Drug pricing probes pressure companies

The objective is to eliminate all the grey areas and hidden costs in the supply and distribution channels, Ho said.

Target and focus

Already underway, the five-month program follows questionnaires the regulator has sent out over the past weeks to healthcare companies.

“Over 22 big foreign healthcare and pharmaceutical firms in Shanghai—where most are headquartered—have been interviewed and 10 of these were medical device companies,” said Alan Zhou, partner at Global Law Office. They were later asked questions relating to their market share, products, distribution and pricing, he said.

Prices of drugs have always been set through government bidding and purchasing processes, whereas those of medical devices have not, which has left makers of the latter with more freedom to set prices and generally lower restrictions and compliance burdens.

Although it is too early to tell how this campaign will impact the business of foreign pharmaceutical and medical device companies, it's clear that device makers are now on the regulator's radar as well, said Zhou.

The NDRC has identified seven types of illegal conduct to focus on:

• Monopoly agreements among drug manufacturers, operators and associations.
• Abuse of dominant market position by manufacturers and distributors to raise or set unreasonable drug prices.
• Price fraud or the setting of misleading or falsified prices by retailers/pharmacies.
• Violations by hospitals and medical institutions of zero-markup (zero-profit) policies.
• Violations of government-set price ceilings for certain drugs.
• Violations of policies regarding clear price tags and disclosure.
• Other illegal conduct prohibited by the PRC Pricing Law and PRC Anti-monopoly Law (AML).

The Circular also lists several phases of enforcement.

“The first step is to collect information from the industry, monitor price curves and allegations and read through media reports to identify any potential misconduct,” said Katherine Wang, a life sciences partner at Ropes & Gray in Shanghai. “Next, the NDRC will target and contact individual companies if they need to follow up on any irregular or suspicious leads.”

The NDRC may conduct dawn raids without advance notice and will interview relevant executives or managers, and may also request access to financial books and computer files, Wang said.

Compliance and preparation

All in all, companies will need to be able to justify the price labels on their products.

“Each company's pricing strategy is different, and the best approach would be to review these practices and understand any weaknesses that the NDRC may focus on during the investigation,” said Wang.

Companies should receive the regulators courteously but limit the scope of inquiry where possible, she said, adding that they should be extra careful if the NDRC has enough leads to ask targeted questions.

Caution is key. Lawyers spoke of cases where emails and communications with distributors have left evidential traces of price manipulation (such as discussions on setting next level retail prices), which is a violation under the AML. Any AML violations discovered during this round of investigations can lead to being sanctioned or disqualified from tenders in certain provinces.

According to a client alert by Pillsbury Winthrop Shaw Pittman, the NDRC is expected to require the following materials from multinational and domestic pharmaceutical companies to assist its investigation:

• The company's basic information, including registration information, affiliates, organization, shareholders, legal representative and ultimate controller.
• Sales volume in the global and Chinese markets from 2013 to 2015.
• Sales volume of the company's top 10 best-selling products in the global and Chinese markets from 2013 to 2015.
• Main competitors and market share in relevant markets.
• Information on price fluctuations on the top 10 products in the Chinese market from 2013 to 2015.
• Detailed description of the company's sales model, business policy and sales target in China, including a list of distributors.
• Distribution agreements and models, price comparisons of the top 10 drugs in the Chinese market and other markets, patent status and other information the company wishes to provide.

And as for preventive measures, a Baker & McKenzie report advises companies to put in place a protocol or action plan in the event of a dawn raid, audit business practices for legal compliance, provide more comprehensive training to employees, and implement and monitor internal compliance policies.

Pricing and marketing problems

Drug manufacturers have to crack through a number of processes to get their products into the PRC market, said Ho. “Even if a company has a drug registered in China, it can take one or two years until it starts seeing sales revenue due to all the bidding and listing requirements.”

A multinational company (MNC) typically enters into a distribution agreement with a local company—usually a large player like Sinopharm Group or Shanghai Pharma—and then works to market and list its products at each government level as well as at individual hospitals.

