Protection of Intellectual Property

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 patent 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 provide 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.


It is not yet clear how the Administrative Protection will be implemented, with the demise of the SPAC, and the assumption of responsibilities for Administrative Protection by the new State Drug Authority (SDA). 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.


Price and Profit Controls

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 of burdensome and 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% annually. It further directed "medical units" to limit their purchases of imported and foreign joint venture pharmaceuticals to no more than 30% 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 seem to 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.

PhRMA emphasizes that China's price control regulations would be self-defeating and counter-productive. The primary burden would fall on Chinese patients, who would be denied access to innovative life-saving medicines developed abroad. Moreover, absent adequate rewards for innovation, it will be difficult for China to attract foreign investment in its state-owned pharmaceutical sector.

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.

PhRMA also understands that there will be controls on advertising and "drug selling expenses." According to the new rules, the originators of medicines will be allowed 25% of sales for drug selling expenses, while those who do not represent the originator will be allowed 10%. Normally, "selling" expenses should include: advertising, promotion, sales representatives' salaries, incentives, TM&E, training, marketing, product registration, clinical studies, distribution and freight. In March of every year, enterprises must report to their local pricing bureau an analysis of selling expenses by products.

The Chinese Government also has stated its objectives to control discounts to hospitals, clinics and other end users. Pharmaceutical enterprises cannot offer discounts higher than 5%, while the seller must indicate on the invoice the actual selling price net of discount.

Excessive profits by wholesalers over and above 5% are illegal and will be confiscated by local authorities. In March of every year, according to the new regulations, medical units must report their income from wholesale and retailing of drugs to the local (e.g., provincial) pricing bureau.

The Chinese Government reportedly has suggested that medical units should raise medical fees to offset lower income from drugs, although it does not suggest how the medical units may go about doing this. For those territories that find it difficult to raise medical fees, an additional 3% profit allowance will be given to county units, and an additional 8% profit allowance given to village units.

In late 1996, the international pharmaceutical industry launched a concerted campaign to convince the Chinese Government that the controls would not accomplish what they sought and would, in fact, be counterproductive to their goals. As a result, the Chinese Government granted some leeway for higher margins for innovative foreign manufactured pharmaceuticals, particularly if technology is transferred to China.

At an industry briefing in October 1998, PAB Director General Bi Jing Quan presented SDPC's possible modifications to the original proposal. However, there are major questions that remain regarding the regulations, which continue to discriminate against imported medicines and to promote WTO-inconsistent "import substitution." These include:

The research-based pharmaceutical industry will spend over 20% of its annual sales revenues in 1998 on R&D, or around US$21 billion. This amount is higher by far than any other industrial sector. The drug industry provides not only highly skilled jobs but advancements in science, technology, research, medicine, marketing, manufacturing and sales.

The current changes to the proposed pricing structure do not recognize R&D investments made by international companies within China, or the need for China to bear some of the burden for global R&D expenditures to avoid being a "free rider". Without further modifications to the draft regulations, the price controls will discourage the establishment of research and development capabilities in China, continued capital investment and manufacturing, technology transfer, and additional hiring and training of Chinese staff. Medical education programs in certain therapeutic areas will be affected as well as the substantial support PhRMA companies give to patient education.

Research-based pharmaceutical firms administer worldwide R&D programs and make difficult choices among nations, therapeutic areas and specific drugs in selecting where to invest their R&D funds. The Chinese Government should continue with further revisions to the proposed price controls on pharmaceutical products in China, unless they wish to see a significant reduction of investment by the research-based pharmaceutical industry in China.


Price controls would create significant economic distortions, shifting costs to administration and to government bureaucracies, which would make decisions about drugs instead of the usual players in the marketplace such as physicians. Furthermore, price/profit controls would undermine the spirit of economic and trade liberalization which the WTO represents and deprive foreign firms of many of the benefits conferred through Chinese accession to that body.

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.


Other Trade Issues


The U.S. research-based pharmaceutical industry, as represented by PhRMA, believes that the United States Government should continue to support renewal of China's MFN status, since the maintenance of an open and liberal trading relationship is in the interest of both countries. The renewal of China's MFN 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 does ask 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.


Potential Exports/Foreign Sales

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 precisely the impact of the imposition of price and profit controls on the share that PhRMA member company affiliates enjoy in the China pharmaceutical market. It is clear that the Chinese Government intends the price and profit controls to have a dampening impact on the success of the international industry in China. If the new rules are implemented in a way that protects the domestic industry from competition with the Joint Venture companies, and favors the former, the impact could be extremely serious.

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.

PhRMA estimates that the potential size of its companies' share of the pharmaceutical market for finished formulations of western medicines could reach US$1.4 billion, if the aforementioned problems encountered by PhRMA member companies in China were rectified.

For all the aforementioned reasons, PhRMA believes that China should be listed as a Priority Watch Country under Special 301 in 1999.