Nike’s Importation Fine Serves As A Lesson For Drug Firms In China

Beijing issued Nike a RMB 4.87 million fine for using double standards for an imported product in China, prompting legal and industry watchers to warn multinational companies to keep prices competitive or they could find themselves under tighter scrutiny.

BEIJING – Oregon-based athletic shoe manufacturer Nike Inc. was fined by the Beijing Administration of Industry and Commerce for selling a pair of high-end basketball shoes, marketed as being the same as a product abroad, for RMB 1,299 ($208), a price that was higher than other markets. Although it may seem a stretch, industry observers believe the ramifications of the fine could reach the pharma industry.

Authorities levied a fine of RMB 4.87 million ($773,000) to Nike Oct. 25 for cheating consumers; the shoes only had one air cushion rather than the two as advertised. The fine is a drop in the bucket for Nike, which generated revenue of $6.7 billion in the third quarter. Nike apologized, saying it used the wrong marketing material, and promised to refund consumers.

But legal experts and pharmaceutical industry watchers say the case should catch everyone’s attention for a different reason. The ruling marks the first time a multinational company was fined for using double standards in China instead of the more generic charge of fallacious promotion.

Companies have leeway to vary designs and prices based on market conditions in China, Beijing-based Yu Ma, director of foreign investment at the research institute of China’s Ministry of Commerce, said.

“Unfortunately, there is a long-held eyesore among our enforcement agencies – selective enforcement, and the target is often multinationals,” Ma said. “The practice may be a fine for individual cases, but in the long term, it deteriorates the overall legal environment.”

The key take away from the Nike case, according to Ma, is to leave no stone unturned when it comes to commercial promotion compliance in China, because multinational firms attract more attention for such mistakes, small or large.

“In the majority of cases, it’s the Chinese domestic makers that are hurting consumers with quality issues and promotion deceptions. They should be the enforcement focus,” Ma said.

Focus On Pharma

The case may indicate the government’s heightened scrutiny of pricing and commercial tactics for high-priced MNC products and represents a new tool in an ongoing price war on rising pharmaceutical costs, said lawyer Chiang Ling Li, partner of international law firm Jones Day’s Hong Kong office. Li advises clients on pharmaceutical pricing.

Advertising for prescription drugs is banned, unlike over-the-counter products, but an enforcement tool citing double standards could also be used to contest pricing decisions.

To get a handle on overall drug prices that threaten to bust its health budget, China’s National Development and Reform Commission (NDRC) recently cut prices in September, for oncology, hematology and immunology products including imports (Also see "Bristol’s Taxol, Sanofi’s Taxotere Among Latest Victims Of China Price Cuts" - Scrip, 19 Sep, 2012.).

NDRC sets prices for products covered by provincial essential drug lists (EDL) and the National Reimbursement Drug List and revises them regularly. For high-priced drugs that are not covered by basic insurance, manufacturers have some flexibility but must register with NDRC and market them at an agreed price, Li noted. Imported and domestically repackaged drugs can also include insurance, tax, freight and distribution costs.

High-priced drugs will always have tight pricing controls, and the government actively looks for tools to enforce them, Jones Day’s Li said. She cited the recent move by China’s State Intellectual Property Office to release guidelines on issuing compulsory licensing. The guidelines have potentially opened doors for drug manufacturers in China to produce generic versions of drugs that are still under patent protection (Also see "China Compulsory Licensing Reg Opens Door For Generics Of Patented Drugs" - Scrip, 15 Jun, 2012.).

“China may not issue compulsory licenses at all, but it clearly mapped out the pathway to obtain one. The potential use of the licenses will present constant pressure to drug manufacturers hoping for higher prices for their products,” Li said.

Although China does not use an international price referencing system, NDRC – tasked with overseeing the process – usually frowns on signs that imported drugs are priced higher in China than in international markets, according to Li.

Multinational firms that attempt to put a premium on products will quickly face pressure, said French investment bank Societe Generale in an Oct.28 report on pharmaceutical manufacturing. The report noted that many firms have turned to outsourcing manufacturing locally to retain some price competitiveness and margins, and warned that companies could face semi-official sanctions if they don’t keep prices competitive.

“The trend has been followed by a substantial increase in drug and medical device recalls and in the gravity of the recalls, leading to production disruption, drug shortages, import bans and increased regulatory scrutiny and sometimes legal costs,” Societe Generale said.

Among the companies singled out in the report as most at risk are Johnson & Johnson, Baxter International Inc. and Medtronic PLC J&J has been mentioned in official Chinese media as having recalled products 25 times since 2009 in the United States and other countries but few in China. The company in July recalled 118 boxes of balloon dilatation catheters after discovering potential risk of a slow or broken contraction unit (Also see "J&J Recalls 118 Balloon Dilatation Catheters In China" - Scrip, 18 Jul, 2012.).