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Print articleChina: Pharmaceutical Policies And Regulations In China
June, 2007 -
In the past few years China has introduced significant regulatory changes in an effort to modernize its pharmaceutical industry and bring it in line with international standards. These include reorganizing the former State Drug Administration into the State Food and Drug Administration (SFDA), thoroughly amending drug regulation and good manufacturing practice (GMP), enhancing intellectual property protection and changing drug import licensing. This rapidly evolving regulatory environment has inevitably led to uncertainty as both regulators and businesses struggle to understand and work within the new requirements.
This overview describes a few key developments as well as highlights some of the areas of uncertainty that remain to be addressed with a particular focus on those areas of most concern for foreign investors.
MARKET ENTRY BY FOREIGN INVESTORS
Regulatory Control
The central government authority with jurisdiction over pharmaceuticals and medical devices (as well as food, health foods and cosmetics) is the State Food and Drug Administration (SFDA). Established in April 2003 through the reorganisation of various government departments, the principal powers of the SFDA in the area of the administration of pharmaceuticals are:
• the formulation of laws and administrative rules regarding pharmaceuticals and the supervision of their enforcement;
• drug registration, formulation of national drug standards;
• establishment of a classification system for prescription drugs and over-the-counter drugs;
• establishment of an monitoring system for the adverse reactions to pharmaceuticals;
• re-evaluation of pharmaceuticals and review of pharmaceuticals to be withdrawn;
• formulation of a state catalogue of basic drugs;
• drafting of good practices for drug research, production, distribution and use, and supervise their implementation;
• supervision over the quality of pharmaceuticals and medical devices;
• investigation and punishment of illegal activities of producing and selling counterfeit and inferior pharmaceuticals and medical devices;
• regulation of radioactive, narcotic, toxic and psychotropic drugs;
• formulation of a qualification system for licensed pharmacists and the registration of licensed pharmacists; and
• direction of national drug regulation work.
In practice, many of the powers of the SFDA have been delegated to local level government authorities in charge of pharmaceuticals. For instance, the pharmaceutical regulatory departments of the province, autonomous region or municipality directly under the central government (the provincial pharmaceutical bureaus) are authorized to issue the pharmaceutical manufacturing licences for drug manufacturers and approve pharmaceutical advertisements.
The position and role of the SFDA as the overall regulator of the pharmaceutical and foods sector has recently come under scrutiny due to allegation of corruption against its officials, including its former head, Zheng Xiaoyu. SFDA officials are suspected of having accepted bribes from pharmaceutical companies to approve untested or substandard medicines and issue production licenses and other certificates. It is possible that the scandals will lead to a shake-up of the SFDA which may lose many of its powers to other agencies.
The key laws are the Law of the People's Republic of China on the Administration of Pharmaceuticals together with its Implementing Regulations and the Measures for the Administration of the Registration of Pharmaceuticals ("Registration Measures"). These statutes are supplemented by a host of regulations dealing with specific issues such as distribution, manufacturing licences, certification for Good Manufacturing Practice (GMP) and Good Supply Practice (GSP), labelling and packaging, advertising, pricing, import-export, etc. Local government authorities have also enacted their own regulations which may supplement and modify some of the national regulations.
The large number of recent regulatory changes has led to a certain level of confusion as both regulators and businesses try to interpret and keep up with the new requirements. Where such uncertainties exist, it is important that businesses not only be aware of the regulations but consult with the SFDA locally and nationally, as appropriate, to understand how they are being interpreted in practice.
Classification of Products
Pharmaceuticals
Under PRC law, "pharmaceuticals" are substances used for the prevention, treatment and diagnosis of human diseases, and with the object of regulating human physiological functions, with stipulated indications, main functions of treatment, usage and dosage. They include Chinese medicinal materials and Chinese medicinal liquids and tablets, prepared Chinese medicines, chemical raw material medicine and their components, antibiotics, biochemical medicine, radioactive medicine, blood serums and vaccines, blood products and diagnostic drugs.
The major implication of a product being classified as a "pharmaceutical" is that it imposes higher requirements on both manufacturers and sellers. All manufacturers of pharmaceuticals must hold a GMP certificate. All wholesale and retail enterprises for pharmaceuticals within the PRC must obtain GSP certification while exporters must obtain an export permit for those products produced for export.
As manufacturing of, and dealing in, products classified as pharmaceuticals imposes certification obligations, it is important to know whether a product is in fact a pharmaceutical. Unfortunately the rules for making the determination are not always clear-cut. For instance, a diagnostic product may be classified as a pharmaceutical or a non-pharmaceutical. However, in the absence of clear rules, it is necessary for operators to consult with the SFDA on a case by case basis to confirm the classification. Most diagnostic products are currently regarded by the SFDA as medical devices, but if the product contains blood serum or other biological matter it may be regarded as a "pharmaceutical". Under the Registration Measures, the SFDA is to issue regulations for the registration of external diagnosis reagents, but to date it has only circulated a draft thereof together with a draft of the Catalogue for External Diagnosis Reagent Categorization. It is still uncertain when these regulations will come into effect.
