By Wen Shuping (溫淑萍)

Issue 529, July 25, 2011

News, page 4 

Translated by Zhang Wen

Original article [Chinese] 

 The State Food and Drug Administration (SFDA) intends to check the quality of essential medicines that have inexplicably low prices, particularly those that sell below their cost, according to Wu Zhen, deputy director of the administration, on July 7.

“Our cost is close to two yuan per injection, but a drug company in Guizhou (a province in southwest China) put in a bid which would sell it for only 1.2 yuan,” said a drug company employee.

SFDA’s announcement worries some drug companies because for the past two years, they have been caught between the SFDA and the National Development and Reform Commission (NDRC), which focuses on lowering unreasonably high drug prices.

Some drug manufacturers who won government bids to sell essential drugs at subsidized prices did so by bidding at below-breakeven prices, alarming industry regulators.

“If the bidding price is lower than cost, how on earth do drug companies make the medicine?” wonders a person from SFDA, quality may be an issue.

The exceptionally low prices started in 2008 when the medical and health care reform was introduced. In August 2009 the prices of the 307 national essential drugs were cut by 25% to 45%.

As the subsidization of medicines spread around the country, prices dropped to new lows.

On December 12, 2010, NDRC revoked the self-pricing rights of 16 foreign-funded medicines to slash prices.

China Pharmaceutical Industry Association (CPIA) held a meeting at the end of 2010 and determined that there was almost no profit in the low prices of essential medicines. In addition, the focus of the bidding process should be shifted from price cuts to product quality and the company’s reputation.

In response, on May 3, 2011, the SFDA released the “Notice on Increasing the Supervision and Inspection of the production, quality and safety of essential drugs,” to ensure the quality of these drugs.

Medicine Companies’ Tactics to Counter New Policies

 What worries pharmaceutical companies most is whether they will be caught out trying to satisfy conflicting demands from the NDRC and SFDA.

 “Many small companies win these bids in Anhui province,” said a worker with a drug company in Anhui province.

 In Anhui, the government is obsessed with lowering prices, which has led to a fall in revenue for larger companies and the withdrawal of most pharmaceutical companies, particularly those with foreign investors.

 On the other hand, companies that win the tenders can’t make a profit due to the low prices, so two scenarios arise.

 One is that a competing firm wins the bid, but does not supply the drugs because of high raw material prices, ultimately hoping to change the existing market structure.

 “A competing firm may bid at the price of 8 yuan, or even 6 yuan, when the cost of production is 12 yuan. But after winning, the firm doesn’t manufacture any drugs. Rival companies can’t manufacture any of the drugs because they lost the rights when losing the bid. Eventually, the firm with the larger market share gets squeezed out of the region,” said an industry expert.  

 Although local governments have ordered bid-winning companies to supply the medicines, drug firms always use the excuse of raw material prices to not manufacture.

The other scenario is more common, some small and medium-sized firms continue to supply medicines but use inferior raw materials to produce them.

 In an example revealed to EO, Sichuan Shuzhong Pharmaceutical Co., Ltd (四川蜀中制藥) substituted apple skins when making the Chinese herbal remedy, isatis root, used to treat colds. “Compared to the high-quality raw materials, apple skins are only a third of the price.”

“SFDA’s move does change the rules,” a drug company representative told the EO. “But, companies can always find loopholes in new policies.”

 Even if the inferior medicine was inspected, resulting in the lot number being cancelled, the company, having greatly enlarged its market share, would replace the inferior drug with a much more expensive and new drug by following protocol. Patients would only briefly enjoy the benefit of cheap, but inferior medicine.

 The Disappearance of Essential Drugs

 “Within the past ten years, 70% of the essential drugs have been replaced by new drugs,” a person in the health sector told EO. “Nowadays, it’s hard to find the most common drugs on the market.”

 A doctor in Qingdao, Shandong Province, researched on the medicines last year and found that when there were price cuts, more than 50 drugs had disappeared from the attached hospital of Qingdao Medical University.

 “Patients complain that hospitals do not provide affordable drugs, but the hospitals can’t do anything because the suppliers have stopped production of these drugs all together,” said a doctor.

 When there is no profit anymore, the supply chain breaks down.

 “What price can ensure both genuine quality medicines and an affordable price for consumers?” asked a drug company worker. He believes that a balance will be difficult to achieve.

 The worker thinks that the unreasonably high prices are from middlemen, but these middlemen have to be present. If the market prices of these drugs are low, pharmacies don’t want to sell them anymore because they can’t earn any commission.

 “In the past, doctors were financially supported by the government, but now they have to make money themselves. They don’t want to sell cheap medicine because they can barely profit from it,” says a person from the health sector.