State Council announces policies to reform pharmaceutical industry

Introduction
Circular 13
Comment

Introduction

China's pharmaceutical industry is set to undergo further change as part of the healthcare reform initiatives announced by the State Council in its February 9 2017 Circular on Several Opinions Concerning Further Reforms of the Policies Governing Drug Production, Circulation and Usage (Circular 13).

Circular 13 sets out the reform's general principles. Detailed implementation measures are expected to follow from the relevant state bodies, including:

• the China Food and Drug Administration (CFDA);
• the National Health and Family Planning Commission (NHFPC);
• the Ministry of Human Resources and Social Security;
• the Ministry of Commerce;
• the National Development and Reform Commission;
• the State Administration of Industry and Commerce; and
• the Ministry of Public Security.

Circular 13

Circular 13 reinforces the government's determination to expedite the approval process for new drugs and calls for quality consistency tests for generics. The key changes set out in the circular are as follows:

• Generics that are consistent with the quality of originator drugs (so-called 'high-quality generics') will be deemed to be interchangeable with the originator drugs. High-quality generics will be prioritised for hospital procurement. Only the first three high-quality generics to pass the consistency test will be eligible for collective tenders for public hospitals.
• The Marketing Authorisation Holder system will apply to both new drugs and high-quality generics if they are developed or manufactured in China.
• A compulsory licence can be granted and enforced for any patented drug that prevents or treats a critical illness. This practice, if widely implemented, will significantly impact the competitive landscape for innovative products.

Healthcare affordability is another major theme of Circular 13. Key changes in this regard are as follows:

• The price of patented and off-patent drugs must not exceed those of the country of origin or China's neighbouring countries. The government expects manufacturers of patented or off-patent drugs to offer price commitments when applying for marketing authorisations and will further leverage price-volume negotiations in collective tenders to exercise its control over drug prices.
• The CFDA will be responsible for establishing an ex-factory price database for pharmaceuticals to enhance surveillance and provide better intelligence for antitrust enforcement.
• Public hospitals must prioritise their use of essential drugs. The NHFPC will organise health economic studies to evaluate clinical outcomes and further rationalise the use of drugs. The performance review of public hospitals will be closely tied to the change in healthcare costs.
• Reimbursement by basic medical insurance funds will be calculated based on disease-related groups, the number of patients or the number of days spent in hospital. Costs associated with drugs and consumables will not be separately reimbursed.
• Sales of pharmaceuticals on the Internet will be promoted. Consumers can order pharmaceuticals online and pick them up from, or have them delivered by, bricks-and-mortar retail pharmacies.

Anti-bribery and anti-corruption enforcement remain high on the government's agenda. Circular 13 asks the CFDA to strengthen the administration of medical representatives. All medical representatives will have to register with the CFDA (or its local counterpart) and their registration will be published in a timely manner. More notably, medical representatives can engage only in academic promotion and technical consulting activities; they will be prohibited from selling pharmaceuticals. Failure to comply with these requirements will impact individual credit ratings.

Comment

Circular 13 will considerably impact the multinational pharmaceutical companies' China strategy. Companies should carefully review the policies and monitor the progress of any implementing rules associated therewith.

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