Medical Devices
A "medical device" as defined by PRC regulations refers to any instrument, apparatus, appliance, material, or other article whether used alone or in combination with other items, including the software necessary for its proper application. Medical devices do not achieve their principal actions in or on the human body by means of pharmacology, immunology or metabolism, but may be assisted in their function by such means; they are used to achieve the following intended objectives:
1. Diagnosis, prevention, monitoring, treatment or alleviation of disease;
2. Diagnosis, monitoring, treatment, alleviation of or compensation for an injury or handicap conditions;
3. Investigation, replacement or modification for anatomy or a physiological process; or
4. Contraception.
Nutritional supplements
There are no specific regulations governing the distribution of nutritional supplements in China. Manufacturers and distributors are required to comply with different licensing requirements depending on whether or not specific claims are made with respect to the health effects of the supplements. If no specific health claims are made with respect to the food supplements, nutritional supplements shall be governed by the general regulations regarding food in China. Nutritional supplements for which specific health (but not therapeutic) effects are claimed or which is intended to supplement vitamins or minerals shall be registered as a health food and shall be subject to specific rules governing amongst others, their production and distribution.
New Establishment and M&A
Foreign investors wishing to invest in China's pharmaceutical sector may consider creating a new company or acquiring an existing pharmaceutical business (M&A deal). The major advantage of an M&A deal is that an already operational business is acquired and thus can immediately add to the production capacity of the buyer. One of the disadvantages is that the existing licences of the target enterprise cannot always be transferred but have to be applied for anew by the company established after the completion of the deal. Both new establishments and M&A transactions require the approval of the relevant authorities in China and the establishment of one of the following foreign investment vehicles:
• an equity joint venture;
• a cooperative joint venture;
• or a wholly foreign-owned enterprise.
Due diligence of the target is important in an M&A deal. In a greenfield project, careful investigation of the local regulations and restrictions such as environmental quota affecting the operation of a pharmaceutical plant is necessary.
In order to direct foreign investment into certain priority industry sectors while restricting or prohibiting investment in other sectors, the Chinese government has issued a wide range of rules and regulations to govern foreign investment in the country. The key national statute for implementing China's foreign investment policy is the Regulations for Guiding the Direction of Foreign Investment (Guiding Regulations). The Guiding Regulations classify all foreign investment projects into one of four categories: encouraged projects, permitted projects, restricted projects and prohibited projects. The classification of an investment project under the Guiding Regulations determines the feasibility and establishment method for the project as well as the eligibility of the project for certain tax benefits.
Manufacturing activities currently classified as encouraged for foreign investment include the production of raw pharmaceuticals that are patented in or granted administrative protection by China and raw chemical pharmaceuticals that need to be imported; and the production of new agents and products that use new technologies such as sustained release, controlled release, targeting, and transdermal absorption.
Restricted category manufacturing activities include the production of blood products, chloromycetin, penicillin G, lincomycin, gentamycin, dihydrostreptomycin, amikacin, tetracycline hydrochloride, terramycin, midecamycin, kitasamycin, cipro-floxacin, norfloxacin and ofloxacin. Among the projects in which foreign investment is prohibited are the processing of certain traditional Chinese medicinal materials and production of traditional Chinese medicinal products prepared by means of secret recipes.
MANUFACTURING AND DISTRIBUTION
Manufacturing
Foreign investors who invest in the establishment of drug manufacturing enterprises in the PRC are generally free to choose between establishing a wholly foreign-owned enterprise or forming a joint venture with a Chinese counterpart.
The process of establishing a new pharmaceutical enterprise with foreign investment typically includes the following steps:
1. obtaining a Provisional Business Licence: apply to the relevant Commission for Foreign Trade and Economic Cooperation for approval to establish a company and then apply to the local Administration for Industry and Commerce (local AIC) for a "Business Licence for an FIE under Construction".
2. obtaining a Pharmaceutical Manufacturing Licence: apply to the provincial pharmaceutical bureau for a pharmaceutical manufacturing licence.
3. obtaining a full Business Licence: apply to the to the local AIC for the formal Business Licence.
4. obtaining a GMP Certificate: apply to the provincial pharmaceutical bureau for the GMP Licence within 30 days of obtaining the pharmaceutical manufacturing licence.
Other approvals such as environmental approval or safe production approval may also be required as part of the establishment process.
Registration
All pharmaceuticals to be manufactured within the borders of the PRC must be registered according to the Registration Measures. The registration process has three steps: pre-clinical studies, clinical testing, and approval. Following approval, the manufacturer will receive a Certificate of New Medicine and a Production Approval Number. The drugs may then be subject to up to five years of monitoring by the SFDA or provincial pharmaceutical bureaus in order to ensure quality and safety.
In order to conduct clinical testing on a new or imported drug, the pharmaceutical company must apply to the provincial authorities with pre-clinical studies on the drug. The provincial authorities examine the drug in conjunction with a state-sponsored testing laboratory, and submit their findings to the SFDA. Representatives from the SFDA conduct technical tests on the drug and render their decision based on these tests. If approved, the manufacturer may conduct clinical testing on the drug.
