The execution of Zheng Xiaoyu for corruption and dereliction of duty made headlines last year. As former director of Chinese watchdog the State Food and Drug Administration (SFDA), Zheng’s death sentence reflects the PRC government’s determination to protect consumers. For the pharmaceutical industry, the execution represented a step in the right direction. This sector has been widely criticized due to the prevalence of fake drugs and the lack of intellectual property (IP) protection from the government. The 2003 SARS attack, worldwide anger over deaths caused by the exportation of contaminated food and fake drugs, and Zheng’s approval of unsafe drugs in violation of new rules all exposed China’s lack of enforcement in the health care system. The Zheng scandal alerted the government to the need to reform the nation’s pharmaceutical image by promulgating new measures and regulations. At the opening of the National People’s Congress Premier Wen Jiabao emphasized the importance of the protection of public health, but the issue of IP infringement remains unresolved.
“In China, 90% of the [pharmaceutical] market is either counterfeit or generics,” said Ho Ling, partner and head of IP at Clifford Chance China.
While the existence of counterfeit drugs is widely acknowledged to be a serious issue, generic drugs can be both good and bad for a country. For developing markets, generics are not only affordable but also increase product choices for the public, especially for those who live in rural areas where getting real medicine is expensive. For China’s health care system, generics are thus crucial. However, the more China relies on generics, the further away they are from developing their own drugs. From an IP perspective, generics are a problem.
“Many governments are encouraging the development of generic drugs to drive down public health costs, and generics are legitimate if there is no more patent on the products,” said Li Chiang Ling, partner at Jones Day. If generics are allowed to be put on the market while the patents are still valid then it is much more difficult for the original manufacturers to recoup their investments, she said.
The industry’s growth is led by low costs and the abundance of local tenants in China. The market, according to PricewaterhouseCoopers, is expected to become the world’s fifth largest by 2010 and the largest by 2050. China is emerging as a new centre of innovation.
The country’s large population and economy also make the sector flourish – people are increasingly aware of the importance of health care. “People would spend money on products like obesity medication as they become more affluent,” Li said.
Necessity has become a critical factor driving the development of the pharmaceutical industry. “There is a huge need,” said Stephen Bent, partner at Foley & Lardner. “China has seen growth in the prosperity of people and in the aging of the population with diseases expanding in the country, so there is a huge demand for good health care products.”
Sara Jordan, assistant professor in the politics and public administration department at the University of Hong Kong, said the government’s desire to increase the international and regional competitiveness of local firms also propels the industry’s expansion. But in order to initiate cooperation between domestic and foreign pharmaceutical firms, the government must first increase international confidence in this developing market, she said.
SInce the execution of Zheng, the SFDA has been actively reforming itself as well as the industry through regulatory approaches. The amended Measures on the Administration of Drug Registration,1 which was promulgated last year and took effect in October, is one of the many new sets of regulations that demonstrate the government’s will. Released one day after Zheng’s execution, the measures created a regulatory procedure for generic drugs and increased the transparency of the SFDA and local food and drug administration bureaus, according to Wilmer Cutler Pickering Hale and Dorr. [See Table 1.]
Table 1: SFDA’s Key Regulatory Approaches in 2008
Implementations on Production and Distribution of Stimulants
Draft Provisions for Medical Device Recall
Amendments of Provisions for Medical Device Advertisement Examination
China and the US signing agreement on the Safety of Drugs and Medical Devices
Source: State Food and Drug Administration, PRC
Active SFDA reform is noticeable, but how well the industry is protected from an IP perspective is questionable. Under the current Drug Patent Regulations, a generic manufacturer in China is allowed to start their patent application two years before the patent of a drug expires. The generic drug can then be sold on the market immediately after the patent’s expiration date. This helps the generic manufacturers have their products ready to sell as soon as possible, but the original pharmaceutical companies’ patents are active when they are merely at the research and development stage, and the development of such drugs often requires years of research with indefinite results. The period during which a pharmaceutical company can make a profit is therefore short, and this could reduce pharmaceutical companies’ incentives to develop drugs in China.
According to Ho, pharmaceutical companies are constantly lobbying against the filing of marketing approval applications by generic manufacturers before the expiry of the patent, but are not always successful. “Similar to many other developing countries, the Chinese government has to strike a balance between the accessibility and affordability of quality medicine and maximizing or extending the intellectual property rights or protection offered to the international pharmaceutical companies,” he said.
Conflicts of interest between the goal, the government and the pharmaceutical companies thus emerges. “If you strongly enforce the patent law, it makes it harder for local pharmaceutical manufacturers to grow,” said Doug Clark, partner at Lovells. “But if there is no strong patent system, even the local companies won’t have incentives to invest in research and development,” he said.
CHINA’S PATENT SYSTEM
While the patent system is critical to the industry’s growth, it is not yet fully developed. Jiang Jiancheng, managing partner at Peksung Intellectual Property, said that applying a pharmaceutical patent is far more difficult than any other patent application in China. Clients often complain that they cannot obtain a patent that is as strong as those they get from other countries, he said.
The immaturity of China’s patent system is partly due to the fact that the concept is relatively new, to the country and more particularly to the pharmaceutical industry: the IP system in China is less than 30 years old, whereas that of the US was established more than 200 years ago. In China, drugs were first included in the list of protected items in 1993.
