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Pharmaceutical industry in China
The profile of the pharmaceutical industry in China remains low. China accounts for 20% of the world’s population but only 1.5% of the global drug market, although that share has expanded by 10% plus annually over the last 10 years. China’s changing health-care environment is designed to extend basic health insurance to a larger portion of the population and give individuals greater access to products and services. Following this period of change, the pharmaceutical industry is expected to continue its expansion.
The domestic pharmaceutical market is highly fragmented and inefficient. China, as of 2007, has around 3,000 to 6,000 domestic pharmaceutical manufacturers and around 14,000 domestic pharmaceutical distributors. Most often cited adverse factors include a lack of protection of intellectual property rights, a lack of visibility for drug approval procedures, a lack of effective governmental incentives, poor corporate support for drug research and differences in the treatment in China accorded to local and foreign firms.
Even so, the industry environment has been transformed for the better over the last 10 years. Entry to the WTO has brought a stronger patent system, medical insurance is now more widespread, and pharmaceutical-related regulations have been stiffened. China is reportedly expected to become the fifth largest pharmaceuticals market in the world by 2010.
Additional recommended knowledge
Structure and trends
Currently China has about 3,500 drug companies, falling from more than 5,000 in 2004, according to government figures. The number is expected to drop further. The domestic companies compete in the $10 billion market without a dominant leader. As of 2007, China is the world’s ninth drug market, and in 2008 it will become the eighth largest market.
China’s thousands of domestic companies account for 70 percent of the market, and the top 10 companies about 20 percent, according to Business China. In contrast, the top 10 companies in most developed countries control about half the market. Since June 30, 2004, the State Food and Drug Administration (SFDA) has been closing down manufacturers that do not meet the new GMP standards. Foreign players account for 10% to 20% of overall sales, depending on the types of medicines and ventures included in the count. But sales at the top-tier Chinese companies are growing faster than at Western ones, according to IMS Health Inc.
Even the top selling companies just barely exceed sales of $100 million (hospital market). Most of the Chinese drug-makers fall below the 20th ranking, but 30 of the top 50 companies are local.
In addition, China’s over-the-counter market is growing fast and has become the fourth largest OTC market in the world. Foreign enterprises have been closely monitoring the expanding OTC market. Merck announced the launch of OTC program in China in September 2003. Roche listed China as one of its 10 core OTC markets, with the aim of growing its OTC drug sales by 50% in the next five years and reaching 1.3 billion in 2008. Novartis is expanding its OTC market share in China, and Wyeth has also entered OTC market.
The pharmaceutical market in China is dominated by its non-branded generic industry that operates with basic technology and simple production methods. Domestic pharmaceuticals are not as technologically advanced as western products, but nonetheless occupy approximately 70% of the market in China. Domestic companies are mainly government owned and fraught with overproduction and losses. The Chinese government has begun consolidating and upgrading the industry in an effort to compete with foreign corporations.
It is estimated that most hospitals derive 25-60% of their revenue from prescription sales, hospitals remain the main outlets for distributing pharmaceuticals in China. This will change with the separation of hospital pharmacies from healthcare services and with the growing numbers of retail pharmacy outlets. Retail pharmacy outlets are expected to grow in number once the government finally introduces its system to classify drugs as OTC. The government is now encouraging development of chain drug stores, but the full effect might not be seen for several years.
The price of pharmaceutical products will continue to decrease steadily. In June 2004, the price of 400 antibiotics in 24 categories, including penicillin, was reduced by, on average, 35%. The total value affected by this reduction was US$42 million. The central government has been playing a significant role in pharmaceutical price readjustment. Future price reductions will originate from hospital pharmaceutical retail shops.
The rural pharmaceutical market will shift significantly. 80% of counterfeit products are consumed in rural areas. This provides a huge opportunity for pharmaceutical companies to develop the market in rural areas. In 2005, Huanan Pharmaceutical Group, Guangzhou Ruobei Huale, Baiyunshan Pharmaceutical Group, and others, have stepped up efforts in targeting the rural market.