New and Generic Pharmaceuticals
New pharmaceuticals require clinical testing prior to the application for manufacture approval. After completing their clinical studies, the manufacturer may apply to the provincial pharmaceutical bureau with results from the clinical studies as well as product samples for manufacture approval. The provincial pharmaceutical bureau's decision will be passed to the SFDA for final clearance.
Generic pharmaceuticals generally do not require clinical testing unless they are solid oral medicines. In order to register for manufacture approval, the applicant must submit a sample of the drug along with pre-clinical studies and relevant information to the provincial pharmaceutical bureau. The provincial pharmaceutical bureau's decision will be passed to the SFDA for final clearance.
Imported Pharmaceuticals
Imported pharmaceuticals for human use must already have obtained market approval in the country where the manufacture is located and must undergo clinical testing and be registered in China. Drugs which have not received market approval by the local drug regulatory body in the country or region where the manufacturer is located may not be imported in China unless there is a clinical need for the pharmaceuticals and the SFDA confirms the safety and efficacy of the pharmaceuticals through independent clinical trials.
The foreign applicant is required to appoint its domestic representative office or an agent in China to handle the application procedure. The registration process starts with an application to the provincial pharmaceutical bureaus. The SFDA will conduct a technical evaluation of the pharmaceutical and, if satisfied, may either issue an exemption from clinical trials, if the foreign data is considered sufficient, or an approval for commencing clinical trials of the pharmaceutical in China.
Upon successful completion of the process the SFDA will issue a Pharmaceutical Import Registration Certificate (Registration Certificate) for the product. Once the Registration Certificate has been obtained, the pharmaceuticals may be imported by the manufacturer into China via approved ports with the assistance of a licensed importer.
Distribution
Foreign access to pharmaceutical distribution remains restricted in the PRC. Due to persistent problems in the market such as the sale of counterfeit or fake drugs, any new application for the establishment of a pharmaceutical distribution, retail or trading enterprise is subject to very strict market access evaluation on the basis of the criteria specified in the Opinions on Strengthening Supervision of Pharmaceuticals and Promoting the Development of a Modern Logistics for Pharmaceuticals.
The Opinions provide a complete code of conduct for the operation of enterprises engaged in the circulation of pharmaceuticals, including the supply, purchase, inspection, storage, warehousing and delivery, etc. While there are no set minimum capitalization requirements, it is estimated that compliance with the criteria set forth in the Opinions requires an investment of RMB 20 to 100 million depending on the location of the enterprise. It is likely to be difficult at present to obtain an approval for a greenfield distribution enterprise in China.
Advertising
Chinese law requires that all advertisements for pharmaceuticals be approved by the provincial pharmaceutical bureau where the manufacturing enterprise or importing agent is located. Approved advertisements will receive a pharmaceutical advertising approval number; without which the advertisements may not be published. If pharmaceutical advertisements are to be published outside of the area where the manufacturing enterprise or import agent is located, the enterprise publishing the advertisement must file the matter for the record with the provincial pharmaceutical bureau where the advertisement is to be published.
Chinese law further imposes restrictions on the content of pharmaceutical advertisements. The following contents may not be included in pharmaceutical advertisements:
• unscientific assertions or guarantees of efficacy;
• the rate of successful healing or efficacy;
• false or misleading claims;
• use of the name or image of a State authority, medical research work unit, academic institution, expert, scholar, physician or patient as proof; and
• a comparison with the functions and safety of other pharmaceuticals or medical devices.
The content of pharmaceutical advertisements is required to be true and lawful and based on the directions for use approved by the SFDA. Specific types of drugs may have further advertisement restrictions, e.g. advertisements for all prescription drugs may only be published in professional magazines and not in the mass media and must include the text, "This advertisement is only to be read by medical professionals".
Despite such restrictions, illegal advertising remains a major issue. A national survey by the SFDA of 466 newspapers and 55 local TV stations from January to November 2006 apparently discovered 48,990 illegal advertisements for drug products. The SFDA has announced a series of measures over the past year designed at improving advertising standards, including prohibiting advertisement of certain classes of prescription drugs and issuing standards for labeling and instructions to be included in packaging for non-prescription drugs as well as releasing a new Measures for the Examination of Pharmaceutical Advertisements and Standards for the Examination and Announcement of Pharmaceutical regulations, both to take effect in May 2007.
Labelling
All pharmaceuticals sold in China must comply with local labelling requirements. Labels, including the text appearing on packaging, must coincide with the approved information of the instructions for use and must be in standard Chinese characters. They cannot in any way hint at effectiveness, have misleading instructions, or promote the product. Manufacturers offering similar products in prescription and over-the-counter forms must use different colours and labels. Over-the-counter drugs should have also clear, easy to comprehend labels so that the user can choose and use the drug effectively.
Chinese law requires that all advertisements for pharmaceuticals be approved by the provincial FDA where the manufacturing enterprise or importing agent is located. Approved advertisements will receive an approval number, without which the advertisements may not be published. Advertisements may be published outside the area where the enterprise or importer is located pending approval from the provincial FDA of the intended area.
