On July 2, the National Development and Reform Commission (“NDRC”) announced that it is investigating costs and prices charged by 60 foreign and domestic drug makers. Concerned pharmaceutical manufacturers should be aware that the investigation process imposes certain rights and obligations on the manufacturers and the investigating authorities alike.

The Chinese pharmaceutical pricing regime is primarily governed by the Price Law of the People’s Republic of China, the Pharmaceutical Administration Law of the People’s Republic of China, the Regulations for the Implementation of the Drug Administration Law of the People’s Republic of China, and the Code of Conduct for pharmaceutical pricing.

Authorities have the right to fix prices for (1) drugs listed in the directory of drugs for national basic medical insurance and (2) drugs not listed in the directory but monopolistically manufactured and distributed. There are about 2700 kinds of drugs within these categories, which represent 23 percent of drugs on the market. The prices of all other drugs are set by the market. If drug manufacturers refuse to follow government pricing mandates, authorities have the right to order a price correction, to confiscate a manufacturer’s proceeds, and to impose a fine for an amount no more than five times the illegal proceeds. In serious cases, authorities have the right to shut down a manufacturer’s business.

When considering the price of drugs, authorities have certain obligations. They must consider social costs, market supply and demand, and the legitimate interests of patients. Additionally, authorities are required to organize experts from the pharmaceutical, medical, economic, and other fields to conduct an assessment. If necessary, the authorities may solicit comments from drug manufacturers, drug distributors, medical institutions, citizens, and other relevant persons. When conducting a pricing investigation, authorities must comply with certain guidelines. If authority personnel must enter an enterprise as part of an investigation, there must be two or more personnel participating. Investigation findings must be signed by all investigators, and must truthfully reflect the different views of members of the investigation team. Enterprises must not be charged any fee for the investigation. Authority personnel are enjoined from dining at the investigated enterprises. If dining at the enterprise is necessary, the investigators must pay for their food and are to be served food of the same standard as that served to the enterprise’s employees. When establishing a drug price, authorities must publish the drug’s price and the price’s effective date in designated publications.

Under the drug pricing regime, drug manufacturers are required to fix drug prices that are subject to market regulation and to establish prices for new products which are subject to government-set or guided prices, except for special products for trial sales. Manufacturers also have the right to report or claim against actions that have infringed upon their rights of independent pricing. If a manufacturer is not satisfied with a punishment decision made by the authorities, the manufacturer has the right to apply for administrative review of the decision. If the manufacturer is not satisfied after administrative review, it may file suit in a people’s court.

Manufacturer’s obligations under the drug pricing regime include setting prices according to the government’s requirements and cooperating with the government during investigations. Manufacturers also have the obligation to keep abreast of all relevant laws and regulations, including government guided-prices, government-set prices, legal price intervention measures, and any emergency measures adopted by the government; to provide any documents or other materials necessary to an investigation; to provide the pricing authority with information related to raw material costs and drug pricing; to fix and mark the retail prices of pharmaceuticals; and to avoid sudden excessive profits and any deceptive pricing harmful to the interests of patients.

Within the context of these rights and obligations, drug manufacturers need to cooperate fully with authorities during a pricing investigation. However, if investigators overstep their authority, manufacturers have recourse to administrative review of investigators’ actions. If unsatisfied with the result, manufacturers may file suit and air their grievances in court.