Potential pitfalls in entering China's generics market

Home/Policies & Legislation | Posted 31/08/2009 post-comment0 Post your comment

China's fast-growing pharmaceuticals market is proving attractive to many foreign pharmaceutical firms, including those in the generics sector. Such companies need to be aware of potential pitfalls, some of which were outlined in Scrip News by Mr Jason Wang, Senior Business Development Manager at GreenPine (Tianjin) Pharmaceutical Co, a company that specialises in the registration and distribution of imported pharmaceuticals in China.

With successive double-digit annual growth, China's pharmaceutical market is becoming increasingly alluring to global pharmaceutical manufacturers and distributors. But firms looking for a Chinese partner to help with the registration, sale and marketing of generics in China should be aware of various factors before making a decision to enter.

Before the launch of any imported drug in China, an import drug license (IDL) must be obtained from the State Food and Drug Administration (SFDA). According to SFDA regulations, only the marketing authorisation holder specified in the certificate of pharmaceutical product (CPP) can be the applicant and holder of the IDL. The SFDA requires that a Chinese local agent be appointed to perform the IDL registration on behalf of the applicant, if the applicant does not have a branch or representative office in China.

After granting an IDL, the SFDA will issue one original and one duplicate copy of the IDL to the agent. In most cases, the duplicate is valid for regulatory purposes. So it is advisable for applicants to keep the original copy. In this way, it will be much easier if the applicant wants to terminate an alliance and appoint a new agent.

To obtain exclusive product rights, many Chinese agents like to promise applicants that they will bear the fee charged for the IDL. Actually this is not a very large sum. For example, for a generic injectable antibiotic, the SFDA charges a reviewing fee of CNY45,300 (Euros 4,800). The fee is usually fixed for all kinds of IDL registration. Around CNY50,000 (Euros 5,200) will be required for sample testing (varying according to the test method and procedure for the specification of the product). The SFDA charges no other fees.

When it comes to the costs of clinical trials or bioequivalence tests that vary case-by-case and are paid to non-governmental bodies, applicants must be very careful to put these into a contract with the agent. Otherwise, complications can occur from unexpected changes in regulations, which in recent years have been frequent and sharp.

A case known to the author illustrates this point well. In 2007, an applicant did not specify in the agent contract the obligations for clinical trial costs. At that time such trials were not required for generic IDLs. But when the SFDA issued a deficiency notice to the applicant requiring a local trial, a dispute erupted about whether to continue with the registration and who should bear the costs, which totalled around US$4 million (Euros 2.8 million).

Other than money, time is the most critical factor in the registration and launch of an imported generic drug. According to current SFDA regulations, after accepting the generic IDL application dossier, the centre for drug evaluation (CDE) will issue any deficiency letter within 160 working days. The applicant/agent will be given up to four months to prepare and submit the supplementary data required. The CDE will then send its evaluation result to the SFDA within 54 working days. The SFDA will issue its final decision (approval or rejection) to the applicant/agent within 25 working days.

For generic IDL applications, which include clinical data, the CDE will need an additional 90 working days to evaluate the clinical trial application dossier. Although this timeframe has been clearly specified in current SFDA regulations, it will actually often take much longer to get an evaluation result.

Qualifications to sell
Before signing any contract with an agent, applicants should make sure that the candidate has the qualifications to distribute and sell a pharmaceutical product in China. It should have the certificate for good sales practice (CGSP) issued by the SFDA, which relates to the storage and distribution of drugs to ensure quality. To be granted this license, an agent must have an inspected warehouse (at least 500 m2 with a certain layout and facilities), a certain number of registered pharmacist staff and a standard documentation system.

It is becoming increasingly difficult to obtain certification because the SFDA is trying to cut the number of licenses. Therefore, many small agents without the resources or the capability to run a qualified warehouse system will appoint a CGSP company to do business with the applicant. This means that, when importing the drug from the import license holder, the agent will appoint the CGSP company to pay the holder (although the money is actually supplied by the agent), and to supply all the documents required by customs. The imported product will then be stored in the CGSP company's warehouse. When selling the drug to hospitals or pharmacies, the CGSP company will provide the required documents and collect payment.

