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7 April, 2017
At the end of 2016, there were some 6,802 drug manufacturing companies registered in China, making China the biggest manufacturer of preparations and the largest manufacturer and exporter of active pharmaceutical ingredients ("APIs") in the world. This apparently impressive statistic belies a more worrying reality: 97% of the drugs manufactured in China are generic drugs. In the drug distribution sector, the top three drug wholesalers have a combined market share of 33% – significantly less than the average ratio in developed countries, reflecting the dispersed and fragmented nature of the sector. Furthermore, although the Chinese authorities have made substantial efforts to clean up the market, issues like low drug quality, chaotic drug distribution, high drug prices and commercial bribery are still prevalent in the drug distribution sector.
It was against this backdrop that the State Council of China issued the Further Reforming and Enhancement of Policies regarding Drug Manufacturing, Distribution and Usage Several Opinions (the "2017 Opinions") on January 24, 2017. The 2017 Opinions set the stage for the introduction of rules and policies designed to strengthen the Chinese drug market, to improve the quality of drugs, lower drug prices and facilitate the usage of drugs by ordinary consumers. However, rather than actually putting forward substantive new policies, the 2017 Opinions mainly summarize and revisit certain key policies introduced in the past two years. That said, there are some key takeaways that merit particular attention which we have analyzed below.
A more flexible drug review and examination procedure
To improve drug quality and efficacy, in the 2017 Opinions the State Council proposes to impose stricter review and examination standards for drug registrations. For new drugs1, their clinical worth or value must be a key factor during examination and review; for generic drugs, a precondition to obtaining a marketing authorization from the industry regulator, the China Food and Drug Administration (the "CFDA") will henceforth be passing quality and efficacy consistency assessments compared with the original drug ("Consistency Assessments").
The State Council proposes to establish a category-based examination and review system for drugs used in resuscitation and other life- threatening circumstances, traditional Chinese medicine, and drugs that treat rare diseases, diseases or that particularly affect children and senior citizens, to ensure that the needs of those groups and for the treatment of major diseases are met. Following the model for the implementation of two special processes2 for registration of medical devices, the State Council also recommends adopting a similar priority review and examination process for new drugs where there is urgent clinical need or a shortage of drugs in that space. Presumably, detailed rules will follow to implement this new approach.
Furthermore, the 2017 Opinions underline that patented drugs that prevent or treat major/critical diseases may be subject to compulsory licenses where necessary. This is not new, but obviously remains a concern for drug innovators and inventors.
Bio-equivalence ("BE") studies3 subject to record-filing
Under Article 30 of the Drug Registration Administrative Measures4, the drug manufacturer needs CFDA's prior approval before it can conduct a BE study carried out as part of clinical trials in China. In the Reforming the System for Review and Examination and Approval of Drugs and Medical Devices Opinions issued by the State Council in August 9, 2015 (the "2015 Opinions"), the State Council, for the first time, proposed to change the administrative process for conducting BE studies from prior approval to record-filing. Later that year, the CFDA published the Announcement regarding Record-filing of Bioequivalence Studies for Molecules (the "BE Announcement").
Under the BE Announcement, record-filing procedures must be carried out with the CFDA in relation to drugs before conducting BE studies, if they:
- are generics of marketed reference products with identical APIs, administrative routes, dosage forms and specifications with respect to the reference product (reference products must be brand-name drugs);
- have been approved by the CFDA, but a BE study is required for variation research; or
- have been approved by the CFDA, but a BE study is required for the Consistency Assessment (reference products must be brand-name drugs or internationally- recognized generics).
Drugs that fail to meet the above criteria will still be subject to prior approval from the CFDA in order to carry out a BE study. Qualified applicants for BE studies can complete the record-filing process by submitting the application materials to an online platform designated by the CFDA, after which a record- filing number will be generated automatically. Before the enrollment of the first subject, applicants need to register all required information in the registration platform for drug clinical trials, which will be made public by the CFDA.
In the 2017 Opinions, the State Council reiterated its proposal to change the administrative regime from approval to record- fling, and to allow medical institutions, universities, research institutes and social privately-funded evaluation agencies to participate in BE studies. Again rules will be separately issued for the implementation of the above.
Consistency Assessment of Generic Drugs
Chinese authorities have made the Consistency Assessment for generic drugs the centerpiece of their regulatory efforts. For years, this routine practice commonly deployed in the US, EU, Japan, and other developed jurisdictions has been conspicuous by its absence in the China drug market. The 2017 Opinions, together with other recent policies formulated by the Chinese authorities place great emphasis on the Consistency Assessment for generics. The State Council considers it necessary for all generic drugs to pass the Consistency Assessment in the course of drug registration.