Historic foreign involvement
Bayer of Germany, the inventor of aspirin, began trade with China in as early as 1882. Hest, known as Aventis, sold its products through 128 distribution agents across China in 1887, becoming China's no. 1 Western medicine and dyeing provider. Eli Lilly and Company opened its first overseas representative office in Shanghai in 1918. ICI, the predecessor of the world's no. 3 pharmaceutical enterprise AstraZeneca, began trade with China in 1898, and still maintains its old-time office by the Huangpu River in Shanghai.
In the 9 months from January to September 2004, the total output of the country’s pharmaceutical industry reached $40 billion, 15.8% higher than the same period of 2003. In the same period, 23 major state-owned pharmaceutical companies had sales of $10 billion. A survey of 16 typical city hospitals, the usage of drugs increased by 32.23% in the first half of 2004 as compared with that of 2003.
Around 36% of all China’s pharmaceutical enterprises are state-owned. Another 35% are privately owned domestic enterprises and the remaining 29%, foreign-funded. Synthetic drug manufacturing remains the pharmaceutical industry’s largest business in China, constituting 65% of industry sales. Another 21% of industry sales come from traditional Chinese medicine. Biotech-related medical products and medical equipment make up the rest.
China's huge and gradually aging population and strong biopharmaceutical sector have almost guaranteed a large but varied pharmaceutical market profile. Zhejiang, Guangdong, Shanghai, Jiangsu and Hebei provinces have always been among the top five most productive provinces in China. Each of these provinces has grown steadily by an average of 20 per cent per annum from 1998 to 2003 (with the exception of Jiangshu in 1998 and 1999) and reflects an increasingly healthy developing trend in the Chinese pharmaceutical industry.
Most pharmaceutical firms are located in the southeastern zone that includes two well-developed areas and three under-developed areas. The two most popular areas of well-developed pharmaceutical industry, called the growth poles, are the Eastern China zone of which Zhejiang province is located in the centre and the South China zone represented by the Guangdong province. The total output value of these two provinces accounted for 21 per cent of the total output value of pharmaceutical industry of China in 2003.
The three sub-developed areas of pharmaceutical industry, called the potential points, are also identified as the Middle China Zone, the Northeastern Zone and the Southwestern Zone, centralised in Hebei Province, Heilongjiang province and Sichuan province, respectively.
The development of the pharmaceutical industry in China was found to be predominantly driven by economic factors. The nature of an industrial region can roughly fall into one of the following three types: natural resource-driven region, economy-driven region and science and technology-driven region. The pharmaceutical industry in China grows well only in areas with a strong macroeconomic background rather than in regions with rich natural resources or advanced science and technology. Moreover, it is shown that the stronger the macro-economy, the faster the pharmaceutical industry grows. Therefore, the decision-making policy on pharmaceutical development in a region should be largely based on its macroeconomic situation.
Broadly speaking, it appears that the dynamic features of the pharmaceutical industry in China remain steady. According to the reform plan, China will conduct a regime of vertical management in drug supervision and management departments, intensify supervision and control over medicines, and gradually set up a drug management system featuring legal management, unified law enforcement, standard codes of conduct, honest practice and high efficiency. To meet the objective requirements of drug administration and the needs of the development of medical services, a drug supervision and management body was formed in 1998.
The pharmaceutical industry in China was found to be extensively fragmented. Excessive repetitive establishment of provincial pharmaceutical industries was found to be serious in comparison to other industries in China. It also demonstrates a low-level, repetitive development situation of the pharmaceutical industry in different regions of China.
