WATCH COUNTRY

China

The U.S. research-based pharmaceutical industry, as represented by PhRMA, believes that the United States Government should support the establishment of China's Normal Trade Relations (NTR) status, since the maintenance of an open and liberal trading relationship is in the interest of both countries. The establishment of China's NTR status should provide the foundation for seeking further improvements in China's business and commercial practices that will bring them into line with the global standards of the World Trade Organization, to which China seeks accession. PhRMA member companies China strongly support the WTO Accession bid of the Government of China, conditioned on Chinese implementation of WTO-consistent intellectual property protection and market access disciplines. Given the current environment for industrial property and barriers to market access for pharmaceutical product, PhRMA requests China's placement on the 2000 "Special 301" Watch List.

Protection of Intellectual Property

Exclusive Marketing Rights: In 1992, the U.S. and China negotiated a Memorandum of Understanding (MoU) to provide 7.5 years of marketing exclusivity to U.S. pharmaceuticals not introduced during a designated "Administrative Protection" period (1986-1992). Chinese law implementing the agreement states that anyone who has not obtained a certificate for Administrative Protection (AP) is prohibited from manufacturing or selling the subject product during the term of exclusivity. The law also provides that the owner of the certificate can request the authorities to stop local companies from manufacturing or marketing the pharmaceutical, and can institute legal proceedings to recover economic damages for infringement.

In 1994, however, new legislation was passed (Notice 72) that nullifies this protection for U.S. pharmaceuticals. Notice 72 states that domestic pharmaceuticals which were given approval by MOH during the examination of AP for a foreign manufacturers shall be considered a legally marketed and manufactured and shall not be considered an infringement of AP. This loophole encourages MOH to grant certificates to local companies for copies of products before the AP certificate is granted to foreign manufacturers by the now defunct SPAC. Furthermore, industry intelligence indicates that MOH certificates are being granted even if the local company has not complied with all MOH regulations or is not truly ready to market the product.

According to the 1992 MoU, Article 2 of the regulations for Administrative Protection provides that: "The competent Chinese authorities will prohibit persons who have not obtained a certificate for Administrative Protection from manufacturing or selling the subject product during the term of Administrative Protection." Enforcement of Administrative Protection has been governed by Article 18 and 19 of the Regulations which were approved by the State Council and promulgated by the former SPAC in December 1992. Article 18 provides that the MOH under the State Counsel and provincial municipal health authorities shall not allow anyone other than the patent owner who has obtained Administrative Protection from manufacturing or selling the product. Article 19 provides that the Administrative Protection Certificate owner can request the authorities under the State Council to stop local companies from manufacturing or marketing the pharmaceutical. The Administrative Protection Certificate owner also can institute legal proceedings in the people's court to recover economic damages.

PhRMA believes that Notice 72 is not consistent with Articles 18 and 19 of the Administrative Protection Regulations cited above. Paragraph two of the Notice states that the pharmaceuticals (applied for by local companies) which were approved by the Ministry of Public Health during the examination of Administrative Protection shall be considered as legally marketed and manufactured and shall not be considered as an infringement of Administrative Protection. As such, Notice No. 72 clearly violates the period of marketing exclusivity provided for in the MoU.

Enforcement of Patent Protection: The products that were patented under China's new patent law in 1993 will soon be reaching Chinese patients. PhRMA members expect the Chinese Government to enforce the intellectual property protection that these products are due under China's laws. These same members are concerned, however, that difficulty they have encountered in trying to ensure protection of "Administratively Protected" products - and enforcement of the "Administrative Protection" program in accordance with the January 1992 China-U.S. MoU - will mean that China may not be willing to ensure close enforcement of its patent law once their patent-protected products become available on the market in China. PhRMA urges the U.S. Government to seek clarification from the Chinese Government as to how the program of Administrative Protection will be implemented by the SDA. The U.S. Government also should seek a revocation of Notice 72 and a reinstatement of the 7.5 years of marketing exclusivity in China for products protected by Administrative Protection. In addition, industry seeks enforcement to stop local companies from all research, development or marketing activities relating to products protected by Administrative Protection.

Anti-Counterfeiting Efforts: Counterfeiting of drugs, particularly in Guangdong Province has significantly increased in the past year. We acknowledge the recent promulgation of regulations regarding drug circulation and administrative sanctions. However, there needs to be strengthened enforcement which requires the allocation of additional resources. The problem is so serious for some PhRMA Member companies that they have already spent the time and resources to close several factories within a twelve month period.

Data Exclusivity: There also are serious concerns regarding the confidentiality of product registration information during the registration process for imported products, localization (domestic manufacture), and, as mentioned above, administrative protection. Too often, the foreign company discovers during the registration process that domestic competitors begin manufacturing the generic of the product. Much of the domestic manufacture is of counterfeit products, particularly for products which are being localized. From the packaging, it is often difficult to distinguish the counterfeit and real product. For import and administrative protection products, often the domestic product obtains legitimate licenses. However, many PhRMA member companies believe that too much processing of information is required in the application process and this information is secretly passed on to the many research institutes (some evidence of this has been discovered) throughout China with the result being the appearance of domestic generics.