Price Control
Pharmaceuticals are divided into three pricing classes: government-fixed, government-guided, and market-regulated. Government-fixed and government-guided pricing applies to pharmaceuticals listed in the pharmaceutical directory of the national basic medical insurance and some special pharmaceuticals (such as narcotic drugs, psychotropic drugs, immunomodulators, and contraceptive drugs).
Pricing policies also differ between GMP drugs and non-GMP drugs, branded drugs and generic drugs, new drugs, high quality drugs, and ordinary drugs. The government has recently introduced strict price controls on a wide range of pharmaceutical products (with more expected) which is putting pressure on profit margins for domestic producers.
Product Liability
Statutory Product Liability
Two highly-publicized accounts of contaminated pharmaceuticals and their aftermath came to light in 2006 -- one, an injection of the aromatic phenol Armillarisin A, tainted with diethylene glycol, a coolant toxic to humans, and the other, an injection of the antibiotic clindamycin that had not been properly sterilized. Following the deaths and adverse reactions that resulted, authorities were quick with retribution, revoking production licenses and approval certification, recalling and destroying the injections, and issuing large fines against the companies.
According to the Law of the People's Republic of China on the Administration of Pharmaceuticals, any drug manufacturer who produces drugs without approval or license or otherwise produces counterfeit or substandard drugs will be imposed with serious administrative punishments, including suspension of production, revocation of certificates or licenses, or fines of up to five times the drugs' sales price. Manufacturers who are found to have committed a crime during the production of drugs will be liable to criminal prosecution.
Pharmaceutical manufacturers are responsible for compensating victims who suffer injury or loss arising from the use of defective drugs. As Chinese law requires no negligence or fault of a manufacturer to give rise to product liability, manufacturers can be forced to provide compensation if any casual links are found between a defective pharmaceutical and the loss of victims.
Product Liability Insurance
Pharmaceutical manufacturers should take every effort to control their product quality and invest in product liability insurance to cover possible compensation to third parties.
Product liability insurance for pharmaceutical manufacturers has yet to take hold in China, with reportedly only 4% of domestic pharmaceutical manufacturers buying product liability insurance. The situation is gradually improving and product liability insurance is gaining in popularity in tandem with the development of China's economy and the growth of its pharmaceutical export sector.
IP PROTECTION
It is estimated that as much as 10-15% of over the counter drugs currently sold in China, particularly in rural areas, are counterfeits (The American Chamber of Commerce in Shanghai's 2005 White Paper). Intellectual Property (IP) protection is therefore a major ongoing concern for foreign investors in the pharmaceutical industry. Protection is available through patents and various regulatory mechanisms.
Patent Protection
Pharmaceutical products have been patentable in China since 1 January 1993. Before the Patent Law was amended, pharmaceuticals were specifically excluded from the patent system. Patent protection may be granted in China for inventions, designs and utility models. Invention patents are the most relevant to pharmaceutical and biotechnology industries and the following discussion deals mainly with invention patent applications. These applications must be filed in Chinese and are examined by the Chinese Patent Office for formalities and substance. In order to obtain a grant, an application is examined for subject matter, novelty, inventiveness, sufficiency of disclosure and practical applicability.
Subject matter capable of being patented includes:
• non-therapeutic cosmetic treatment such as hair dyeing methods, and methods of sterilization that are not practiced directly on the body;
diagnostic, handling and analytical methods performed on human and animal tissues and body fluids separate from the body;
• treatment, analysis and preservation methods performed on dead animals and humans;
• analytical and diagnostic methods practiced on the human body solely for the purpose of obtaining normal human or animal physiological data, e.g. performance limits in the field of sports medicine or occupational medicine; and
• methods of testing on the human body solely for the purpose of perfecting a medical device, e.g. testing doppler echocardiograms.
Subject matter excluded from patent protection includes scientific discoveries, methods for the diagnosis or for the treatment of diseases, and animal and plant varieties.
Administrative Protection of Pharmaceuticals
The Regulations for the Administrative Protection of Pharmaceuticals provide for protection of pharmaceutical products that were excluded from patent protection before 1993. If a certificate of administrative protection is granted, no public health authority may issue a product approval licence for the manufacture or sale of the pharmaceutical without a licence from the patentee, and if the pharmaceutical is manufactured or sold without the patentee's permission he may request that relevant department halt the process. The right to seek damages in the People's Court is also granted. It is unclear whether the protection granted extends as broadly as the original patent, or whether it is limited to the particular pharmaceutical.
Enforcement Issues
If the owner of a patent finds that its IP rights are being infringed upon by another party, he may institute legal proceedings in the People's Court. However, experience has show that the courts are generally not equipped to expeditiously handle infringements actions brought by foreign complainants, although this is slowly changing with the establishment of specialised IP courts in a number of provincial capitals. The Administration for Industry and Commerce is responsible for enforcement of registered trade marks and unregistered rights pursuant to the Anti-Unfair Competition Law. The Administrative Authority for Patent Affairs is responsible for the enforcement of patents and designs. The administrative authorities' powers are broad, and include powers which are quasi-judicial in nature. The administrative authorities are, for example, empowered to order an infringer to cease acts of infringement, and to pay fines and compensation.