Currently in China, the pharmaceutical industry is undoubtedly still developing. The most desirable strategy has been, therefore, to concentrate on the regional pharmaceutical industries. There are three main reasons for this strategy: high profitability and growth of the pharmaceutical industry, unnecessary political competition among regions, and excessive exploitation of regional administrative power. (Hu Yuanjia; 2007)
The pharmaceutical industry is always known as a high-return and rapidly growing industry. After the Chinese market was reformed, China gradually makes space for a healthy, steady and rapidly developing pharmaceutical industry, where profit rate and growth rate are much higher than in other industries. In the view of high profit returns, regional governments often allow excessive development of regional medicine industries without careful analysis of regional competitiveness, actual advantages and development strategies to incentivise the regional development of the entire economy.
In China, drug administration departments are established at both central and regional governmental level. Every region has a regional drug administration department with some authority and power. Without good communication and cooperation between administration department, unnecessary competition between regions might occur. The number of drug companies under each administrative department is often wrongly recorded resulting in an inaccurate evaluation index of the regional economic development and governmental performance.
Complex regulatory processes induce excessive exploitation of regional administrative power. Before the revision of Chinese Pharmaceutical Law in 2001, the province drug administration was assigned with authority to streamline the process of registering a generic drug. Consequently, this regional authority power was exploited resulting in excessive duplication of the same drugs. For example, a fluoroquinolone type medicine was registered and manufactured by more than 1,000 enterprises. Fortunately, the Chinese government immediately realised the serious problem and withdrew the regional authority power to prevent overlapping of authorities. Duplication of drug is, however, not the only example. After the allocation of authority of approval right of opening drug companies was taken down to provincial level several years ago, a sharp increase in the number of drug companies was noted. It was reported that 70 new drug production enterprises were approved to open during the first half of 2003, while only 45 similar enterprises were approved to open during the three years from 1998 to 2001.
Research and development
With their low budget for research and development, China’s pharmaceutical makers are in a different league from the multinationals, but they do enjoy certain advantages. Many Chinese companies not only produce the dosage forms (such as tablets) but also own the pharmacies where they are dispensed, as well as the distribution networks that deliver them to the hospitals, where nearly 80% of drugs are sold. In addition, Chinese companies can produce generic versions of branded drugs for a fraction of their price.
Of the 3,000 pharmaceuticals - not including traditional medicines - manufactured in China since the 1950s, 99 percent are copies of foreign products, as are almost 90 percent of China's biotech products. Most Chinese companies - even joint ventures - compete with each other for the same generics. Many are struggling for survival; more than 32 percent recorded losses in 1999, according to the Pharmaceutical Department of National Development and Reform Commission.
Moreover, compared with international pharma giants, Chinese companies are not only small, but are weak in technology and often lack capital. The total R&D expenditures for Chinese-owned pharma businesses amounted to less than that spent by a single major Western pharma company.
Companies organization and management
A Western pharmaceutical company in China is basically controlled by its parent company. The subsidiary follows its parent company’s advanced management model, is highly influenced by the headquarters in decision making, finance, and research and development. But in pharmaceutical marketing, the subsidiary’s management team has more autonomy, mostly due to the different characteristics of Chinese market.
Most Western pharmaceutical companies’ subsidiaries in China are foreign citizens appointed directly by the parent companies. In a poll of 33 foreign pharma companies, 28 say their general managers are foreign citizens, accounting for 85% of the total; 15 say their vice general managers of productions are foreigners, accounting for 45%. Foreign VPs of finance and marketing account for 52% and 39% respectively.
The same poll shows mid level management positions such as department directors are held by Chinese. Chinese marketing directors account for 27%, foreign marketing directors account for 39%, and the rest, according to the author of this pharma China report, goes to repatriates. Five Western pharma companies have foreign R&D directors, and only three have foreign HR directors.
Comparison of Chinese and Western pharmaceutical companies
Like its U.S. and European counterparts, the Chinese pharma business is regulated by government agencies, and competition is fierce in the business. The biggest differences include following:
When the Chinese are developing an API they try patent searches via the internet, but are limited by the scope of the available services. Few factories yet have patent attorneys on staff, but for the larger pharma groups who are seeking partnerships with large Western firms, this may come soon.
