The NDRC has announced that it has commenced a new four-month long investigation into the cost and price of medicinal products and will examine 27 companies over input costs and 33 for pricing, according to a statement posted on the commission’s Evaluation Center of Drug Pricing on 2 July 2013.  It is thought that the investigation is being conducted so that any future adjustments to pharmaceutical prices can be made in a more informed and timely manner.

The National Development and Reform Commission

The NDRC is an agency under the Chinese State Council, which has broad administrative and planning control over the Chinese economy.  Since March 2013 the Commission has been headed by Xu Shaoshi.  The NDRC's functions are to study and formulate policies for economic and social development, maintain the balance of economic development, and to guide the restructuring of China's economic system. The Commission regularly reviews pharmaceutical prices, and periodically implements price ceilings that apply to government reimbursement levels. The agency also directs bulk purchases of pharmaceuticals by local and provincial governments.  The NDRC recently undertook a similar exercise in relation to the pricing of infant milk formula products, which resulted in an overall price cut of 20%.

Previous investigations

The NDRC has reviewed pharmaceutical prices many times over the past decade, but the current investigation is expected to be on a larger scale.  Compared with previous investigations, the current investigation is also expected to be more detail-orientated, according to reports in the Chinese media.  Earlier investigations have often largely been conducted online, with respondents required to submit the necessary data and documents electronically.  However, more than 40% of respondents failed to submit the necessary information prior to the previous deadline, and so the NDRC has decided to resort to onsite field surveys, which have the potential to be more meticulous and to provide more reliable data.

Former rounds of investigation by the NDRC have mainly focused on domestic pharmaceutical products and did little to influence the price of products of overseas multi-national companies.  However, overseas companies operating in China will constitute nearly half of the targets of the present investigation.  Although most of the 33 companies being investigated for input costs, such as production and distribution costs, manufacture Traditional Chinese Medicines (TCMs), many of the other 27 companies being investigated on pricing include large multinational companies including MSD (Merck & Co), Boehringer Ingelheim, GlaxoSmithKline, Astellas and Sandoz.  Local industry executives stress that the inquiry is the latest in a regular series of audits by the NDRC which is responsible for setting an upper ceiling price for all patented and generic drugs reimbursed by the government.  The NDRC has stated that the four-month survey is aimed at the ‘timely setting and adjustment of drug prices’

Impetus for review

The Measures on the Investigation of Ex-Factory Prices of Pharmaceuticals (the ‘Regulation’) came into effect on 1st December 2011.  This Regulation authorises the NDRC and each provincial authority to investigate ex-factory prices of locally manufactured, imported and locally repackaged, pharmaceutical products.  Manufacturers under investigation must provide sales and financial information including, but not limited to, sales policies and contracts, manufacturing and distribution costs and shipment records.  The Regulation also establishes methods for the NDRC investigators to verify retail prices and the accuracy of the ex-factory prices claimed.  One of the approaches taken by the NDRC in setting prices is to use a formula that takes into account the ex-factory and manufacturing costs and profit margins.  Therefore, the Regulation may place downward pressure on pharmaceutical pricing by discouraging the overstatement of ex-factory pricing.

On 9 July 2013, the Chinese media were informed by the NDRC that the pricing investigation is a routine procedure according to the Regulation and policy, and it does not automatically follow that there will be an upward pricing adjustment.   Although the NDRC has stated that the four-month survey is aimed at the ‘timely setting and adjustment of drug prices’, there is pressure to control and reduce costs in China as the country's population grows older, a trend that is straining the country's medical system and care facilities.  Furthermore, China’s most recent national Essential Drugs List (EDL), published in March 2013, increased the number of pharmaceutical products from 305 to 500, increasing patient access to medicines and in doing so placing further financial pressure on the nation’s already strained reimbursement systems.

Future implications

Most multi-national pharmaceutical companies have been looking east to the opportunities of emerging markets, and especially China, as patent expiries and maturing western markets dent profits.  Companies with Chinese local manufacturing facilities and products under the remit of the Chinese pricing authorities should prepare for potential investigations.  Despite the initial concern following the announcement, many commentators have signaled that the investigation is a routine development.   Mr Zuo, Communications Director at the R&D-based Pharmaceutical Association Committee, (RDPAC), has stated that the NDRC intends to improve the method used to calculate the price of pharmaceutical products, including foreign products.  Other industry experts believe that a goal of the investigations is to better understand how the prices of some foreign products compare with locally produced generic equivalents.  However, analyst consultants at IMS Health have predicted that any price cutting following the investigations may lead to revenue from Chinese markets for some companies decreasing by around 15%. 

Analysts at CitiGroup China have suggested that the investigation may not necessarily lead directly to price cuts, or even imply another round of imminent price cuts across the board, but may reflect the intention of policymakers to provide a rational basis for future targeted price cuts on more highly priced medicinal products.  This may have implications for the manufacturers of more expensively priced biopharmaceutical products in particular, especially in the large oncology markets.  Other commentators have cautioned optimism, and have welcomed the collection of authentic data to inform inevitable future pricing control mechanisms, and predict that in the long term the industry will not be overly affected and will recover.’