PhRMA strongly supports the recently announced agreement for China's forthcoming accession to the WTO, on the basis that China has agreed to meet WTO disciplines for protection of intellectual property, transparency, national treatment, government procurement, and other areas. We look forward to China's membership in the WTO and its greater integration into the world economy.

Protection of Intellectual Property

Implementation of China's WTO accession package should provide full product patent protection for U.S. pharmaceutical products that have not been received protection up to the present time. This issue dates back to 1992, when 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 provided 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. As stated above, we look forward to complete product protection in China, but until accession is completed look to the Government of China to live up to the terms of its bilateral commitments to the U.S.

In the past year, drug counterfeiting, particularly in Guangdong Province has increased significantly. We acknowledge the recent promulgation of regulations regarding drug circulation and administrative sanctions. However, there needs to be strengthened enforcement of existing laws and regulations which requires the allocation of additional resources. The problem is so severe 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 also remains a serious concern for PhRMA member firms. This includes 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.


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 in the interim period prior to implementation of its WTO obligations. 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 on this basis as well. In addition, industry seeks better enforcement of existing legislation and regulations 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.

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 have violated 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 Chinese patients and 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:

  • 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% profit and finished goods 20% profit. Traditional Chinese Medicines (TCMs) in finished form will be granted 20% and biologicals 35%.

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

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

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.

Since 1996, the international pharmaceutical industry has sought 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 regulations reportedly declare that for balancing purposes, low margins will apply to imported medicines of high value. (Foreign medicines which are used in large quantities impacting market share are considered high value and importation and pricing are to be restricted by the State.) Not only is artificial manipulation of trade flows prohibited under the WTO, but this means that SDPC could determine the equilibrium price at port, as well as the wholesale and retail prices, resulting in trade-distorting subsidies to dealers for handling domestically-produced medicines.

  • The pricing regime requires that foreign companies share sensitive proprietary information in order to calculate the appropriate price/profit margin for imports such as the ex factory price, sales income, profit, and net income margin of drugs produced by joint ventures in China. Disclosure of these data provides competitive intelligence easing the piracy of foreign products.

In a previous version of the price controls, there was some assurance of an appropriate profit to domestically produced products for recovery of reasonable costs including allotments for the R & D expenditures of new medicines and recognition of quality manufacturing and therapeutic benefits of innovative technologies. These premiums were not provided for imports in the previous version of the regulations. It is not yet clear whether this problem has survived in the new regulations.

The research-based pharmaceutical industry will spend over 20% of its annual sales revenues in 1999 on R&D, or around US$24 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. Specifically, PhRMA's goals include:

  • That all aspects of China's pharmaceutical pricing and reimbursement system accord de jure and de facto national treatment to imported pharmaceutical products and ingredients under Article III of GATT 1994.

  • That all non-tariff measures, such as performance requirements, on purchase, pricing, listing and reimbursement of imported pharmaceutical products, are restricted.

  • That federal, provincial or local measures that directly or indirectly discriminate against imported medicines are eliminated.

  • That uniform administration, transparency and judicial review are applied to procedures, formulas and criteria for calculation or administration of pharmaceutical price controls and reimbursement

  • That appropriate enforcement of administrative protection provisions, as per US-China MoU of January 1992, are applied.

Other Trade Issues

PhRMA anticipates that a number of the following issues may be addressed through China's expected accession to the WTO.

1. 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.

2. 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%, with no value added. This is due to import duties of around 12% (which we believe should be zero on drugs under a "zero-for-zero" tariff arrangement), VAT of 17% (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.)

3. Imported Raw Materials:
Currently, 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.

4. Approval of Investment Should Also Constitute 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.

This is because: (1) 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; and (2) 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.

5. Future 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.


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 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$1.6 billion, if the aforementioned problems encountered by PhRMA member companies in China were rectified.