Sweeping China Policy Reforms Seen Bolstering Domestic Generics

Off-patent original drugs in China are set to face unprecedented competition as the country drives up policy support for high-quality, bioequivalent domestic generics, and outlines other sweeping moves covering pricing and compulsory licenses.

A new wide-ranging circular issued on Feb. 9 by China’s Cabinet, the State Council, outlines a number of fundamental policy changes, including the allowance of substitution of original branded but genericized drugs with high-quality, bioequivalent domestically manufactured generics, which will also be prioritized in hospital procurement processes.

Not only will local generics be interchangeable for original brands, the generics themselves will also face less competition in simplified public tenders. For example, only the first three domestic makers of the same generic product to pass bioequivalence testing will be able to participate in the tender, to the exclusion of other companies.

The general policy principles outlined in the document, “Opinions on Further Reforming Drug Manufacturing, Distribution and Usage”, are a new sign that Chinese regulators are looking to bring more pressure to bear on drug prices, industry experts say. [Click here to see the Circular – Chinese language.]

“From granting accelerated approvals to generics to now providing financial incentives, the message is clear - the government wants to increase generic shares, via both prices and volume,” Katherine Wang, a partner at international law firm Ropes & Gray’s Shanghai office, told Pink Sheet.

“Circular No. 13 reinforces the government’s determination to expedite approvals for new drugs and urges generics to pass quality consistency tests,” she added in a Feb. 20 alert.

Comparative Price System

Incentives aside, the government is also poised to use more direct pressure to reign in drug prices. The State Council circular requires prices of new drugs and generics to not exceed those in the country of origin or China’s surrounding countries. Previously, Chinese regulators have usually required drug prices not to exceed prices in Hong Kong, Macao, Taiwan, and Japan.

Although the new document didn’t give details, the new list could potentially include India and Southeast Asian nations where drug prices are often lower, legal experts pointed out. The China FDA has been tasked with setting up a database of relevant ex-factory prices to monitor compliance.

“That could potentially bring more pressure to patented drugs, including offering volumes [in exchange for price concessions],” Wang pointed out.

In other moves enshrined in the circular, public hospitals will be expected to rationalize medicine use to control costs, and a pilot marketing authorization holder (MAH) scheme will be extended and potentially applied to both innovative new drugs and high-quality generics if they are developed or produced locally, again favoring local generic producers.

The MAH scheme, rolled out in 10 provinces in May 2016, enables domestic drug R&D institutions and individuals to apply for and hold drug product licenses, and the eligible parties can fully outsource manufacturing activities to contract producers. (Also see " Authorization Holder Scheme To Shake Up China R&D, Drug Production " - Pink Sheet, 8 Nov, 2015.)

Price Dilemma?

However, the CFDA itself may have its own dilemma to deal with under the planned changes, whereby it is planning to seek price commitments from manufacturers of both patented and off-patent drugs at the time of applying for marketing authorization.

This may be difficult “particularly considering that the CFDA is not authorized by law to condition drug approval on price commitment,” noted partners Lei Li and Chen Yang at the Beijing office of another global law firm, Sidley Austin, in a Feb.14 note.

Some details also need further outlining, they added, such as “whether companies will be prohibited to increase their drug prices after launch and whether companies will be allowed to adjust drug prices in China after launch when prices in overseas markets have changed.”

Since early 2016, China’s National Health and Family Planning Commission (NHFPC) has initiated national drug price negotiations, which have held out the promise of a larger volume market share in return for price cuts for some high-priced oncology and other drugs, but the volume uptake has in fact been mostly slow. (Also see "Deep China Price Cuts Reveal Complex Considerations" - Scrip, 23 May, 2016.)

Regulators are now requesting more incentives to participate, including leveraging public payers to offer timely reimbursement to both new and off-patented drugs, although volumes may still be used to bring down prices in collective tendering processes.

CL Overhang

Another renewed overhang to innovative companies in the new circular is that of compulsory licenses (CLs). Although China has yet to grant any CLs, the threat is ever-present and has been emphasized in recent years.

In the latest document, the government said it won’t hesitate in using CLs for any patented drug to force patient access to selected products. “Compulsory licenses can be granted and enforced for any patented drugs that prevent or treat critical illness,” the Feb.9 Circular stated.

Although it didn’t give any details, observers say the critical trigger conditions would usually mean serious infectious diseases such as hepatitis, and medical access needs for cancer.

Although CLs remain a distant threat at present, legal experts say the potential implications could be significant. “If widely implemented, this practice will significantly impact the competitive landscape for innovative products,” predicted Katherine Wang at Ropes & Gray in a Feb.20 note.

In 2015, China rejected Gilead Sciences Inc.‘s bid for patent applications relating to its blockbuster hepatitis C drug Sovaldi (sofosbuvir). (Also see "China Fast-Tracks Multiple HCV Drugs With Access In Mind" - Scrip, 28 Apr, 2016.)

The new outline policy circular still requires further implementation details and measures from relevant agencies including the CFDA, NHFPC, and the Ministry of Human Resources and Social Security, among others, during which process how the objectives may be practically applied should emerge.

From the editors of PharmAsia News.