Pharma Focus Asia
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China seeking Protection

Henry Wheare and Doug Clark, Lovells London

China\'s accession to the WTO in December 2001 has resulted in more transparent regulation of its pharma industry, a gradual opening up of markets, more enforcement of IP rights and greater opportunities for outsourcing.

China is the world's second largest pharmaceutical chemicals producer and is expected to triple its market share by 2010. Regulatory improvements are playing their part; the State Food and Drug Administration (SFDA) was set up in June 2004 to take over the responsibilities of the former State Drug Administration for pharmaceutical manufacture and trade. Only manufacturers with a valid pharmaceutical manufacturing enterprise permit issued by the provincial SFDA can produce pharmaceuticals in China.

New regulations have also been introduced governing packaging, labelling and advertising. These are in line with international standards and so should not present any difficulty for foreign manufacturers, apart from the requirement to be in the Chinese language. However, certain advertising is banned, including prescription drugs and drugs for the treatment of angina, high blood pressure, hepatitis and diabetes.

In line with its WTO obligations, China is opening up its markets to foreign and foreign invested importers and distributors of pharmaceutical products. The previous rule that foreign invested joint ventures had to be majority owned by Chinese companies has been relaxed, although the approval process may deter some companies.

Foreign majority controlled retail and distribution joint ventures and since 11 December 2004 wholly owned foreign invested enterprises are also permitted under the relaxed rules but are still highly regulated under current Chinese regulations and no foreign companies have so far been approved. Majority foreign owned wholesalers need a permit to deal from the provincial SFDA, while retailers are only permitted for chain stores with fewer than 30 outlets, and need a permit to deal from the local SFDA while also complying with the relevant Goods Supply Practices (GSP).

Patent Protection

Patent protection for pharmaceuticals in China has only been available since 1993. Traditionally, Chinese domestic pharmaceutical companies have relied on developing local versions of foreign drugs; less than 2 per cent of domestic developed drugs are protected by patents and an estimated 90 per cent of foreign pharmaceuticals in China are imitated.

Many new types of pharmaceutical or medical research are not protected because patent laws specifically exclude them on public policy grounds. These include therapeutic methods of treatment, diagnostic methods, processes for cloning human beings and certain genetic modifications.

Outsourcing

Outsourcing manufacturing is likely to increase in coming years. This raises issues of protection of IP rights, since the legal system is not able to prevent the misappropriation of intellectual property and trade secrets by business partners or employees. Practical measures to reduce the risks of misappropriation include limiting the disclosure of information on a need to know basis and ensuring that employee/supplier contracts acknowledge trade secrets and confidentiality obligations.

The terms of technology licence agreements are also important. Despite WTO relaxation, there remain significant restrictions on the terms under which technology can be in-licensed in China. Under the Technology Import-Export Management Regulations issued on 10 December 2001, technology is classified as prohibited, restricted or permitted for import-export purposes.

Under the regulations, the licence must include basic warranties regarding the rights of the licensor and the ability of the technology to achieve the stated objectives as well as relatively standard IP indemnity provisions. In addition, the licence must not:

  • Include improper tie-in arrangements, including requiring the purchase by the licensee of unnecessary technology, raw materials, products, equipment or services
  • Require the licensee to pay royalties or assume other obligations in respect of expired or invalid patents
  • Limit the licensee's ability to make improvements or use such improvements, and the IP rights to such improvements made by the licensee are to vest in the licensee
  • Restrict the licensee's right to obtain other similar or competing technology
  • Unreasonably restrict the source of the licensee's raw materials, components, products or equipment
  • Unreasonably restrict the licensee's production volumes, product types or sales prices
  • Unreasonably limit the export sales channels of products manufactured using the licensed technology

Many of these are recent developments and largely dictated by WTO commitments. To an extent, they are theoretical, and guidance is needed to negotiate the regulatory controls, which continue to dictate the pace of reform in China. It will take a while before the pharmaceutical industry is fully open to foreign investors.

Author Bio

Henry Wheare and Doug Clark
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