On April 24, 2015, the newly amended Drug Administration Law of PRC (“Drug Administration Law”) was passed by the 14th session of the Standing Committee of the National People’s Congress and took effect on the day of promulgation. Previously the Drug Administration Law was amended twice, respectively in 2001 and 2013.

The 2015 revision amends or deletes Article 7, 14, 55, 89, and 100. The three highlights of the new Drug Administration Law are as follows:

1. Cancellation of the “drug license before business license” system for establishing drug manufacturing or distribution enterprises

The 2015 revision deleted the stipulation in the previous Drug Administration Law that one must hold a Drug Manufacture License (“DML”) or Drug Distribution License (“DDL”) for the registration with the administrative department for industry and commerce (“AIC”). This repealed the prior approval requirement to establish drug manufacturing and distribution enterprises. The previous system of obtaining a “drug license prior to business license” has been converted to a “business license prior to drug license” system. Under the previous system, drug manufacturing and distribution enterprises had to first apply for and obtain the DML or DDL before initiating the registration proceedings with the AIC to obtain the business license. With the 2015 revision, the new system for establishing drug manufacturing and distribution enterprises conforms to the procedures for establishing general enterprises, which has simplified the process.

Obtaining a DML or DDL is no longer a precondition for AIC registration. Therefore, Article 100 was deleted to keep consistency with the 2015 revision. It stated “Where a D or Drug Distribution License is revoked in accordance with this Law, the drug regulatory department shall notify the AIC to alter or cancel the registration.”

2. Removal of the fixed pricing and guided pricing mechanisms

Under the new Drug Administration Law, Article 55 was deleted, thus the government has decided to stop directly fixing and guiding drug prices. This was a significant change to the old regime. According to the previous Drugs Administration Law and the current Pricing Law of the PRC and Regulations for the Implementation of the Drug Administration Law of the PRC, there were three ways drugs are priced: (1) the government fixed prices, (2) the government guided prices, or (3) the market regulated prices. Now the drug prices are just directly regulated by the market. For drugs listed in the Catalogue of Drugs for National Basic Medical Insurance and drugs not listed in the catalogue but monopolistically manufactured and distributed, their prices were fixed or guided by the government; while the prices of other drugs were regulated by the market. There were more than 2,700 types of drugs priced by the government, occupying 23% shares of the Chinese drug market.

The 2015 revision on drug pricing changed the government planned pricing model to a market pricing model. When purchasing these drugs, medical institutions can now autonomously negotiate the purchase price with drug enterprises. This change also reflects the reform ideas in the Plan of Promoting the Drug Price Reform Program (Draft for Public Opinion) issued by the National Development and Reform Commission, stating “remove government pricing, [and] make the actual transaction price of drugs decided by market competition through controlling medical fees by health insurance and purchasing by invitation to bid.”

3. Market-adjusted price must still comply with related laws and regulations

In the 2015 revision, Article 89 (stating “Violations of Article 55, 56, 57 of this Law concerning the price control of drugs shall be punished according to the Pricing Law of PRC”) was renumbered as Article 88, and substantively, the provision was revised to reflect the deletion of Article 55 and 57. Along with the deletion of Article 55 (prices are fixed or guided by the government), Article 57 (“Drug manufacturing and distribution enterprises, and medical institutions shall provide the competent authority of pricing with information such as the actual purchasing and selling prices and quantities of the drugs”) was also deleted. Therefore, Article 88 now only refers to violations of Article 56 as punishable according to the Pricing Law.

While the government no longer directly fixes or guides prices, the price of drugs will still be under the control of the government through Article 88. The prices must still comply with the regulations concerning the control on prices of drugs prescribed by the competent authority under the State Council. In addition, the drug price must be fixed in conformity with the principles of fairness, rationality, honesty, and good faith. In addition, the price of a drug must correspond to the quality of the drug. If a drug manufacturer or distributor violates these principles, seek excessive profits, or conduct price gouging, they will still be subject to administrative penalties.

When the China Food and Drug Administration solicited public comments on revising the Drug Administration Law, professionals in the pharmaceutical industry raised issues with the drug market’s imperfect supervision and credit system, the unclear legal liability, inadequate punishment, and the bundled management of the Marketing Authorizations and DML. These issues remain unsolved by the 2015 revision. The five amendments to the Drug Administration Law, however, demonstrate a greater role of the market, guidance for the development of medical and pharmaceutical economics, and a transform of the government’s thoughts on supervision. Such revision indicates the direction of the future reform of the healthcare and pharmaceutical industries in China and should be praised.

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