The Chinese business environment is mainly relationship-based, and this is reflected in the pharmaceutical business. Establishing relationship with a pharma companies through personal connections is a common way to contact Chinese pharma companies. Attending pharmaceutical exhibitions, pharmaceutical conferences or seminars is another approach, as is holding a press conference attended by officials of related government agencies or associations and senior pharmaceutical executives.
From 2003 to 2004, the number of pharmacies climbed to 200,000 from 180,000, and the number of retailers owning chain stores rose from 1200 to 1349.
Before the 1980s, the distribution channel for China’s pharmacy products was vertically integrated, as there were few middlemen for medicine sales and the only wholesalers were the traditional pharmacy stores. However, after the 1980s, with the deepening of China’s reforms, the distribution of China’s pharmacy products have undergone profound changes that have to some extent changed this.
At present, there are three main distribution channels for China’s pharmacy enterprises:
Under this distribution form, there is a sole authorized organization in the country that is responsible for the sale of one or more products of a pharmacy company. Such kind of distribution also can be called "the national agent mode." The pharmacy company is responsible for the manufacturing, research and development of the products, and the general agent for the nationwide sale of the products of the company. In most cases, the agents buy the pharmacy products with cash after weighing the costs and profits, and the market risks lie with the wholesalers.
Under this mode, the pharmacy enterprise search for its national or regional general agent and use the agent’s market network to sell its products. Such kind of distribution mode can be called "the regional general agent mode." The pharmacy enterprise usually entrusts its general agent with the sale of its products through a bidding process or forming alliance with the agent, providing it products at a bottom price. The agent, after buying a certain amount of products, win the authorization from the pharmacy company to sell in a specific region and becomes its sole authorized agent in the region. The regional general agent can be the general wholesaler in a big region, provincial wholesaler, district wholesaler or municipal wholesaler, etc. In a big region or in a province, regional general agents provide patients with their products through sub-wholesalers and retailers. In a small place such as a county, products can go directly from the regional general agent to retailers and then to patients, without the involvement of sub wholesalers.
Before taking such a distribution channel, the pharmacy enterprise should first register an independent licensed marketing company, and then set up offices in major cities which are responsible for monitoring sales and distribution of its products in their respective regions. Such a distribution mode, which requires large amount of capital and high-level management for the pharmacy enterprise, is mostly used by large-sized pharmacy enterprises.
In the above-mentioned modes, pharmacy enterprises, middlemen and patients are three basic components. Middlemen can also be classified under the categories of wholesalers and retailers. Retailers include those with shops, without shops and retail groups. What needs to be pointed out is that in China, the biggest pharmacy retailer is the hospital, due to the country’s medicare and social security mechanisms. In the retail market, 85% of pharmacy products go to patient through hospitals.
Hence, the major distribution channels in China can also be described as the following:
The first two modes are the leading ones in China.
In recent years, China’s pharmacy enterprises have entered two new fields: e-business and the setting up of pharmacy retailing chain stores. At present, the development of the B to C mode of pharmacy business in China is limited.
B2B is the main development trend of China’s e-pharmacy commerce. Though the trade volume of B2B e-pharmacy business only makes up a percentage of the total pharmacy sales, it still has large development potential. In China’s case, the B2B e-pharmacy commerce has grown by 300 percent yearly. In 2003, the trade volume of internet pharmacy sales was estimated to be 10 percent of the total.
In addition, more and more IT and other industry lead companies have been shifting their investments into the pharmaceutical industry. One example is Fang Zheng Group, an IT company that had invested a total of US$363 million into pharmaceuticals and healthcare. Guangzhou Bai Yun Shan Pharmaceutical Manufactory earmarked US$12 million to start an external-use medicine project, which was in addition to its US$48 million antibiotics project.
Domestic companies doing R&D
To date, the Chinese domestic pharmaceutical industry has invested very little in the research and development of new drugs, though the central government is encouraging R&D through investment and other incentives in an effort to build a world-class pharmaceutical industry.
