In an effort to drive down medical costs, the PRC Ministry of Finance has announced it will audit 77 randomly selected drug makers in China in order to examine the companies’ costs and profits and determine the reasonableness of their drug pricing mechanisms.
The Ministry of Finance (MOF) of the People’s Republic of China released the Notification on Carrying Out Accounting Information Quality Inspection in Pharmaceutical Industry in 2019 (Circular 18) on June 4, weeks after the Shanghai-listed Kangmei Pharmaceutical was found to have overstated its cash position by about 30 billion RMB (approximately $4.3 billion). According to Circular 18, the MOF will collaborate with the National Healthcare Security Administration in the special audit of 77 pharmaceutical companies in June and July 2019, as listed therein, and the local counterparts of these two authorities will report their findings to the MOF before August 30, 2019. MOF states in Circular 18 that it intends to examine the companies’ costs and profits and to determine the reasonableness of drug pricing mechanisms in a bid to drive down medical costs.
The list covers some of the largest domestic drug makers and also includes the Chinese subsidiaries of three international pharmaceutical conglomerates. MOF mentioned that the companies were randomly selected, and the audit may extend to their affiliates, distributors, and third-party service providers, and to medical institutions when necessary.
The audit will focus on the authenticity and compliance of a company’s reported sales expenses. Circular 18 sets forth four specific areas of scrutiny in detail:
1. Authenticity of reported sales expenses
2. Authenticity of cost
3. Authenticity of income
This initiative is the first time that the MOF has launched a nationwide audit specifically targeting pharmaceutical companies. The audit may allow the MOF to detect irregularities or other issues that other industry regulators may miss. Circular 18 provides that the MOF may report its findings to other regulators if the issues identified during the audit are within their scope of authority, and it is possible that the MOF may expand this audit to other drug makers or players in the Chinese medical industry if the spotted issues are seen as prevalent in the industry. As such, we recommend that businesses operating in the Chinese medical industry closely monitor this special audit and any consequent sanctions, and take the following remedial actions:
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