China moves to free-market pricing for pharmaceuticals, after price controls led to quality problems & shortages

China Scraps Price Caps on Low-Cost Drugs. By Laurie Burkitt
Move Comes After Some Manufacturers Cut Corners on Production
Wall Street Journal, May 8, 2014 1:15 a.m.
http://online.wsj.com/news/articles/SB10001424052702304655304579548933340544044

Beijing

China will scrap caps on retail prices for low-cost medicine and is moving toward free-market pricing for pharmaceuticals, after price controls led to drug quality problems and shortages in the country.

The move could be a welcome one for global pharmaceutical companies, which have been under scrutiny in China since last year for their sales and marketing practices.

The world's most populous country is the third-largest pharmaceutical market, behind the U.S. and Japan, according to data from consulting firm McKinsey & Co., but Beijing has used price caps and other measures to keep medical care affordable.

Price caps will be lifted for 280 medicines made by Western drug companies and 250 Chinese patent drugs, the National Development and Reform Commission, China's economic planning body, said Thursday. The move will affect prices on drugs such as antibiotics, painkillers and vitamins, it said.

The statement said local governments will have until July 1 to unveil details of the plan. In China, local authorities have broad oversight over how drugs are distributed to local hospitals.

Aiming to keep prices low, some manufacturers cut corners on production, exposing consumers to safety risks, said Helen Chen, a Shanghai-based partner and director of L.E.K. Consulting. Many also closed production, creating shortages of low-cost drugs such as thyroid medication.

"It means the [commission] recognizes that forcing prices down and focusing purely on price does sacrifice drug safety, quality and availability," said Ms. Chen.

Several drug makers, including GlaxoSmithKline PLC, didn't immediately respond to requests for comment. Spokeswomen for Sanofi and Pfizer Inc. said that because implementation of the new policy is unclear, it is too early to understand how it will affect their business in China.

The industry was dealt a blow last summer when Chinese authorities accused Glaxo of bribing doctors, hospitals and local officials to increase sales of their drugs. The U.K. company has said some of its employees may have violated Chinese law.

The central government, which began overhauling the country's health-care system in 2009, has until now largely favored pricing caps and has encouraged provincial governments to cut health-care costs and prices. Regulators phased out five years ago premium pricing for a list of "essential drugs" to be available in hospitals.

Chinese leaders want health care to be more accessible and affordable, but there have been unintended consequences in attempting to ensure the lowest prices on drugs. For instance, many pharmaceutical companies registered to sell the thyroid medication Tapazole have halted production in recent years after pricing restrictions squeezed out profits, experts say, creating a shortage. Chinese patients with hyperthyroidism struggled to find the drug and many suffered with increased anxiety, muscle weakness and sleep disorder, according to local media reports.

In 2012, some drug-capsule manufacturers were found to be using industrial gelatin to cut production costs. The industrial gelatin contained the chemical chromium, which can be carcinogenic with frequent exposure, according to the U.S. Centers for Disease Control and Prevention.

"Manufacturers have attempted to save costs, and doing that has meant using lower-quality ingredients," said Ms. Chen.

The pricing reversal won't necessarily alleviate pricing pressure for these drugs, experts say. To get drugs into hospitals, companies must compete in a tendering process at the provincial level, said Justin Wang, also a partner at L.E.K. "It's still unclear how the provinces will react to this new national list," Mr. Wang said.

If provinces don't change their current system, price will remain a key competitive factor for drug makers, said Franck Le Deu, a partner at McKinsey's China division.

"The bottom line is that there may be more safety and more pricing transparency, but the focus intensifies on creating more innovative drugs," Mr. Le Deu said.

  —Liyan Qi contributed to this article.