Most Chinese pharma companies with foreign distribution export traditional Chinese medicine mainly to Asian countries or regions. Their foreign distribution, therefore, is not as significant as their western counterparts.
The Chinese government legalized foreign ownership of retail pharmacies in 2003. On March 14, 2005, AXM Pharma Inc. (AMEX: AXJ) entered into a distribution agreement with Sinopharm Holding Guangzhou Co., Ltd. for an expected purchase amount through December 2005 of RMB 54 million ($6.56 million) for the Company's line of Elegance products, formerly known as Whisper.
Additional products, including Anti-Fatigue and Asarone, are expected to be sold in upcoming quarters. The sales territory includes Guangdong, Guangxi, Yunnan, Guizhou, Fujian, Sichuan, Chongqing, Hainan, Hubei and Hunan.
Sinopharm Holding Guangzhou Co., Ltd., an affiliate of China National Pharmaceutical Group Corp. is actively engaged in the research and development, capital investment, manufacture and trade of pharmaceuticals and medical instruments. Sinopharm has achieved an annual sales volume of 10 billion RMB (over 1.2 billion U.S. Dollars) and a total import and export volume of 200 million U.S. Dollars.
In recent years, more and more western pharmaceutical corporations, such as GSK, Roche, Novo Nordisk, and others, have come to China and set up R&D centers. Many world leading pharmaceutical companies have established joint venture manufactories in China. Some have even set up sole propriety manufactories. As of 2004, amongst the largest 500 overseas enterprises, 14 of them are pharmaceutical companies.
As of 2004 (three years after China's WTO entry), nearly all global pharmaceutical companies have already completed their accession into the Chinese market and will gradually shift their focus to research development. The main reasons for overseas companies coming to China have been to save costs by using the extensive science and technology research bases currently in place in China, the abundant human resources, and less expensive medical and clinical trials.
The involvement of many foreign pharmacy enterprises operating in China can be dated back to a century ago. Bayer of Germany, the inventor of aspirin, began trade with China in as early as 1882. Hest, known as Aventis, sold its products through 128 distribution agents across China in 1887, becoming China’s No.1 Western medicine and dyeing provider. The US Eli Lilly & Co. opened its first overseas representative office in China’s Shanghai in 1918. ICI, the predecessor of the world’s No 3 pharmacy enterprise AstraZeneca, began trade with China in 1898, and still maintained its old-time office by the Huangpu River in Shanghai.
There are 1,800 foreign-funded pharmaceutical enterprises in China. Currently, all the top 20 pharmaceutical companies in the world have set up joint ventures or wholly owned facilities in China. This suggests that market conditions have never been more challenging, with competition at an all-time high.
Foreign companies doing R&D in China
After China’s entry into the WTO, many leading pharmaceutical companies are transferring their research and development centers to China. For instance, Roche of Switzerland opened its R&D center in Shanghai recently, GSK has established its OTC research and development center in Tianjin, China, and Pfizer and Janssen Pharmaceutica (Johnson & Johnson) will carry out similar plans in the near future. AstraZeneca, Bayer, Eli Lili, and Hoffman-La Roche, have also set up R&D or clinical trial centers in China.
A poll on 33 foreign pharmaceutical enterprises in China shows that seven out of the 33 companies have their R&D centers in China, accounting for 22% of the surveyed. The remaining 26 pharmaceutical enterprises have no R&D centers in China, accounting for 78 of the surveyed.
Among the seven foreign pharmaceutical enterprises with R&D centers in China, three have their R&D centers in Beijing, two in Shanghai, one in Guangzhou and one in Changzhou of Jiangsu Province. The maximum number of researchers at those centers is 40, with a majority of R&D centers having around 10 researchers. The researchers of most R&D centers are mainly Chinese, and only one R&D center has an all-foreign research team. All the R&D centers were founded after 1999, mainly in 2000 and 2001. The capital investment of these centers is not available.
