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    European Business in China Position Paper 2006

    Finance and Taxation Working Group

    Pharmaceutical Working Group

    Key Recommendations

    Increase Access to and Recognition of Innovation

    1. Wider access to new medicines:

    ? Update reimbursement lists on an annual basis with newly registered drugs as provided for

    in the current regulations to provide the most up-to-date medical therapies to Chinese patients.

    ? Adjust reimbursement lists (delete old products which have been replaced by better treatments) on a bi-annual basis as provided in current regulations.

    ? Create additional options of insurance/reimbursement coverage such as the encouragement

    of commercial healthcare insurance, which would also reduce the burden on the government.

    2. Better recognition of value of innovation:

    ? Reward innovation through appropriate provisions in Drug Price Regulation. In particular delink

    the pricing of innovative drugs from generic benchmarks and maintain the independent price hearing review mechanism.

    3. Protection of IPR:

    ? Adopt patent term restoration and implement appropriate regulatory data protection, similar

    to measures adopted in other major markets, in order to better encourage and support investment in pharmaceutical R&D in China.

    Create an Innovative - Friendly Regulatory Environment

    4. Shorten clinical trial approval time:

    ? Shorten clinical trial application approval time to 3 months to encourage China's participation

    in global drug development.

    5. Enhance market safety and efficiency:

    ? Provide written guidance to assist local authorities with amending business licenses for pharmaceutical companies to import finished drugs to sell to wholesalers. ? Adopt a Marketing Authorization system to replace the manufacturing/import-based drug registration system.

    6. Eliminate discriminatory drug import requirements:

    ? Ensuring imported and locally manufactured API is treated equally. Introduction to the Working Group

    The European pharmaceutical industry is committed to

    bringing innovative, life-saving, medicines to China and to

    improving the environment for pharmaceutical R&D in

    ? 1 billion has been

    invested into more than 20 factories in China, many of China. This commitment is demonstrated through investment them state-of-the-art. A more detailed analysis of this in China: today more than cumulative investment reveals:

    ? Investment into clinical trials with about 100,000 patients to date and an additional 100,000 patients by


    ? Investment of revenues into manufacturing/operational expenses of about ? 2.5 billion.

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    Finance and Taxation Working Group 179

    ? Taxes paid of more than ? 2 billion.

    ? Investment into drug R&D in China, many of these initial investments, totalling ? 5-10m over several years.

    In no other emerging market in the world has the European pharmaceutical industry made anywhere close to

    this commitment and today a number of European pharmaceutical manufacturers are among the top ten investors

    in pharmaceutical R&D in China.

    The Working Group, which comprises 30 member

    companies, is increasingly focused on engaging the Chinese government, through joint projects, on key concepts that significantly benefit both the R&D investment environment and long-term interests of patients. For instance, in 2005 the European industry in cooperation with the EU-China Trade Project hosted an IPR Study Tour to Europe, which visited more than 10 key government agencies in Europe, including the European

    Commission, UK Patent Office, European Patent Office, French Drug Regulatory Authority, German Ministry of Economics and Labour and EFPIA. Topics discussed included the importance of encouraging investment in pharmaceutical R&D to develop medicines and the related issues of supplementary protection, regulatory data protection, patent linkage, etc. In 2006, the European industry, again in cooperation with the EU-China Trade Project, is organizing a symposium on "marketing authorization". Adoption of such a system would reduce commercial risks for Chinese R&D start-ups, as well as optimise manufacturing capacity by facilitating toll manufacturing, co-promotion and co-marketing.

    The Working Group looks for further opportunities to frequently exchange views with the authorities on the

    issues (both short term and strategic) listed below as well as others, in helping to constructively shape of the future healthcare system in China. Recent Progress

    Progress on some items in 2005 masks a tougher operating environment, and because innovation is still insufficiently recognized there have been few major policy

    breakthroughs. China lacks a true national strategy to develop an R&D-based pharmaceutical industry, which therefore impacts adoption of appropriate provisions by relevant departments. Annual pharmaceutical market growth of 12 - 15% over the past 5 years has slowed recently because of the slow speed of healthcare reform. Despite the tougher operating environment, there have been some positive developments:

    ? The government opened trade and distribution rights across China, although local authorities still need guidance to proceed with implementation;

    ? Local-level implementation of the updated National Reimbursement Drug List was completed, giving patients across the country access to new medicines;

    ? A more innovation friendly draft Drug Price Regulation is under consideration;

    ? Adoption of patent term restoration is being studied, although informally, as part of the Patent Law revisions for 2007.

