Shanghai's drug price limits were biggest shock so far for multinational pharmaceutical companies in China

Companies have already reacted with message to Shanghai government: “We originally planned to continue investing in Shanghai,” but because of this policy it is very likely we will “change our way of thinking”

But it appear that this will not weaken the city government's resolve. “As long as there is evidence that the limits on expensive medicines is correct, we will maintain the policy. We will not change because somebody changes investment plans,” stressed Xu Weiguo.

By our reporter Ding Lin in Shanghai

They had been wronged, and were unhappy and speechless.

“For us, this regulation is a very terrible thing,” said the head of a marketing department for one multi-national pharmaceutical company, his voice filled with a sense of injustice. “Everyone thought this was a sort of punishment – they felt like the international pharmaceutical companies had become a 'target'.”

The target of his attack was a 2002 regulation “Shanghai City Medical Institution Drug Pricing Centralized Bidding and Purchasing Methods.” Article 22 of those regulations state that: Grade 3 medical institutions must purchase at least 70% low-priced medicines (so high-priced medicines can only make up a maximum of 30%); Grade 2 medical institutions must purchase at least 80% low-priced medicines (so high-priced medicines can only make up a maximum of 20%); and Grade 1 medical institutions must purchase at least 95% low-priced medicines (so high-priced medicines can only make up a maximum of 5%).

This regulation very quickly dropped the sales of multi-national pharmaceutical companies in Shanghai. It relied on the national push to reduce medical costs, and hit home [for multi-national pharma ] as the large majority of high-priced medicines come from them.

At one Grade 2 hospital in Shanghai, many prescriptions used to be made up of more than half imported medicines. They are now reduced to below 20%.

More frightening still, Shanghai may become a model for the whole country --- Ministry of Health officials say if all goes well it will be expanded nationwide.

They could take it no more. On 28 April, The Shanghai Department of Health and many other Shanghai government departments received a fax from the “Foreign Pharmaceutical Manufacturer Association” (called RDPAC for short, based in Beijing, also known as the “Pharmaceutical Research and Development Association”). The fax demanded that relevant departments in the Shanghai government “notify each hospital to suspend the “70/30” policy,” and to “reconsider the said policy”.

This sort of large “reaction” came out of the blue for the departments which drafted the regulation: “Actually when we were establishing this policy we requested comments from a few foreign pharmaceutical companies in Shanghai, for example Shanghai Roche, Shanghai Squibb, etc, and also gave them copies of the regulations after they were drafted.”

The sensitive topic of Multinational Pharmacutical companies' profits in China had been disturbed. The Chinese government’s efforts to control rising drug prices were beginning to feel resistance from the multinationals, and a deeper conflict arose:

Deliberations begin

Shanghai has sufficient reason to enact the regulations. “We prepared for half a year to release these regulations,” said Xu Weiguo, the deputy director of the Shanghai City Office of Rectifying Unhealthy Business Tendencies (below called the Tendency Rectification Office)

Previously, the Shanghai city government had a certain amount of experience in standardizing medicine prices: in 2000, for the first time according to the principle of “zhijia xiangfu, shuiping heli”, it implemented a trial price standardization for all medicines used at 34 city-level hospitals, which resulted in a 30% drop in prices; In mid-2001, the Shanghai Office of System Reform [上海体改办] released a price standardization method, and in that year set prices on 21 different medicines (comprising 298 brands) with a value of 582 million RMB, and achieved a wholesale price reduction of 21%. The total savings in health care expenditure for the year was 120 million RMB.

In November 2001, seven central government departments including the State Council Office of Tendency Rectification and the State Planning Commission, jointly released the “Medical Institution Drug Standardized Drug Tenders – Provisional Monitoring and Management procedures” 《医疗机构药品集中招标采购监督管理暂行办法》 More pressing still was that after two years of trials, Shanghai’s City government was gradually discovering some problems involved with standardizing prices, and needed to “introduce a stronger, more pointed policy in order to improve the realities on the ground.”

“At present, a major complaint of the common people towards the government is the high price of medicine, that they simply cannot afford to get medical treatment.”

“In addition, if everyone takes only expensive medicine, the Ministry of Finance will never be able to stand it.” Said Xu Weiguo. “Though this may seem a bit stubborn, if we do not control these costs now they will later produce an even more serious social problem.”

