API: Expensive Drugs to Arrive!

The State Council of China released the Notice on Issuing the Opinions on Pushing Forward the Pharmaceutical Pricing Reform in 2015 to cancel the original prices of pharmaceutical products other than narcotic drugs and category-I psychotropic drugs set by the Chinese government, improve the pharmaceutical product procurement mechanism, give play to the medical insurance expense control, and form the actual transaction prices of pharmaceutical products mainly by market competition. According to the notice, except narcotic drugs and category-I psychotropic drugs are still to be temporarily implemented the maximum ex-factory price and maximum retail price management by the National Development and Reform Commission of China, the prices of other pharmaceutical products set by the government will be cancelled and no longer implemented the maximum retail price management, and the prices are to be formed by the market through different ways and according to the classification management principles. In a few words, except special pharmaceutical products including narcotic drugs and psychotropic drugs, etc., prices of other common pharmaceutical products should be decided independently by the market supply and demand situations, i.e., market-oriented pricing.

The original idea of the market-oriented pricing is to have pharmaceutical factories realize free competition, and benefit the medical insurance, thus to reduce the support in the medical insurance expenses. Based on this policy, some pharmaceutical products that are in short supply or are cheap could be preserved by increasing prices, not to be out of supply due to low prices. However, Liaoning Pharmaceutical Products and Medical Consumables Centralized Procurement Website (www.lnypcg.com.cn) has continued to release early warning notices in recent years, involving nearly 100 pharmaceutical products that cannot be supplied or distributed normally, for which the main reason is one: the soaring of API prices. Enterprises have to suspend production because they cannot make ends meet. And this situation is getting worse recently.

The main reason behind is that several APIs are monopolized by distributors, which is exactly the same trick as the expensive ginger and beans several years ago. Relevant report can be seen in the hot article "Who did it? Skyrocketing for 58 Times in a Month! Chlorpheniramine Soaring from RMB 400 to RMB 23,300" recently.

Then, why the price rise of APIs surfaces at this time? In fact, essentially, it is relevant to the excessive quantity of money on the market recently. In a pond (market) with a fixed size, the level line will naturally rise when the water (money) increases. General prices are subject to the strict regulation of the price bureaus and basically don’t rise. All the previous expensive garlic, beans, ginger, sugar, and apples with rising prices were not the basic demands such as rice, but were demands a little higher than basic demands; and they were subject to strict regulation and are all gone after the media paid attention. However, as there has been more water (money) on the market recently, there needs to be an outlet; previously, real estate served as the reservoir, then the common ginger, garlic and sugar, etc., and now the APIs that are not in popular demand. When one thing is pressed down, another thing floats up, and this time what floats up is APIs, a commodity targeted by the extra hot money that you can’t imagine. Pharmaceutical products are a special commodity in essence, which is a saying from the textbook.

Specifically speaking, this price rise of APIs is simple and crude without any skill, but the buyers—pharmaceutical factories have to choke with silent fury. Monopoly brings windfall profits, which is true, but monopoly needs costs, which are the extra "water" on the market. APIs are essential raw materials in pharmaceutical production, and are purchased with target quantity, but in terms of the cost structure, they don’t account for a large proportion in the final total drug prices; most pharmaceutical factories have to buy even if the prices rise, because they have to survive and do business. After such mode of monopoly occurs, there will subsequently be a large group of followers (borrowing debts to copy such mode), and by then, the first batch of leaders will begin to flee the market to earn the maximum profits.

End of the monopoly story. Then what will happen next? API prices soaring will lead to the price soaring of pharmaceutical products, which can be foreseen in the future. And some pharmaceutical products might be in shorter supply recently, because their prices are controlled not to rise but their costs are steep. As a result, many pharmaceutical factories suspend the production and wait until the market prices rise. For such circumstance, regulation should be strengthened and anti-monopoly measures should be taken. But regulation always lags behind. API prices may be controlled this time, but pharmaceutical excipient prices might start to soar after a certain time. Sigh! The extra water in the pond has to go somewhere.

How to understand that the pharmaceutical product prices will rise and possibly rise greatly? Profits of pharmaceutical product manufacturers are calculated pro rata: if the selling price of a pharmaceutical product is RMB 10 and the cost thereof is RMB 5, then its profit margin will be 100%; if the API price grows by 10 times to make the cost reach RMB 50, then in order to maintain the previous percentage, the selling price will reach RMB 100. This is only a simple hypothesis. In the reality, there is often the ex-factory price, wholesale price, distribution expense, retail price, and storage cost, etc., which will all produce multiplier effect to the final prices of pharmaceutical products. The above may bring some development opportunities for e-commerce of pharmaceutical products. Pharmaceutical product profits will be higher when the pharmaceutical product prices are high. Pharmaceutical e-commerce may provide online more discounts and more discounts that are higher than those of physical stores.

To sum up, as the new production approvals will not be granted within a short time, the current trend of API price soaring may continue, and the bankers can thus become larger, to target from the antiallergic agents in common use such as chlorpheniramine, to drugs for chronic diseases that cover more extensive with larger dosages, such as people with hypertension. The Chinese government may need to conduct strong intervention recently. In fact, there has already been relevant policy, for example, the document numbered GGYZF [2017] No. 37 Implementation Opinions on Reforming and Improving the Supply Security Mechanism for Drugs in Shortage clearly proposes: Crack down upon violations of laws and regulations. Strengthen tracking and monitoring of API sources, enterprise inventories, and market transaction behaviors, etc., comprehensively deliberate on and judge emerging issues and trends, pay close attention to pharmaceutical product and API production and circulation enterprises with significant price rises, and carry out special investigations on cost prices if necessary. Strengthen pharmaceutical product and API market regulation, investigate various violations of laws and regulations such as pushing up prices and monopolies according to law, increase the punishment, and maintain the market order. Study and formulate the Guidelines on Monopolistic Pricing Behaviors for APIs Used to Produce Drugs in Short Supply, to establish the dishonest operator blacklist system, and formulate measures according to law to prohibit relevant operators who repeatedly commit cases involving pharmaceutical products in short supply and API monopolies from engaging in the pharmaceutical industry.

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