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 U.S. FDA. In practice, much of the power of the SFDA has been delegated to the 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 the unauthorized lease or transfer of their licenses to third parties.
The regulator itself has recently become the subject of corruption investigations into its officials, including the former head of the SFDA, 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.
Principal Powers of the SFDA in the Administration of Pharmaceuticals
Formulating and supervising enforcement of laws and administrative rules regarding pharmaceuticals
Formulating national drug standards
Establishing a classification system for prescription and OTC drugs
Establishing a monitoring system for adverse reactions to pharmaceuticals
Re-evaluation and review of pharmaceuticals
Formulating a state catalogue of basic drugs
Regulation of radioactive, narcotic, toxic and psychotropic drugs
Drafting and supervising good practices for drug research, production, distribution, and use
Supervising the quality of medical devices and pharmaceuticals
Investigating and punishing illegal activities of producing and selling counterfeit and inferior pharmaceuticals and medical devices
Formulating a qualification system for licensed pharmacists and the registration of licensed pharmacists
Direction of national drug regulation work
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 from adequately understanding legal requirements and drawing 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 used alone or in combination with others to diagnose, prevent, monitor, treat, or alleviate disease, injury, or handicap, or to 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 both 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 and must thus be applied for anew. Both new establishments and M&A transactions require 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 licenses 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 classifying foreign investment projects in different categories representing the relative 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.
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 to 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.
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 must undergo clinical testing and be registered in China. Generally speaking, only pharmaceuticals that have already obtained marketing authorization in the country of manufacture may apply for registration in China. Foreign drugs that have not been registered overseas may be registered in China provided the SFDA confirms their safety, efficacy, and clinical need. If a medical institution has an urgent clinical need to import a small amount of a medicine not registered in China, it may be permitted to do so upon SFDA approval of the import. The medical institution may only use the medicine thus imported for its approved purpose.
To register a foreign drug in China, the 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 issue 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 the exemption from, or the passing of, the clinical trials, the SFDA will issue a Pharmaceutical Import Registration Certificate for the product and the pharmaceutical may be imported via approved ports with the assistance of a licensed importer.
Principal Steps in Registering Imported Drugs
Foreign applicant appoints local agent for its application
Filing of application to SFDA: Application materials shall comprise: general information on the drug, pharmaceutical research materials (including samples), pharmacological and toxicological research materials, information on clinical trials
Drug registration inspection conducted by National Institute for Control of Pharmaceutical and Biological Products and technical evaluation conducted by Center for Drug Evaluation (CDE)
SFDA decides whether to grant approval for clinical trials of the drug or to grant exemption from such trials
Clinical trials are conducted by SFDA-accredited trial centers
Clinical trial results and supplementary data are submitted to SFDA and reviewed by CDE
SFDA decides whether to grant or reject drug registration application
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 - 100 million (approx. U.S. $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.
All pharmaceuticals sold in China must comply with local labeling 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 colors 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.
Required Pharmaceutical Labeling Information
Labels must contain at least:
Further information, space permitting:
Disease or symptoms treated
Dosage and amount included in package
Lot and license number
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.
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 advertisements for prescription drugs).
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 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 labeling and instructions to be included in packaging for non-prescription drugs. Further measures aimed at improving the regulation of pharmaceutical advertising are expected within the next two years.
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.
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 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, manufacturers can be forced to provide compensation if any causal links are found between a defective pharmaceutical and the loss of victims.
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.
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.
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 animal and human cadavers;
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.
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 the building of good relationships with the administrative authorities and effective coordination with investigators, designated agencies, and administrative authorities to solve counterfeiting problems.
China is gradually amplifying legislation in the pharmaceutical sector. Operators should keep abreast of ongoing regulatory changes and 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.
Elizabeth Cole is a Partner in Deacon's Shanghai office and Erik Leyssens is an Associate in Deacon's Hong Kong office.