A worker arranges medicine in a drugstore in Zouping county, Shandong province. The government plans more cuts in drug prices to make medicine more affordable to middle- and low-income families. [Photo / China Daily]

The government is set to implement more price caps and cuts on medicines

All signs show that China is on its way to impose more price caps on pharmaceuticals to ensure they are affordable to middle- and low-income families.

Rumors are spreading in the industry that, very soon, the nation's two lists of drugs under price controls, the essential drug list and the national reimbursement drug list, will be expanded.

The moment of truth will come by the end of March, according to a report from the domestic brokerage Rising Securities. The prices of 253 medicines would be affected.

Li Weizhi, a Rising Securities analyst, said that the price cut this time is expected to help the patients save up to 10 billion yuan ($1.6 billion) every year.

Will the would-be change be good or bad news for international pharmaceutical companies? Will they rake in more sales revenue from China by selling their products to more people?

Will they face tougher competition from domestic pharmaceutical companies? Or should they, if they cannot make money from their basic offerings, look in other directions for higher sales? And could they?

In a panel discussion at the 2012 session of the Chinese People's Political Consultative Conference, which closed last week in Beijing, President Hu Jintao said China must go on reforming its medical system, so that hospitals, as many still do, will no longer rely on drug sales for their revenues but concentrate on their services.

In the meantime, during the National People's Congress annual session, Minister of Health Chen Zhu confirmed to lawmakers that the government was to expand the EDL and lower the prices for prescription medicines further.

However, a report by IMS Health Inc, an international medical care research firm, said that multinationals with products on the EDL and NRDL will probably be reluctant to participate in the next round of tenders, fearing that there may be significant price cuts but no guarantees for an increase in their sales volume.

The prices of the drug types on both the EDL and NRDL are determined by public bidding. They are to remain under strict government price caps when used in hospitals.

The central government has been trying to lower the prices of drugs on the EDL and NRDL. The National Development and Reform Commission, the top economic regulator in China, has cut drug prices 27 times since 1997, according to China Business News.

The latest round of price cuts came in March 2011, as the government lowered the price ceilings on 162 types of medicines included in the EDL by an average of 21 percent.

The government also canceled the independent pricing rights of 19 types of off-patent medicines, all produced by multinationals, such as Eli Lilly and Co, Bayer HealthCare and Pfizer Inc. An off-patent medicine is a drug on which the patent has expired.

Some Chinese analysts said the coming price changes will not affect the overall medical market situation. Zou Min, chief analyst of Essence Securities, said the price cut will be by a similar rate to the previous price cut, which took place in March 2011.

It would result in a cut of 20 percent in general. For off-patent drugs manufactured by foreign companies, it is likely to be 10 percent. "I don't think it would significantly affect international drugmakers' profits in China," Zou said.

Foreign companies' prices are already very high. The price cut "may even stimulate their sales, and offset the narrowed profit margin," he added.

Nonetheless, many international companies tend to claim otherwise, at least for now. Biopharmaceutical company Merck Serono AG's Thyrozo - a thyroid treatment drug - is on China's EDL. According to Howard Sui, chairman and president of Merck Serono China Co Ltd, being listed has brought both opportunities and risks to the company.

"The essential drugs are used in the grassroots market, so it helps us expand our presence in China. On the other hand, price cuts of the medicines on the list pose cost pressures for us," he said.

A Chinese patient's daily spending on Thyrozo, as an imported medicine, is no more than 2 yuan (32 cents). Given the production and logistics costs, the company would not make any profit if its price is further lowered, Sui said.

Jenny Xiong, communication director of the Swiss-based company, said Merck Serono is very cautious when thinking about whether or not to take part in any new round of EDL and NRDL tenders.

"If the prices are kept too low to cover our costs, we will have to call it quits. Our focus is to maintain our quality of products and our strength to develop and introduce new drugs for local patients," she said.

John C. Lechleiter, chairman, president and chief executive officer of Eli Lilly and Co, said the company will not reduce prices merely to enter the government sanctioned low-price drug lists. He said, when making decisions, the company will weigh product prices with other factors, including quality and patient demand.

Stella Ling, communications director of Bristol-Myers Squibb China, said the company is following a similar principal in trying to strike a balance between pricing policy and access to China's government drug lists. "Our priorities are quality and safety," Ling said. "We believe pairing high quality with a high price is a reasonable thing to do."

The government-imposed price changes may also be an opportunity for foreign pharmaceutical companies to adjust their strategies, said Frank Guo, Greater China director for Ipsos, an international market research company. The strategies that Guo recommended are:

To develop new products tailored to the local market by taking advantage of their strong research and development capability as well as China's large patient pool.

To promote high-end products to meet the demand from wealthier people and more developed regions.

To expand their presence in the grassroots market with mature products.

But the greatest challenge for foreign companies, he said, is to understand the government policies on market access, cost control and medical reform. "If you don't, you can't have your roadmap for corporate development," he said.

While arguing that price reductions may help narrow the gap between medicines made by foreign and local companies, they do not provide the ultimate cure for hospitals' addiction to selling expensive drugs, said Yu Mingde, president of China Pharmaceutical Enterprises Association.

That would require essentially banning hospitals from reselling drugs and completely separating hospitals from the drug distribution channel, he said.

All public hospitals should have access to more abundant public funds for the development of their services, he added.

Contact the writer at liujie@chinadaily.com.cn