In developing an effective intellectual property enforcement programme, experience suggests that the key elements are building of good relationships with the administrative authorities and effective coordination of investigators, designated agencies and administrative authorities to solve counterfeiting problems.
This overview describes a few key developments as well as highlights some of the areas of uncertainty that remain to be addressed with a particular focus on those areas of most concern for foreign investors.
MARKET ENTRY BY FOREIGN INVESTORS
Regulatory Control
The central government authority with jurisdiction over pharmaceuticals and medical devices (as well as food, health foods and cosmetics) is the State Food and Drug Administration (SFDA). Established in April 2003 through the reorganisation of various government departments, the principal powers of the SFDA in the area of the administration of pharmaceuticals are:
• the formulation of laws and administrative rules regarding pharmaceuticals and the supervision of their enforcement;
• drug registration, formulation of national drug standards;
• establishment of a classification system for prescription drugs and over-the-counter drugs;
• establishment of an monitoring system for the adverse reactions to pharmaceuticals;
• re-evaluation of pharmaceuticals and review of pharmaceuticals to be withdrawn;
• formulation of a state catalogue of basic drugs;
• drafting of good practices for drug research, production, distribution and use, and supervise their implementation;
• supervision over the quality of pharmaceuticals and medical devices;
• investigation and punishment of illegal activities of producing and selling counterfeit and inferior pharmaceuticals and medical devices;
• regulation of radioactive, narcotic, toxic and psychotropic drugs;
• formulation of a qualification system for licensed pharmacists and the registration of licensed pharmacists; and
• direction of national drug regulation work.
In practice, many of the powers of the SFDA have been delegated to local level government authorities in charge of pharmaceuticals. For instance, the pharmaceutical regulatory departments of the province, autonomous region or municipality directly under the central government (the provincial pharmaceutical bureaus) are authorized to issue the pharmaceutical manufacturing licences for drug manufacturers and approve pharmaceutical advertisements.
The position and role of the SFDA as the overall regulator of the pharmaceutical and foods sector has recently come under scrutiny due to allegation of corruption against its officials, including its former head, Zheng Xiaoyu. SFDA officials are suspected of having accepted bribes from pharmaceutical companies to approve untested or substandard medicines and issue production licenses and other certificates. It is possible that the scandals will lead to a shake-up of the SFDA which may lose many of its powers to other agencies.
The key laws are the Law of the People's Republic of China on the Administration of Pharmaceuticals together with its Implementing Regulations and the Measures for the Administration of the Registration of Pharmaceuticals ("Registration Measures"). These statutes are supplemented by a host of regulations dealing with specific issues such as distribution, manufacturing licences, certification for Good Manufacturing Practice (GMP) and Good Supply Practice (GSP), labelling and packaging, advertising, pricing, import-export, etc. Local government authorities have also enacted their own regulations which may supplement and modify some of the national regulations.
The large number of recent regulatory changes has led to a certain level of confusion as both regulators and businesses try to interpret and keep up with the new requirements. Where such uncertainties exist, it is important that businesses not only be aware of the regulations but consult with the SFDA locally and nationally, as appropriate, to understand how they are being interpreted in practice.
Classification of Products
Pharmaceuticals
Under PRC law, "pharmaceuticals" are substances used for the prevention, treatment and diagnosis of human diseases, and with the object of regulating human physiological functions, with stipulated indications, main functions of treatment, usage and dosage. They include Chinese medicinal materials and Chinese medicinal liquids and tablets, prepared Chinese medicines, chemical raw material medicine and their components, antibiotics, biochemical medicine, radioactive medicine, blood serums and vaccines, blood products and diagnostic drugs.
The major implication of a product being classified as a "pharmaceutical" is that it imposes higher requirements on both manufacturers and sellers. All manufacturers of pharmaceuticals must hold a GMP certificate. All wholesale and retail enterprises for pharmaceuticals within the PRC must obtain GSP certification while exporters must obtain an export permit for those products produced for export.
As manufacturing of, and dealing in, products classified as pharmaceuticals imposes certification obligations, it is important to know whether a product is in fact a pharmaceutical. Unfortunately the rules for making the determination are not always clear-cut. For instance, a diagnostic product may be classified as a pharmaceutical or a non-pharmaceutical. However, in the absence of clear rules, it is necessary for operators to consult with the SFDA on a case by case basis to confirm the classification. Most diagnostic products are currently regarded by the SFDA as medical devices, but if the product contains blood serum or other biological matter it may be regarded as a "pharmaceutical". Under the Registration Measures, the SFDA is to issue regulations for the registration of external diagnosis reagents, but to date it has only circulated a draft thereof together with a draft of the Catalogue for External Diagnosis Reagent Categorization. It is still uncertain when these regulations will come into effect.
