March 28, 2011 / 6:29 AM / 8 years ago

China cuts maximum retail price of drugs to help tame inflation

BEIJING, March 28 (Reuters) - China slashed the maximum retail price for more than 1,200 types of antibiotics and circulatory system drugs on Monday in a move likely to crimp the profits of foreign and local drug makers.

The National Development and Reform Commission (NDRC), the country’s state planning agency, announced rules earlier this month requiring hospitals and clinics nationwide to cap the price of certain drugs. The rules take effect on Monday.

The price caps, which are aimed at combating inflation and warding off disgruntlement over high healthcare costs, will cut the prices of 1,265 types of drugs by an average of 21 percent, according to Pharma China, a publication that specialises in China’s pharmaceutical sector.

The NDRC estimated that the rules will save patients 10 billion yuan ($1.53 billion) annually.

“The impact is definitely negative to the bottom line (of pharmaceutical makers),” said Linus Yip, chief strategist for First Shanghai Securities in Hong Kong.

The NDRC also pledged to step up inspection with violators facing fines of up to five times the value of “unlawful” profits or closure.

Chinese hospitals are notorious for padding revenues and doctors’ salaries by prescribing expensive or unnecessary medication, a practice that infuriates ordinary Chinese.

The price cuts will have a bigger impact on smaller Chinese drug makers than the global pharmaceutical companies, who can more easily absorb the impact to their revenues, said Yip.

The multinational companies affected by the rules include Pfizer , Novartis , GlaxoSmithKline and Sanofi Aventis , according to industry publication Pharma China.

China’s leaders have repeatedly said their most important task this year is controlling inflation. So far, complaints about rising prices have amounted to little more than grumbles, but inflation has sparked social unrest in the past.

The country’s inflation topped expectations at 4.9 percent in the year to February, near its fastest level in more than two years, and looks set to climb in coming months. [ID:nTOE72D02H]

MORE PRICE CONTROLS EXPECTED

Analysts predict further price cuts.

“What becomes worrying is that there is at least a short term momentum for the government to irrationally slash prices further in order to contain inflation at a time of rising production and regulatory costs,” said James Shen, publisher of Pharma China.

That could force some of China’s smaller drug makers out of business, Shen added.

“If the trend is short term, it can turn out to be beneficial for large companies, including multinationals and state-owned conglomerates since only they have the financial muscle to ride out the short-term difficulties,” he said.

After the Communist Party swept to power in 1949, healthcare was virtually free for urban residents under a cradle-to-grave welfare programme. Legions of “barefoot doctors” fanned out across the countryside to staff clinics run by communes and provide farmers with basic medical care.

But the government commercialised healthcare and education in the late 1990s to ease the heavy burden on state coffers.

A spate of suicides by patients who could not afford medical treatment and attacks on doctors in recent years epitomised the failure of the healthcare reform, forcing the government to rethink its healthcare system.

The current administration has championed the have-nots of society, fearing hundreds of millions of ordinary people could become the source of anger unless grievances about price rises and unaffordable healthcare and housing are eased.

China has announced plans to complete landmark healthcare reforms by 2020, aiming to provide safe and affordable medical coverage for the country’s 1.3 billion people. ($1 = 6.557 yuan) (Additional reporting by Donny Kwok in Hong Kong; Editing by Don Durfee and Ken Wills)

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