This is a very popular way of doing business in China, but applicants should be aware that it is prohibited by the SFDA. To win distributorship contracts, unqualified agents will often hide from applicants the fact that they do not have CGSP status. To avoid subsequent legal risk, applicants should consider two things. First, ask the agent to supply the GSP certificate and, importantly, check whether the holder's name and address are correct. Second, visit the agent's warehouse to make sure it has the required systems and facilities to meet SFDA requirements.

It will be difficult to secure successful sales of a generic drug if its generic name is not included in China's national reimbursement drug list (NRDL). This would mean that most patients would have to pay for the drug out of pocket because there will be no reimbursement from the government.

Applicants need to check with their agent whether the drug intended to be exported to China is listed in the NRDL. If it is not, agents should be asked to draw up a plan to get it listed. Normally, the Ministry of Human Resources and Social Security updates the list every four years. Often, it can cost millions of Yuan to get a product listed. By checking the listing plan, applicants can learn more about possible timescales for reaching import volume targets.

Many applicants are concerned only about their supply price to the agent. Actually, the retail price is much more critical for successful sales because it determines how much room the agent can have to support their promotional activities. In China, the National Development and Reform Commission (NDRC) is the administrative body that controls the retail prices of all drugs listed in the NRDL.

Normally, it will issue a price cap (upper retail price limit) for each drug, and all drugs on the list under the same generic name will be sold under this cap. But if a supplier can submit enough data to prove that the quality, safety and efficacy of its product are better than other drugs with the same generic name, the NDRC may issue an exceptional retail price approval. With this, the supplier can get a higher margin to support their promotion. In addition, products with this status can be separated from other generic competitors in hospital tenders, meaning they will meet little competition.

The exceptional price policy has been heavily criticised in recent years because many generics firms have provided false data in their application dossiers to secure the classification. There have even been allegations of kickbacks to evaluators.

So in 2005, the NDRC postponed the evaluation of all applications for unclear reasons. In its Guidelines for Deepening the Reform of the Healthcare System, issued on 6 April 2009, the government said it would still strive to lower drug prices, but said nothing about new policy on the exceptional price system.

No single agent could cover all of China's hospitals by itself. Many agents employ sub-distributors to carry out marketing and promotion activities in different areas, and they often appoint several of them just in one province (there are 32 provinces in mainland China). It is quite typical for an agent to have hundreds of sub-distributors.

The agent will sign supply contracts with these sub-distributors, so if the import license holder cannot deliver ordered products, the agent is at risk of running into trouble with its many sub-distributors. The agent and license holder might even be blacklisted by hospitals if they cannot supply the product according to agreements. This will have a very negative impact on the agent's reputation in subsequent yearly tenders, which are essential to get products purchased by hospitals. This is why agents insist on product orders being met in full, without exception.

It is therefore the applicant's obligation to inform the agent of its actual production capacity, while agents must inform applicants of hospital tender schedules and its monthly or quarterly purchase plan in advance.

Sub-distributors often use ‘money promotion’ – paying cash for each prescription, rather than academic detailing – to get doctors to prescribe their products. Although this is illegal, it is difficult for the government to trace or verify the payment and acceptance of the money. In 2007-2008, the government launched a campaign to crack down on bribes in pharmaceutical sales activities; some sub-distributors and doctors were arrested. But many people believe the government will not be able to take full legal action to clean up the market.

Applicants should be very careful about handling this potential risk. For example, they should specify in the contract that agents must behave, in all their sales activities, strictly in line with China's law and regulations. If applicants provide money or materials to agents for the purpose of promoting a product, they should specify and limit their use. In this way, applicants can stay clear of any lawsuits resulting from money promotions by agents or sub-distributors.

According to SFDA regulations, the agent/import license holder should submit annual pharmacovigilance reports for each product it sells in China. Without these, there will be problems for the re-registration of the license after the initial five-year validity period. So, if the license holder wants to continue the sales of the product in China, it should require its agent to prepare and submit the reports in advance. The SFDA has released a standard downloadable template for these on its website.

To avoid possible losses from adverse events, license holders in other countries often ask their Chinese agents to purchase local product liability insurance. At present there is no such insurance in China. Companies have investigated the feasibility of setting up an insurance system in China, but they have received very negative feedback from local pharmaceutical manufacturers. Very few Chinese patients consider seeking product liability settlements from pharmaceutical manufacturers if they suffer adverse events. This means most producers ignore the role of such insurance in their growth plans and are reluctant to take part in any programme.

Source: Scrip

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