Medical Devices
A "medical device" as defined by PRC regulations refers to any instrument, apparatus, appliance, material, or other article whether used alone or in combination with other items, including the software necessary for its proper application. Medical devices do not achieve their principal actions in or on the human body by means of pharmacology, immunology or metabolism, but may be assisted in their function by such means; they are used to achieve the following intended objectives:
1. Diagnosis, prevention, monitoring, treatment or alleviation of disease;
2. Diagnosis, monitoring, treatment, alleviation of or compensation for an injury or handicap conditions;
3. Investigation, replacement or modification for anatomy or a physiological process; or
4. Contraception.
Nutritional supplements
There are no specific regulations governing the distribution of nutritional supplements in China. Manufacturers and distributors are required to comply with different licensing requirements depending on whether or not specific claims are made with respect to the health effects of the supplements. If no specific health claims are made with respect to the food supplements, nutritional supplements shall be governed by the general regulations regarding food in China. Nutritional supplements for which specific health (but not therapeutic) effects are claimed or which is intended to supplement vitamins or minerals shall be registered as a health food and shall be subject to specific rules governing amongst others, their production and distribution.
New Establishment and M&A
Foreign investors wishing to invest in China's pharmaceutical sector may consider creating a new company or acquiring an existing pharmaceutical business (M&A deal). The major advantage of an M&A deal is that an already operational business is acquired and thus can immediately add to the production capacity of the buyer. One of the disadvantages is that the existing licences of the target enterprise cannot always be transferred but have to be applied for anew by the company established after the completion of the deal. Both new establishments and M&A transactions require the approval of the relevant authorities in China and the establishment of one of the following foreign investment vehicles:
• an equity joint venture;
• a cooperative joint venture;
• or a wholly foreign-owned enterprise.
Due diligence of the target is important in an M&A deal. In a greenfield project, careful investigation of the local regulations and restrictions such as environmental quota affecting the operation of a pharmaceutical plant is necessary.
In order to direct foreign investment into certain priority industry sectors while restricting or prohibiting investment in other sectors, the Chinese government has issued a wide range of rules and regulations to govern foreign investment in the country. The key national statute for implementing China's foreign investment policy is the Regulations for Guiding the Direction of Foreign Investment (Guiding Regulations). The Guiding Regulations classify all foreign investment projects into one of four categories: encouraged projects, permitted projects, restricted projects and prohibited projects. The classification of an investment project under the Guiding Regulations determines the feasibility and establishment method for the project as well as the eligibility of the project for certain tax benefits.
Manufacturing activities currently classified as encouraged for foreign investment include the production of raw pharmaceuticals that are patented in or granted administrative protection by China and raw chemical pharmaceuticals that need to be imported; and the production of new agents and products that use new technologies such as sustained release, controlled release, targeting, and transdermal absorption.
Restricted category manufacturing activities include the production of blood products, chloromycetin, penicillin G, lincomycin, gentamycin, dihydrostreptomycin, amikacin, tetracycline hydrochloride, terramycin, midecamycin, kitasamycin, cipro-floxacin, norfloxacin and ofloxacin. Among the projects in which foreign investment is prohibited are the processing of certain traditional Chinese medicinal materials and production of traditional Chinese medicinal products prepared by means of secret recipes.
MANUFACTURING AND DISTRIBUTION
Manufacturing
Foreign investors who invest in the establishment of drug manufacturing enterprises in the PRC are generally free to choose between establishing a wholly foreign-owned enterprise or forming a joint venture with a Chinese counterpart.
The process of establishing a new pharmaceutical enterprise with foreign investment typically includes the following steps:
1. obtaining a Provisional Business Licence: apply to the relevant Commission for Foreign Trade and Economic Cooperation for approval to establish a company and then apply to the local Administration for Industry and Commerce (local AIC) for a "Business Licence for an FIE under Construction".
2. obtaining a Pharmaceutical Manufacturing Licence: apply to the provincial pharmaceutical bureau for a pharmaceutical manufacturing licence.
3. obtaining a full Business Licence: apply to the to the local AIC for the formal Business Licence.
4. obtaining a GMP Certificate: apply to the provincial pharmaceutical bureau for the GMP Licence within 30 days of obtaining the pharmaceutical manufacturing licence.
Other approvals such as environmental approval or safe production approval may also be required as part of the establishment process.
Registration
All pharmaceuticals to be manufactured within the borders of the PRC must be registered according to the Registration Measures. The registration process has three steps: pre-clinical studies, clinical testing, and approval. Following approval, the manufacturer will receive a Certificate of New Medicine and a Production Approval Number. The drugs may then be subject to up to five years of monitoring by the SFDA or provincial pharmaceutical bureaus in order to ensure quality and safety.
In order to conduct clinical testing on a new or imported drug, the pharmaceutical company must apply to the provincial authorities with pre-clinical studies on the drug. The provincial authorities examine the drug in conjunction with a state-sponsored testing laboratory, and submit their findings to the SFDA. Representatives from the SFDA conduct technical tests on the drug and render their decision based on these tests. If approved, the manufacturer may conduct clinical testing on the drug.
New and Generic Pharmaceuticals
New pharmaceuticals require clinical testing prior to the application for manufacture approval. After completing their clinical studies, the manufacturer may apply to the provincial pharmaceutical bureau with results from the clinical studies as well as product samples for manufacture approval. The provincial pharmaceutical bureau's decision will be passed to the SFDA for final clearance.
