By Ben Hirschler, Ransdell Pierson and Kazunori Takada
July 26 China has a drug problem. While most
Western countries spend 10-12 percent of their healthcare budget
on medicines, in China it is well over 40 percent, a disparity
that goes to the heart of Beijing's crackdown on the industry.
A promise this week by GlaxoSmithKline to make its
drugs more affordable in China in the wake of a bribery scandal
is an important lever Chinese authorities may now use to start
redressing the balance.
Britain's biggest drugmaker has given no details on the size
of the price cuts it will consider, but an examination of its
discounts in other emerging markets suggests there may be scope
for reductions for some medicines of a third or more. Other
pharmaceutical firms might have to follow suit.
"Four executives were arrested, the company itself will
probably be fined top to bottom, and they are having to cut
prices," said one veteran industry executive in China, who
declined to be identified.
"That'll send a signal to other players in the industry, and
prices should come down."
Chinese police have detained four Chinese GSK executives in
connection with allegations the drugmaker funnelled up to 3
billion yuan ($489 million) to travel agencies to facilitate
bribes to doctors and officials to boost sales and raise the
price of its drugs.
GSK has said some Chinese executives appeared to have broken
the law, but Chief Executive Andrew Witty said on Wednesday that
head office had no knowledge of the alleged wrongdoing.
None of GSK's competitors in China has publicly said they
would cut prices, and major pharmaceutical companies reached by
Reuters have so far declined to comment.
But a precedent was set earlier this month when Nestle
led other foreign milk powder makers in cutting prices
in China after Beijing launched an investigation into possible
price-fixing and anti-competitive behaviour in that sector.
Around the same time, the powerful National Development and
Reform Commission said it was examining pricing by 60 local and
international pharmaceutical companies.
"The Chinese government never does anything without a
reason. China could be using these investigations partly to
clean house and to also drive prices down," said Philip Urofsky
at law firm Shearman & Sterling, who previously worked at the
U.S. Department of Justice on cases involving the Foreign
Corrupt Practices Act.
BIG PREMIUM FOR FOREIGN MEDICINE
Data from the World Health Organization (WHO) and other
groups shows how China's drugs market has been thrown out of
kilter by a system that effectively encourages public hospitals
to prescribe large amounts of expensive medicine to earn
revenue, given cuts in government subsidies over 30 years.
"In China, a very high proportion of health expenditure is
spent on medicines, which reflects both over-consumption and
high prices," said Hans Hogerzeil, a professor of global health
at the University of Groningen and a former WHO director of
As in many emerging markets, there is strong demand in China
for Western drugs, whose brands offer quality assurance in an
environment where patients often worry over sub-standard or
counterfeit treatments. As such, they can command hefty price
premiums, even though they are no longer protected by patents.
Just how big a premium is revealed in data collected by
Dutch-based Health Action International (HAI), a non-profit
group focused on access to medicines.
HAI found that in China's Shaanxi province last year, prices
charged for drugs made by the original Western drug company in
both the public and private sectors were about 11 times the
international reference price as calculated by the U.S.-based
independent group Management Sciences for Health.
Exact comparisons with other markets are difficult, but a
separate survey of prices in New Delhi, India, found the prices
patients paid in the private sector for originator brands were
much less at under five times the reference level.
China's government has also faced criticism that some drug
prices are higher than in South Korea and Taiwan, both developed
"You have to question why the Chinese government is buying
high-priced originator brands for off-patent medicines. It's
clear they could treat many more patients, without any increase
in expenditure, if they only procured lower-priced,
quality-assured generics," said Margaret Ewen, coordinator for
global pricing at HAI.
GSK FINDS CHEAPER PRODUCTS SELL MORE
GSK has a record of cutting prices in emerging markets.
In Indonesia, for example, GSK has halved the price of its
top-selling inhaled lung drug Seretide, also known as Advair,
and its antibiotic Augmentin was slashed by 50 percent in Brazil
Newer drugs have seen price reductions, too, with Avodart
for prostate enlargement cut by a third in Russia and a similar
discount seen for cancer treatment Tykerb in India.
All these price cuts were made in the expectation that
cheaper products would sell better - a strategy that GSK says
has paid off in these cases.
Witty said on Wednesday that tiered pricing "may well be
important" in China.
Jason Mann, managing director of emerging market healthcare
and global biotechnology at Konus Capital in Hong Kong, said GSK
might cut prices by 5-10 percent on average.
But he questioned if other big drugmakers would immediately
follow because they all sold different medicines in China and
might not be directly competing with any that GSK reprices.
Many international health experts would welcome tiered
pricing as a way to counter pressures in the Chinese healthcare
system, where hospitals get 40 percent of their income from
prescribing drugs, giving doctors an incentive to use costly
products and creating a fertile seedbed for corruption.
The most recent edition of the WHO's World Medicines
Situation report, issued in 2011, said that in China "even in
the most basic primary care level institutions, patients are
frequently provided with unnecessary and expensive drugs".
As a result, medicines account for nearly half, or 43
percent, of China's total health expenditure, the WHO said.