Draft measures to limit drug prices over entire distribution chain

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The National Development and Reform Commission (NDRC) released its Interim Measures on Drug Products Distribution-Stage Price Management (January 2012, Draft for Comments) earlier this year with a target introduction date of 1 July 2012. The target was not met and a second date has yet to be set. The measures are a response to longstanding public and government perceptions that drug prices and profits in China are too high, and to more recent public outrage over news reports on exorbitant drug mark-ups.

Reports of excessive drug price mark-ups have prompted scrutiny on the pharmaceutical industry.
Reports of excessive drug price mark-ups have prompted scrutiny on the pharmaceutical industry.

The measures are short – just 15 articles and two brief appendices – but are likely to have a major impact on the Chinese pharmaceutical industry and its sales and marketing practices. Current price control policies focus on retail end-prices, and enterprises may determine prices for drug transactions themselves as long as the maximum retail prices are not exceeded. There is also a 15% maximum permitted mark-up for hospitals over the price they pay their suppliers. Ex-factory prices are typically low, with distribution costs and profits and part of hospitals’ costs all booked as drug distribution mark-up (hence hospitals’ preference for higher priced drugs).

The measures would, for all drugs subject to government price determination, limit permitted price mark-ups over the whole distribution process in China, from factory or importation to sale by non-profit medical institutions to patients, by setting upper limits for drug price mark-ups (in percentages and amounts) in two stages:

  • Wholesale: from factories or importation to medical institutions (Appendix 1); and

Appendix 1:

Drug wholesale stage mark-up ratios

Ex-factory / import price

Mark-up ratio (amount)

  1. < RMB10

30%

  1. RMB10 – 40

20%+RMB1

  1. RMB40 – 200

15%+RMB3

  1. RMB200 – 800

10%+RMB18

  1. RMB800 – 2,000

8%+RMB34

  1. > RMB2,000

RMB194

  • Medical institution sales: from medical institutions to patients (Appendix 2).

Appendix 2:

Medical institution sale stage

mark-up ratios

Medical institution purchase price

Mark-up ratio (amount)

  1. < RMB10

25%

  1. RMB10 – 40

15%+RMB1

  1. RMB40 – 200

10%+RMB3

  1. RMB200 – 800

8%+RMB5

  1. > RMB800

RMB69

Permitted mark-ups are proportionately higher on low-price drugs, apparently to encourage them. Business operators determine the initial drug prices – ex-factory or at port of importation – autonomously in accordance with the principles of fairness, legality and good faith (articles 2-4). Limiting mark-ups over the whole distribution chain would tend to undermine the traditional business model (with low ex-factory prices and high distribution mark-ups), encourage higher ex-factory prices, put pressure on long-term profits and encourage consolidation of distributors.

Suppliers (domestic or foreign) of drugs to the Chinese market will also need to submit price data to the government, for its baseline data base, for the prescribed limits on mark-ups. Business operators will have to submit promptly each year the previous year’s lowest, highest and average ex-factory or port of importation prices to a drug price information platform designated by the NDRC. (For import prices, this is done by either the foreign manufacturer or its authorised business enterprise in China.) The average prices are calculated by dividing total annual sales by total annual volume. The following information is also submitted together with the price information:

  • A scanned copy of the drug package insert and photo of minimal retail packaging;
  • At least three scanned PDF copies of proof of payment of taxes dated at least two months apart in the form of receipts or VAT bills on sales from manufacturers to distributors;
  • Other information the price authorities require (articles 4-6).

Provincial-level price authorities then regulate “distribution stage” drug prices in their jurisdictions using information from the drug price information platform. At the wholesale stage, limits on mark-ups are higher for low-priced products and lower for high-priced products (see Appendix 1). At the medical institution sales stage, mark-ups are to be gradually eliminated altogether, but in the meantime should not exceed those in Appendix 2 (instead of the current 15%). Mark-ups by medical institutions for different brands of the same drug must not exceed the maximum calculated on the basis of the drug’s overall maximum retail price (articles 7-9).

Provincial-level price authorities will verify and publish hospital retail prices for drug products selected by tender according to mark-ups provided in the measures. For drug products where manufacturers do not report ex-factory or import prices as required, or whose wholesale stage mark-ups exceed the standard, a medical institution retail price will not be published and local drug purchase tender agencies will be notified (article 10).

Narcotics, class I psychotropics, contraceptives produced and purchased under the mandatory state plan, vaccines for the state immunisation programme, medical institution preparations and Chinese medicine piece preparations will still be regulated under other existing regulations. Low-priced drugs in short supply, as published by the national and provincial governments, and other drugs covered by other regulations will not fall under the measures, as long as their prices do not exceed the government-set prices (articles 11 and 12).

Under the Price Law and Price Violations Administrative Penalty Rule, price authorities can penalise (1) providing false information to the price authorities; (2) exceeding mark-ups set in the measures, and (3) other price violations (article 13).

Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mail at: Zhang Danian (Shanghai) [email protected]