    Despite these improvements, healthcare policy reform needs to proceed at a faster pace. China initiated an extensive reform of its healthcare system several years ago, emphasizing that the three reforms of financing, reimbursement, and distribution/pricing should proceed simultaneously. However, today hospitals are still severely under financed because a relatively small percent of GDP is spent in the healthcare sector (about 5.5%), and actual government investment is very small. Many services are priced below the market price and although

    currently 130m citizens are covered by the urban reimbursement system, coverage will need to accelerate in

    the future.

    In the past year there has been a continued focus on reducing prices of pharmaceuticals (prices have already been reduced 17 times in recent years), including bidding policies, which primarily focus on "price" rather than "quality". Instead investment in the healthcare sector

needs to be increased which will then enable more people

    at local level to obtain adequate healthcare treatment.

    Accelerated healthcare finance reform would result in

    greater access to new medicines, true savings through

    reduction of over-prescription of services and medicines,

    and lead to much more structural efficiency.

    As outlined in the 11th Five-year plan (FYP), approved by

    the NPC in March 2006, a major task for the government

    is re-invigorating China through science, "strengthening

    basic research and research into cutting-edge disciplines

    as well as research in technologies for public welfare

    applications". This includes pharmaceutical R&D, which

    is a high-tech industry employing top scientists and spanning related high tech industries such as cell & molecular

    sciences, biotechnology, genetics, combinatorial

    chemistry, robotics, computer & information technology ? 100 billion is and informatics & databases. More than invested annually worldwide in pharmaceutical R&D, which is characterized by an extended development period (pre-clinical and clinical development typically takes 10 to 12 years before actual marketing approval), high-risk (only about 1 out of every 5,000 screened compounds meets the safety and efficacy profile to be approved as a medicine for human use) and high cost (more than ? 500m per product on average). Nearly no


    European Business in China Position Paper 2006

    Finance and Taxation Working Group

    pharmaceutical R&D is carried out in China today as it is

    very difficult to include China as a significant contributor to global drug development, especially because clinical

    trial approval in China typically taking 9-12 months and

    new drugs in China typically obtain approval 2-4 years

    after other major markets. In addition, China does not

    extend patent terms as in other major markets and with

    reimbursement/healthcare insurance just developing in

    China, new medicines have a very slow uptake.

    All these factors are reflected in our estimate that less

    than 5% of the market share of the R&D-based pharmaceutical

    industry in China is related to Chinese patents,

    and less than 15% to international patents. The clearest

    signal of overall improvement for a policy environment to

    support the R&D-based pharmaceutical companies would

    be a substantial increase in the market share of new

    patented medicines, which typically easily exceeds 50% Key Recommendations in developed markets. Increase Access to and Recognition of Innovation The FYP places an emphasis on the creation of an "innovation-oriented country" in addition to reducing rising inequalities. High priority is given to "resolving the lack of adequate and affordable medical services". The Working Group welcomes these priorities and supports efforts to ensure that increasing consumption does not preclude patients from healthcare. The following recommendations provide practical suggestions for achieving these goals:

    1. Wider access to new medicines


    The medical insurance system in China is in the initial phase of development. It is a long process due to the complexity of the issue and the lack of financial means. One consequence of this slow development and lack of funding is that Chinese patients lack access to new pharmaceutical solutions. Indeed, only 130m people are covered by the urban reimbursement system. This leads to very high out-of-pocket costs and as a result patients complain of "kan bing nan, kan bing gui" ("difficult to obtain access to medical treatment, medical treatment is expensive").


    Short-term solutions to widen access exist that the government should consider. One such solution relates to the National Reimbursement Drug List (NRDL). If these lists were updated annually, to include the most innovative products, patients would have access to the most up-todate pharmaceutical therapies. Current regulations also require that these lists be reviewed bi-annually, so that old products are deleted. This should be enforced because any delay means that new medicines still have not had the opportunity to obtain reimbursement at the provincial and local level.

