A reputation for counterfeiting, poor quality control, ever-changing and inconsistent application of regulations and the challenges of ensuring that development does not unduly prejudice the welfare of the general population - this description of China’s pharmaceutical industry is representative of much that is good, bad and challenging in China’s recent regulatory and economic development.
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 and, in effect, repair its reputation. 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 import drug 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 article 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 to foreign investors.
The Industry Regulator
The central government authority with jurisdiction over pharmaceuticals and medical devices (as well as food, health foods, and cosmetics) is the SFDA, which generally serves the same function as the US FDA. In practice, much of the SFDA’s power has been delegated to local government authorities in charge of pharmaceuticals. The pharmaceutical regulatory departments of the province, autonomous region, or municipality directly under the central government (the provincial FDAs) are authorized to issue the pharmaceutical manufacturing licenses for drug manufacturers and approve pharmaceutical advertisements. The SFDA and the provincial FDAs have wide investigative and enforcement powers: in 2006 the SFDA revoked the business licenses of 160 pharmaceutical manufacturers and distributors. The grounds for revocation ranged from the companies involved keeping irregular purchase and sales records, advertising illegally, operating beyond their business scope and unauthorised lease or transfer of their licenses to third parties.
The regulator has recently become itself the subject of investigations into corruption of its officials including its former head Zheng Xiaoyu. Corrupt SFDA officials are suspected of having accepted bribes from drugs companies to approve medicines and issue production licences 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.
Regulatory Uncertainty
The key statutes are the Law on the Administration of Pharmaceuticals and its Implementing Regulations. These are supplemented by a host of regulations dealing with specific issues such as distribution, manufacturing licenses, GMP and good supply practice (GSP), labeling and packaging, advertising, pricing, import-export, etc. Local government authorities have also enacted their own regulations which may supplement and modify some national regulations.
Recent regulatory changes and inconsistencies between local and national regulations often prevent business operators to adequately understand legal requirements and draw up adequate strategies in China. Where such uncertainties exist, businesses should consult directly with the SFDA locally and nationally, as appropriate, to understand how they are being interpreted in practice.
An example of this uncertainty relates to diagnostic products, which are variously classified as either pharmaceuticals or medical devices. Under PRC law, “pharmaceuticals” are substances used for the prevention, treatment, and diagnosis of human diseases, whereas “medical devices” are any instrument, apparatus, appliance, material, or other article whether used alone or in combination with others, to diagnose, prevent, monitor, treat, or alleviate disease, injury, or handicap, or serve as a contraceptive. The major implication of a product being classified as a “pharmaceutical” is that it imposes higher requirements on both manufacturers and sellers. For pharmaceuticals, manufacturers must hold a GMP certificate, wholesale and retail enterprises within the PRC must obtain GSP certification, and exporters must obtain an export permit for those products produced for export. It is often not possible to determine how a diagnostic product will be classified, so it is necessary to consult with the SFDA on a case by case basis.
New Establishment and M&A
For foreign pharmaceutical companies, China has become a major source of raw materials and finished products and is also increasingly targeted as a market. Foreign investors wishing to invest in China’s pharmaceutical sector have, as in other jurisdictions, a choice between setting up a greenfield project or acquiring an existing operation (M&A deal). While an M&A deal brings an operational business and immediately adds to the buyer’s production capacity, the transfer of the existing licenses of the target enterprise needs to be carefully planned and may not always be possible without re-applying for them. Both new establishments and M&A transactions require the the establishment of one of the recognized vehicles for foreign investment in China: an equity joint venture, a cooperative joint venture, or a wholly foreign-owned enterprise. In addition, the investment and operation of a pharmaceutical company has to be approved by the foreign investment authority which will review the corporate documents and/or acquisition documentation and the provincial FDA which will approve the manufacturing licences and GMP certificates.
The development of China’s economy is still to a large extent subject to government planning. In order to direct foreign investment into certain priority industry sectors, China has issued regulations which classify foreign investment projects in different categories representing the relatively desirability of foreign investment in such projects. Under these regulations, two catalogues have been published which list specified projects as encouraged, restricted, or prohibited. Projects not included in the catalogues are deemed to be permitted category projects. The feasibility and establishment method for the project as well as its eligibility for certain tax benefits is based on the classification of a project in any of the categories. With the exception of a limited category of traditional Chinese medicine projects, investment in the pharmaceutical sector is generally encouraged or permitted.
Manufacturing
Foreign investors who invest in the establishment of drug manufacturing enterprises in the PRC are generally free to establish a wholly foreign-owned enterprise or form a joint venture with a Chinese counterpart. The process of establishing a new pharmaceutical enterprise with foreign investment typically involves going through several rounds of approval first to establish a company, then to obtain a Provisional Business License, a Pharmaceutical Manufacturing License, a full Business License, and finally a GMP Certificate. Other approvals such as environmental approval or safe production approval may also be required as part of the establishment process.
Registration
All pharmaceuticals manufactured in China must be registered according to the Measures for the Administration of the Registration of Pharmaceuticals. The registration process has three steps: pre-clinical study, clinical trials, and approval. Upon approval, the manufacturer will receive a Certificate of New Medicine and a Production Approval Number. The pharmaceuticals are then subject to up to five years of monitoring by the SFDA or provincial FDA.
