50% decrease in drug prices after negotiation

Recently, the National Health and Family Planning Commission of the People’s Republic of China (the “NHFPC”) announced the outcome of the first round of drug price negotiations (the “Announcement”). According to the Announcement, new drug prices for Viread, Conmana and Iressa were agreed during the negotiations and they will be discounted by more than 50%. The negotiated prices will be applied during the purchase process of public medical institutions for the period from 2016 to 2017. The above negotiated drugs will benefit from priority in the purchase, consumption and reimbursement processes.  Shortly after the Announcement, the Notice of the Centralised Purchase of Nationally Negotiated Drugs (the “Notice”) was jointly issued by the NHFPC, the National Development and Reform Commission, the China Food and Drug Administration and other relevant authorities. The Notice aims to push forward the drug negotiation regime and further clarifies points which need attention. This includes the manufacturing companies of the negotiated drugs ensuring the quality and supply of the drug, local authorities listing all negotiated prices at the Provincial Drug Centralised Purchase Platform and medical institutions purchasing drugs at the negotiated prices online.

According to the Opinions on Promoting the Drug Pricing Reform, which were issued on 4 May 2015, the drug price negotiation regime will be generally applied to patented and exclusively manufactured drugs. That is to say, most of the products of multinational companies will face a price negotiation process in the coming years. Companies will need to be well prepared , which will include gaining a deep understanding of the negotiation regime and designing a preliminary negotiation strategy which is based on a comprehensive consideration of the products’ patent terms, the market situation and substitutability.

NDRC launched anti-trust investigation into pharmaceutical sector

China’s top pricing-related anti-trust regulator, the National Development and Reform Commission (“NDRC”), has launched a new round of anti-trust investigations into pharmaceutical companies. One of the top US pharmaceutical firms has already been summoned for inquiry and more foreign and domestic companies are to follow. The investigation is described as "large-scale and systematic"; the aim is to collect evidence to see whether these companies have violated regulations regarding competition. The investigation may not only focus on strengthening competition enforcement in the pharmaceutical sector, but may also increase the pressure in the ongoing drug price negotiations.  Aside from its role as the regulator of price-related competition issues, the NDRC used to be the main body in China to determine the price of a large percentage of drugs, including patented drugs, mainly produced by multinational pharmaceutical companies. An NDRC-initiated price-probe would usually be followed by a cut in drug prices, for example, in 2013, the NDRC launched a wide-ranging examination into the cost of drugs at 60 domestic and international pharmaceutical companies, resulting in a price cut of certain brands of drugs by more than 20%. 

From the middle of last year, the NDRC gave up most of its powers in drug price determination; instead, the price of patented and exclusively manufactured drugs will be decided by price negotiations between companies and the National Health and Family Planning Commission of the People’s Republic of China (the “NHFPC”). Already, three companies, including two multinational companies, have agreed to decrease the price of certain innovative drugs by 50%, and we predict most products of multinational companies will face this negotiation process in coming years.

However, the involvement of the NHFPC does not mean that the NDRC has lost its influence in drug pricing, and it seems likely that this new round of anti-trust investigations will increase the pressure in the ongoing price negotiations.

In the circumstances, it is becoming increasingly important for pharmaceutical companies to make sure their pricing strategy complies with the competition regulation and to establish effective competition compliance programs.

NDRC launches Drug Price Investigation

Recently, the National Development and Reform Commission (the “NDRC”) issued the Notice of Specific Inspection on Pharmaceutical Prices, which requires price control departments of all levels to carry out specific inspections on pharmaceutical prices. These inspections will begin on 1 June 2016 and end on 31 October 2016. The areas of inspection include the price settings by pharmaceutical manufacturers, medical institutions, the Centre for Disease Control and Prevention,blood banks, the Drug Centralised Bidding and Purchasing Platforms, drug purchasing departments and related industry associations. The emphasis of this inspection is on those active pharmaceutical ingredients and drugs with unusual price fluctuations.  This Notice requires specific inspection of the following behaviours:

  1. Monopoly agreements reached or implemented by API enterprises, manufacturers or industry associations.  
  2. Abuse of a dominant market position by API enterprises, manufacturers who are selling API or drugs with an unusually high price.  
  3. Fraudulent pricing practices of retail enterprises including fictitious original prices and misleading price markings.   
  4. Non-execution of the zero profit policy and the mark-up percentage policy by medical institutions.  
  5. Selling government priced drugs at a higher price than the regulated highest retail price.  
  6. Non-execution of the price markings policy.  
  7. Other behaviours which do not comply with the Price Law and the Anti-Trust Law.

An NDRC initiated price investigation will usually be followed by a cut in drug prices, for example, in 2013, the NDRC launched a wide-ranging examination into the cost of drugs at 60 domestic and international pharmaceutical companies, resulting in a price cut of more than 20% for certain brands of drugs. There could be a risk that drug prices will be cut in coming years.

Tightened policy in private investment in medical institution

In April 2016, a young man named Wei died because of a misleading online medical institution advertisement and an ineffective treatment. Misled by an online medical institution advertisement, Wei went to a highly-ranked public hospital’s oncology department for treatment which was actually outsourced to a private company. The department used an ineffective and outdated treatment method which not only caused monetary loss to Wei but also led to his death. This story has sparked a heated discussion in China and the government has been put under huge pressure for failing to regulate and administrate online medical institution advertisements and hospitals. Besides actively taking several measures to deal with this scandal including implementing a thorough investigation into and handing a punishment to related entities, the Chinese medical authority has learned from the scandal and appears to want to tighten administration in the areas involved to ensure the quality of medical services. Some local medical authorities are the first to illustrate this.  On 4 May 2016, the officer of the Beijing Health and Family Planning Commission claimed that local authorities should organise comprehensive inspections to clean up these kinds of contracted outsourcing businesses between hospitals and outside private businesses. The relevant agencies also called for strict examination of false medical advertisements. 

On 17 May 2016, the Shanghai Health and Family Planning Commission reaffirmed that doctors taking part in medical operations are registered and they are prohibited from working outside their registered workplace. It is forbidden for a hospital to outsource the work of its departments to doctors who are not registered at that hospital or to outside private companies. Advertisements should strictly adhere to the Measures for the Administration of Medical Advertisements and the content should be true, legal and accurate.

It can be seen that the Chinese government is strengthening supervision of the cooperation models between private businesses and medical institutions. Although supervision now is mostly focused on the outsourcing contract model, it is possible that this trend may also influence other cooperation models between private capital and medical institutions, including even foreign investment into medical institutions. Furthermore, some online medical services such as doctor alliances which provide medical services through online platforms will also be affected.

CFDA seeking comments on the food and drug traceability system

On 27 April 2016, the China Food and Drug Administration(the “CFDA”) issued the Opinions on Further Improving the Food and Drug Traceability System (Draft for Comment) (the “Opinion”) which closed for public comments on 23 May 2016.

The Draft aims to encourage enterprises to establish sound traceability systems which focus on supervision of all forms of food and drugs throughout the entire process. According to the Draft:

  • Food and drug manufacturers and distributors shall adopt appropriate approaches to record or identify sources of raw materials, buying and selling details, and destinations of products.  
  • Institutions using medical devices shall record all purchased medical devices’ sources. For Class III medical devices, original data shall be saved and it should be ensured that such information is traceable.  
  • Drug and medical device manufacturers shall carry out Good Manufacturing Practice (GMP) and distributors shall comply with the Good Supply Practice (GSP) for the purpose of ensuring data’s authenticity, integrity and traceability.  
  • Consumers can claim damages against the distributors or manufacturers. Distributors or manufacturers must pay the compensation due under the claim first and then seek compensation themselves from the liable party through the traceability system.   
  • The traceability system should be diversified depending on products’ different properties, risks and legal requirements.