Generic pharmaceuticals generally do not require clinical testing unless they are solid oral medicines. In order to register for manufacture approval, the applicant must submit a sample of the drug along with pre-clinical studies and relevant information to the provincial pharmaceutical bureau. The provincial pharmaceutical bureau's decision will be passed to the SFDA for final clearance.
Imported Pharmaceuticals
Imported pharmaceuticals for human use must already have obtained market approval in the country where the manufacture is located and must undergo clinical testing and be registered in China. Drugs which have not received market approval by the local drug regulatory body in the country or region where the manufacturer is located may not be imported in China unless there is a clinical need for the pharmaceuticals and the SFDA confirms the safety and efficacy of the pharmaceuticals through independent clinical trials.
The foreign applicant is required to appoint its domestic representative office or an agent in China to handle the application procedure. The registration process starts with an application to the provincial pharmaceutical bureaus. The SFDA will conduct a technical evaluation of the pharmaceutical and, if satisfied, may either issue an exemption from clinical trials, if the foreign data is considered sufficient, or an approval for commencing clinical trials of the pharmaceutical in China.
Upon successful completion of the process the SFDA will issue a Pharmaceutical Import Registration Certificate (Registration Certificate) for the product. Once the Registration Certificate has been obtained, the pharmaceuticals may be imported by the manufacturer into China via approved ports with the assistance of a licensed importer.
Distribution
Foreign access to pharmaceutical distribution remains restricted in the PRC. Due to persistent problems in the market such as the sale of counterfeit or fake drugs, any new application for the establishment of a pharmaceutical distribution, retail or trading enterprise is subject to very strict market access evaluation on the basis of the criteria specified in the Opinions on Strengthening Supervision of Pharmaceuticals and Promoting the Development of a Modern Logistics for Pharmaceuticals.
The Opinions provide a complete code of conduct for the operation of enterprises engaged in the circulation of pharmaceuticals, including the supply, purchase, inspection, storage, warehousing and delivery, etc. While there are no set minimum capitalization requirements, it is estimated that compliance with the criteria set forth in the Opinions requires an investment of RMB 20 to 100 million depending on the location of the enterprise. It is likely to be difficult at present to obtain an approval for a greenfield distribution enterprise in China.
Advertising
Chinese law requires that all advertisements for pharmaceuticals be approved by the provincial pharmaceutical bureau where the manufacturing enterprise or importing agent is located. Approved advertisements will receive a pharmaceutical advertising approval number; without which the advertisements may not be published. If pharmaceutical advertisements are to be published outside of the area where the manufacturing enterprise or import agent is located, the enterprise publishing the advertisement must file the matter for the record with the provincial pharmaceutical bureau where the advertisement is to be published.
Chinese law further imposes restrictions on the content of pharmaceutical advertisements. The following contents may not be included in pharmaceutical advertisements:
• unscientific assertions or guarantees of efficacy;
• the rate of successful healing or efficacy;
• false or misleading claims;
• use of the name or image of a State authority, medical research work unit, academic institution, expert, scholar, physician or patient as proof; and
• a comparison with the functions and safety of other pharmaceuticals or medical devices.
The content of pharmaceutical advertisements is required to be true and lawful and based on the directions for use approved by the SFDA. Specific types of drugs may have further advertisement restrictions, e.g. advertisements for all prescription drugs may only be published in professional magazines and not in the mass media and must include the text, "This advertisement is only to be read by medical professionals".
Despite such restrictions, illegal advertising remains a major issue. A national survey by the SFDA of 466 newspapers and 55 local TV stations from January to November 2006 apparently discovered 48,990 illegal advertisements for drug products. The SFDA has announced a series of measures over the past year designed at improving advertising standards, including prohibiting advertisement of certain classes of prescription drugs and issuing standards for labeling and instructions to be included in packaging for non-prescription drugs as well as releasing a new Measures for the Examination of Pharmaceutical Advertisements and Standards for the Examination and Announcement of Pharmaceutical regulations, both to take effect in May 2007.
Labelling
All pharmaceuticals sold in China must comply with local labelling requirements. Labels, including the text appearing on packaging, must coincide with the approved information of the instructions for use and must be in standard Chinese characters. They cannot in any way hint at effectiveness, have misleading instructions, or promote the product. Manufacturers offering similar products in prescription and over-the-counter forms must use different colours and labels. Over-the-counter drugs should have also clear, easy to comprehend labels so that the user can choose and use the drug effectively.
Chinese law requires that all advertisements for pharmaceuticals be approved by the provincial FDA where the manufacturing enterprise or importing agent is located. Approved advertisements will receive an approval number, without which the advertisements may not be published. Advertisements may be published outside the area where the enterprise or importer is located pending approval from the provincial FDA of the intended area.
Price Control
Pharmaceuticals are divided into three pricing classes: government-fixed, government-guided, and market-regulated. Government-fixed and government-guided pricing applies to pharmaceuticals listed in the pharmaceutical directory of the national basic medical insurance and some special pharmaceuticals (such as narcotic drugs, psychotropic drugs, immunomodulators, and contraceptive drugs).