“Before 1993, you could only register a process patent for a pharmaceutical product,” Ho said. There are now three types of patents that companies can register – invention patents, design patents and utility patents. Audrey Shum, senior associate at Clifford Chance, suggested that for key inventions pharmaceutical companies should register an invention patent, which provides the strongest rights to the patent holder. However, the registration process is longer.
Patent litigation, as is the case in any country or jurisdiction, takes a long time and is costly. Very often, specialists and technical experts are involved. Shum said pharmaceutical companies need to take into account that as soon as they file an infringement action, the defendant may file invalidation against that patent. “Pharmaceutical companies must know their own patents well and be prepared to deal with the invalidity challenge,” Shum said.
In domestic litigation, the court has an obligation to conclude the case within six months, but foreign-related litigation is not subject to the same rule. While the distinction was intended to allow parties to a foreign-related litigation more time to collect and prepare evidence originating outside China and for foreign-related communication, the practical result is that many foreign-related litigations end up dragging on for years due to the lack of any time limit, Ho said.
According to Shum, the court process is more defendant-friendly. “It is easier to be a defendant than to be a plaintiff in a Chinese litigation,” she said.
While patent litigation is complex, the punishment for trademark infringement is ineffectual. In the draft trademark amendment,2 the trademark infringement fine will be increased to Rmb1,000,000 (from Rmb100,000). Nicholas Blank, associate managing director at Kroll, said that the insufficient fine is one of the most common complaints from his clients.
“There is simply not a sufficient deterrent against infringers, who make high profits on a daily basis by selling counterfeit products,” he said. “In one case we recently investigated, the infringer received three years’ imprisonment, which is great, but too often not the case.” Imprisonment, Blank said, is the most effective punishment for counterfeiters.
LAWYER’S CHALLENGES AND PRACTICES
The problems with the IP regime and the underdeveloped patent system result in certain challenges and limitations for lawyers in China. Catching up with the new regulations and measures from the SFDA, for example, can be difficult.
The new regulations reflect the government’s determination to improve the sector. Yet getting adequate lawyers and experienced judges to deal with the growing IP problems still remains an issue, not to mention getting enough qualified legal professionals in the pharmaceutical practice area.
“To be an effective advisor, you have to know what questions to ask so that you can identify the issues even if you are not an expert.” he said.
Bent also added that as there are not many people in China with practical experience, those working with the government mostly gain second-hand IP knowledge in the sector from reading books. But this will change over time.
“I think as the numbers of lawyers grow, there will be more people who have had a career in law and then go into the government. People by then will have practical experience; and can also make contributions on the policy side,” he said. “It takes a long time to be trained to get the insights as a lawyer in this sector.”
But even if there are judges with extensive experience and technical ability, Clark said that their pay is much lower than lawyers with good technical ability.
“No one wants to be a judge. That’s acknowledged by the Supreme Court. They have a big problem in attracting good judges because of the salary issues,” he said.
Despite all these challenges, most lawyers agree that the government has taken active steps to regulate the pharmaceutical industry. The amendment of the patent law, which is being reviewed at the moment, covers a wide range of issues focusing on the pharmaceutical industry. One positive step that the government has taken is that they are attempting to clarify the process of compulsory licenses. Yin Xintian, director of the department of treaties and regulations with the State Intellectual Property Office of the PRC, said patent agencies of the State Council can issue compulsory licensing orders on drugs in order to prevent, treat or contain pandemics, according to China Daily News. Yin said that drug makers can, with the compulsory licensing orders, also export the drugs to other developing countries without licensed production. At the moment, compulsory licenses are only available in a national emergency.
“We hope that the government will exercise this right quite cautiously, and they have been,” Shum said. As far as she is aware, the government has never granted any compulsory licenses to any generic companies. “If the government exercises its rights to grant compulsory licenses too casually, it’s going to be a serious concern to the big pharmaceutical companies,” she said.
The recent implementation rule of patent linkage is a strong measure that protects the pharmaceutical patent owners. It allows a generic drug manufacturer to file for registration with the SFDA two years before the patent expires. However, the SFDA will withhold approval until the patent’s expiration date is met, and a patentee has the right to ask the SFDA to revoke an approved drug registration. As the registration system is linked to the patent system, this gives the patent owner an advantage, as they are granted the monopoly to sell the drugs in China for the full term of the patent, Lewis Ho said.
Yet according to Li, patent linkage was not effectively enforced when it was introduced into law several years back. It remains to be seen how the new rules will change the enforcement landscape.
The lack of transparency in the drug application and approval process makes it difficult for pharmaceutical companies to fully utilise the patent linkage system, Ho said.
CHALLENGES FOR GOVERNMENT
Insufficient enforcement is the core obstacle holding back the industry’s growth. Though the IP regulations are in line with the World Trade Organization’s requirements and are comparable with that of the US and other western countries, enforcement in China remains weak.
Local protectionism and disparate levels of awareness in cities, for example, create further difficulties. “The most important thing that is missing is the national standard form of enforcement,” Bent said. Of course, courts in large cities such as Beijing, Guangzhou or Shanghai do have extensive experience in dealing with patent cases. But in other parts of China, where the public has less exposure to new technologies and thus less interest in technology investment, demand for enforcement is minimal.
Lawyers are optimistic about improvement in this sector. China, Bent said, has come a long way with law, patent standards and courts in a short time, and to criticize what has happened in China is thus not fair and not reasonable.
“Businesses themselves have to accept the notion that the patent is more than just a piece of paper,” he said.
1. See Do Clinical Drug Trials Trigger Imminent Infringement? in CLP November 2007.
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