New Drugs Administration Law Paves the Way for New Reform

On 24 April 2015, China revised the Drugs Administration Law for the second time following the last revision in 2013.

The main two revisions to the Drugs Administration Law in 2015 are the following:

1. Provisions related to drugs pricing as set forth in Article 55 of the Drugs Administration Law are deleted. Article 55 sets out the current principle of drugs pricing. Drugs pricing is determined either by government or by market, depending on whether a drug falls under the catalogue of drugs which are covered and reimbursed by social insurance scheme or other special circumstances (e.g., blood products, vaccines, contraceptives). The government controls the price of drugs falling under the above scope by setting up either a cap ex-work price (domestically made drugs)/CIF price (imported drugs) or a cap retail price. The deletion of such clause implies that the price control on drugs will soon be abolished and the drugs price, in the future, will be mostly determined by the market. The detailed implementation rules are expected to come very soon.

The deletion of drugs pricing is good news for foreign pharmaceutical manufacturers. If the drug price is dependent on the market, it is expected that patented drug manufacturers and/or originator drug manufacturers may further raise their drug prices. Further, such deletion of drug pricing also is advantageous to encourage foreign pharmaceutical manufacturers to convert their imported drugs into domestically made drugs, so that they may benefit from lower manufacturing cost in China whereas their margin for domestic manufacturing and final retail price will no longer be affected by Chinese drug pricing rules.

The deletion of drugs pricing is also good news to Chinese generic manufacturers who is able to increase their profit margin which was restrained by the drugs pricing rules.
Despite the above, the pricing of drugs also has large impact on medical insurance. If there is a large increase in price of drugs which fall under the catalogue of drugs which are covered and reimbursed by social medical insurance scheme, the reimbursement of social medical insurance will be raised up accordingly. It is unknown how the current social insurance reimbursement regime will respond to such pricing changes.

2. In addition to deletion of the clause on drugs pricing, the revisions to the Drugs Administration Law also delete the preliminary approval procedure, i.e. the Drugs Manufacturing License or the Drugs Trading License, before the registration with the administration of industry and commerce. Previously, a new drug manufacturer or a new drug distributor could not obtain its business licence until it had obtained the Drugs Manufacturing License or the Drugs Trading License from the local FDA. This implies that to incorporate a drug manufacturing company or a drug trading company currently, it was necessary to first set up a consulting company or a trading company whose business scope is not covered by these licences, in order to be able to have a legal entity first established to recruit necessary staff and equipment to comply with the requirements set forth in the licences. Further, the previous preliminary approval requirements also made acquisition transaction more complicated due to the regulatory issues to be considered prior to acquisitions, especially the preliminary approval procedure. This new revision provides more convenience for the establishment and acquisition procedures.

The revisions to the Drugs Administration Law do not constitute a big reform to the current drugs administration regime, but are crucial to remove legal obstacles in terms of pricing and regulatory issues and pave the way for follow-up reforms. However, many other hot-discussed topics are not touched by these revisions, e.g. third party logistics, drug export.