But Shanghai’s medical insurance costs are also facing big pressures. Compiled documents indicate that in 2001 Shanghai over-all planned medical insurance spending were 10 billion RMB, but actual expenditures for the year were 12 billion RMB. Planned spending for 2002 was 11 billion RMB, with 2 billion in Xujiahui district alone, but the expenditure in that district alone were 200 million over budget.

“If we do not increase control,” Xu said, “Shanghai's medical insurance system may collapse.”

In February, 2002, at the behest of the Shanghai office of tendency rectification, planning and drafting of the final regulations began. The Shanghai department of health, tendency rectification office, and six other offices participated in drafting the new document. After the complex process of “adjusting and studying, listening to comments, discussion all sorts of topics, unified thinking, finalizing the draft, dicussing again,” the complete document was released in mid-July, 2002. Inside the document the following principles were clarified: “High quality at reasonable price, supply low-priced medicines with guarantees, take into account other demands.”

The regulation puts similar medicines into three categories: 1. Those that have not yet received GMP certification; 2. Those that have GMP certification; and 3. “Seven types of medicine” (special use drugs; foreign research drugs that are protected by administrative protection in China; and others). These three classes actually represent the same medicine's “low”, “middle”, and “high” price categories.

The document’s strongest point is to limit the proportion of high-cost medicine that hospitals can use. For now, no other (Chinese domestic) regional medicine price standardization regulation contains this sort of regulation.

“We had two basic reasons for limiting high-cost medicines,” said a responsible person from one of the departments. “First of all, under the current “low level and broad coverage” basic principle of medical insurance, this is a more rational use of limited medical insurance funds. Some medicines, for example, need not be sold at such a high price. Also, this will rectify some of the improper trends in the flow of medicines – After realizing the reform of the medical insurance system, because of the quantity...by the time it reaches individuals, irregular activities in the sale of medicine and medical equipment is causing more and more pronounced troubles [lit. contradictions].

And the specific percentages in the price limits, according to a person involved in the process, were “the result of survey of the hospitals.” “We realized that in Shanghai's best Grade 3 hospitals, high-cost medicines were about 30% of the total medical expenditures, and many heads of drug procurement at hospitals said that 30% should be an adequate percentage [for high-cost drugs].

However, according to these calculations, it would be impossible to achieve a goal of “limiting high cost medicines.” Therefore, the Shanghai city authorities added another condition to their survey, one that clearly guided the process: The three grades of hospital would have different percentages of different types of medicine, with high-cost medicines not exceeding, for the three grades of hospital, 30%, 20%, and 5% respectively.

The Shanghai Dept of health also set another boundary-line for high-cost medicines: Those drugs whose price exceeds the State Planning Commission's unified price, and which are priced at least 30% higher than the highest accepted bid price for a GMP certified version of the same medicine, shall be considered part of the “high-cost” category.

Though Shanghai health department officials stressed that these limits “are not targeted at any company or any group,” but it is true that almost all of the medicines whose price is set by the State Planning Commission are imported medicines, and that what is being called “high-cost medicine” is for the most part referring to those [imported] drugs. In fact, according to this decision, any imported medicine that has a domestic copy, all those foreign or joint-venture products, will all be put on the 'limited' list.

Last August, the committee for standardization of medicine purchasing price for medical institutions of the Shanghai city government met and began the first round of post-regulation tenders: In late August, the first tender announcement was completed, and to date Shanghai has already completed five tenders for 322 medicines on the list for the public health insurance, at a total expenditure of 3 billion RMB. The tender was a remarkable success, with the bid medicines wholesale price dropping 10% -- that’s a 300 million RMB decrease in medical cost burden compared to last year – clearly, “limiting high-cost medicines” is an undeniable success.

In one tender after another, more and more medicines were included in the bids. As a result, foreign pharmaceutical companies felt more and more that they were being treated unfairly.

The “30/70” problem has become a conflict that the Shanghai city government has to deal with.

The conflict erupted early this year

In March, Shanghai city government gathered the city hospitals together for a big meeting. In that meeting, they stressed that hospitals must follow the regulation's limits on high-cost medicine.

Because of worries about “tendering bids”, many hospitals either stopped buying or bought fewer of the limited, high-cost medicines.

