Pharmaceuticals in China

The profile of China within the pharmaceutical industry is still low. China accounts for 20% of the world’s population but only 1.5% of the global drug market, although that market has been expanding by a 10% plus annually over the last 10 years.

The pharmaceutical market is highly fragmented and inefficient. China today has around 3,000 to 6,000 domestic pharmaceutical manufacturers and around 14,000 domestic pharmaceutical distributors. Most often cited adverse factors include: a lack of protection of intellectual property rights, a lack of visibility for drug approval procedures, and differences in the treatment in China accorded to local and foreign firms. Even so, the industry environment has been transformed for the better over the last 10 years. Entry to the WTO has brought a stronger patent system, medical insurance is now more widespread, and pharmaceutical related regulations have been stiffened.

Number, size, and growth
Currently China has about 3,500 drug companies, falling from more than 5,000 in 2004, according to government figures (see List of pharmaceutical companies in China). The number is expected to drop further. The domestic companies compete in the $10 billion market without a dominant leader. At present, China is the world’s ninth drug market, and in 2008 it will become the eighth largest market.

China’s thousands of domestic companies account for 70 percent of the market, and the top 10 companies about 20 percent, according to Business China. In contrast, the top 10 companies in most developed countries control about half the market. Since June 30, 2004, the State Food and Drug Administration (SFDA) has been closing down manufacturers that do not meet the new GMP standards. Foreign players account for 10% to 20% of overall sales, depending on the types of medicines and ventures included in the count. But sales at the top-tier Chinese companies are growing faster than at Western ones, according to IMS Health Inc.

Even the top selling companies just barely exceed sales of $100 million (hospital market). Most of the Chinese drug makers fall below the 20th ranking, but 30 of the top 50 companies are local.

In addition, China’s OTC market is growing fast and has become the fourth largest OTC market in the world. Merck announced the launch of OTC program in China in September 2003. Roche listed China as one of its 10 core OTC markets, with the aim of growing its OTC drug sales by 50% in the next five years and reaching 1.3 billion in 2008. Novartis is expanding its OTC market share in China, and Wyeth has also entered OTC market.

Production levels
In the 9 months from January to September 2004, the total output of the country’s pharmaceutical industry reached $40 billion, 15.8% higher than the same period of 2003. In the same period, 23 major state-owned pharmaceutical companies had sales of $10 billion. A survey of 16 typical city hospitals, the usage of drugs increased by 32.23% in the first half of 2004 as compared with that of 2003.

Around 36% of all China’s pharmaceutical enterprises are state-owned. Another 35% are privately owned domestic enterprises and the remaining 29%, foreign-funded. Synthetic drug manufacturing remains the pharmaceutical industry’s largest business in China, constituting 65% of industry sales. Another 21% of industry sales come from traditional Chinese medicine. Biotech-related medical products and medical equipment make up the rest.

Low R&D
With their low budget for research and development, China’s pharmaceutical makers are in a different league from the multinationals, but they do enjoy certain advantages. Many Chinese companies not only produce the dosage forms (such as tablets) but also own the pharmacies where they are dispensed, as well as the distribution networks that deliver them to the hospitals, where nearly 80% of drugs are sold. In addition, Chinese companies can churn out generic versions of branded drugs for a fraction of their price.

Of the 3,000 pharmaceuticals-not including traditional medicines-manufactured in China since the 1950s, 99 percent are copies of foreign products, as are almost 90 percent of China's biotech products. Most Chinese companies-even joint ventures-compete with each other for the same generics. Many are struggling for survival; more than 32 percent recorded losses in 1999, according to the Pharmaceutical Department of State Economic and Trade Commission (SETC).

Moreover, compared with international pharma giants, Chinese companies are not only small, they are weak in technology and often lack capital. In fact, the total R&D expenditures for Chinese-owned pharma businesses amounted to less than that spent by a single major Western pharma company.

Companies organization and management
A Western pharmaceutical company in China is basically controlled by its parent company. The subsidiary follows its parent company’s advanced management model, is highly influenced by the headquarters in decision making, finance, and research and development. But in marketing, the subsidiary’s management team has more autonomy, mostly due to the different characteristics of Chinese market.

Most Western pharmaceutical companies’ subsidiaries in China are foreign citizens appointed directly by the parent companies. In a poll of 33 foreign pharma companies, 28 say their general managers are foreign citizens, accounting for 85% of the total; 15 say their vice general managers of productions are foreigners, accounting for 45%. Foreign VPs of fiancé and marketing account for 52% and 39% respectively.

The same poll shows mid level management positions such as department directors are held by Chinese. Chinese marketing directors account for 27%, foreign marketing directors account for 39%, and the rest, according to the author of this pharma China report, goes to repatriates. Five Western pharma companies have foreign R&D directors, and only three have foreign HR directors.

