China's pharmaceutical industry is undertaking a critical transformation toward high-quality and innovation-focused development, reflected by the explosion of new drug and clinical trial approvals in recent years, according to global consultancy firm McKinsey.

The transformation is being driven by factors such as a rapidly aging society, higher healthcare demands, drug regulation reforms, and increased investment inflows, said McKinsey.

"Healthcare is one of the most exciting sectors in China, growing above 10 percent annually," said Franck Le Deu, a senior partner at McKinsey.

"We expect more and more new drugs will come from Chinese companies."

He made the remarks during a media conference recently in Beijing and stressed China's faster approval process for clinical trials and new drugs, and the"4+7" volume-based tendering policy, are having a big impact on the pharmaceutical market structure in China.

In late 2018, Chinese authorities launched a national centralized procurement pilot program in four municipalities and seven local cities, commonly known as the 4+7 volume-based tendering policy, with an aim to slash drug prices and deepen reforms in the healthcare sector.

Earlier this month, the National Healthcare Security Administration issued a notice to extend the pilot work to more cities and provinces.

In the first round of the pilot program in early 2019, 31 drugs were listed for centralized procurement across all public hospitals in the 11 cities, and a successful bidder on a particular drug had the entire guaranteed purchase amount.

In practice, centralized procurement will be about 60 percent to 70 percent of the annual drugs purchased by public hospitals in the pilot regions, according to an article published on the State Council's website.

The centralized procurement is open to all approved companies that can produce drugs on the procurement list in the Chinese mainland. However, a selected drug, if a generic, must pass the consistency evaluation on quality and effectiveness against its original drug.

Clinical effects, adverse reactions, and batch stability of the drugs will be considered during the tendering, and their consistency will be the main criteria for evaluation, while production capacity and stability of the supplier will also be considered, the article said.

Zhou Gaobo, a partner at the firm, said the new landscape in China's pharmaceutical market has been contoured by government reforms. He urged Chinese companies to upgrade production and management for better cost control, increased product quality and higher production capacities, as well as to invest heavily on research and development to transition more to innovative drugs, if they want to survive the fierce competition.

The new environment also offers new standout chances for competent companies, he said.

Since 2016, investment in China's medical and pharmaceutical sector has reached $103 billion, studies from the company showed.

The company's studies also showed new pharmaceutical products are being brought to the China market faster due to related policy reforms, and more are from Chinese companies.

In 2016, only 17 percent of new drug applications in China were granted fast-track review, and in 2018, the figure rose to 74 percent.

New drugs approved in 2016,2017, 2018 and the first half of 2019 were respectively six, 41, 54 and 22, among which an increasing number is from Chinese companies in recent years.

New drugs approved from Chinese pharmaceutical companies were respectively three, one, nine, and four, for 2016, 2017, 2018 and the first half of 2019.

According to Hou Lei, also a partner at the firm, China's innovation capacity in the pharmaceutical sector has increased considerably since 2015, in terms of registration administration, market entrance, investments, talents, local innovation, and internationalization.

"Most Chinese companies start with generics as a market follower, and now many are trying to flip their product portfolios for more innovative drugs with increased efforts," she said.

"There have been me-too and me-better drugs from Chinese companies, and it is only a matter of time before Chinese companies produce first-in-class and best-in-class drugs."

The average pipelines of Chinese mainland biotech companies that applied for listing in Hong Kong in 2018 were 10, more than that of foreign biotech companies that floated shares on Nasdaq that year, which was four, she said.

However, the experts all said as the market landscape changes, Chinese pharmaceutical companies are faced with a series of challenges to become more competent to survive.

The challenges include how to foster research and development capabilities for high-quality products, digitalization, and optimization in organization and management.

Chen Qiulin, deputy director of the Health Industry Development Research Center at the Chinese Academy of Social Sciences, also said the Chinese pharmaceutical market's increasing emphasis on quality and cost-efficiency is driving local companies to focus more on innovation-driven development, and enhance their innovation and R&D capacities, although it is not an easy task.

Jiang Xueqing contributed to the story.