Pharmaceutical Research and Manufacturers of America - Policy Views - Issues Around The World - Special 301 Report



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:

PhRMA also understands that the Government of China intends to allow GMP plants higher margins for products they produce. For enterprises seeking a higher price than the controlled price based on quality, safety and clinical efficacy, a public hearing will be held by the Pricing Bureau of the SDPC to review such an application. For popular brands of TCMs, applications to see a higher price will be reviewed by the Pricing Bureau and State TCM Administration.

The research-based pharmaceutical industry requests the U.S. Government's support in deterring the Chinese Government from implementing discriminatory and onerous price controls on foreign manufactured pharmaceuticals, and by pursuing the Chinese Government's demonstration of national treatment and transparency principles to the pricing system for this important sector as a condition for WTO accession. Specifically, PhRMA's goals include:

Lack of Transparency and Consistency: The positive effort of the State Drug Administration in initiating and developing a regulatory framework for the pharmaceutical industry within the past year should not be overlooked. However, now as the State Drug Administration solidifies and fills in the regulatory framework, it needs to seek broader bases of opinion, including feedback from the foreign research-based industry.

Too often the research-based industry discovers that although its domestic counterparts have been consulted, PhRMA member companies have not been consulted or we have been consulted too late to have any impact on a future policy/regulation. Regarding national drug price policy, we have already witnessed several stages of reform and adjustment. Now, a new policy will be issued heading in a different direction again. Drafts need to be circulated for comment. Transparency from the beginning to the end of the regulatory process is crucial for market efficiency because transparency leads to the development of consistent policy. Transparency and consistency are needed by the foreign research-based industry not only to properly evaluate investment decisions into facilities, but also because it can often take several years to introduce a prescription drug to a market so that it can reach profitability.

Customs Duty, VAT and Cost of Distribution: By the time an imported product reaches the patient, the cost will have risen by at least 80-90 percent, with no value added. This is due to import duties of around 12 percent (which we believe should be zero on drugs under a "zero-for-zero" tariff arrangement), VAT of 17 percent (which is zero-rated on ethical drugs in countries such as Sweden and the United Kingdom), port clearing charges, drug inspection (which re-tests products which already have official certificates of analysis from GMP factories abroad), distribution through the state controlled distribution system and the mark-up made by hospitals on dispensing to patients.

Moreover, in China a manufacturer must pay VAT on free samples, whereas the providing of free samples is considered a promotional expense (not subject to VAT) in other parts of the world.

Chinese law only permits a foreign-invested enterprise (the China factory company) to promote and sell products which it manufactures. Therefore, a company doing business in China is supposed to employ two separate sales forces to sell the same portfolio of products it sells through one sales force in most other parts of the world. Imported products must be promoted through foreign representative offices and sold to hospitals by Chinese distributors whereas locally manufactured products must be promoted by the factory company and may be sold to a hospital either through a distributor or by factory company itself. Even when a foreign company establishes a second factory in China, products from the two factories (since at each geographic location the foreign company would need to establish a separate foreign-invested enterprise company) should be marketed and sold through separate sales forces. (The only possible exception is if both factory companies are part of a holding company which, itself, requires significant investment.)

Imported Raw Materials: Chinese policy encourages the local manufacture of the active ingredient and such policy could significantly adversely affect the future investment plans of foreign companies. For instance, for a Class I New Drug, the foreign company is not allowed to apply for a patent on the bulk active. However, a domestic company may apply for a patent on the bulk active. First, this raises immediate concerns about the development of similar products which could affect the patent rights and market share of the foreign company. Moreover, the foreign company must be concerned about the future supply of the bulk active, for import of the bulk active similarly requires a drug import license, renewable every three years. In the future, the foreign company may be unable to receive approval to renew the drug import license for the bulk active and be forced to purchase it from a domestic company.

Approval of Investment vs. Approval of Products of Investment Project: In calculating the cost of investment, the foreign pharmaceutical investor is left with the predicament that only after it builds the factory will it know for sure which products it will be allowed to manufacture in the factory. First, the approval for investment occurs earlier than the ultimate approval for products, the approval for a particular product of a company depending on the anticipated demand and current number and capacity of manufacturers already producing that product at the time of the foreign company's application. Second, approval of the investment project and products had previously been by separate government agencies. In the past, several PhRMA Member companies have built factories, but not been able to register some of the products they intended to manufacture.

Within the past year, the State Drug Administration promulgated the Temporary Regulation for the Establishment of Drug Manufacturing Enterprises which requires State Drug Administration approval (at the national level) to establish a new drug manufacturing enterprise (including foreign-invested enterprise). The State Drug Administration also approves the registration of products. Therefore, since approval of the manufacturing enterprise is based upon a feasibility study and other contract/application documents which identify the products to be manufactured, approval of the manufacturing enterprise should also constitute approval of the products identified for manufacture.

Discriminatory Renewal of Import Product Licenses: Currently, import products receive an import drug license (formerly called "import drug permit") which is effective for three years. Chinese authorities have stated that in the future they would only intend to renew a drug import license for one additional three-year period provided comparable domestically manufactured products have been developed during the six year period. In other words, if a product has not become "localized" (manufactured in China) within six years, then Chinese authorities generally would not further renew the import license and the product may no longer be further marketed in China.

First, domestically manufactured products do not face such restrictions. Second, options available to a foreign company other than import are not always feasible or are restricted by law. For instance, building a factory in China is very expensive, costing about US$ 30 Million for a "green-field" site. Toll manufacturing is currently not allowed and a draft regulation which will likely be implemented in the near future would only allow the owner to entrust others to manufacture provided the owner already has a factory in China capable of manufacturing the product. Moreover, licensing is restricted by the fact that at the end of the term of the license the technology is presumed to be transferred to the licensee, unless otherwise approved, and the licensor does not have the right to market or sell the product which it has licensed.

PhRMA seeks the full support of the U.S. Government in seeking to overcome the aforementioned trade barriers for the researched-based pharmaceutical industry in China. Resolution of the problems facing the pharmaceutical industry in China will help ensure our industry's support for China's WTO accession.

Damage Estimates

PhRMA is currently studying methodology for estimating damages caused by absence of intellectual property protection in China (Appendix B). It has been difficult to measure precisely the size of China's pharmaceutical market, and the shares held in that market by foreign and domestic pharmaceutical companies. Today, there are 12 PhRMA member affiliates in China, which PhRMA estimates enjoy approximately a 12 per cent share of the China pharmaceutical market of US$6 billion (for finished formulations of western medicines) or around US$720 million in annual sales. It also is difficult to determine whether the total number of pirated products (as a percentage of all products on the market in China) has fallen substantially in the last five years, a result of the enactment of improved intellectual property protection or improved enforcement of these "IP" laws. PhRMA member companies in China estimate that a substantial part of the market still is dominated by pirated or counterfeit products, and that market share could rise from 12 percent to 25 percent, or roughly double current sales if problems in China were rectified.

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