On August 17, 2015, one of China’s antitrust enforcement authorities, the National Development & Reform Commission (NDRC), issued a letter to the Anhui Provincial Government, and requested it to correct administrative monopolies in government drug procurement programs. This action by NDRC sheds light on an often overlooked aspect of China’s drug procurement system: antitrust compliance in the new drug price negotiation programs. Pharmaceutical companies in China should pay close attention to the effect of this decision on future drug price negotiations.
Since 2015, China’s health authorities at various levels have implemented aggressive price negotiation programs. One of these programs is “Procurement with Quantity Commitment,”i.e., local governments request drug manufacturers or distributors to reduce drug prices in exchange for the government’s non-binding quantity commitment for local hospitals’ drug procurement. Local governments are directly involved in the design and implementation of these programs, and usually place restrictive conditions on bidding terms and bidder qualifications. These programs have created huge price-reduction pressures on drug companies, and at the same time raised questions about whether these negotiation programs constitute an “administrative monopoly” under China’s Anti-Monopoly Law (AML).
NDRC’s letter concerns drug price negotiation programs in Bengbu City, Anhui Province. In April, 2015, the Municipal Health & Family Planning Commission (MHFPC) of Bengbu City issued a notice inviting manufacturers of 30 drugs to participate in drug price negotiations on the condition that they reduce their drug prices by at least 25 percent. However, after investigation, NDRC found that for each drug, there were at least two manufacturers recognized by the Anhui Provincial Government as qualified providers, and therefore by inviting only one manufacturer for each drug, MHFPC deprived other drug manufacturers of the opportunity to participate in the price negotiation. NDRC expressed the opinion that this restriction violated the provisions in the AML prohibiting administrative monopoly.
Also, in April and May 2015, Bengbu City’s MHFPC issued two notices inviting drug distributors to participate in negotiations for logistics services for certain drugs. In the notices, Bengbu City’s MHFPC set different minimum revenue thresholds for eligible bidders in and out of Bengbu City. NDRC found that this discriminatory requirement also violated the anti-administrative provisions in the AML.
Since 2015, drug companies in China have made significant efforts to adapt to the Chinese Government’s drug price negotiation programs. The programs have raised questions about compliance with applicable drug regulatory provisions. This significant NDRC communication reminds both local governments and drug companies that antitrust compliance counts as well. If drug companies feel a negotiation program is an illegitimate administrative monopoly and abridges their legitimate rights (such as the government’s creation of “hospital procurement cartels”), they should consider raising their concerns to antitrust authorities for remediation.
More importantly, this NDRC’s communication re-emphasizes the Chinese Government’s strict scrutiny of antitrust issues in the pharmaceutical industry. Drug companies – particularly multinational drug companies – should review the antitrust compliance status of their own activities, such as their drug price adjustment and compensation arrangements with distributors. They should also watch the interplay of the AML and China’s Bidding Law and Government Procurement Law in connection with these drug price negotiation programs, to ensure compliance in the complex, evolving regulatory environment in China.