SHANGHAI - Chinese media recently reported that some drugs in hospitals are sold at 13 times their ex-factory prices, which led the National Development and Reform Commission to release new measures on drug pricing, UBS said June 23.

Asparagus pill, a traditional Chinese medicine cancer adjuvant drug, was reportedly being sold at the Hunan Second Xiangya Hospital at RMB 213 ($31.32) per pill, 13 times its ex-factory price of RMB 15.5.

"This resulted in widespread public pressure regarding the unreasonably high drug price phenomenon, and thus the hasty introduction of the draft by the government," UBS analyst Amy Zou wrote in a June 23 research note.

In June, the NDRC released a draft of drug pricing guidelines to Chinese pharmaceutical associations for comments. Under the new guidelines, NDRC described a detailed drug price reduction schedule and a locked mark-up period during the distribution phase (Also see "China's New Guideline For Drug Pricing Favors Innovation And First-to-market Generics" - Scrip, 14 June, 2010.).

These new policies "will be difficult to implement," Bin Li, executive director at Morgan Stanley's research department, said at that time.

Industry expects the final version to be released in August. However, UBS believes the release of the final version will be further delayed.

The exorbitant prices of drugs are partly a result of manufacturer "agent sales models," that act on behalf of manufacturers to market their drugs to hospitals, much like direct salespeople employed by pharma companies. Sales agents also educate doctors and even negotiate with local distributors, hospitals and governments to win the tenders and set the drug price in some cases.

These models imply a low gross margin and low cost for manufacturers since they don't have to set up their own sales teams. The model also carries a large spread between the retail price and the ex-factory price as sales people tack on their commissions.

Direct sales models, however, carry a high gross margin but also high costs and a smaller distribution spread for manufacturers.

"Therefore, the expensive drug phenomenon is partly due to manufacturers' sales models rather than being entirely caused by the high drug pricing," Zou said.

She agreed that a profit margin ceiling and locked mark-up will be hard to implement, due to difficulty in monitoring costs, expenses and weak enforcement power.

"The high drug pricing cannot be fundamentally solved by simply imposing limits on manufacturing profit margins and distribution spreads, but by permanently removing the gray interest chain in the drug distribution industry," Zou noted.

Inevitable Price Cuts For New Drugs On EDL And NDRL

In the last 10 years, China has imposed 25 price cuts on drugs listed on the National Drug Reimbursement List.

The room for further price cuts is very limited for previously listed drugs on the NDRL: "Further price cuts on these drugs will badly hit the supply as manufacturers would have less and less willingness to produce," the UBS analyst wrote.

Early this year, hospitals' purchasing prices for essential drugs saw a cut by 25-50 percent in the local tender compared with the ceiling retail prices set by the central government in 2009.

China may lower the ceiling retail prices of essential drugs in the near term to reduce the gap between hospitals' purchasing prices and retail prices, according to UBS.

However, these price cuts will not have a significant impact on the pharmaceutical industry because they will be more focused on distributors.

-Dai Jialing (j.dai@elsevier.com)

Public Criticism Puts Pressure On Chinese Government To Reduce Drug Prices

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