Pricing policies also differ between GMP drugs and non-GMP drugs, branded drugs and generic drugs, new drugs, high quality drugs, and ordinary drugs. The government has recently introduced strict price controls on a wide range of pharmaceutical products (with more expected) which is putting pressure on profit margins for domestic producers.
Product Liability
Statutory Product Liability
Two highly-publicized accounts of contaminated pharmaceuticals and their aftermath came to light in 2006 -- one, an injection of the aromatic phenol Armillarisin A, tainted with diethylene glycol, a coolant toxic to humans, and the other, an injection of the antibiotic clindamycin that had not been properly sterilized. Following the deaths and adverse reactions that resulted, authorities were quick with retribution, revoking production licenses and approval certification, recalling and destroying the injections, and issuing large fines against the companies.
According to the Law of the People's Republic of China on the Administration of Pharmaceuticals, any drug manufacturer who produces drugs without approval or license or otherwise produces counterfeit or substandard drugs will be imposed with serious administrative punishments, including suspension of production, revocation of certificates or licenses, or fines of up to five times the drugs' sales price. Manufacturers who are found to have committed a crime during the production of drugs will be liable to criminal prosecution.
Pharmaceutical manufacturers are responsible for compensating victims who suffer injury or loss arising from the use of defective drugs. As Chinese law requires no negligence or fault of a manufacturer to give rise to product liability, manufacturers can be forced to provide compensation if any casual links are found between a defective pharmaceutical and the loss of victims.
Product Liability Insurance
Pharmaceutical manufacturers should take every effort to control their product quality and invest in product liability insurance to cover possible compensation to third parties.
Product liability insurance for pharmaceutical manufacturers has yet to take hold in China, with reportedly only 4% of domestic pharmaceutical manufacturers buying product liability insurance. The situation is gradually improving and product liability insurance is gaining in popularity in tandem with the development of China's economy and the growth of its pharmaceutical export sector.
IP PROTECTION
It is estimated that as much as 10-15% of over the counter drugs currently sold in China, particularly in rural areas, are counterfeits (The American Chamber of Commerce in Shanghai's 2005 White Paper). Intellectual Property (IP) protection is therefore a major ongoing concern for foreign investors in the pharmaceutical industry. Protection is available through patents and various regulatory mechanisms.
Patent Protection
Pharmaceutical products have been patentable in China since 1 January 1993. Before the Patent Law was amended, pharmaceuticals were specifically excluded from the patent system. Patent protection may be granted in China for inventions, designs and utility models. Invention patents are the most relevant to pharmaceutical and biotechnology industries and the following discussion deals mainly with invention patent applications. These applications must be filed in Chinese and are examined by the Chinese Patent Office for formalities and substance. In order to obtain a grant, an application is examined for subject matter, novelty, inventiveness, sufficiency of disclosure and practical applicability.
Subject matter capable of being patented includes:
• non-therapeutic cosmetic treatment such as hair dyeing methods, and methods of sterilization that are not practiced directly on the body;
diagnostic, handling and analytical methods performed on human and animal tissues and body fluids separate from the body;
• treatment, analysis and preservation methods performed on dead animals and humans;
• analytical and diagnostic methods practiced on the human body solely for the purpose of obtaining normal human or animal physiological data, e.g. performance limits in the field of sports medicine or occupational medicine; and
• methods of testing on the human body solely for the purpose of perfecting a medical device, e.g. testing doppler echocardiograms.
Subject matter excluded from patent protection includes scientific discoveries, methods for the diagnosis or for the treatment of diseases, and animal and plant varieties.
Administrative Protection of Pharmaceuticals
The Regulations for the Administrative Protection of Pharmaceuticals provide for protection of pharmaceutical products that were excluded from patent protection before 1993. If a certificate of administrative protection is granted, no public health authority may issue a product approval licence for the manufacture or sale of the pharmaceutical without a licence from the patentee, and if the pharmaceutical is manufactured or sold without the patentee's permission he may request that relevant department halt the process. The right to seek damages in the People's Court is also granted. It is unclear whether the protection granted extends as broadly as the original patent, or whether it is limited to the particular pharmaceutical.
Enforcement Issues
If the owner of a patent finds that its IP rights are being infringed upon by another party, he may institute legal proceedings in the People's Court. However, experience has show that the courts are generally not equipped to expeditiously handle infringements actions brought by foreign complainants, although this is slowly changing with the establishment of specialised IP courts in a number of provincial capitals. The Administration for Industry and Commerce is responsible for enforcement of registered trade marks and unregistered rights pursuant to the Anti-Unfair Competition Law. The Administrative Authority for Patent Affairs is responsible for the enforcement of patents and designs. The administrative authorities' powers are broad, and include powers which are quasi-judicial in nature. The administrative authorities are, for example, empowered to order an infringer to cease acts of infringement, and to pay fines and compensation.
In developing an effective intellectual property enforcement programme, experience suggests that the key elements are building of good relationships with the administrative authorities and effective coordination of investigators, designated agencies and administrative authorities to solve counterfeiting problems.
