Fangda Partners’ Josh Shin gives an overview of recent regulatory upgrades affecting the Chinese pharmaceutical industry.
On August 26, 2019, China enacted the Amended Drug Administration Law as part of its efforts to strengthen and streamline its regulation of the pharmaceutical industry. The amended law seeks to address prominent problems in the pharmaceutical industry, such as counterfeit drugs, substandard drugs and high drug prices. To address these problems and to accomplish other goals, the Amended Drug Administration Law will place strict supervisory standards and measures over the entire pharmaceutical industry, including R&D, manufacturing, sales, and end-use and management of drugs. The Amended Drug Administration Law will take effect on December 1, 2019.
1. The new law makes it easier to bring new drugs to market under the market authorization holder (MAH) system
The Amended Drug Administration Law will modernize the pharmaceutical market by introducing a nationwide MAH-based drug approval system. The new system will make it easier for drug developers to bring new drugs to market. At the same time, it will increase their responsibility to ensure the safety of those drugs.
This MAH-based drug approval system will focus drug licensing on marketing approvals, as opposed to the current system’s production approvals. The aim is to encourage the development of innovative drugs by allowing drug researchers, research institutes and biotech companies with innovative technologies to market drugs by outsourcing production instead of requiring in-house manufacturing (which means substantial investment) as is currently required to bring a new drug to market.
While the new MAH system will make it easier to receive approvals to bring new drugs to market, the system will also place new requirements on MAHs. They will now be responsible for the safety, effectiveness, and quality of a drug across its entire life cycle. They will need to establish a quality assurance system over the whole drug development and production process, covering all aspects of preclinical research, clinical trials, production and distribution, post-marketing research, adverse reaction monitoring and reporting. Moreover, the MAH must be able to provide patient compensation for defective drugs. Meanwhile, for an overseas MAH, a domestic corporate legal person must be designated to fulfill the MAH’s obligations and assume joint and several liability with the MAH. However, it remains to be seen how the scope of such joint liability will be defined, especially when the domestic corporate legal person is not in the distribution chain of the relevant drugs.
Finally, the Amended Drug Administration Law sets out several measures supporting the introduction of an MAH-based approval system, in particular requiring medical institutions and drug license holders, manufacturers and distributors to establish drug tracking systems capable of reporting to the governmental authorities. China’s National Medical Products Administration (NMPA) will issue technical guidance with more details as well as establishing a dedicated collaboration platform to enable the government to develop a unified drug tracking system and standardized drug specifications.
2. Ease of restrictions on the import of small quantities of unapproved pharmaceuticals
The Amended Drug Administration Law will ease the restrictions on importing and selling drugs lacking approval from China’s NMPA. This means that drugs legally marketable overseas but lacking NMPA approval in China may be imported for personal use in small quantities. Further regulations will be required to define the amount of drugs any one individual may import.
China currently classifies any drug unapproved by the NMPA as a counterfeit drug, which means that drugs legally marketable overseas but unapproved in China cannot be imported or sold in China. China has strictly enforced this prohibition with prison sentences of up to three years and stiffer penalties if the imported drug resulted in death.
However, under the Amended Drug Administration Law, these drugs will no longer be classified as counterfeit drugs. Therefore, authorities might reduce the penalty or exempt importer from prosecution or reduce punishments in cases involving the importation of a small amount of a drug that has been legally marketed abroad.
The amendment does not mean that China is ready to relax rules on importing generic drugs. Anyone who wants to import generic drugs for profit-making purposes still must follow Chinese laws to register and receive approval in advance. As such, businesses are not allowed to import drugs without approval, and legal risks still exist for distributors who buy drugs abroad. A company that imports these drugs without approval may still have its business permit revoked and be fined up to 30 times the value of the imported drugs.
China has a huge appetite for these overseas-approved but domestically-unapproved drugs since Chinese patients suffering from serious diseases are barred from using effective drugs readily available in overseas markets. Not surprisingly, many patients seek to buy these drugs from overseas, often through black market dealers, who expose themselves to legal risks for selling counterfeit drugs. The decision no longer to classify unapproved drugs as counterfeit drugs and allow their import and sale without legal liability if the drugs are imported for personal use is good news for anyone who can benefit from access to cheap life-saving drugs from abroad, which likely follows from public and media’s high attention on efforts to import inexpensive generic drugs.
3. Whether the compulsory GMP and GSP certification procedures would be scrapped by the country is still in doubt
The Amended Drug Administration Law reaffirms the previously announced repeal of the compulsory certification procedures for Good Manufacturing Practice (GMP) and Good Supply Practice (GSP). To simplify administrative procedures and shift the focus in monitoring from a one-time prior approval system for every five years to a continuous post-administration product quality supervision system, Article 50 of the Amended Drug Administration Law repeals compulsory GMP and GSP certification and no longer requires drug manufacturers and distributors to be GMP and GSP certified every five years for their drug quality and safety supervision systems.