In January 2004, Roche of Switzerland opened its research and development center, the fifth R&D center of the pharmaceutical giant, and the first to be established in China. Roche planned to hire 40 to 50 scientists in the first year and focus their research on pharmaceutical chemistry study. The center aims to step into traditional Chinese medicine research.
Foreign companies doing drug testing or clinical trials in China:
Other former functions of the ministry have been assigned to different government bodies. The most important of these was the transfer of medical insurance responsibilities to the new Ministry of Labor and Social Security. Nonetheless, the Ministry of Health retains its other main functions-regulatory development and oversight, healthcare resource allocation, and medical research and education. The Chinese government's establishment of a single drug regulatory authority was an important step toward foreign access, because it eliminated the conflicting standards that prevailed among provincial government agencies, centralized the Chinese healthcare regulatory system, and made it more transparent. SFDA now oversees all medications-both Western and TCM-as well as advertising. Its new regulations follow FDA's model. In July 1999, as part of medical insurance reform, SFDA released its first list of over-the-counter (OTC) medications, and in 2000, the state began to regulate OTC and prescription drugs separately. SFDA did so to encourage patients to purchase OTC medicines for less serious diseases, thereby reducing government medication expenditures and hospital visits. The SFDA plans to cut the number of manufacturers down to around 2,000 over the next two years by attrition and by requiring remaining firms to meet the new GMP standards. In fact, SFDA required all pharmaceutical companies in China to obtain GMP certificates from SFDA by June 30, 2004 to be licensed to sell their drug products in China. About 3000 of the companies met the deadline; companies in the process of obtaining certification may subcontract secondary production to a certified company until June 30, 2005.
In 2005, SFDA launched a regulation on drug research and supervision management aimed at enforcing GLP to investigative drugs, traditional Chinese medicine injections and biotechnology products. The regulation aims to help China’s drug research and development gain international recognition.
China quickly advanced its pharmaceutical-related regulations around the time of its December 2001 entry into the World Trade Organization (WTO). Chin has strengthened patent protection: In conformity with the WTO/TRIPS agreement, the patent protection structure adopted by China approaches that of Japan, Europe, and the US. Since the end of the 1990s, the government has been striving to develop a healthcare insurance system that covers 200 million Chinese. Already, 90% of the population in major cities like Shanghai, Beijing, and Guangzhou are covered, for a total of over 80 million. The Pharmaceutical Management Law was overhauled in December 2001 and various regulations were enacted from 2002-2003. Transparency in the approval process is gradually improving.
In accordance with WTO regulations, China has committed itself to cutting tariffs, liberalizing its domestic distribution practices, and restructuring its regulatory environment. China has allowed foreign enterprises to import products and engage in distribution services. Furthermore, China has also implemented new drug administration laws designed to streamline product registration and protect Intellectual Property Rights (IPR). China has agreed to six years of "data exclusivity" and has committed itself to implementing a patent linkage system. The SFDA has worked to crack down on counterfeiters but without greater resources and stricter legal consequences these actions alone have yet to be enough to curb this rampant problem.
Since 1998, the government has raised bar for entering the pharmaceutical business by passing laws including Drug Management Law and Regulations on Pharmaceutical Manufacturing. They involve following aspects of pharmaceutical manufacturing, drug distribution and selling, drug registration, requirements for manufacturing traditional Chinese medicines, medical packaging manufacturing requirements, and and medical device manufacturing requirement.
The new laws will likely have a negative effect on market growth and profitability during the transitional period, but over the next 5-10 years this market should be able to provide the returns it is capable of.
Government drug pricing policy
In order to alleviate the burden of medical expenses on the society and ensure the implementation of the medical insurance scheme, retail prices of pharmaceutical products qualified for the program and included in the National Basic Medical Insurance Scheme Drug Catalogue will be regulated. The pricing mechanism is based upon three considerations when setting the maximum retail price - production cost, a wholesaler spread set by the government and the prices of comparable products in the market. Any products priced above this level will be cut.