Very quickly, a number of foreign companies who already had products in bids for tender had a “very clear feeling”: As multi-national pharmaceutical companies, China is a highly valued market, and “the floor suddenly fell out of business in Shanghai.”

“For example, Pfizer's Norvasc (络活喜) (for high blood pressure) originally accounted for a large proportion of sales at our hospital,” said one doctor from a Grade 2 hospital, “ but now in order to limit them we basically don't dare use them. We buy very little imported medicine, and prescribe very little of it.”

Sighing emotionally, the doctor said “ At our hospital, a lot of medicines are having the same problem as Norvasc.”

One year ago, because of the national compulsory move to limit medicine costs, Bristol-Myers Squibb already came up against “the most serious policy-related loss since entering the China market.” And now, another round of “policy-related losses” may arrive just as BMS regains its strength. Last year, BMS did about 1.1 billion RMB in in Chinese hospital medicine business , of which about 30% was in Shanghai.

At the same time, the 40 foreign pharmaceutical companies that make up RDPAC also began hearing more and more of this sort of “complaint”. “At the time RDPAC held a special meeting to discuss the situation,” said a senior manager at one Shanghai-based pharmaceutical company, “and concluded that most agreed that [the regulation] will damage foreign pharmaceutical companies' trust in China.”

Even more urgent was that according to the original plan, Shanghai was to hold its sixth bid for unified medicine purchases to tender in late April (this has been delayed for the time being because of SARS). This meant that even more foreign pharmaceutical companies’ profits were going to be involved.

As a result, this March many of the multi-national pharmaceutical companies began thinking about “solidifying the strength of the industry” and of going through the foreign pharmaceutical business association and “making links” with relevant government departments.

In mid to late April, at the arrangement of Shanghai city government departments, the heads and general managers of five or six multi-national pharmaceutical companies including Pfizer, Roche, and Novartis met for two hours to discuss with representatives from the Shanghai Dept of Health, Medical Insurance, Commodity Pricing and other departments.

They were relatively veiled, and expressed their support for the bid tendering, and they raised the point that now Shanghai hospitals didn't really dare buy their medicines,” recalled a person who was at the meeting. “At the time, a leader from the Shanghai Health Department introduced the policy from our perspective, and raised two important points: one, patients who are self-paying or not under the (public) insurance scheme are not subject to this regulation; and two, after the current system of calculating medical expenditures is used for some time, if it is discovered that the limits are too restrictive it will be adjusted in a short time.

One very interesting detail is that after hearing this explanation “these old bosses all said ‘sorry, can we take a short break’ and they went out to discuss. After discussing they returned looking very happy and said they would go back and continue to investigate, and afterwards give us their comments.”

It is important to note, industry insiders point out that at present many multi-national pharmaceutical companies make a large number of their sales in Chinese hospitals and the public health insurance system.

Therefore, the RDPAC sent its fax of 28 April. Expressing the dissatisfaction of the association, one member said: “One of the foreign pharma association’s discussion points was that although many of the medicines are already past their patent protection period, we have never received any protection in China.

And at present the mood of the RDPAC seems very delicate. When contacted by phone, Mr. Wen, who is in charge of public and media relations at the association, said only that “At present we cannot discuss the regulations with the media. We are only discussing it with relevant government departments.”

Something that one senior manager at one of the companies is concerned about is “this government policy is putting the good with the good, and comparing the low level to the low level, and the rewards for everyone...the payment from society...it’s the same.”

“Actually it would be less effort to be pushed down into the “low level” medicines,” he said. “What’s crucial here is the question of what direction society is being led, is it encouraging scientific progress?

“The government should reconsider for a moment whether the present condition is reasonable or not,” he said. As a result, everyone should present their requests, and hopefully “the relevant Shanghai officials will first put the regulations on hold, put them aside and enter into discussions again.”

In fact, there have already been companies that told the Shanghai city government that they “originally planned to continue investing in Shanghai,” but that because of this policy may very well “change their way of thinking.”

But at present, there is no sign that indicates that the Shanghai city government will change its decision to “limit high-cost medicines” because of this. “As long as there is evidence in reality demonstrating that the limits on high-cost medicines is a correct policy, we will continue it,” stressed Xu Weiguo “We will not change because somebody is going to pull out their investment.”

