OBJECTIVES: The pricing system for chemical drugs is currently applied to biologics in China as no specific pricing system for biologics exists yet in China. This practice does not fully reflect the characteristics of biologics and may potentially prevent the launch of biologics in China and discourage the development of biologics. The objective of this study is to explore adequate pricing mechanisms for biologics. METHODS: Both primary research (field research, expert interviews, surveys) and secondary research were conducted to determine the key determinants of the price of biologics and understand the complexity of R&D, manufacturing and distribution required for biologics. Statistical analyses were performed to assess the relationship of key determinants and the price. Government and manufacturer behavior were modeled using game theory to demonstrate prerequisites of implementing ‘differential pricing’. RESULTS: A different pricing system is required for biologics given its unique characteristics. Certain characteristics (including special clinical value, target-specific R&D efforts, complex manufacturing process and higher distribution costs) were found to be the key influencing factors when determining biologics’ prices. Since these characteristics vary significantly depending on the type of biologics, the important ratios used in the pricing formula like "SG&A/sales ratio", "yield rate", "profit rate (innovation-based)", "distribution mark-ups", "VAT rate" and "differentiation mark-up (quality-based)" have to be determined on a case by case basis. Using blood products as an example, three differentiation factors (clinical efficacy, gold standard finish product assessment and overall manufacturing process evaluation) are key to achieve differential pricing. CONCLUSIONS: "Differential pricing" should be included in the biologics pricing system. Ratios in the existing pricing formula like ‘yield rate’, ‘distribution mark-up’, ‘profit rate’ and ‘differentiation mark-up’ should be adjusted to reflect the differences between biologics and chemicals. Differentiating criteria should be carefully chosen to reflect the value of biologics thus to develop the biopharmaceutical industry.