22 Jun 2010 09:52

China's latest drug price reforms revealed - survey

Shanghai. June 21. INTERFAX-CHINA - The National Development and Reform Commission (NDRC) is expected to implement new drug pricing reforms, under the Measures for Drug Price Management, according to a document obtained by an industry insider.

The new measures constitute an important development in China's ongoing health care reform. Industry associations were consulted on the new regulations and asked to submit proposals to the NDRC pricing division by June 15. However, it is not know when the finalized measures will be issued.

According to the above-cited document, the new rules consider a number of factors to determine drug prices, including profit margins for pharmaceutical companies, market demand, affordability, and quality standards.

There are currently three drug pricing formulas in China: authorities can set price caps on retail prices, or they can set ex-factory prices on specific drugs, while companies themselves may set prices of some drugs after filing with relevant officials.

According to the new regulations, period costs for innovative chemical drugs - equal to the sum of the administration cost, sales cost and financial cost divided by the ex-factory price - must not exceed 45 percent. The sales profits rate, equal to pre-tax profit divided by the ex-factory price, must not be greater than 18 percent.

The respective figures for generic chemical drugs are 30 percent and 8 percent.

"These limits were designed to prevent pharmaceutical companies from setting inflated prices for drugs based on exaggerated production costs," deputy secretary-general of the NDRC China Pricing Association, Zhao Zhendong, told Interfax on June 21.

Under the new regulations, the profit margin for innovative biological drugs must not exceed 20 percent, while the rate for innovative finished traditional Chinese medicines (TCM) is capped at 23 percent.

"The higher figure for TCMs shows that the government hopes to encourage the development of the sector," Zhao explained.

The measures stipulate additional rules for the pricing of several categories of drugs, including patented drugs, high-quality drugs and finished TCMs which use Good Manufacturing Practice (GAP) certified raw materials.

Generic drugs are also subject to additional rules: the price of the second version of a medicine to come on the market must be 10 percent lower than that of the first version; and price of the third version must be 10 percent lower again. This mechanism is designed to reduce the profit companies make from reproducing generic drugs, and encourage them to develop new products.

In addition, the price of generic drugs which have received awards from the State Council, or are manufactured for export to developed countries, can be set no more than 30 percent higher than versions of the drug which have not received an award and are only domestically distributed.

"These new rules suggest that the NDRC hopes drug price reforms can be used to help encourage innovation in the pharmaceutical industry," Zhao said.

A new set of maximum permitted markups for drugs throughout the distribution process will also be introduced. A markup of 40 percent will be permitted for drugs with an ex-factory price below RMB 5 ($0.73); 30 percent for those with an ex-factory price between RMB 5 ($0.73) and RMB 20 ($2.93); 25 percent between RMB 20 ($2.93) and RMB 100 ($14.64); 20 percent between RMB 100 ($14.64) and RMB 500 ($73.21); 15 percent between RMB 500 ($73.21) and RMB 1,000 ($146.41); and 8 percent between RMB 1,000 ($146.41) and RMB 10,000 ($1,464). For drugs with an ex-factory price exceeding RMB 10,000 ($1,464), the maximum markup will be RMB 901.5 ($131.99).

Zhao pointed out that other measures will likely be introduced to ensure markup policies are effective, such as a two invoice system for drug procurement contract bidding. This system seeks to streamline the distribution chain by allowing the involvement of only one distributor between manufacturers and medical institutions.

The measures so far provide only a framework for reform, and it is likely that regulations to guide their implementation will be issued in future, Zhao added.