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China initiates drug pricing investigation

China initiates drug pricing investigation

China’s drug price reform policy was launched in May last year. Initiated by China’s National Development and Reform Commission (NDRC), the policy is aimed at guiding the drug market into sufficient competition to lower pharmaceutical drug prices in China. In line with this policy, a new round of drug price inspections was formally launched by the NDRC on 1 June this year as an integral part of the drug price reform.

The NDRC is one of the three antitrust law enforcement agencies in China, and its focus is on price-related monopoly activities.

The round of inspections, which fall under the remit of China’s Anti-Monopoly Law and Price Law, will last for five months, until 31 October 2016. The inspections will not only affect drug retailing outlets and healthcare institutions, but also drug manufacturers and distribution enterprises, as well as industry associations.

Among the six types of activities that were stated as ‘affecting fair competition’ in the pharmaceutical market, monopoly agreements and abuse of dominant market position are listed as the top-two activities that will be examined by the NDRC at this time.

Implications of the price inspections

In 2008 and 2009, several pharma giants were raided by the European Union, with the raids uncovering evidence of antitrust activities highlighted by cartel arrangements and duplicate drug patent applications to impede the marketing of lower-priced generics. It can be expected that pharmaceutical companies with a presence in China will face similar raids by the NDRC, and those found to have price-related issues will face lawsuits and penalties – especially considering that the Chinese anti-competition authority apparently has a broader definition of anti-competitive harm than the European Union authorities.

As well as monopoly agreements and abuses of dominant market positions, which are both regarded as typical anti-competitive conduct in the Chinese legislative framework, the NDRC also particularly mentioned that bulk drugs (also known as active pharmaceutical ingredients), blood products and Chinese herbal medicine pieces would be under the spotlight.

Despite the abovementioned markets of bulk drugs and Chinese medicines being dominated by local pharmaceutical manufacturers, both domestic and foreign pharmaceutical companies, as well as their downstream channel partners, will be targets of the price inspections.

There is a firmly-rooted public impression in China that imported drugs cost more, and Chinese media frequently criticises the ‘overpriced’ imported drugs sold by multinational pharmaceutical companies. In view of this, foreign pharmaceutical enterprises in China are highly likely to be given extra attention regarding their pricing strategies. After all, the NDRC does conduct special investigations in response to public opinions – as early as 2013, on the outbreak of GlaxoSmithKline’s bribery case in China, the NDRC launched a drug cost price investigation during which 33 domestic pharmaceutical companies and 27 foreign companies were included as the subjects.

Advice for pharmaceuticals operating in China

Healthcare market players should notice that Chinese price regulators are transferring their roles and methodologies from regulating price levels to regulating pricing behaviours, which will inevitably generate more interaction between companies and government.

In order to avoid being caught off guard in this round of inspections, companies should remember that prevention is always better than remediation. Whether they face unannounced visits, enquiries or investigations, collection of relevant materials would always be involved. As such, before such an event compliance officers should have ready:

  • a representation of the company’s pricing model and strategies
  • cost-related documents and records, including research and development expenses, purchase costs for pharmaceutical excipients, and factory prices for final products
  • three years’ worth of records of total sales in China and the proportion to global sales for the company’s major products
  • finance policies, financial statements, account books, bills and contracts, if they may be deemed necessary
  • distribution structures for the company’s products in the Chinese market
  • basic corporate information on the company’s registration and profile.

In view of the inspection methods that have been announced at this time, the NDRC is encouraging more public supervision as well as more detailed surveys and research on drug prices, indicating that the inspections will not be a single motion ending in October, but will be followed with further steps more specific to the results and identified problems. Hence, pharmaceutical companies should refresh their internal compliance frameworks, including:

  • ensuring a reference guideline for Chinese investigations is available to all relevant staff
  • having internal communications and training programmes cover anti-competitive topics, and ensuring all staff with exposure to pricing and sales know how to handle sensitive materials
  • training related staff on how to react to investigators, including what to do if someone comes into the office unannounced to seize documents and how to conduct themselves in the event of a raid
  • reviewing compliance programmes, in particular codes of conduct and antitrust policies, seeking independent advice from an external consultant to better identify potential gaps.