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Biopharmas Targeted for New Pricing Probe in China

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By Shannon Ellis
Staff Writer

SHANGHAI – Multinational drug companies may have to deal with much greater oversight of their pricing policies in China as regulators sharpen their focus and work to bring down costs for patients.

"The Chinese government has typically had a hands off attitude toward the Western pharmaceutical companies. They could pretty much set their own prices for Western drugs, unless generics; they could go about selling their products with relatively little interference," said Greg Scott, founder of Chinabio LLC, a biotech consultancy.

In early July, however, the National Development and Reform Commission (NDRC) announced two price probes in a single week.

One was focused on infant formula and the other on drugs – both essential goods made by foreign brands.

"This might be reflective of the new regime, a shift in behavior," Scott said. "I think they are going after the multinationals."  

Heavy fines were handed out to some infant formula makers while others agreed to lower their prices voluntarily. But there has been little action yet in regard to the probe on drug pricing.

The drug-pricing probe includes a number of biotech companies including multinationals Glaxosmithkline plc, Baxter International Inc., Astellas Pharma US Inc., Boehringer Ingelheim GmbH, Merck & Co, Sandoz Inc., Fresenius Kabi Pharmaceuticals Holdings Inc. and domestic biopharma companies like Jiangsu Hengrui Medicine Co. and Zhejiang Hisun Pharmaceutical Co. Ltd.

The cost of drugs can be troubling. Prices can reach as high as 100 percent to 120 percent of drug prices in the West, said Scott, whose consultancy has conducted pricing studies in China. Scott cited the anticancer drug Avastin (bevacizumab), which is selling at 110 percent of the price in the U.S., but with a much lower volume of sales and less profits to its maker Genentech Inc., a division of Roche.

"No particular drugs have been targeted, but the focus is on generic and branded generic drugs," said Robert McTiernan, a China health analyst at IHS. "It is not one particular type of drug or therapeutic area. It is looking at how companies set drug pricing. It is asking companies to prove to the NDRC that there are legitimate costs in the background to justify the high price of drugs."

"They are not looking at particular drugs but particular companies," McTiernan noted.

Although probes into drug prices happen regularly, regulators are digging much deeper this year.

"This is pretty much an annual exercise," McTiernan said. "Last year's survey was affected by a boycott from local and foreign companies who were slow to respond and supply the information that the NDRC uses to set their retail price ceiling.

"The NDRC's retail price ceiling cuts addressed various core therapeutic areas carrying high costs, like chronic diseases, chemotherapy drugs, or blood drugs, over the last three years, quite systematically bringing prices down," McTiernan said.

"(They) are targeting foreign drugs for the premium that branded generics enjoy, closing the gap between foreign drugs and Chinese drugs in terms of pricing."

This year's drug-pricing probe has two parts that experts say are more invasive than in the past and require corporations to provide more sensitive information than previous annual audits. Multinational corporations are also being more heavily targeted.

But while such audits of drug prices are common, the probe this year is more intense than in the past and is being done almost at the same time as authorities step up efforts to crack down on other activities such as bribery – all with a particularly focus on the pharmaceutical industry.

There are actually two surveys into drug pricing being done simultaneously.

The first one, to be completed by the end of October, is the more intrusive and involves 27 companies that have been singled out for their high price margins. Seven of them are multinationals. Companies will be asked to not just self-report as they have in the past but, for the first time, will have to receive field investigation teams.

These teams have a long to-do list that McTiernan called "really intrusive from an administrative perspective and commercially sensitive."

The NDRC is looking at pharmaceutical manufacturing, sales, cost base and pricing from the past three consecutive years until 2012; accounting systems, contracts, production capacity, history, marketing information, sales methods and raw material sourcing.

In 2008 the NDRC was given expanded powers to investigate pricing and anti-competitive activity with the authority to issue much steeper fines as high as 10 percent of group turnover. The NDRC has the official authority to put a price ceiling on any drug.

2nd Survey Targets Big Distribution Operations

The second survey is of ex-manufacturing prices, targeting 33 domestic drug manufacturers and only one foreign firm, Cardinal Health. The focus is on big firms with large distribution operations and includes state-owned Sinopharm, China's largest pharmaceutical company. They are looking at the markup applied between factory and patient.

"The surveys are designed to allow the NDRC to build a picture of the costs and pricing processes within these firms, to develop a more accurate and transparent pricing mechanism. The information will be used in the NDRC's retail price calculation formulas," McTiernan explained.

The cost of drugs is a key concern for health care authorities in China and other emerging markets that are expending coverage to lower costs for greater numbers of people.

China has nominally extended health care to about 95 percent of the population but, as things stand today, patients still pay about half of their drug costs out of pocket.

Expensive drugs put a heavy burden not only on the health care system but on the population at large.

China spends a high proportion of its health budget to cover drugs, about 50 percent and rising, according to National Health and Family Planning Commission data. That compares to a drug spend that is 15 percent to 35 percent in Organisation for Economic Co-operation and Development countries.

"They are not getting a good deal in China" McTiernan said.

Foreign drug companies can charge higher prices because of their patents and a widespread lack of confidence on domestic manufacturers. Even at the higher price, many patients prefer foreign branded drugs over locally manufactured generics.

But drug companies typically do not set drug prices on their own.

Most drugs are dispensed by pharmacies run by the hospitals, which often charge as much as 15 percent on all drug sales. That creates an unintended incentive for them to sell the more expensive patented drugs.

The government has been trying to remove the drug markup at hospitals, but without providing other revenue streams, the high costs of corruption and overtreatment eradicate potential savings.

The fragmented distribution system also adds another level of costs, with plenty of opportunity for corruption. It was notable that after GSK met with Chinese authorities on July 22 to discuss the corruption charges brought by the Chinese police, they highlighted that they would look at their operational model to reduce prices and make drugs more affordable to the Chinese consumer. Some estimate that corruption adds 20 percent to the price of drugs. (See BioWorld Today, July 31, 2013.)