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When Kangmei Pharmaceutical, a producer of traditional medicines, overstated its 2017 cash holdings by $4.4 billion, Chinese officials cast a withering eye on the company’s accounting. Now, Kangmei’s “oopsie” may be causing problems for even bigger dogs in the field.

The Chinese government will audit 77 randomly selected pharmaceutical companies over the next two months, including the local arms of major players like Sanofi, Bristol-Myers Squibb and Eli Lilly, in an attempt to monitor prices in the drugmakers’ supply chain and potentially target profit margins.

The probe will also scrutinize China’s largest domestic drug firms, including subsidiaries of CSPC Pharma, Jiangsu Hengrui Medicine and Shanghai Fosun Pharmaceutical Group. In response to the government’s move, Hong Kong’s benchmark Hang Seng Index declined 0.7%, with shares of CSPC Pharma down 4.3%.

China is speeding up a crackdown on pharma after Kangmei’s multibillion-dollar mistake raised concerns about domestic drugmakers’ accounting practices and corruption in the industry. Kangmei chalked up the misstatement to an accounting error, but the company was concerned enough to warn investors about a potential forced delisting if the government found ethical violations in its inaccurate disclosure.

That crisis followed the prosecution of Wu Zhen, former deputy director of the old China FDA, in February in connection with a data-faking scheme last year involving a rabies vaccine from Changsheng, one of the largest Chinese vaccine makers. In April, the government floated a potential penalty of 15 to 30 times the value of any product engaged in any sales malpractice or data gouging. That potential penalty was more than triple an earlier proposal and underscored officials’ push to oust rogue vaccine markers from the market.

Driven in part by scandal and economics, China is in the midst of a healthcare overhaul, targeting rising generic drug prices and booming profit margins as domestic and international drugmakers reap profits in the expanding market. On the government’s slate? Spurring new drug research and slashing the price of generics.

In February, Chinese officials rolled out a plan to cut the value-added tax rate by more than 80% for 21 rare disease therapies and four active pharmaceutical ingredients, bringing the rate down from 16% to 3%. The move would likely benefit international drugmakers that have largely cornered the market on manufacturing orphan drugs in China.

Paired with its push to spur innovation, China has also clamped down hard on generic and off-patent branded drug costs, casting doubt on continued growth for some of the world’s largest drugmakers.

For the first quarter, Wolfe Pharma analysts said the major drugmakers it followed averaged 29% growth in China compared with 13.3% in emerging markets on the whole. Those same companies posted just 8.2% growth in the U.S. in the same time period. And the increases were fueled in part by legacy blockbusters’ traditional success in China even after losing patent exclusivity in developed markets. But China’s push toward innovation and its clampdown on generic pricing have put the skids on those profits.

One example is the government’s so-called “4+7” tendering process, which requires public hospitals in 11 major cities to offer guaranteed business for lower prices through a rigorous bidding process.

In drug classes with three or more competitors, the low bids automatically won, and drugmakers had to discount up to 80% off list price to win a contract. AstraZeneca and its Crestor statin drug were among the multinationals that lost out to cheaper meds in that tender process.

By Kyle Blankenship

Source: Fierce Pharma