On May 4, 2015, seven Chinese government agencies jointly announced that they will lift price controls for most drug products, and establish a market-oriented drug pricing mechanism. This will have a fundamental impact on the pricing mechanisms of drug companies in China. On the same day, the National Development and Reform Commission (NDRC) announced that it will increase its monitoring of illegal pricing behaviors and launch an enforcement campaign, and this will significantly heighten the risks that companies will face in case of violation.

The joint announcement by the seven government agencies, titled the Opinion on Advancing the Drug Price Reform, manifests that the goal of the reform is to “establish a market-oriented drug pricing mechanism, and reduce to the maximum extent the government’s direct interference with drug pricing.” Specifically, the following changes will be implemented from June 1, 2015:

  • For patented drugs and drugs manufactured by one company only, the government will establish a price negotiation mechanism participated by stakeholders of the healthcare system, such as pharmaceutical companies, hospitals, and provincial governments.
  • For drugs covered by government insurance programs, the government will formulate the standards for government payment for drugs.
  • For blood products not covered by medical insurance, vaccines covered by national procurement programs, AIDS drugs paid by the government, and contraceptive drugs and devices, prices will be determined through drug bidding programs or negotiation.
  • For narcotic drugs and psychotropic drugs, Maximum Ex-Works Prices and Maximum Retail Prices will be maintained.
  • For all other drugs, Maximum Ex-Works Prices and Maximum Retail Prices will be lifted, and the manufacturers are allowed to decide drug prices on their own.

The Opinion also lays out drug price monitoring measures after the drug price control is lifted. NDRC issued a companion document, the Notice on Strengthening Monitoring of Drug Prices, to detail the drug price monitoring measures. These include:

  • The government will monitor the Ex-Works Prices or landed prices of “drugs with insufficient competition.”
  • The government will monitor drugs that present the following drug irregularities, and may conduct investigations when necessary: (i) frequent or significant drug price fluctuations; (ii) significant price differences with drugs in other countries, or other drugs of the same type, or drugs in other regions in China.
  • Specifically, the government will focus its investigation on companies selling drugs at unreasonably high prices by abusing market dominant positions.
  • NDRC announced that it will start a half-year drug price inspection program.  If a drug company engages in serious violations, NDRC will make a recommendation to health authorities to ban this company from drug procurement programs for two years.

After lifting its direct drug price control, the Chinese Government will shift its focus of drug price administration to monitoring of drug pricing violations and increase its enforcement in this area.  Therefore, multinational drug companies, in addition to necessary business adjustments, should revisit their price compliance programs, including antitrust compliance programs, to ensure there is no violation of government pricing regulations, particularly relevant provisions in antitrust laws