However, one month after the promulgation of the Amended Drug Administration Law, China’s authorities are apparently having second thoughts when it comes to the management GMP and GSP certifications. In a draft proposal named Existing Certifications to be Retained in the Drug Regulatory System released by the NMPA in the middle of September, both GMP and GSP certifications are presented. Specifically, GMP is required for the drug registration, outsourcing production approval and in other instances., with GSP necessary for the wholesale, retail and purchase of anesthetics drugs. That means, these two certifications will still play an important role in the administrative handling of drugs in the country.
Regardless of the uncertainty over the abolition of the GMP and GSP certifications, regulations on drug manufacturing and distribution will not be loosened in terms of drug quality and safety. The Amended Drug Administration Law calls for greater ongoing oversight from regulators over pharmaceutical companies and the individuals within those companies in charge. Thus, drug manufacturers and distributors must still comply with strict manufacturing and distribution requirements.
Under the Circular on Building a Team of Professional and Specialized Pharmaceutical Drug Inspectors issued on July 18, 2019, qualified inspectors will conduct compliance and risk analysis inspections at medical research and production facilities to ensure products, including drugs, cosmetics and medical equipment, are developed and produced in compliance with the law. Meanwhile, the NMPA and provincial level drug administration departments are expected within the next three years to establish a specialized drug inspection system staffed mostly with full-time professional inspectors and some part-time inspectors in a support function. The specialized drug inspection system would provide national and provincial inspection teams to conduct regular and unscheduled onsite inspections to medical research and production facilities.
In conclusion, under the Amended Drug Administration Law and relevant laws and regulations, NMPA and its provincial counterparts are mandated to strengthen their surveillance of drug manufacturers and distributors.
4. Door left unlocked for online sale of prescription drugs
Although the previous draft of the Amended Drug Administration Law released for public consultation explicitly provided that MAHs and drug distributors may not sell prescription drugs through third-party online platforms, the Amended Drug Administration Law, as enacted, does not contain this express prohibition. Nevertheless, it does tighten overall supervision of online drug sales. Specifically, the Amended Drug Administration Law prohibits online sales of vaccines, blood products, anesthetics, psychoactive and radioactive drugs, highly toxic medicines and other drugs under special administration. More detailed implementation rules are expected to govern the online sale of prescription drugs.
5. The new law strengthens penalties for counterfeit and substandard drugs
The Amended Drug Administration Law intends to offer consumers and patients greater protection by increasing penalties on producers of counterfeit and substandard drugs.
Both the lower and upper limits on penalties for enterprises will be increased. For instance, enterprises that produce or distribute counterfeit drugs may be fined from 15 to 30 times their illegal gains, as opposed to the current fine of two to five times their illegal gains. The potential fines for manufacturing or distributing substandard drugs, have increased from one to three times their illegal gains to 10 to 20 times their illegal gains with a minimum fine of RMB 1,000,000 (about US$140,000). Heavier punishments may also apply for those enterprises that produce or sell counterfeit or substandard drugs taken by pregnant women or children. Finally, any enterprise that produces or sells counterfeit or substandard drugs may be fined and ordered to suspend operations, or even have its business license revoked.
The Amended Drug Administration Law also states that individuals may face legal liability for their involvement in producing or selling counterfeit drugs. Legal representatives, people in charge, those directly responsible, and others can face penalties, including monetary fines and debarment. These individuals may be barred from engaging in drug manufacturing and distribution for five years or may be barred for life and detained by the competent public security authority for not less than five days but not more than 15 days in serious circumstances.
The Amended Drug Administration also seeks to protect patients and consumers by ensuring that drug administration departments are properly exercising their supervisory duties. These departments will face heavy punishments for dereliction of duty when handling counterfeit or substandard drug cases.
The Amended Drug Administration Law provides a perfect opportunity to cement the progress made so far and to introduce new expectations for compliance through the product life cycle. However, the corresponding implementing rules remain to be developed to push forward these reform initiatives to benefit patients and those in the industry.
Innovation and compliance are two important shared goals of the government and pharmaceutical industry. With the constantly changing competitive landscape and fast-advancing medical technology, the pharmaceutical industry, as well as the regulators, must collaborate to find the most appropriate balance for risks and benefits.
The promulgation of the Amended Drug Administration Law specifies the nature of the Healthy China Initiative, which aims to overhaul and transform the healthcare industry, prompting companies to provide better products and services for people. In addition to the Amended Drug Administration Law, in recent years, China has said it will not impose import tariffs on anticancer drugs, it has accelerated the examination and approval process for new drugs, and built an all-process drug tracing system. These efforts have shown the country’s dedication to guarantee the safety and reliability at every stage of drug production, sales and use.
