China’s Pharmaceutical Price Controls Threatens Profit Margins of Foreign Drug Makers

The Chinese government’s efforts to control the skyrocketing prices of pharmaceuticals in China are threatening the profit margins of foreign pharmaceutical manufacturers. The government’s measures to control drug prices has been two fold, the first is the implementation of a competitive bidding system which determines drug prices for hospital purchases, the second is a mandatory retail price reduction ordered by China’s State Council.

In January 2000, the government implemented a price tendering process that requires drug manufacturers to submit bids to the local governments to set prices for pharmaceutical purchases. This system was put in place in order to compel drug manufacturers to sell their products more inexpensively. The Chinese healthcare system would then reap the benefits of the lowered drug costs. However, due to the fragmented Chinese pharmaceutical market, drug makers are not able to make up for the lower prices by selling higher volumes. There has not been a systematic adoption of the tendering process in all cities, or even hospitals. Thus, some hospitals abide by the bidding system, while others do not, causing a rift in the pricing mechanism.

Besides the pressures from the tendering system, foreign pharmaceutical manufacturers must also face the cutting of retail prices for drugs by the State Planning Commission. Prices for widely used drugs have been slashed by 5% to 70% in the past three years, with much of the cuts falling within 15% to 20%. As a result of these price cuts, wholesalers have begun cutting back on orders for these drugs. The lowered prices of the drugs have meant lower profit margins for these middlemen.

In this environment of increasing pressure, Eric Von Zwisler, Chief China Executive of Zuellig Pharma, Asia’s largest drug distribution, sales and marketing company, suggests that in order for pharmaceutical manufacturers to make money in China, they must “keep a firm grip on the pricing of their products at the local level.” Foreign companies must increase their influence over the tendering process by becoming more involved with the local people involved in the bidding. These include the local doctors, hospitals, and distributors.

For example, Xian-Janssen Pharmaceutical (joint venture between Johnson & Johnson and several Chinese companies) has built up relationships with over 1,200 second and third tier distributors and wholesalers. This has allowed the company to have greater reach into China’s hospitals vis-à-vis its foreign competitors. The company has even sent some of its distributors for training in marketing and management to overseas universities such as the National University of Singapore in the past few years.