Cheng, an executive at a pharmaceutical firm. Prices in the innovative drug sector should be based not only on manufacturing but also on R&D and other costs, he added.

In addition to R&D expenses, pharmaceutical companies also need to invest heavily in marketing because after their innovative drugs are included in the government's procurement programs, hospitals still need to undergo selections before the medicines can reach patients.

Moreover, innovative drugs have a very low success rate, as many projects fail before achieving commercialization, according to executives from pharmaceutical companies interviewed by Yicai. A few successful projects are not enough to cover many unsuccessful efforts and be profitable, they added.

Between 2017 and last year, 120 Chinese innovative drugs were approved for marketing, according to the China National Pharmaceutical Industry Information Center.

As a result of the innovative drug industry's low profitability, many investors and financiers withdrew from the market.

The Chinese government medical insurance program does not recognize the commercial value of innovative drugs, and many investors decided to pull back, Lu Xianping, founder of Chinese original innovative drug developer and manufacturer Shenzhen Chipscreen Biosciences, told Yicai.

Overseas and US funds' withdrawal level is even higher, according to Su.

US investors are particularly cautious when investing in Chinese biopharmaceutical companies now, Josh Smiley, president and chief operating officer of China-based innovative drugmaker Zai Lab, told Yicai. They mostly worry about medicines' prices and value, Smiley added.

To tackle these challenges, some companies turn to overseas markets, especially the US, to sell their innovative drugs and achieve profitability.

For example, Hutchmed's metastatic colorectal cancer treatment Fruquintinib received marketing approval in the US last November, five years after being greenlit in China. However, as Fruquintinib's price in the US is 2,400 times higher than in China, Hutchmed's financial situation began to improve immediately after the drug's entry into the US market.

The contribution of drugs from R&D pipelines at Chinese pharmaceutical companies rose to 28 percent last year from 4 percent in 2013, according to data from technology-based medical services provider Iqvia. China ranks second only to the United States for this parameter.

China also follows the US in terms of treatment options and solutions for complicated diseases available to patients, Lu noted.

Editors: Xu Wei, Futura Costaglione