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China wants to set
drug-price caps, angering
pharmaceutical companies
By: Leslie Chang and Karby Leggett
The Wall Street Journal, December 3, 2001
Chinese officials want to impose price caps on the
drug industry, upsetting pharmaceutical companies who say it is a
misguided effort to fix China's ailing health-care network.
The State Development Planning Commission, which sets
drug prices, wants to impose a ceiling on the prices companies can charge
for both imported and domestically manufactured medicines. Under the plan,
a maker of a patented drug could sell it for no more than 30% to 40%
beyond what it would cost a generic Chinese manufacturer to produce.
Officials have said they want to cut prices across the board for generic
drugs as well, according to company executives who have been briefed on
the plans.
The regulation, which officials only now appear to be
putting into action after it was issued earlier this year, is being
condemned by foreign companies, which say such restrictive price caps are
untenable given the immense investments companies make to develop these
drugs. Companies likely to be affected include many of the world's
pharmaceutical giants, among them GlaxoSmith
Kline PLC, Merck
& Co., and Roche
Holding AG, all of which have invested in China in recent years.
"This is the biggest challenge our industry has
ever faced" in China, says the general manager of one foreign
pharmaceutical company. Implementation of price caps, he says, could lead
to widespread layoffs.
The affair is a reminder that China's imminent entry
to the World Trade Organization will not end the power of officialdom to
throw a company's entire business plan out of whack with a simple
directive. It also highlights the continuing lack of transparency in many
Chinese industries. In the opaque and highly regulated pharmaceutical
sector, many key details of how the government plans to calculate the
price caps are still unknown. "Which companies they are using to
calculate the cost, how far down they are going, we don't know," says
another industry executive.
What is certain is that China's health-care system
needs help, and cutting drug prices seems to appeal to Beijing as a
quick-fix solution. Many provincial and local governments that lack the
funds to support the nation's hospitals have cast them off on their own.
As a result, hospitals have come to rely on medicine sales for the bulk of
their revenue, unlike in other markets where there is more of a balance
between sales of drugs and other services. The situation leads to a
tendency to overprescribe medicines, which can carry public health risks.
The business of peddling medicines to hospitals, where an overwhelming 80%
to 90% of all medical sales in China take place, has also bred corruption,
with many hospitals accepting kickbacks that increase patient costs.
But imposing price caps won't solve the industry's
problems and could even exacerbate the tendency to overprescribe, critics
say. What needs to be done, they argue, is the far more difficult task of
putting hospitals on solid financial footing.
"If officials would fix the hospital-financing
problem, they would see that drug prices are not the problem," says
the industry executive.
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