    It should be emphasized that new medicines can often help reduce the overall costs of healthcare, for example by reducing hospitalisation days.

    In the longer term, the scope of the medical insurance system needs to be expanded to include greater numbers of people. The design of new solutions is necessary to

    provide additional financing mechanisms and the use of Recommendation: supplementary commercial medical insurance. The government has outlined a number of planned initiatives to double the number of people covered by urban

    reimbursement system within one year, to begin a rural medical insurance system, and to have most Chinese covered by some type of reimbursement system within the next 3-4 years. In addition it is important to: ? Update reimbursement lists on an annual basis with newly registered drugs as provided in current regulations to provide most up-to-date medical therapies to Chinese patients;

    ? Adjust reimbursement lists (delete old products that have been replaced by better treatments) on a biannual basis as provided in current regulations;

    ? Create additional options of insurance/reimbursement coverage such as the encouragement of commercial healthcare insurance, which would also reduce the burden on the government.

    2. Better recognition of the value of innovation Concern:

    Drug price policy has vacillated considerably in the past several years - NDRC has already cut prices 17 times in recent years and changed its rationale for such cuts many times and intends to re-price all drugs that are on the National Drug Reimbursement list within the next year. If China is to build an innovation-oriented economy, predictability of sufficient financial return is a key premise for making long-term investments into pharmaceutical R&D in China.

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    Finance and Taxation Working Group 181


    As the Chinese economy develops at such a rapid pace, the healthcare system is in a continuing transition. Within this ever-changing environment the launch of new medicines is a relatively recent phenomenon. Many companies still rely on mature products to generate the majority of revenue. However, changes to pricing policy in the last several years now tie the price of the originator medicine to the cost-basis of its generic version plus a small premium. This approach is contrary to international practices where the price of generics is linked to the originator

    medicine, the price of which reflects the level of R&D investment, higher specifications and drug safety procedures, global drug surveillance programs, postmarketing drug development programs and quality, among

    other factors.

    During this period of change the government has, to some extent, recognized this pricing approach as an impediment to industrial development and granted the originator company (the primary investor) individual meetings with price authorities in order to review the price of products. This is a key element in order to keep some balance in a very unpredictable price environment.

    Despite this minimum guarantee of predictability, in the long term pricing should be based on transparent predictable and non-discriminatory criteria. This is particularly so in hospital bidding procedures that are asserting additional Recommendation: price cuts beyond those of NDRC.

    NDRC, in revising the Drug Price Regulation in 2006, should focus on adopting a much more pro-innovation policy by:

    ? De-linking the pricing of innovative drugs (of the originator, but now off-patent) from generics. The Working Group does not know of any other country, which, in controlling the prices of drugs, links the price of the innovative drug to the generic cost basis. Rather, the innovative drugs are priced first according to investment and innovation and included recognition of the

    fact that the innovator develops the market through the education of healthcare professionals as well as postmarketing activities such as post marketing surveillance

    and additional clinical development programs.

    ? Maintaining independent price hearings and individual

    meetings for innovative products, since innovative companies are primary investors in pharmaceutical R&D.

    3. Protection of IPR


    The Working Group sees IPR as the basis for the development of a healthy pharmaceutical industry in China.

    IPR can be characterized by a "bundle" of rights, and many of these rights China does not yet have in place. For example, innovative companies are still unsure of which registration approvals drugs are eligible for, and which have been granted, data exclusivity. Also the lack of

    Assessment: patent term restoration significantly affects the amount of Supplementary Protection Period -A number of major investment in pharmaceutical R&D in China.

