By Li Hui and Adam Jourdan
BEIJING/SHANGHAI, April 17 (Reuters) - China has backtracked on its policy of capping retail prices on medicines and will allow pharmaceutical companies to set prices for some drugs, after criticism that controls had caused a drug drought that derailed treatment for millions of patients.
Beijing has been struggling with rising healthcare costs, violent conflicts between patients and doctors and medicine safety issues, and President Xi Jinping has said providing affordable, accessible healthcare is a government priority.
The partial reversal of the price control policy, in an announcement quietly posted on a government website on Tuesday, will give drug companies that were reluctant to supply low-cost medicines greater incentives to do so and likely ease shortages.
But the move is limited to a specific number of drugs and falls short of tackling the official price controls that have placed undue price pressures on the pharmaceutical industry.
It follows a series of critical articles in Chinese media that exposed a shortage of the drug Tapazole faced by millions of hyperthyroidism patients since last year.
Essential drugs for other conditions have also vanished from the shelves in the past few years, as domestic manufacturers have found it not viable to produce them.
China will loosen price controls on a list of "commonly used low-cost medicines", allowing pharmaceutical companies to set prices as long as the daily cost of taking the drug "remains in a certain range", according to a statement on the National Health and Family Planning Commission's (NHFPC) website.
The statement did not specify what that range was and which medicines would be included in the list.
"Drug shortages directly impact clinical treatment for patients, and threaten the health and life of the masses," an unnamed official said in a Q&A posted on the website. "Securing the supply of low-cost medicine is an important part of deepening health and medical system reforms."
Shares in Chinese drugmaker CSPC Pharmaceutical Group Ltd rose 3.8 percent on Thursday, while Shanghai Fosun Pharmaceutical (Group) Co. shares rose 1.3 percent.
The new regulations will also allow hospitals to choose suppliers of these medicines. Under the current drug procurement system, suppliers are chosen through provincial bidding systems geared to keeping costs low, driving drug companies to cut or suspend production of many basic medicines.
"The most important reason (for the drug shortages) is inappropriate management and control by government bidding departments in the bidding and procurement process," said Yu Mingde, president of the Chinese Pharmaceutical Enterprises Association, an organisation supervised by China's cabinet.
The new policy is expected to improve the supply of inexpensive basic medicines. A proposal submitted to an advisory body to China's parliament in March cited a survey that showed more than 200 kinds of inexpensive medicine were in short supply, over half of which were priced under 10 yuan ($1.61).
About 300-400 kinds of inexpensive basic medicines, such as Tapazole, are widely used in China, covering 80 percent of medicine use of all patients, according to the proposal.
The official price caps and government-run bidding have forced prices down at the expense of quality, said Yu, with some companies cutting corners to supply at below-cost prices.
For other essential medicines supplied under public health programmes, local governments will remain in control of purchasing and distributing.
Alexander Ng, a Hong Kong-based principal at McKinsey & Co, a consulting firm, predicted bankruptcies among many small local pharmaceutical companies, partly due to price pressures.
Such pressures, along with the increased cost of meeting regulations and probes into corruption in the sector, dragged on profit growth and squeezed margins last year, according to a Reuters' analysis of over 50 Chinese healthcare firms.
Combined profit growth in 2013 fell to around 2.6 percent from 15.2 percent the year before, while profit margins shrank from close to 17 percent to 10.5 percent.
China has poured more than 3 trillion yuan ($482 billion)into medical reforms over the past five years, focusing on expanding health insurance coverage and improving access to medical service and medicines.
The country's healthcare bill is set to hit $1 trillion by 2020, according to a report from McKinsey & Co.
Some pharmaceutical companies had told Reuters they were unwilling to continue supplying loss-making products.
"We stopped producing in June 2012 because the price was too low," said a worker surnamed Yang at Beijing Yanjing Pharmaceutical, one of the major suppliers of Tapazole.
"Our cost is above 2 yuan, but the bid price used to be 1.27 yuan until the first half of last year, we lost millions each year supplying this medicine."
The shortage of Tapazole, used to treat over-activity of the thyroid gland that can cause rapid weight gain or palpitations, last year sent patients scrabbling for an imported alternative, forcing them to pay a hefty premium.
The existing healthcare system also discourages doctors from prescribing essential medicines because hospitals make very little or no money from selling them, making it more difficult for patients to get treatment with low-cost medicines. ($1 = 6.2214 Chinese Yuan) (Editing by Sui-Lee Wee and Alex Richardson)