New and Generic Pharmaceuticals
New pharmaceuticals require clinical trials prior to manufacture approval. Following the trials, the manufacturer may apply to the provincial FDA for approval on the strength of their results and product samples. The provincial FDA’s decision will be passed to the SFDA for final clearance.
Generic pharmaceuticals generally do not require clinical trials unless they are solid oral medicines. To register for manufacture approval, the applicant must submit a product sample along with pre-clinical studies and related information to the provincial FDA, whose decision will be passed to the SFDA for final clearance.
Imported Pharmaceuticals
Imported pharmaceuticals must undergo clinical testing and be registered in China. Untested drugs or those unapproved for production by the provincial FDA may not be imported in China unless the SFDA confirms their safety, efficacy, and clinical need through independent trials.
The foreign applicant is required to appoint an agent in China to handle the application procedure, which consists of an application to the provincial FDA and a technical evaluation by the SFDA. If the SFDA is satisfied, it may either obtain an exemption from clinical trials or an approval for commencing clinical trials. The process of clinical trials for imported pharmaceuticals is essentially the same as that for new pharmaceuticals.
Upon exemption from, or the passing of, the clinical trials, the SFDA will issue a Pharmaceutical Import Registration Certificate for the product and the pharmaceuticals may be imported 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 distribution sector 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. 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 (approx US$2.5-12.5 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/Labelling
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 is located pending approval from the provincial FDA of that area.
Chinese law further imposes restrictions on the content of pharmaceutical advertisements. Advertisements may not contain any unscientific assertions or guarantees of efficacy, claims of a successful healing rate or efficacy; the representation of authorities, scholars, or patients as proof; or a comparison with the functions and safety of other pharmaceuticals or medical devices. Specific types of drugs may have further restrictions (e.g. the phrase “purchase and use under a physician’s prescription” must appear on prescription drugs).
Illegal advertising, however, remains a major issue. A survey by the SFDA of 466 newspapers and 55 local TV stations from January to November last year 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 labelling and instructions to be included in packaging for non-prescription drugs. Further measures aimed at improving regulation of pharmaceutical advertising are expected within the next two years.
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 contraception 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
According to the Law on the Administration of Pharmaceuticals, any manufacturer who produces drugs without approval or license or otherwise produces counterfeit or substandard drugs will risk serious administrative punishments, including suspension of production, revocation of certificates or licenses, or fines of up to five times the drugs’ sales price. If a manufacturer’s actions are deemed to constitute a crime it 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, any casual links found between a defective pharmaceutical and the loss of victims can cause manufacturers to provide compensation.
Product Liability Insurance
Due to the nature of the pharmaceutical industry and the inconsistency of the SFDA with regards to quality supervision, uncertainties on product quality requirements still exist. Pharmaceutical manufacturers should take every effort to control their product quality and invest in product liability insurance to cover losses of compensation to third parties. Product liability insurance for pharmaceutical manufacturers has yet to take hold in China, though, as China’s pharmaceutical export industry continues to expand, it is gaining popularity.
2006 saw two highly-publicized accounts of tainted drugs and their aftermath -- one, an injection of Armillarisin A, an aromatic phenol, containing diethylene glycol, a coolant toxic to humans, and the other, an injection of the antibiotic clindamycin that had been not properly disinfected. Following the deaths and adverse reactions that surfaced, authorities were quick with retribution, revoking production licenses and approval certification and issuing large fines against the companies.
IP Protection
It is estimated that as much 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 of the People’s Republic of China 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 able to be patented includes:
• non-therapeutic cosmetic treatments (e.g. hair dyeing methods) and methods of sterilization 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 sports 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 treatment of diseases, and animal and plant varieties.
Administrative Protection of Pharmaceuticals
Pharmaceutical products excluded from patent protection prior to 1993 are protected under the Regulations for the Administrative Protection of Pharmaceuticals. If a certificate of administrative protection is granted, no public health authority may issue a product approval license for the manufacture or sale of the pharmaceutical without a license from the patentee. If the pharmaceutical is manufactured or sold without the patentee’s permission, he may request that the process be halted and has the right to seek damages in the People’s Court. 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. Experience has shown that the courts are generally not equipped to expeditiously handle infringement actions brought by foreign complainants, although this is slowly changing with the establishment of specialized 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. They are, for example, empowered to order an infringer to cease acts of infringement and to pay fines and compensation.
In developing an effective IP enforcement program, experience suggests that the key elements are building of good relationships with the administrative authorities and effective coordination with investigators, designated agencies, and administrative authorities to solve counterfeiting problems.
Conclusion
China is gradually amplifying legislation in the pharmaceutical sector. Operators should keep abreast of ongoing regulatory changes in order to adapt their China strategy and operations in order not to fall foul of new requirements. Problems with enforcement and rampant counterfeiting and passing off are a clear warning to foreign pharmaceutical companies to remain vigilant in protecting their intellectual property rights. |