Barriers to Market Access for Patented Pharmaceutical Products

National Treatment: In efforts to gain control of health care spending, the State Development and Planning Commission (SDPC) proposed price/profit controls on drugs to regulate the pharmaceutical market in late-1996. The SDPC's price and profit control regulations entered into force on December 1, 1998, despite strong objections from the U.S., European Commission (DG-I), and Switzerland that the new pricing regime violates the WTO's "National Treatment" principle.

The Chinese Government's imposition discriminatory price controls on pharmaceuticals in December 1998 is the most serious issue currently facing the research-based pharmaceutical industry in China and raises major questions about future investments in China. Recently, we have learned that the SDPC's regulations are being mirrored by equally serious protectionist actions at a provincial level. Recently, Guangdong province limited increases in sales of medicines by Chinese "medical units" to a maximum of 15 percent annually. It further directed "medical units" to limit their purchases of imported and foreign joint venture pharmaceuticals to no more than 30 percent of total purchases. If fully implemented, the Guangdong directive would represent a sharp cut in sales of imported and foreign medicines. Similar WTO-inconsistent measures reportedly are being considered by other Chinese provinces.

The Chinese government stated that the purpose of the price controls is to reduce unfair competition by controlling the prices of joint-venture products (i.e., joint ventures between state and foreign companies), and stimulate company mergers to eliminate low-quality manufacturers. The international industry believes, however, that the new price control system is a means for the Ministries to "jockey" for power and an effort to help/protect state-owned enterprises from foreign competition. For imported products, the SDPC shifted pricing authority away from the former State Pharmaceutical Administration of China (SPAC) to SDPC's own Price Administration Bureau (PAB), an agency which does not have direct knowledge of the pharmaceutical sector or foreign investment in that sector. In addition, the SDPC has strengthened its price control mechanisms through provincial price bureaus.

PhRMA understands that the national price and profit controls will be phased in. There are indications that the controls will affect some companies and some sectors of the Chinese health care system before others. From the previous drafts of the price regulations to which PhRMA and its member companies were given access, the following was clear:

(1) The proposed price control regulations, on their face, discriminate against foreign pharmaceutical products and thus appear to be fundamentally inconsistent with the World Trade Organization's "national treatment" principle.

(2) In violation of GATT Article III:4 and the WTO Agreement on Trade-Related Investment Measures ("TRIMs"), the proposed Chinese regulations (a) promote "import substitution," (b) establish different and less favorable procedures and formulas for pricing imported pharmaceuticals, and (c) bestow an array of benefits on Chinese-made products that are not afforded to "like" imported products.

(3) The Chinese government also appear to violate GATT Article III:4 by removing disproportionately large numbers of imported drugs from the National Essential Drug Reimbursement List for purposes of promoting import substitution. Such de facto discrimination contravenes the WTO's national treatment principle.

(4) The proposed regulations lack transparency and invite protectionist abuses.

PhRMA continues to believe that the price and profit control regulations constitute a major market access barrier to U.S. pharmaceutical exports. Such regulations have disastrous implications for future sales of research-based U.S. pharmaceuticals in China's rapidly expanding market. While China is fully capable of building an internationally competitive, research-based industry, this important goal cannot be achieved unless the pharmaceutical market is opened up to foreign competition without discriminatory regulatory barriers. Furthermore, intellectual property must be adequately protected, and investment in innovative research and development adequately rewarded. While Chinese officials have claimed that the most recent version of the controls offer improvements over previous drafts, PhRMA remains deeply concerned about the controls and the way in which they could be implemented. PhRMA understands the details of the controls in their most recent form as follows:

• Class I (drugs discovered, developed and produced in China) and Class II (drugs for which Phase I and Phase II of the clinical research was conducted in China) new drugs will enjoy a three-year period of "relaxed control" from the date of approval;

• New products approved under Category I to Category V can keep their original profit ratio for a period of five years after expiration of the new drug protection period;

• For patent-protected compounds, locally produced raw materials approved under "Category IV" (products marketed elsewhere in the world), will be granted 30 percent profit and finished goods 20 percent profit. Traditional Chinese Medicines (TCMs) in finished form will be granted 20 percent and biologicals 35 percent.

• In a Good Manufacturing Practices (GMP) approved plant, locally produced raw materials (old products) will be allowed a profit margin of 15 percent and finished goods will be allowed 11 percent. Biological finished goods will be allowed 23 percent and TCMs will be allowed 15 percent.

• For specialty drugs after the expiration of new drug protection period, raw materials will be allowed a 20 percent profit margin, and finished goods will be allowed 15 percent. Specialty drugs include anti-cancer drugs, anesthetics, birth controls products, etc.