China to audit 77 drugmakers, including Lilly, after $4.3B scandal

After one of its largest listed drug makers was found to have overstated its cash position by $4.3 billion, China is starting an audit of 77 major pharmaceutical companies, including the Chinese arms of Indianapolis-based Eli Lilly and Co., Sanofi and Bristol-Myers Squibb Co.

The list of drugmakers to be audited in June and July, which China’s Ministry of Finance said were randomly chosen, also includes its biggest domestic drug makers such as Jiangsu Hengrui Medicine Co. and Shanghai Fosun Pharmaceutical Group Co.

An index of health-care companies traded in Shanghai and Shenzhen fell as much as 1.8% in early trading Tuesday.

Shandong Buchang Pharmaceuticals Co., whose chairman Zhao Tao was recently in the news for allegedly paying a $6.5 million bribe to get his daughter into Stanford University, also was in the list announced Tuesday.

The audit comes weeks after Kangmei Pharmaceutical Co., a producer of traditional Chinese medicines, said after a regulatory probe that it had used false documents and transaction records to overstate its cash holdings by 29.9 billion yuan.

China is embarking on a major overhaul of its health-care system as its growing middle class demands better-quality medical access, and it is attempting to clean out errant firms from the sector, which run the gamut from those with accounting irregularities to makers of low-quality vaccines.

China’s regulators are also embarking on a campaign to drive down generic drug prices so that more national funds can be spent on new medicines. The new pricing policy has roiled Chinese domestic pharmaceutical shares, as the sector largely relies on generic drug sales to prop up profit.

“Regulators also seem to want to find out the real cost of drugs as this audit may focus on looking into companies’ sales expenses and costs,” said Wang Ruizhe, analyst at Capital Securities Corp. “This paves the way for further drug price cuts.”