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.
Recommendations
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.
Recommendations
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.
Recommendations
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.