The Standing Committee of the National People's Congress recently approved the second revision to the Law on the Administration of Pharmaceuticals (referred to as the 'Drug Administration Law'), the core piece of legislation governing the pharmaceutical industry in China. The amendments, effective as of April 24 2015, introduce several welcome changes to the original Drug Administration Law, which had not been substantively updated since 2001.

Operational permits

The first noteworthy change is the removal of the pre-approval requirement so as to simplify the business administration process for drug companies. Articles 7 and 14 of the original Drug Administration Law required a drug manufacturer or distributor to obtain a drug manufacturing permit or drug distribution permit (ie, operational permits) as a pre-approval mechanism for incorporation. Drug companies could not obtain business licences from the State Administration for Industry and Commerce or its local counterparts before successfully obtaining operational permits. Pursuant to the amendments, drug manufacturers and distributors will be able to obtain business licences before obtaining operational permits.

This is part of the government's general initiative to "streamline administration and delegate power" and to issue industrial approvals after business registrations. It allows drug manufacturing and distribution investors to prepare for and start up their businesses in the name of their newly incorporated legal entities. Although legally set up, these entities will still be unable to engage in drug manufacturing and distribution until they receive approval or the relevant operational permit from the local counterpart of the China Food and Drug Administration (CFDA). From now on, applicants can first obtain business licences from the relevant local administration for industry and commerce (AIC), with a qualifier in the business scope stating that for any business activities subject to approval, companies can engage in these activities only after approval is obtained from the relevant authorities.

On a related note, the amendments have also deleted Article 100 of the previous Drug Administration Law in connection with the revocation of operational permits. If a drug company's drug manufacturing permit or drug distribution permit is revoked, the CFDA will no longer inform the relevant local AIC to amend the company's business licence or deregister the company.

Drug pricing

Another significant change relates to the lifting of the government's drug price controls. Article 55 of the original Drug Administration Law required drug manufacturers, distributors and medical institutions to abide by the state-run pricing mechanism where prices were mandated or guided by the government. In addition, drug manufacturers were required to provide the government pricing authorities with genuine information with respect to drug production and distribution costs.

The amendments have deleted Article 55, unveiling China's drug pricing reform to eliminate fixed price caps and introduce a market-oriented mechanism. On May 4 2015 this change was further substantiated by the Opinions on Promoting Pharmaceutical Price Reform jointly released by China's central pricing authority, the National Development and Reform Commission (NDRC), along with several other administrative bodies.

According to these opinions, the NDRC aims to gradually establish a market-driven drug pricing system and minimise direct government intervention in drug pricing. Drug prices are to be determined by means of market competition, such as tendering or negotiations with local medical insurance authorities. Specifically, the opinions set out five product-specific principles of the reform of the drug pricing system:

  • Drugs reimbursed by basic medical insurance (BMI) funds – prices will be established on the basis of reasonable medical reimbursement standards by the BMI administrations together with other authorities.
  • Patented drugs and drug products with exclusive sources of supply – prices will be determined through a transparent and multilateral negotiation mechanism.
  • Blood products not included on the National Reimbursable Drug List, immunisation and vaccines purchased by national centralised procurement, national free antiretroviral treatment for HIV and birth-control drugs and devices – prices will be determined by government procurement or negotiations.
  • Narcotic drugs and Type 1 psychotropic drugs – the government will continue to set the maximum ex-factory and retail prices.
  • All other drugs – prices will be set by manufacturers based on production costs and market supply and demand.

It is anticipated that the NDRC will allow the market to decide on drug pricing and increase the frequency of price surveillance in the future, most likely by monitoring prices and enforcement against unlawful pricing behaviour.

Since 2000 the government, especially the NDRC, has played a key role in the drug pricing system by setting 'government-guided prices' or maximum retail prices. This reform will undoubtedly be deemed the most significant change to the Chinese drug pricing system in years. According to an anonymous NDRC representative, although some drug prices may increase due to production costs or market demand, the NDRC expects that most drugs will not experience a rapid price increase.

Comment

Overall, the Drug Administration Law amendments introduce welcome changes and reflect the government's determination to foster the development of the pharmaceutical industry by lifting redundant administrative controls. Meanwhile, the Drug Administration Law is expected to evolve further in the coming years, as the CFDA is in the process of proposing another round of revisions to the Drug Administration Law for approval by the State Council and the National People's Congress. Potential policy changes on the CFDA's agenda include:

  • piloting a marketing authorisation holder system alongside the current drug approval system;
  • introducing a drug master file system to the review system for active pharmaceutical ingredients, drug excipients and packaging materials; and
  • further delegating review and approval authorities to the local food and drug administrations.

It is crucial that life sciences companies continue to monitor the proposed changes and assess the impact on their business models in order to maintain a competitive edge amid China's fast-changing regulatory landscape.

For further information on this topic please contact Katherine Wang at Ropes & Gray LLP by telephone (+86 21 6157 5200) or email (katherine.wang@ropesgray.com). The Ropes & Gray LLP website can be accessed at www.ropesgray.com.

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