Comparison of Chinese and Western Pharma Business
Like its U.S. and European counterparts, the Chinese pharma business is regulated by government agencies, and competition is fierce in the business. The biggest differences include following:
 * most Chinese pharma companies are generic drug manufacturers;
 * a large number of are traditional Chinese medicine manufacturers;
 * hospitals are still the major drug market;
 * patent issues are the greatest weakness of Chinese producers.

When the Chinese are developing an API they do try to do patent searches via the internet, but that is not complete, according to a Western pharmaceutical consultant. Few factories yet have patent attorneys on staff, but for the larger pharma groups who are seeking partnerships with large Western firms, this may come soon.

The Chinese business is mainly relationship-based, and so is the pharmaceutical business. Therefore, establishing relationship with a pharma companies through personal connections or friends’ friends is a good way to contact a Chinese pharma company. Attending pharmaceutical exhibitions, pharmaceutical conferences or seminars is also a good way of knowing more pharma companies. Holding a press conference attended by officials of related government agencies or associations and senior pharmaceutical executives is also a common way of establishing relationships with pharma companies.

SourceS: Dow Jones, IMS, China Pharmaceutical Industry Research Report 2004

Regulatory Requirements
China quickly advanced its pharmaceutical-related regulations around the time of its December 2001 entry into the World Trade Organization (WTO).


 * Strengthened patent protection: In conformity with the WTO/TRIPS agreement, the patent protection structure adopted by China approaches that of Japan, Europe, and the US.


 * Healthcare insurance system: Since the end of the 1990s, the government has been striving to develop a system that covers 200 million Chinese. Already, 90% of the population in major cities like Shanghai, Beijing, and Guangzhou are covered, for a total of over 80 million.


 * Regulations related to pharmaceutical affairs: The Pharmaceutical Management Law was overhauled in December 2001 and various regulations were enacted from 2002-2003. Transparency in the approval process is gradually improving.

Since 1998, the government has raised bar for entering the pharmaceutical business by passing laws including Drug Management Law and Regulations on Pharmaceutical Manufacturing. They involve following aspects:


 * Pharmaceutical manufacturing
 * Drug distribution and selling
 * Drug registration
 * Requirements for manufacturing traditional Chinese medicines
 * Medical packaging manufacturing requirements
 * Medical device manufacturing requirement

Government Drug Pricing Policy
In order to alleviate the burden of medical expenses on the society and ensure the implementation of the medical insurance scheme, retail prices of pharmaceutical products qualified for the program and included in the National Basic Medical Insurance Scheme Drug Catalogue will be regulated. The pricing mechanism is based upon three considerations when setting the maximum retail price - production cost, a wholesaler spread set by the government and the prices of comparable products in the market. Any products priced above this level will be cut.

Centralized Tendering Drug Procurement Program
The centralized tendering procurement system operates in two ways. First, several hospitals and medical institutions join together to invite tenders. Then, they appoint qualified agents to handle tenders. These agents are prohibited from having ties with the industry regulatory or administrative bodies.

In 2002, 70% of public hospitals at county or above level implemented this tendering system. This system has successfully passed the pilot phase and proven effective. Both the number of participating hospitals and variety of drugs expanded substantially.

More power to hospitals and medical institutions. In a market economy, hospitals and medical institutions do their own drug procurement. They source drugs from manufacturers at market prices and dispense them to patients. The centralized tendering drug procurement system, however, gives more power to hospitals in drug procurement. As a result, some unfair, unjustified and unreasonable practices surface as decision makers of some hospitals abused their power in order to get economic benefits.

GMP Compliance Certification
GMP is a system to ensure products are consistently produced and controlled according to quality standards. It is designed to minimize the risks involved in any pharmaceutical production that cannot be eliminated through testing the final product. A directive circular issued by the Ministry of Health in Jul 95 marked the official launch of GMP certification in China. The China Certification Committee for Drugs (CCCD) was established in the same year. A subsidiary organization was also set up to manage the certification program.

Currently nine government agencies are the key agencies responsible for regulation. They are the State Food and Pharmaceutical Administration (SFDA), the State Development and Reform Committee, the Commerce Ministry, the State Traditional Chinese Medicine Administration, the Ministry of Labor and Social Security, the Ministry of Health, the State Population and Family Planning Committee, the Ministry of Science and Technology, and the State Quality and Technology Supervision Administration.

In addition, more than 10 industrial associations also regulate the industry.