Back in February 6, 2016, the State Council issued the Carrying out Quality and Efficacy Consistency Assessments for Generic Drugs Opinions, requiring that generic drugs listed in the National Essential Drugs (2012 Edition) in an oral solid dosage form, which were granted marketing authorization prior to the implementation of the new registration classification for chemical drugs but had not been examined and approved according to the principle of consistency with respect to quality and efficacy had to complete the Consistency Assessment by the end of 2018. The timeframe may be extended to the year 2021 if special circumstances apply. Drugs manufacturers that fail to meet the deadline will not be able to renew their marketing authorizations.
The State Council reaffirms in the 2017 Opinions that all generic drugs must pass the Consistency Assessment in due course. It also confirms the concept that drugs passing the Consistency Assessment will be included into the Catalogue of Substitute Drugs for Brand- Name Drugs, thus enjoying a position of being prioritized in drug procurement, and calls for a mechanism to be created for incentivizing institutions to use generics that have passed Consistency Assessment by making them eligible for medical insurance coverage. On the flip side of this coin, where three or more drug manufacturers of the same type of generic drugs have passed the Consistency Assessment, generic drugs of the same type that have not passed the assessment will not be considered in any procurement activities.
Price cap for patented drugs and drugs whose patents have expired
In the 2017 Opinions, the State Council proposes to adopt a set of comprehensive measures to control the prices of patented drugs and drugs whose patents have expired in China, and to make sure their price does not exceed those in neighbouring markets or the country of origin. These measures may include imposing price commitments when applying for registration, drug price negotiation, procurement processes, and payment through medical insurance. We note that similar concepts appeared in the 2015 Opinions, in which the State Council required that all applicants for new drugs must make a commitment to the CFDA that the marketing price of the drug undergoing registration would not be higher than that in its country of origin or in neighbouring markets.
Based on a news report from Bloomberg, the CFDA has issued draft rules on capping the price of new drugs, and "neighbouring markets" was preliminarily defined in the draft as the drug markets in Japan, South Korea, India, Hong Kong, Macau and Taiwan. Unfortunately this draft is not publicly available. Based on such news report, drug manufacturers refusing to make such a commitment will not be able to obtain approval from the CFDA. Once drug approval is granted, commitments made by the manufacturer will be made public online. However, our communications with the CFDA and its local arms show that they are not, as yet, requiring any written commitments on drug pricing, but are unwilling to comment further.
Nonetheless, from public sources we have come across reports of several rounds of national drug price negotiations. The targeted drugs were mostly patented drugs whose prices were, in the view of the Chinese authorities, unreasonably high. The average price reduction ratio for such drugs following re-negotiation was 50%5.
Internet + drug distribution
Given that off-line sales of drugs cannot satisfy the growing needs of the Chinese population, and that e-commerce is a booming sector in China, in the 2017 Opinions the State Council promotes the so called "Internet + drug distribution" concept, so as to facilitate drug sales. The thinking goes that the Internet will be a more efficient tool in reducing transaction costs, raising distribution efficiency and breaking up monopolies. In the 2017 Opinions, the State Council encourages cooperation between drug distributors and Internet companies, and exploration of new drug delivery methods, including ordering online and then collecting drugs at physical stores, or ordering online and having stores deliver.
However, the biggest concern here is that the attitude of the regulator towards online drug sales seems to be in a permanent state of flux. In July 2016, the CFDA called off the pilot project for selling drugs on third-party Internet platforms, presumably due to extensive illegal prescription drug transactions. This was deemed to be a setback for the online drug-sales sector. In the 2017 Opinions, online drug sales are once again officially an encouraged business, which could be a clear signal that the Chinese authorities are, once again, willing to support the development of online drug distribution. As a less heavily regulated space, online drug sales had become fertile territory for illegal drug transactions, such as illegal sales of prescription drugs. To prevent this from happening again, in the 2017 Opinions, the State Council requires the CFDA and the Administration of Industry and Commerce to maintain effective administration over online drug transactions, and to enhance daily supervision. Whether this is enough to change the reality of the risks inherent to the online universe remains to be seen.
Reform of the marketing approval holder system
The marketing authorization holder system was first put forward in the 2015 Opinions. On May 26, 2016, the State Council officially launched the drug marketing authorization holder project in ten pilot areas, namely Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, and Sichuan. Prior to this pilot project, the holder of a marketing authorization had to be the drug manufacturer, which, in effect, blocked the possibility of entities or people that did not have drug manufacturing capabilities from applying for drug marketing authorizations. This meant entities and people such as research centers and scientists had to transfer their research results to drug manufacturers before drug registration.
This pilot project opened up a new phase in the drug registration space in China. It allows R&D institutions and researchers to obtain drug marketing authorizations, whereupon they are allowed to contract with qualified manufacturers for mass production.
In the 2017 Opinions, the State Council further proposes that the marketing authorization holder system will be applicable to new drugs and generics that pass the Consistency Assessment, with its ultimate goal of rolling out the new system nationwide as soon as possible.
