Market Access Report: Pharmaceuticals

Practical Considerations

Divergent interests between the government, state hospitals, health workers and domestic and international pharmaceutical companies hurt the development of China's pharmaceutical industry. Whereas the government wishes to limit its subsidized costs of drugs dispensed to hospital patients, state hospitals, China's predominant seller of pharmaceuticals to end-users, have a vested interest in generating hospital revenue through patient drug sales, most of which are Chinese drugs. Because most foreign companies' drugs are not eligible for reimbursement under the national medical insurance system, Chinese patients generally will not be reimbursed for foreign drugs. In Shanghai, for example, foreign imported drugs represented only 4% of all drugs qualifying for government reimbursement in 1998, the latest year for which such figures are publicly available. The continued exclusion of most foreign drugs from reimbursement qualification translates into significant lost opportunities for foreign players in this sector.

Of further concern is the not uncommon practice of doctors and health workers basing drug purchase decisions on monetary or other benefits they may personally receive from drug manufacturers or distributors.

Regulatory Regime

China strictly regulates the importation and distribution of pharmaceutical products and has put into place numerous laws, regulations, notices and circulars to protect and ensure drug quality, safety and effectiveness. The State Drug Administration (SDA) is the government agency responsible for the administration of pharmaceuticals in China. The legislative cornerstone of China's pharmaceutical regulatory regime is the recently revamped PRC Law on the Administration of Pharmaceuticals (中华人民共和国药品管理法) , which became effective December 1, 2001. It was overhauled to promote a more transparent and predictable market environment, and intended to create an equable system of conduct among importers and domestic market participants alike. Drug approvals and licensing requirements have been simplified and now rest in the centralized control of the SDA, suggesting that greater uniformity can be expected in application reviews.

Pursuant to the recently revised Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) , foreign investments in the pharmaceutical manufacturing sector are classified as either restricted or encouraged, depending on the nature of the drugs to be manufactured in China (with the exception of the manufacture of specified Chinese traditional medicines, which remains prohibited to foreign investors).

Trading and distribution rights for all foreign investors in China, including those in the pharmaceutical sector, remain problematic, although existing draconian restrictions will gradually be loosened in upcoming years in line with China's WTO commitments. Pursuant to the Pharmaceuticals Law, foreign drug makers may participate in the China market after receiving an import permit, a registration certificate and customs entry permission at designated ports. While the approval process may still prove burdensome for imported drugs, upon grant of approval, access to the Chinese market can be relatively unrestricted.

In order to elevate the standard of domestic pharmaceutical participants, China has announced several compliance measures that must be fulfilled, such as the Good Manufacturing Practices (GMP) to close the drug quality and safety gap between Chinese enterprises and their international counterparts. Approximately 6,300 domestic enterprises must comply with GMP standards before 2005 or be shut down; some industry experts forecast only half will succeed on schedule.

Intellectual Property Rights (IPR)

The supply of pharmaceutical products in China is outweighed by demand, proving incentive enough for corrupt manufacturers and sellers to perpetuate the market for pirated patents and inferior drugs. It is reported that unscrupulous domestic companies imitate up to 90% of all foreign pharmaceutical products in China. Nevertheless, for a number of reasons including domestic health and safety concerns and its WTO commitments, China is expected to increase protection of IPR in the pharmaceutical sector by stepping up efforts to stamp out the production and sale of fake drugs. The Pharmaceuticals Law now provides for individual accountability and criminal liability, which should serve as a more persuasive deterrent than was previously available. In addition, amendments to China's Patent Law (effective on July 1 2001), permit statutory damages for patent infringement to be based on either the loss suffered by the patent owner or the financial gains made by the infringing party. Where the loss suffered or profit gained cannot be clearly determined, damages may be based on a multiple of the patent licence royalties.

Conclusion

Although China has strengthened its pharmaceutical laws to provide for greater predictability and administrative efficiency in line with the spirit of its WTO commitments, there are peripheral challenges independent of WTO accession that still need to be addressed. China's accession to the WTO inherently implies a continuous commitment to reviewing legislative efficacy. While recent and anticipated developments in ChinaÕs regulatory framework do indeed address some of the symptoms afflicting foreign pharmaceutical companies in China, including IPR protection and distribution, it is unclear when a comprehensive legislative cure for unethical marketing practices and the absence of a transparent drug reimbursement qualification process will bring further relief.

By Mitch Dudek & Anthony Hotung

Jones Day Reavis & Pogue, Shanghai