Lifting of Price Controls on Drugs Threatens Smaller Pharmaceutical Manufacturers in China

In a move to raise competitiveness in the pharmaceutical industry in China, the State Food and Drug Administration (SFDA), the government body which has replaced the State Drug Administration for some pharmaceutical regulatory functions in China, has lifted price controls on over 90% of pharmaceutical products available in the country. As a result, pharmaceutical manufacturers in China have been scrambling to gain market share by undercutting their competitors’ prices. Many drug makers in China have found themselves in a position where sales are increasing, however, expenses have also risen due to greater efforts in marketing and promotion.

Smaller drug companies are feeling the impact of the new regulations. The price wars ensuing between the larger pharmaceutical manufacturers have begun to squeeze the profit margins of these smaller companies. For example, Shandong Xinhua Pharmaceutical, which produces antiseptics, analgesics and antipyretics, reported a 16.4% decrease in net profits to RMB 68.38 million (US$8,261,000) in 2002. The company has already increased its direct sales channels, invested in greater efforts to market to foreign markets, as well as cut down on operating costs. In spite of these measures, the company concedes that the year ahead will still be a tough one.

It is expected that this “disorder” will continue in China’s pharmaceutical industry for an extended period of time. Although the government’s goals of greater competition and increased improvements in the pharmaceutical sector are sound in theory, the process will be long and arduous. In order to prevent counterfeit drug production and illegal drug manufacturers from competing with lawful companies, the government has enforced regulations to require drugs to be “certified” prior to being marketed for public consumption. This has already halved the number of domestic manufacturers to 4,000 through the shutting down of illegal manufacturers.