On 6 June 2016, 7 months after the China Food and Drug Administration (“CFDA”) published the Pilot Plan for the Drug Marketing Authorization Holder Mechanism (Draft for Public Opinions) (“Draft for Public Opinions”), the General Office of the State Council officially released the Pilot Plan for the Drug Marketing Authorization Holder Mechanism (Guo Ban Fa  No. 41) (“Pilot Plan”), which attracted public attention.
According to the Pilot Plan, ten provinces and municipalities, including Beijing Municipality, Tianjin Municipality, Hebei Province, Shanghai Municipality, Jiangsu Province, Zhejiang Province, Fujian Province, Shandong Province, Guangdong Province, and Sichuan Province will implement the pilot drug marketing authorization holder mechanism (“Drug MAH Mechanism”). This means that drug research and development (“R&D”) institutions and research personnel within the pilot regions are now eligible to apply and obtain drug marketing authorizations and drug approval numbers. The Pilot Plan will be in effect until 4 November 2018. It demonstrates China’s strong momentum to reform the drug registration mechanism in China, to stimulate drug R&D, and push for the specialization of drug R&D and manufacturing.
Highlights of the Drug MAH Mechanism
China has implemented the registration mechanism that ties the drug manufacturing license with the drug approval number for a long time. Although drug R&D institutions could apply for and obtain new drug certificates, if they wanted to manufacture the drugs, the institutions must invest a significant amount of money to build their own manufacturing facilities to obtain the drug manufacturing license and the GMP Certification, and then apply for the drug approval number. Many drug R&D institutions, due to insufficiency of funds, would transfer their products to the drug manufacturers by means of technology transfer.
For drug R&D institutions, on the one hand, building the factories by themselves costs high and they may not be good at drug manufacturing and operation; on the other hand, drug technology transfer may have the issue of a low return compared to the R&D investment. Therefore, neither way is the optimal choice. The drug manufacturers were not in the best place either. As the current laws are silent on the liabilities of the researchers and developers, even if there were design defects or adverse reactions caused by the drugs which may arise from the R&D process, the drug manufacturers may bear the liabilities for such defects or adverse reactions.
The most important feature of the Drug MAH Mechanism is to separate the marketing authorization and the manufacturing license. The Drug MAH Mechanism will hold the market authorization holder (“MAH”) liable for the quality and the effectiveness of the drugs throughout the drug’s full lifecycle, including the R&D, registration, manufacturing, circulation, surveillance and evaluation. Implementation of such mechanism will change the landscape of profit allocation and distribution of risks and liabilities for the pharmaceutical industry.
According to the Pilot Plan, the drug R&D institutions and research personnel in the pilot administrative regions can submit drug clinical trial applications and drug marketing applications as drug registration applicants (“Applicants”). Upon obtaining the drug marketing authorizations and drug approval numbers, they may become MAH (“Holders”). The Holders may, depending on their own circumstances, entrust qualified drug manufacturers (“Entrusted Manufacturers”) within the pilot administrative regions to manufacture the drugs that are approved for marketing or manufacture the authorized drugs by themselves (provided that the Holders hold the corresponding manufacturing qualifications). Compared to the Draft for Public Opinions published in November 2015, the Pilot Plan echoes with the other reform measures related to drug registration better and broadened the scope of pilot drugs to include chemical drugs, traditional Chinese medicine and biological products. In addition, the Pilot Plan has relaxed the requirements of change applications in the Draft for Public Opinions. It allows the Applicants or Holders to change Applicants, Holders or Entrusted Manufacturers by means of submitting supplementary applications during the review and evaluation period of drug registration applications or after the drug marketing applications are approved.
The abovementioned rules grant more flexibility to the Holders and a greater impact on the market. The Drug MAH Mechanism aims to incentivize the drug R&D institutions, to accelerate the standardization of the industry, to distribute liability and to promote an effective regulatory system.
Potential Issues in Practice
The industry and the media responded enthusiastically after the publication of the Pilot Plan. They generally believe that the Drug MAH Mechanism will significantly benefit the drug R&D institutions and research personnel. However, because the R&D cycles of drugs are long, there will be a time gap between the implementation of the Pilot Plan and the issuance of the first market authorization. Many issues may arise in the process of implementing the Pilot Plan. Continuous exploration from different perspectives such as rule making, supervision and enforcement, and structuring of agreements and corresponding implementation is needed to mold the MAH mechanism, which has been implemented in Europe, the United States, and Japan for many years, to accommodate for the Chinese market so that such MAH mechanism will truly encourage the innovation of drugs, the optimization of resource allocation, and the improvement of regulatory effectiveness.
1. Rule Making
The Pilot Plan provides the general roadmap of the Drug MAH mechanism. Some commentators consider that compared to the Draft for Public Opinions, the Pilot Plan simplifies the requirements of eligibilities of the holder and the application documentations in the draft for public opinions of the Pilot Plan published in November 2015. Such simplification shows that the regulatory authorities will adopt the “easy in and strict out” approach with a strong emphasis on process regulation. However, we think that the level of the authority that published the Pilot Plan determines that the Pilot Plan is a framework document and shall not contain too many technical details. Specific issues in practice such as the requirements of documentations and qualifications will be dealt with in the subsequent implementation rules and operational guidance to be published by the CFDA and the provincial FDAs in the pilot provinces and municipalities.