Most foreign pharmaceutical firms cannot apply for PRC drug distribution licenses, and the sheer size of the country makes it impossible for a single company to handle logistics for a national network.

The process of moving the drugs from the warehouse to the hospital is straightforward in tier 1 cities, where the wealthier are more willing to pay more for premium medicines. But the challenge comes when reaching out to more remote areas, where foreign players lack the sales reach and local business knowledge, and need to rely on agents and smaller distributors to push their product.

And this convoluted network is a key reason why prices get incrementally marked up. The end-patient's bills are often beyond the manufacturer's control, and multinational drug makers have voiced their concerns over the years that this is more of a systematic issue, Ho said.

The government wants to drive down drug prices due to public grievances about the weaknesses of the current medical and insurance system, and to increase ethics and efficiency in the sector overall, he explained.

The National Health and Family Planning Commission announced price cuts of 55%, 54% and 67% for three top-selling generic lung-cancer drugs made by AstraZeneca PLC, Zhejiang Beta Pharma Co. and GlaxoSmithKline PLC, respectively, on May 23. The commission said it has been working with 15 central government departments to conduct negotiations with manufacturers, and the reductions may extend to other drugs in similar categories.

Practitioners say the government has been enforcing regulations and proper conduct in the healthcare sector seriously. The CFDA [China Food and Drug Administration] has reportedly been inspecting clinical trials to check for any data integrity issues, and prosecutors are also enforcing anti-bribery laws with a heavy hand.

“All of these measures indicate that the market in China may be getting tougher for MNCs,” said Wang.

By Katherine Jo

The National Development and Reform Commission (NDRC) has formally launched a nationwide pricing investigation into China's pharmaceutical and medical devices industries.

The campaign, announced through the May 22 Circular on the Launch of a Dedicated Nationwide Review on the Pricing of Pharmaceuticals (Circular), runs from June 1 to October 31, 2016.

“The NDRC wants to gain an in-depth understanding of the entire value chain all the way from the manufacturer to the patient,” said Lewis Ho, Hong-Kong based partner and head of Dechert's Asia life sciences practice. “It's not only targeting the drug makers, but also inspecting hospitals, distributors, procurement platforms, research institutions, industry associations and trade organizations—basically everyone involved in the sector.”

Marketing drugs in China is complex, where pharmaceutical companies need to undergo bidding and product listing processes at the national, provincial, city and individual hospital levels. Add to that the need to work with multiple local distributors and logistics providers, and tracking revenue, commissions and price markups at each step becomes even more complicated.

The objective is to eliminate all the grey areas and hidden costs in the supply and distribution channels, Ho said.

Target and focus

Already underway, the five-month program follows questionnaires the regulator has sent out over the past weeks to healthcare companies.

“Over 22 big foreign healthcare and pharmaceutical firms in Shanghai—where most are headquartered—have been interviewed and 10 of these were medical device companies,” said Alan Zhou, partner at Global Law Office. They were later asked questions relating to their market share, products, distribution and pricing, he said.

Prices of drugs have always been set through government bidding and purchasing processes, whereas those of medical devices have not, which has left makers of the latter with more freedom to set prices and generally lower restrictions and compliance burdens.

Although it is too early to tell how this campaign will impact the business of foreign pharmaceutical and medical device companies, it's clear that device makers are now on the regulator's radar as well, said Zhou.

The NDRC has identified seven types of illegal conduct to focus on:

• Monopoly agreements among drug manufacturers, operators and associations.
• Abuse of dominant market position by manufacturers and distributors to raise or set unreasonable drug prices.
• Price fraud or the setting of misleading or falsified prices by retailers/pharmacies.
• Violations by hospitals and medical institutions of zero-markup (zero-profit) policies.
• Violations of government-set price ceilings for certain drugs.
• Violations of policies regarding clear price tags and disclosure.
• Other illegal conduct prohibited by the PRC Pricing Law and PRC Anti-monopoly Law (AML).

The Circular also lists several phases of enforcement.

