SHANGHAI – Authorities in Beijing are loosening price controls for a select number of commonly used, low-cost medicines. While few innovative drugs are expected to be affected, the move signals the government is willing to take a step back when necessary in its ongoing efforts to rein in drug costs.

"I think the government is trying to be more flexible on pricing," Lewis Ho, partner at Dechert LLP, told BioWorld Asia. "At least this can give some much needed breathing room for all companies – Chinese and foreign companies alike."

The price cap was created to help ensure that medicines would be readily and cost effectively available nationwide. Local manufacturers responded to the caps and regular price cuts with widespread criticism saying profitability took such a hit they could no longer afford to manufacture the drugs, even at the substantial volumes government tendering offered.

When reports of shortages hit the media for medicines like Tapazole (methimazole, Pfizer Inc.) for Grave's disease and hyperthyroidism – which was on the Essential Drug List – the government let it be known it would try a different tack. (See BioWorld Asia, Dec. 12, 2013.)

This latest announcement on securing the supply of low-cost medicines, inches things a step closer to action. It was posted on eight government department websites showing their unified support, including agencies such as National Health and Family Planning Commission (NHFPC), the National Development and Reform Commission (NDRC), the CFDA and the Ministry of Finance.

The drug administration chief of the NHFPC said, "a list of such drugs is expected to be publicized by June, and the producers of the drugs will be entitled to the right of pricing according to production costs and the market situation."

The price limit that the government places on commonly used drugs will be eliminated under the new initiative, Zheng added.

China has a complex system for setting drug prices, requiring several levels of negotiation, from the prices set at the national level by the powerful NDRC to provincial tenders, and more negotiations that happen again at the hospital level. It can be a long and bureaucratic process.

Even after a drug receives CFDA approval, it may take another two years before a company can come close to 60 percent market penetration and only if it has mastered the tendering process, said Friedhelm Blobel, CEO of Sciclone Pharmaceuticals Inc., when discussing the system in China.

Also companies struggle with the lack of transparency and variability of prices.

"You negotiate prices at the central level and then renegotiate at provincial and then again at the hospital levels. So you set a price and then renegotiate it several times which can be set on a case by case by different hospitals. You don't see a uniform price," explained Ho.

It is commonly understood the government is trying to balance the management of its growing health care expenses while at the same time encourage home grown innovation. So far, innovative biologics have not had to go through the same ringer as low-cost drugs.

"Generally the government does have preferential treatment for different types of products, including certain kinds of products they believe are innovative," said Ho. "The price pressure is lower and can benefit foreign companies that have more innovative products to enter China."

Blobel refers to the special pricing that 'originator' drugs receive on the market, although it is unclear how much longer the government will maintain this.

However there have been concerns the price caps for low-cost drugs was only a first step, with the government set to tackle prices for innovative drugs at a later point.

One question mark remains as to what the outcome will be of the NDRC's pricing investigation initiated in October, looking into the way 60 pharmaceutical companies set their prices in China, including many multinational companies.

The investigation examined factors such as the cost at the factory, how much distributors are paid and the price paid at the hospital.

Ho said many companies have submitted their surveys back to the NDRC, but it is unclear what the next will step be and how the information will be used. So far it has just been at the information collection stage with no actions taken. Several years ago the NHFPC conducted a similar survey and it is possible the different agencies could share information to benchmark prices over time.

There is a risk, Ho said, that over the course of the investigation collusion or violations of China's anti-competition or anti-monopoly laws could be revealed, triggering an enforcement action.

It's not surprising that many companies are reluctant to bring their newest or most innovative products to China, not just because of intellectual property issues but also concerns over pricing.

"The system does not encourage foreign companies to import their most innovative products into China. You have to strike a balance. If companies don't import, it is not good for the patient," Ho said.