Comparison of regulatory requirements with other countries
There should be no big differences between rules of China and those of the U.S. Pharmaceutical, partly because China is following and copying U.S. rules. Chinese regulations affect nearly every aspect of drug manufacturing, from the design and construction of manufacturing facilities to the development of procedures and the training of operations personnel performing them.

There is only federal regulation on new drug application, but there are both local regulation and national regulation regarding pharma expenditures of hospitals, reimbursable drug lists, and other issues. National regulation is implemented by SFDA and other state agencies, while local regulation is implemented by provincial agencies.

Through related laws, China has established a physician licensing system, which requires physicians to pass a national exam to be eligible for applying for licenses. After passing the exam, physicians will be eligible for applying for certificates for the practice of medicine. Licensed physicians can open their own clinics five years after getting licenses, during which they must work as physicians.

There is a mechanism for approving new drugs (from NDA filing to approval). A full three-phase research trial takes three to five years, similar to the U.S., while requirements to start a trial are onerous by foreign standards, according to Western drug-company executives.

Although the approval time is being shortened, there still remain many aspects where transparency is lacking.

Patents
Drugs are patentable. Western pharmaceutical companies have applied for numerous patents in China. About 10,000 patents for traditional Chinese medicines belong to Western companies. But some Western observers say China lacks of administrative protection for patents. In 1992, the United States and China signed a memorandum of understanding (MOU) to allow administrative protection (AP) in China for US pharmaceutical patents granted between 1986 and 1992. The MOU provided seven-and-a-half years of market exclusivity, or AP rights, in China for pharma patents that were: not protected by exclusive rights before the amendment of current Chinese laws; patent protected after 1 January 1986 and before 1 January 1993 in an MOU signatory country; not previously marketed in China. Several Chinese government policies have prevented US industry from realizing the intended MOU benefits. According to Article 42 of the Patent Law, the duration of patent right for inventions shall be twenty years, the duration of patent right for utility models and patent right for designs shall be ten years, counted from the date of filing.

The State Intellectual Property Office is responsible for enforcing patents. The intellectual property system in China was originated from and developed as a result of the policy of reform and opening-up. The State Council, the Patent Office of China, the predecessor of SIPO, was founded in 1980 to protect intellectual property, encourage invention and creation, help popularize inventions and their exploitation, and promote the progress and innovation in science and technology.

In 1998, with the restructuring of the government agencies, the Patent Office of China was renamed SIPO and became a government institution under the direct under control of the State Council. The office is in charge of patent affairs and deals with foreign-related intellectual property issues.

U.S. and China
As a member of the World Intellectual Property Organization, China is active in protecting international patents. The SIPO has signed IP protection memorandums with countries including Russia and Thailand on the protection of intellectual properties. Under such agreements, international patents are valid and protected in China. But without such a memorandum, patens approved at a foreign country are not valid in China.

On July 14, 2005, China and U.S. reached an agreement on intellectual property protection. According to western pharmaceutical business journals, most discouraging to US pharma companies has been the rampant theft of their intellectual property through patent infringement and counterfeiting. All those factors undermined the competitive advantage that innovative pharma companies stood to gain from their marketing investments. As a result, US companies accounted for less than 10 percent of China's total pharma imports between 1998 and 2000.

In the sensitive area of better protection of intellectual property rights (IPR), China has agreed to implement the Trade Related Intellectual Property Agreement of the Uruguay Round. To comply, Chinese companies will have to change their long-time practice of relying on counterfeit products. According to China's Securities Times, foreign companies will be able to file compensation claims ranging from $400 million to $1 billion against companies that copy patented medicines.

Articles 18 and 19
Articles of the Patent Law related to foreign companies include articles 18 and 19. Article 18 Where any foreigner, foreign enterprise or other foreign organization having no habitual residence or business office in China files an application for a patent in China, the application sha1l be treated under this Law in accordance with any agreement concluded between the country to which the applicant belongs and China, or in accordance with any international treaty to which both countries are party, or on the basis of the principle of reciprocity.

Article l9 Where any foreigner, foreign enterprise or other foreign organization having no habitual residence or business office in China applies for a patent, or has other patent matters to attend to, in China, it or he shall appoint a patent agency designated by  the patent administration department under the State Council  to act as his or its agent.

Where any Chinese entity or individual applies for a patent or has other patent matters to attend to in the country, it or he may appoint a patent agency to act as its or his agent.

The patent agency shall comply with the provisions of laws and administrative regulations, and handle patent applications and other patent matters according to the instructions of its clients. In respect of the contents of its clients' inventions-creations, except for those that have been published or announced, the agency shall bear the responsibility of keeping them confidential. The administrative regulations governing the patent agency shall be formulated by the State Council.

Sources: SFDA, China Pharmaceutical Industry Report 2004