A Legislative Prescription for the ills of the Drug Industry

The pharmaceutical industry in the PRC has long been plagued with problems such as the high cost of drugs, corruption and inferior quality medicines. In an attempt to rid China of such ills, the law has been amended. We take a look at what these amendments will mean for the future of pharmaceuticals in China.

On February 28 2001 the Standing Committee of the National People's Congress (NPC) significantly amended the PRC law on Administration of Pharmaceuticals (中华人民共和国药品管理法)(the Law). The Law governs China's pharmaceutical industry, a multi-billion dollar industry that has attracted investment from most of the world's largest pharmaceutical companies and has been growing about 20% annually for several years. After more than a year and a half of drafting and deliberation, more than 100 articles were deleted, modified or added to the Law. Only four articles from the original Law were left untouched, and the total number of articles increased from 60 to 106. Because the changes were so extensive, the NPC Standing Committee restated the Law in its entirety rather than issuing a list of particular changes.

BACKGROUND

The Law was originally adopted in 1984 and became effective on July 1 1985. The amended Law will go into effect on December 1 2001. Generally, the amended Law follows the organizational structure of the original Law. The amended law strengthens the legislative foundation over pharmaceutical regulation, including approvals, manufacturing, storage, packaging, prescriptions, advertising and pricing. Several changes merely codify, at the legislative level, what had already been implemented through administrative regulations or in practice. The amended Law will apply to foreign-invested enterprises and market participants even though domestic issues within the PRC pharmaceutical industry and its evolving regulatory system largely drive the amendments.

EVOLVING REGULATORY STRUCTURE

The pharmaceutical industry remains subject in certain respects to state planning under Article 5 because of the industry51s social and economic importance, and because the state directly or indirectly bears much of the cost of pharmaceuticals. Since the original Law was adopted in 1984 a number of changes have been made in the regulation of the pharmaceutical industry. The State Drug Administration (SDA) was created in 1998, combining functions formerly under the Ministry of Public Health, former State Pharmaceutical Administration and State Administration of Traditional Chinese Medicines (TCMs).² While the original Law created the pre-SDA regulatory structure, the amended Law reflects the centralization of authority over drugs in the SDA and other organizational reforms. The amended Law specifies that the SDA (referred to as the State Council department of drug supervision and administration) is in charge of national drug administration, and a number of articles in the amended Law relate specifically to the role that SDA plays in relation to other government departments and provincial drug administrations (the PDAs).

The amended Law lessens the administrative burden with respect to the:

(a) establishment of enterprises to manufacture or sell drugs; and

(b) approval of new drugs.

Chapters 2 and 3 maintain the distinction between manufacturing enterprises (shengchan qiye) and trading or non-manufacturing enterprises (jingying qiye either retail or wholesale). An approval certificate is needed to engage in manufacturing or non-manufacturing of activity. Previously, approval was required from two local government departments before a company could even apply for registration. Under the original Law, the provincial health administration and the provincial pharmaceutical administration both had to grant approvals and issue permits before an enterprise could register with the local Administration of Industry and Commerce (AIC), meaning a drug company required two industry permits as well as a business license before commencing operations. Article 14 now requires approval only by the PDA and local AIC for establishment of a drug manufacturing or non-manufacturing enterprise (one permit and one business license). Approval authority for a retail non-manufacturing enterprise rests with the drug administration at the county level or above.

The operations of such enterprises are made subject to more stringent regulations. Chapter 3 establishes substantially more comprehensive requirements for the operations of trading enterprises with respect to record keeping, qualifications of personnel and the storage of pharmaceuticals. Articles 26-28 establish similar requirements for medical institutions.³

Overlapping approval powers and local protectionism also are reduced with respect to approval procedures for new drugs. Some PDAs had exercised their own approval authority over drugs so that national approval of a new drug could mark just the beginning, rather than the end, of a manufacturer's administrative travails. Articles 29 through 31 eliminate local approval authority for drugs and vest sole responsibility with the SDA drug approvals. Article 69 similarly proscribes local governments and PDAs from implementing any drug inspections or examination and approval procedures that limit or exclude non-local products.

The accompanying chart details the allocation of key regulatory duties under the amended Law. The SDA and/or PDAs hold responsibility for most tasks, while the Ministry of Health, State Development and planning Commission (SDPC) and the State Administration of TCMs also have certain specified regulatory duties with respect to pharmaceuticals as generally provided in Article 5 of the amended Law.

INTELLECTUAL PROPERTY

Article 4 provides for State research support and intellectual property protection with respect to the research and development of new medicines. This change essentially reflects the patent and administrative protections that already exist for new drugs. However, the statute's broad language (which remains a characteristic of Chinese legislative drafting) about encouraging and protecting new drugs is not without significance. When the Law was initially adopted in 1984, the PRC afforded no patent protection to drugs, and the industry's over-capacity for generic production and paltry investment in research continue to be of concern. Thus, the amended Law signals both the evolution that has already occurred with regard to IP protection for drugs in China and the potential for further improvement.

Article 36 also provides that the State Council will establish a protection system for pharmaceutical materials, which will be especially important for botanical resources. Article 3 also provides State protection for wild plants with medicinal value.