Regulation of medical representatives tightened
The medical representative system was introduced into China in the 1980s. Originally, medical representatives mainly served as professionals who carried out academic promotion activities with respect to medical institutions and physicians. However, as participation in the Chinese drug market requires a relatively low level of professional qualifications from medical representatives, in some cases they gradually became agents of commercial bribery and corruption activities. Chinese authorities have been trying to clean up the market and strengthen the regulation of medical representatives for some time. In the Catalogue for Occupational Classifications (2015 Edition), a medical representative is defined as a professional who represents a drug manufacturer in carrying out information communications and feedback collection activities.
The 2017 Opinions expressly emphasize again the importance of tightening the administration of medical representatives, and proposes to establish a record-filing system for medical representatives. Apart from direct selling of drugs, medical representatives will be restricted to academic promotion and technical consultancy activities. Those who fail to comply with those restrictions will have their dishonest behaviour tracked and listed in their personal credit records.
Tightened supervision over drug distribution
In the 2017 Opinions, the State Council also proposes a revamping of the drug distribution sector, by requiring that the CFDA, the National Health and Family Planning Commission, and the Administration of Industry and Commerce jointly launch regular investigations to crack down on unlawful behaviour, such as "lending out" of permits and licenses, engaging in fictitious transactions, forging records, commercial bribery, price fraud, and monopolistic pricing. To back this up, there is a clear determination that where drug distributors and medical institutions are found to be in violation of laws and regulations, they will not only be punished in accordance with the relevant rules, but will also have negative records placed in their drug procurement records, entity credit records as well as the personal credit records of the people concerned. Furthermore, their unlawful acts will be made public i.e. "naming and shaming", and such distributors will be banned from selling drugs to public medical institutions for a period of two years.
Conclusion
The 2017 Opinions show us the direction and strategies Chinese authorities wish to take in pursuing drug reform. The question is whether top down policy directions are enough to turn the ship around on the ground, given the scale and depth of the issues with industry governance. Local enforcement is likely to be key. For foreign players in the Chinese drug market, the 2017 Opinions may also bring some benefits. For instance, foreign drug manufacturers that are actively engaged in the research and development of new drugs in China could benefit from the proposed priority review and examination process (see paragraph 1 above). The newly-launched marketing authorization holder system allows foreign- invested R&D centers to be eligible to become holders of drug marketing authorizations for the first time6.
In addition, the Chinese authorities are attempting to promote the transformation and upgrading of all drug distributors in China which can only benefit the market as a whole. On the other hand, foreign drug manufacturers and drug distributors (the latter is a relatively small sector given it is relatively difficult to obtain the approvals for this) need to be prepared for stricter ethical and operational standards, more intrusive imposition of Good Manufacturing Practices, a more stringent drug price control mechanism and more extensive governmental compliance involvement in drug distribution activities. However without vigorous local enforcement efforts these new policies will become something of a 'dead letter'.
By the end of 2016, there are more than 142,000 drug wholesale companies registered in China. Foreign investment in the Chinese drug market is generally welcome, especially in the distribution sector where bringing in more foreign investment to boost the development of the whole sector was particularly pinpointed in the Development Plan for National Drug Distribution (2016-2020). Currently, there are a certain number of foreign-invested drug distribution enterprises in China, either in the form of joint ventures or wholly foreign-owned enterprises, some of which are the result of M&A activities. As the Chinese authorities are pushing for consolidation of the highly fragmented drug distribution sector, foreign investment is being encouraged, albeit more in the direction of cooperation-type arrangements with existing Chinese distribution companies that already hold drug distribution permits, rather than in the establishment of new ones, and reportedly some local authorities are limiting the issuance of new drug distribution permits in order to achieve this.
1 Based on the 2015 Opinions, "New drugs" are defined as drugs that have never been sold in the market both
2 within and outside of Mainland China, including innovative drugs and improved new drugs.
The two special processes for medical device registration are: priority review procedure as stipulated in the Priority Procedures for the Review and Examination of Medical Devices effective as of January 1, 2017; and fast-track review process as provided in Special Examination and Approval Procedures for Innovative Medical Devices (for Trial Implementation) effective as of March 1, 2014.
3 "BE study" refers to a study on the human body which applies bioavailability study methods with pharmacokinetic parameters as indicators to see if there is any statistical difference in the degree and rate of active ingredient absorption of the preparation under the same experimental conditions, but with the same or different dosage forms of a drug.
4 The Drug Registration Administrative Measures were issued by the CFDA with effect as of October 1, 2007.
5 Please see official press here:
www.nhfpc.gov.cn/yaozs/s3578/201605/fc76991a716141
6 However, based on an official interpretation, foreign natural persons even with a Foreigner Permanent Residence Certificate are not permitted applicants for drug marketing authorizations. Please see the official
interpretation in Chinese here:
http://www.sda.gov.cn/WS01/CL1790/164916.html