Centralized tendering drug procurement program
The centralized tendering procurement system operates in two ways. First, several hospitals and medical institutions join together to invite tenders. Then, they appoint qualified agents to handle tenders. These agents are prohibited from having ties with the industry regulatory or administrative bodies.
In 2002, 70% of public hospitals at county or above level implemented this tendering system. This system has successfully passed the pilot phase and proven effective. Both the number of participating hospitals and variety of drugs expanded substantially.
More power to hospitals and medical institutions. In a market economy, hospitals and medical institutions do their own drug procurement. They source drugs from manufacturers at market prices and dispense them to patients. The centralized tendering drug procurement system, however, gives more power to hospitals in drug procurement. As a result, some unfair, unjustified and unreasonable practices surface as decision makers of some hospitals abused their power in order to get economic benefits.
GMP compliance certification
GMP is a system to ensure products are consistently produced and controlled according to quality standards. It is designed to minimize the risks involved in any pharmaceutical production that cannot be eliminated through testing the final product. A directive circular issued by the Ministry of Health in Jul 95 marked the official launch of GMP certification in China. The China Certification Committee for Drugs (CCCD) was established in the same year. A subsidiary organization was also set up to manage the certification program.
Currently nine government agencies are the key agencies responsible for regulation. They are the State Food and Pharmaceutical Administration (SFDA), the State Development and Reform Committee, the Commerce Ministry, the State Traditional Chinese Medicine Administration, the Ministry of Labor and Social Security, the Ministry of Health, the State Population and Family Planning Committee, the Ministry of Science and Technology, and the State Quality and Technology Supervision Administration.
In addition, more than 10 industrial associations also regulate the industry.
Comparison of regulatory requirements with other countries
There should be no big differences between rules of China and those of the U.S. Pharmaceutical, partly because China is following and copying U.S. rules. Chinese regulations affect nearly every aspect of drug manufacturing, from the design and construction of manufacturing facilities to the development of procedures and the training of operations personnel performing them.
There is only federal regulation on new drug application, but there are both local regulation and national regulation regarding pharma expenditures of hospitals, reimbursable drug lists, and other issues. National regulation is implemented by SFDA and other state agencies, while local regulation is implemented by provincial agencies.
Through related laws, China has established a physician licensing system, which requires physicians to pass a national exam to be eligible for applying for licenses. After passing the exam, physicians will be eligible for applying for certificates for the practice of medicine. Licensed physicians can open their own clinics five years after getting licenses, during which they must work as physicians.
There is a mechanism for approving new drugs (from NDA filing to approval). A full three-phase research trial takes three to five years, similar to the U.S., while requirements to start a trial are onerous by foreign standards, according to Western drug-company executives.
Although the approval time is being shortened, there still remain many aspects where transparency is lacking.
Western pharmaceutical companies have applied for numerous patents in China. About 10,000 patents for traditional Chinese medicines belong to Western companies. However, some Western observers say China lacks administrative protection for patents.
In 1992, the United States and China signed a memorandum of understanding (MOU) to allow administrative protection (AP) in China for US pharmaceutical patents granted between 1986 and 1992. The MOU provided seven-and-a-half years of market exclusivity, or AP rights, in China for pharma patents that were: not protected by exclusive rights before the amendment of current Chinese laws; patent protected after 1 January 1986 and before 1 January 1993 in an MOU signatory country; not previously marketed in China. Several Chinese government policies have prevented US industry from realizing the intended MOU benefits. According to Article 42 of the Patent Law, the duration of patent right for inventions is twenty years, and the duration for utility models and patent right for designs is ten years, counted from the date of filing.
The State Intellectual Property Office is responsible for enforcing patents. The intellectual property system in China was originated from and developed as a result of the policy of reform and opening-up. The State Council, the Patent Office of China, the predecessor of SIPO, was founded in 1980 to protect intellectual property, encourage invention and creation, help popularize inventions and their exploitation, and promote the progress and innovation in science and technology.