The R&D, manufacturing and marketing of drugs require tremendous investment of personnel, material, and monetary resources. Applicants and Holders that bear the legal liabilities related to drug safety and quality during the full cycle of the drugs must have the adequate competency. The Pilot Plan only states that the Applicants and Holders shall submit liability commitment letters to commit that they will submit the guarantee agreements signed by guarantors or the insurance contracts signed by the insurance companies to the provincial FDAs. There are no specific rules regarding the competency and the financial requirement of the Applicants and the Holders nor are there rules on the qualifications of the guarantors and insurers or specifications on the scope or the monetary limit of the guarantee or insurance. In addition, the Pilot Plan does not include important information such as the application procedure, the time limits and whether a Holder is allowed to entrust multiple drug manufacturers. The industry should pay close attention to the subsequent explanations and statements to be published by the drug regulatory authorities in the follow up policy and regulatory documents.
2. Supervision and Enforcement
During the Pilot Plan’s implementation period, the drug regulatory authorities may face challenges on enforcement measures. For example, although the Pilot Plan clearly states that research personnel may be eligible to become Applicants or Holders, the feasibility of such situation is in question as the Applicants or Holders bear significant legal liabilities and as only drug manufacturers were eligible to apply for drug approval numbers in China till now. Reports also show that even in Europe and the United States, 95% of the Applicants or Holders are in fact, drug manufacturers. For individual applicants who are research personnel, the drug regulatory authorities shall scrutinize the qualifications of such applicants and their capability to bear the liability in considering the applications.
In addition, because the MAH and the Entrusted Manufacturer may belong to different pilot administrative regions, the CFDA and the provincial FDAs in pilot administrative regions need to think carefully and coordinate with each other in establishing a joint action mechanism on how to implement daily supervision and investigation to ensure drug quality and safety.
3. Structuring of the Agreements and Corresponding Implementation
The Pilot Plan not only requires Applicants and Holders to submit guarantee agreements or insurance contracts, but also requires that Holders to sign written contracts and quality agreements with the Entrusted Manufacturers clearly stipulating the parties’ rights, obligations and liabilities. In addition to performing the relevant legal obligations, the Entrusted Manufacturers shall also perform the obligations under these agreements in accordance with the law. Thus, the implementation of the Drug MAH Mechanism largely relies on the reasonable arrangements and implementation of a series of agreements.
The Applicants and Holders must carefully consider the risks associated with the clinical trials, manufacturing and sales of drugs. They must also establish, in entering into cooperation with the Entrusted Manufacturer, their quality assurance and pharmacovigilance systems to ensure post-market drug safety and quality. For example, Applicants and Holders must have feasible plans for the post market surveillance for drug adverse reaction and a recall procedure and implementation mechanism of the procedure.
Since the implementation and enforcement of the Drug MAH Mechanism largely depends on the structure and the substance of the agreements between the Holders and the Entrusted Manufacturer, the industry needs the CFDA to provide further guidance to set the ground rules. The rights, obligations, and liabilities shall be arranged between the parties in a reasonable way within the scope permitted by laws and regulations. It is suggested that the stakeholders stay alert to the industry updates and seek professional legal advice when necessary.
Well drafted agreements do not guarantee successful performance. At the initial stage of the implementation of the Pilot Plan, we anticipate that there will be an adjusting period for all stakeholders involved. For example, the insurance companies may at first be reluctant to accept individual research personnel as the premium payer and the insured person. In addition, the selection of Holders by the Entrusted Manufacturers and vice versa will be paid attention to. After the implementation of the Drug MAH Mechanism, finding suitable Entrusted Manufacturers will be one of the major issues faced by the Holders. It is unclear whether the more sophisticated and well-established drug manufacturers will focus on drug R&D themselves and become MAHs rather than accept the Holders’ entrustment to manufacture other Holders’ drugs. It may also be the case that some drug manufacturers that are willing to accept entrustment are incapable of satisfying the expectations and the requirements set by the Holders in various aspects. This uncertainty will become clearer as the time passes and the market adapts to the new mechanism.
Without any doubt, the Drug MAH Mechanism is a significant progress for the drug regulation and administration system reform in China. However, there certainly will be challenges. The regulatory authorities and enterprises will continue to explore and cooperate with each other to optimize the resource allocation of the pharmaceutical industry in China and to promote further development and innovation of the industry.
We have less than 2.5 years from now until the end of the Pilot Plan in November 2018. We understand that the CFDA will further refine and clarify relevant rules in the near future. We look forward to the detailed rules for implementation and the effects and comments of such rules.
Editor’s note: this article was simultaneously published on Chinalawinsight.com