Implications of China’s New Drug Law

The Chinese legislature passed majoramendments to the Drug Administration Law (“DAL”) on August 26, 2019 which willtake effect on December 1, 2019. The new DAL entails many changes which willmake China’s drug administration smarter, more reasonable, and pro-innovation. Belowis an analysis of the major changes and their implications.

1. Online sales ofprescription drugs.

The new DAL takes a more lenient and open butcautious approach to online sale of prescription drugs. Except forcertain high-risk pharmaceutical products such as vaccines, blood products,anesthetics, psychotics, medical toxins, radioactive drugs, and precursorchemicals, online sale of prescription drugs is not entirely prohibited,but it must satisfy the drug sales provisions of the DAL as well as separateregulations to be issued by the National Medical Products Administration(“NMPA”). It is reportedthat measures under consideration include: (1) drug distributors eligible foronline sales must be an entity with drug distribution license; (2) drug onlinesales network must be interconnected with the medical institutions' systems toachieve information sharing and to ensure genuine prescription and drug safetyof the patients; (3) drug dispensing and delivery shall meet the GSPrequirements. As can be expected, e-pharmacy is approaching in China.

2.Revised definition ofcounterfeit and inferior drugs

The current DAL treats unapproveddrugs as counterfeit drugs and the importing and selling of such unapproveddrugs as criminal offenses. The new DAL’s definition focuses on activeingredients and claims, rather than regulatory approvals. In particular, counterfeitdrugs refers to: drugs with ingredients inconsistent with national drugstandards; non-medical ingredients passing off as drugs or one drug passing off asanother drug; deteriorated drugs; drugs with indication beyond actual scope of indicationor function. However, importing and selling unapproved drugs in largequantities is still illegal which may implicate regulatory punishment such as fines, confiscationof illegal gains or even administration detention,but not criminal liability. Yet, if only a "small amount" of foreign marketeddrugs are imported into China without authorization, there could be anexemption from punishment or lesser punishment.

3.Local agent requirement

The new DAL requires foreignpharmaceutical companies to appoint a legal agent in China. The legal agentwill need to assume the same regulatory obligations and liability as theforeign marketing authorization holder. If a MAH is a foreign company, itsdesignated business entity in China shall perform its MAH obligations and bearjoint and several liabilities with the foreign MAH.

4.Enhanced drug market authorizationholder system

Following a 3-year pilot project in 10provinces/municipalities to implement an enhanced Drug Market AuthorizationHolder (“MAH”) system, the new DAL will implement this enhanced MAH systemnationwide. The enhanced MAH system separates marketing authorization frommanufacturing authorization. A MAH can either directly manufacture and sell orcontract out to third party to manufacture and sell. A MAH can also transferits market authorization to qualified third parties upon approval. Under thenew DAL, the responsibilities to ensure drug safety, efficacy and quality areimposed on a MAH for the entire life-cycle of a drug such as non-clinicalresearch, clinical trial, production and sales, post-market research, adversereaction monitoring, reporting and handling of drugs.

5.Encouraging drug innovation

The new DAL puts particular emphasis on the development of newdrugs for the treatment of serious life-threatening diseases, rare diseases andpaediatric drugs and the development of traditional Chinese medicine. Withrespect to clinical trial approval, bioequivalence studies require filing (notapproval) with NMPA. For clinical trials that require approvals, if NMPA failsto decide within 60 working days upon receiving a clinical trial application, anauthorization shall be deemed to be granted. Moreover, priority review andapproval pathways are provided for paediatric drugs, drugs with urgent clinicalneeds, new drugs for prevention and treatment of severe infectious diseases andrare diseases. NMPA is also required to conduct the review and approval for adrug application at the same time as the review of the drug's API, drugexcipients, packaging materials and containers, the compliance of drug qualitystandards, production processes, labels, and drug inserts. The new DAL allowsconditional market authorization approval for drugs to treat seriouslife-threatening diseases with no comparable treatment options and drugs for anurgent public health need if mid-stage clinical data can predict clinicalbenefits. The new DAL allows compassionate drug use if a clinical institutionis conducting clinical trial of a drug to treat life-threatening disease withno comparable treatment options, the drug being tested can be available toother patients with the same conditions in the same clinical trial institution,provided that the drug being tested is likely to have benefits and has passedthe ethical review and informed consent has been obtained from the patients.

6.Shift in supervision focus

The new DAL replaces the current staticpre-approval supervision and certification system with a dynamic post-approval inspectionand enforcement system. Pharmaceutical manufacturers and distributors need tobe prepared for fly-in inspections at an increased frequency. The NMPA will expandits inspection force to more effectively supervise the operations ofpharmaceutical companies, both at home and abroad, as well as their vendors andsuppliers. During drugpost-marketing management stage, a MAH shall form a risk management plan andconduct post-marketing research and assess regularly on the safety, efficacyand quality of listed drugs. The new DAL also requires a MAH to monitor andreport adverse drug reactions, recall drugs with quality defect or other safetyrisks, and report annually to the provincial NMPA regarding their drugproduction and sale, post-marketing research and risk management measures. Thelegal representative and principal persons of a MAH are also required to takefull responsibility for the drug quality.

7.First accountabilitysystem

The new DAL provides a firstaccountability system which enables victims of poor drug quality to claimcompensation either from the MAH, the drug manufacturer, the drug distributoror the medical institution. The party being asked to bear the compensation inadvance can seek to recover the compensation from the party who is actuallyresponsible for the drug quality problem.

8.Enhanced penalties

Failureto comply with the statutory obligations will result in more severe penalties,both in the scale of fines and in the forms of sanctions. For example,falsification of regulatory approvals and regulatory dossiers will result inincreased fines (from up to three to 15 times the illegal proceeds). The fine forunlicensed production and sale of drugs has been raised from 2-5 times to 15-30times of the drug product value. Moreover, thelegal representative and main responsible persons of the company will face newsanctions, including 10 years of debarment and detention by the police. The new DAL alsoimposes legal liabilities on local drug administration authorities. For example,if the local government fails to report or delays in reporting significant drugsafety incidences, the responsible officers in the drug administration orsupervision authorities could be demoted or even dismissed.

9.Implications for foreign drugcompanies

The new DALshows China's determination to implement the most stringent drug regulation interms of drug supervision, punishment and accountability system. It opened doorfor more foreign drug companies to enter China in CMO, generic medicinemanufacturing, foreign drug distribution, online sales. The MAH system will provide more flexibility in structuringcross-border transactions. Subject to the NMPA’s approval, marketauthorizations can be transferred from one company to another without changingcontract manufacturers. These changes may enable Chinese MAHs to work withoverseas CMOs and foreign MAHs to work with Chinese CMOs and to restructuretheir supply chains. Foreign companies will be more willing to transact withChinese companies to divest their product portfolios or localize the productionof their assets in China. However, there are certain deficient areas that need tobe addressed. The new DAL is silent on regulatory data protection in medicalindustry which will require other laws and regulations as well as judicialpractices to complement.

(David Zou / Partner, Grandway Law Offices (Shanghai); Kerry Zhang/ Associate, Grandway Law Offices (Shanghai))