In 1998, with the restructuring of the government agencies, the Patent Office of China was renamed SIPO and became a government institution under the direct under control of the State Council. The office is in charge of patent affairs and deals with foreign-related intellectual property issues.
U.S. and China
As a member of the World Intellectual Property Organization, China is active in protecting international patents. The SIPO has signed IP protection memorandums with countries including Russia and Thailand on the protection of intellectual properties. Such agreements are necessary to protect international patents in China.
On July 14, 2005, China and U.S. reached an agreement on intellectual property protection. According to western pharmaceutical business journals, most discouraging to US pharma companies has been the rampant theft of their intellectual property through patent infringement and counterfeiting. All those factors undermined the competitive advantage that innovative pharma companies stood to gain from marketing investments. As a result, US companies accounted for less than 10 percent of China's total pharma imports between 1998 and 2000.
China has more recently agreed to implement the Trade Related Intellectual Property Agreement of the Uruguay Round. To comply, Chinese companies will have to change their long-time practice of relying on counterfeit products. According to China's Securities Times, foreign companies will be able to file compensation claims ranging from $400 million to $1 billion against companies that copy patented medicines.
Articles 18 and 19
Chinese patent law addresses foreign companies in articles 18 and 19. Under Article 18, where any foreigner, foreign enterprise or other foreign organization having no habitual residence or business office in China files an application for a patent in China, the application is treated in accordance with any agreement between the organization's host country and China, or any international treaty to which both countries are party, or on the basis of the principle of reciprocity.
Under Article 19, where such an organization applies for a patent, or has other patent matters to attend to in China, it must appoint a patent agency designated by the patent administration department under the State Council to act as his or its agent.
The patent agency is mandated to comply with the laws and administrative regulations, and to handle patent applications and other patent matters according to the instructions of its clients. The agency bears the responsibility of keeping the contents of its clients' inventions-creations confidential. The administrative regulations governing the patent agency are formulated by the State Council.
There are two types of end users for in China: hospitals and retail pharmaceutical franchising stores. According to a 2004 sample investigation of hospitals in 16 cities, it was estimated that Chinese hospitals purchased a combined total of U$2.5 billion in drugs, an increase of 27% over 2003. The total revenue from pharmaceutical franchising stores was US$5.6 billion in 2004, an increase of 36% over 2003.
Due to China's former planned economy system, hospitals are still the main distributors of pharmaceuticals. In 2003, only 15.1% of total drug expeditures were incurred at pharmacy stores.(Meng 2005) The Chinese government legalized foreign ownership of retail pharmacies in 2003. Corporations such as Alliance Boots have formed retail and distribution joint ventures in China, mainly focused on Guangdong province.
Many companies have said that the drug distribution system in China is inefficient and adds considerably to the retail costs of medicine. Also there have been complaints of unclear regulations, low profitability, complex licensing procedure, hospital bidding, and reimbursement schemes.
The dietary supplements sub-sector has doubled from $3 billion in 1998 to a total sales volume of $6 billion in 2001. Experts estimate that the industry will reach $10 billion in annual sales by 2010, and will continue as consumers seek products with curative weight loss and other health enhancing effects. Over 3,000 domestic manufacturers of dietary supplements produce more than 4,000 different types of products. Domestic manufacturers fail to develop product branding and credibility and rely heavily on advertising to generate sales. As such, most domestic products, due to loss of credibility amongst consumers, tend to have short life cycles. High quality imported products only account for 10% of total sales. Companies say that complicated product registration, expensive and time-consuming certification requirements, and inexperienced and inefficient distributors are common obstacles.
Education and research
There are many institutes of higher learning in China that are engaged in pharmaceutical research. (See Pharmaceutical higher institutions in China.)
This article contains material from the Library of Congress Country Studies, which are United States government publications in the public domain. 
|This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Pharmaceutical_industry_in_China". A list of authors is available in Wikipedia.|