    markets have adopted various schemes of supplementary protection (patent term restoration); both the U.S. and Japan in the 1980's, and Europe in the 1990's. The general international practice provides up to 5 years of additional patent life to compensate for drug development time. Moreover, In China, drug registration is typically obtained 3-4 years after approval in other major markets). The importance of adding usable years of patent life lost to the long development and registration time cannot be stressed enough. By the time a new drug is launched it may have only 7-8 years remaining out of its 20 year patent life. For some drugs, 80% of revenue is earned during the restored years, which considering the expense of developing a new drug (an average of Ä500m) represents a significant reward without which there would be far less incentive to invest into pharmaceutical R&D. Regulatory Data Protection - The implementation of regulatory data protection (data exclusivity) would encourage investment in the costly process of developing (and conducting clinical trials) for innovative drugs with limited patent protection in China. By rewarding the pioneer or innovator company with a period of exclusivity during which time other companies are not allowed to rely, directly or indirectly, on the data generated during the drug development process to obtain a marketing approval, China would also provide an incentive for the registration of orphan drugs in China. Orphan drugs present a significant in-licensing opportunity for many local pharmaceutical companies because the typical orphan drug registrant abroad is a small to medium-sized pharmaceutical or biotech company with no presence in China.


    To encourage investment in pharmaceutical R&D in China: ? Adopt appropriate supplementary protection period 182

    European Business in China Position Paper 2006 财务与税务工作组

    provisions as a part of revisions to the Patent Law for promulgation by the NPC in 2007

    ? Adoption of a precise rule on data exclusivity that:

    - Defines the scope of products covered (e.g. definition of new chemical entity or, whether biotech products are covered, etc.).

    - Describes the application and approval process. - Addresses timing issues (application for some eligible products may have started before adoption of TRIPS, Innovative - Friendly Regulatory Environment while product approval granted after adoption of TRIPS 4. Clinical Trials commitments).


    It is difficult to include China in international multi-centre clinical trials for new medicines as part of global drug development. This means that new medicines are slow to become available for patients in China.


    Although there are exceptions, it typically takes 6 to 12 months to obtain clinical trial approval in China. As clinical trial approval can usually be obtained within 3 months in other major markets, and a decision to proceed with international multi-centre trials is made on a comprehensive basis rather than considering specific factors within any particular market, this lengthy process in China often precludes it from being included in global drug development. Global drug development represents significant benefits not only for Chinese patients but also for Chinese doctors and scientists. They would have access to, and could work with, the newest potential medicines and contribute to the further development of Chinese pharmaceutical industry on the international stage. Recommendation:

    Shorten clinical trial application approval time to 3 months to encourage China's participation in global drug development.

    5. Enhance market safety and efficiency


    Currently some local authorities are unclear regarding the process of amending FIE manufacturer's business licenses to allow for the import of finished drugs as well as distribution on to a wholesaler, under the same license, as locally manufactured products. Local authorities also seem unclear about the requirements for establishment of pharmaceutical distribution companies. Whilst the situation remains unclear, business efficiency is reduced.


    To solve the confusion regarding business licenses, guidance from MOFCOM and SFDA would assist local officials in amending business licenses for the import of finished drugs and for the requirements for establishing pharmaceutical distribution companies. The result of such clarification would be better supply chain management, reduction of costs and, most importantly, enhanced prevention of counterfeits and reduction of costs.

    In the longer term, the key is to switch from a manufacturing license system to a marketing license system. Currently, the Chinese drug registration system is still manufacturing based and differentiates between locally produced drugs and imported drugs, whilst most other major markets have a "marketing authorization" (MA) type system, such as in Europe. In a MA system, the drug registrant (license holder) can choose the manufacturer, and as such it facilitates toll manufacturing, co-promotion (currently allowed) and co-marketing (currently not allowed), and eliminates any differences in registration requirements between locally manufactured drugs and import drugs.

    Most importantly, for local companies who are actively engaged in pharmaceutical R&D and beginning to produce innovative drugs, the MA system would reduce the substantial commercial risk to the innovator of having a manufacturer's name placed on the drug registration license, rather than the innovator (research institute, university, or pharmaceutical company) who may not have a manufacturing facility, or who would choose to invest scarce resources into further R&D rather than manufacturing.

    There needs to be a stronger recognition of the valuable function in the profession of medical representatives. The medical representative is the key link between the drug developer and healthcare professionals, providing new therapeutical solutions and essential information on the use of a drug, including: dosage, indications, drug interaction and side effects, as well as a primary link in the post marketing surveillance and adverse event report mechanism. Internationally, medical representative activities are governed by a standard set of principles, as part of the overall medical education system, which should be recognized in China.

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