The basis for the Shanghai city attitude comes from information and comments it received from a representative of the World Health Organization: “‘As for tenders for medicines,” Xu said, “whether or not a bid is or isn’t accepted, and whether or not certain specific policies can be used in the process, the WHO told me that this is up to us to decide according to the specific national conditions and policies, and that as a matter of principle there is nothing wrong with this approach.’

“Look again at those foreign companies: their prices are higher than ours, and they still want to bid, then they want us to accept their bids. If their prices were the same as ours, there would never be any question of some ‘unfairness’. The problem now is that their prices are too high, and that despite these high prices they demand that we use their medicines.”

“It now appears that they are not going to change anything more.” Multi-national pharmaceutical companies now see this fact more and more clearly.

A unified response?

Their bigger fear is that there may be a unified response: A national struggle and call for lower medicine prices.

For many multi-national pharmaceutical companies, they will very soon have to face many puzzles: According to the plan, medicine expenditures in Shanghai tenders will reach 4.4 billion RMB, among them more and more drugs used in large quantities in clinical settings. Some of the medicines are on the medical insurance list that have not yet gone out to a standardized purchasing tender, and their tender will complete the first round of medicine tenders. Some single-use and disposable medical equipment will also be put up for trial tenders.

“This means that the critical and sensitive products are all coming later, for example stomach medicine [changwei yao], stroke medicines [xinnaoxueguan yao], and high blood pressure medicine, these three types,” said one person familiar with the trade, “many of these foreign businesses will be affected.”

But from the view of the multi-national pharmaceutical companies, the current situation isn't the worst possible. “Shanghai's regulation is only the beginning of the biggest shock since entering the China market, it isn't the end. There will certainly be other measures released later.”

Therefore, what the foreign pharmaceuticals are worried about now is if Shanghai's regulation goes ahead smoothly and produces efficient results, other areas may strive to use the same methods. “This is something that many localities have all along wanted – but not dared to do, to reduce the price of medicine. But one has to consider the political environment, the path of economic development, the reaction of foreign business, etc. If Shanghai is successful in pushing this through, it will surely give other areas confidence [to do the same].”

The reply of departments in charge of price tenders at the Ministry of Health have doubtless confirmed the worries of the foreign companies: “What is important is the reaction of the common people to this policy, if it is implemented smoothly it is very possible that it will be extended nationwide.”

And for the foreign pharmaceutical companies, the least desirable result would be a drop in prices. “As soon as the price falls, that will have a big effect on us, because our ability to withstand a drop in prices is relatively low.” The logic of the foreign companies is that, no matter if you’re doing Research and Development or market investment, originator medicine is always more expensive to make than generic copies of that medicine. Even if they produce the medicines locally, machinery, staff, and transportation costs will be much higher than for local companies, “which means there's little room to lower prices.”

It is worth pointing out that the State Planning Department has a rule: The price for Originally researched and developed medicine must not exceed the price for a generic copy by more than 30%. But this rule is not enforced strongly, and the price often exceeds this limit. “If this were really enforced, many foreign invested companies would have no way to exist in China, because their capital expenses are too high.”

Actually, the prices of many imported medicines in China are much higher than they are in other countries. “It is mostly because of the large number of middle-men that the capital costs are so high,” explains one trade insider, “we cannot directly sell the medicines that we import, the factory sells to a level One company, which adds 5% profit and re-sells it to a level two company, which then adds another 7-8% profit, and finally when the hospital sells it to the patient they may add another 20-30% profit to the cost.”

He explains that in 1998 Guangdong province issued a notice called “Overall control and adjustment of medical institutions' fees and income”, but it was not like the one issued in Shanghai. The notice stated that annual income from medicine sales could not grow more than 15% per year, and from imported and joint venture medicines 30% a year. However, because of opposition from both hospitals and companies, the regulation was recalled after only half a year.

An official from the Shanghai Department of Health stressed that the environment and conditions for medical system reform are much better than at that time, and added that “This time our resolve is strong.”

In mid-June, each hospital in Shanghai will receive a notice from the Shanghai Department of Health about “adjustments and subsidies” in the medicine tender process. “The document will involve adjustments to the method for calculating high-cost medicines and standardize the time for keeping of statistics.”