“The first step is to collect information from the industry, monitor price curves and allegations and read through media reports to identify any potential misconduct,” said Katherine Wang, a life sciences partner at Ropes & Gray in Shanghai. “Next, the NDRC will target and contact individual companies if they need to follow up on any irregular or suspicious leads.”

The NDRC may conduct dawn raids without advance notice and will interview relevant executives or managers, and may also request access to financial books and computer files, Wang said.

Compliance and preparation

All in all, companies will need to be able to justify the price labels on their products.

“Each company's pricing strategy is different, and the best approach would be to review these practices and understand any weaknesses that the NDRC may focus on during the investigation,” said Wang.

Companies should receive the regulators courteously but limit the scope of inquiry where possible, she said, adding that they should be extra careful if the NDRC has enough leads to ask targeted questions.

Caution is key. Lawyers spoke of cases where emails and communications with distributors have left evidential traces of price manipulation (such as discussions on setting next level retail prices), which is a violation under the AML. Any AML violations discovered during this round of investigations can lead to being sanctioned or disqualified from tenders in certain provinces.

According to a client alert by Pillsbury Winthrop Shaw Pittman, the NDRC is expected to require the following materials from multinational and domestic pharmaceutical companies to assist its investigation:

• The company's basic information, including registration information, affiliates, organization, shareholders, legal representative and ultimate controller.
• Sales volume in the global and Chinese markets from 2013 to 2015.
• Sales volume of the company's top 10 best-selling products in the global and Chinese markets from 2013 to 2015.
• Main competitors and market share in relevant markets.
• Information on price fluctuations on the top 10 products in the Chinese market from 2013 to 2015.
• Detailed description of the company's sales model, business policy and sales target in China, including a list of distributors.
• Distribution agreements and models, price comparisons of the top 10 drugs in the Chinese market and other markets, patent status and other information the company wishes to provide.

And as for preventive measures, a Baker & McKenzie report advises companies to put in place a protocol or action plan in the event of a dawn raid, audit business practices for legal compliance, provide more comprehensive training to employees, and implement and monitor internal compliance policies.

Pricing and marketing problems

Drug manufacturers have to crack through a number of processes to get their products into the PRC market, said Ho. “Even if a company has a drug registered in China, it can take one or two years until it starts seeing sales revenue due to all the bidding and listing requirements.”

A multinational company (MNC) typically enters into a distribution agreement with a local company—usually a large player like Sinopharm Group or Shanghai Pharma—and then works to market and list its products at each government level as well as at individual hospitals.

Most foreign pharmaceutical firms cannot apply for PRC drug distribution licenses, and the sheer size of the country makes it impossible for a single company to handle logistics for a national network.

The process of moving the drugs from the warehouse to the hospital is straightforward in tier 1 cities, where the wealthier are more willing to pay more for premium medicines. But the challenge comes when reaching out to more remote areas, where foreign players lack the sales reach and local business knowledge, and need to rely on agents and smaller distributors to push their product.

And this convoluted network is a key reason why prices get incrementally marked up. The end-patient's bills are often beyond the manufacturer's control, and multinational drug makers have voiced their concerns over the years that this is more of a systematic issue, Ho said.

The government wants to drive down drug prices due to public grievances about the weaknesses of the current medical and insurance system, and to increase ethics and efficiency in the sector overall, he explained.

The National Health and Family Planning Commission announced price cuts of 55%, 54% and 67% for three top-selling generic lung-cancer drugs made by AstraZeneca PLC, Zhejiang Beta Pharma Co. and GlaxoSmithKline PLC, respectively, on May 23. The commission said it has been working with 15 central government departments to conduct negotiations with manufacturers, and the reductions may extend to other drugs in similar categories.

Practitioners say the government has been enforcing regulations and proper conduct in the healthcare sector seriously. The CFDA [China Food and Drug Administration] has reportedly been inspecting clinical trials to check for any data integrity issues, and prosecutors are also enforcing anti-bribery laws with a heavy hand.

“All of these measures indicate that the market in China may be getting tougher for MNCs,” said Wang.

By Katherine Jo