China’s New Drug Patent Laws: A Bitter Pill For Big Pharma

In a bold move, China has rewritten parts of its intellectual property laws to allow for Chinese companies to make generic copies of life-saving medication still under patent. These domestically produced drugs will be offered for substantially less than what their North American and European pharmaceutical competitors currently charge. The changes will provide local drug manufacturers with the option to apply for compulsory licenses on patented drugs under specified circumstances three years after a patent has been granted.

Under the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, to which China is a signatory, compulsory licenses can be issued to allow for a company to infringe a patent without authorization from the rights holder. Article 31 of the agreement specifies the parameters in which this license can be granted, taking into account the need to protect the “legitimate interests of the right holder.” Specifically, the government ordinary can only grant compulsory licenses when an attempt to acquire a voluntary license under reasonable circumstances has not been successful within a reasonable time frame. However, this requirement may be foregone in cases of state emergencies, but the infringement without authorization from the patent-holder must still be communicated to the proper owner of the intellectual property right. Article 31 also stipulates that one must also remunerate the rights holder when a compulsory license is issued and any licenses granted can be subject to judicial or independent review of a higher authority.

The Chinese patent laws presently only grant compulsory licenses for patented drugs in instances of national emergencies, extraordinary circumstances, and when the interests of public health are at the fore. Although the wording can be construed as being a bit vague, it is the last circumstance that may have the most resounding influence on the global pharmaceuticals. According to Article 50, not only are eligible drug manufacturers permitted to copy and sell patented drugs in their home countries, but they may also apply for and be granted export rights to send generic drug copies to other countries. This is potentially a game-changer for the pharmaceutical industry as well as the global public health arena, as it is now conceivable for China to export generic medication at a low price to developing countries that do not yet have such legislation in place or the infrastructure to produce the drugs themselves. Moreover, China has been a major producer of the active pharmaceutical ingredients found in such drugs for years, which are then exported to the U.S., combined, and then imported back into China at a premium that most citizens cannot afford. It seems that there are many favorable conditions that played a role in the government’s decision to amend its patent legislation, especially when access to life-saving medication is an important next step following China’s acknowledgement of its growing AIDS problem.

China is not the first Asian nation to instigate such conditions for domestic drug manufacturers in an attempt to curb its national health epidemic. The Chinese reform followed similar legislative amendments in India, where this March the first compulsory license was issued for a domestic producer to make copies of a cancer drug held under patent by Bayer AG at only 3% of the innovator’s price point. In Thailand, the numbers of HIV-positive people who could afford patented medication prior to the country’s issuance of a compulsory license is in sharp contrast to the number of patients currently receiving the drugs following the granting of a compulsory license.

A reading of Chapter VI of China’s current patent laws regarding compulsory licenses shows that the stipulated legislation hues closely to TRIPS agreement terms; however, some critics believe that the laws are still too vague and unworkable in practice. It is interesting to note that Article 53 contains a specific provision saying that compulsory licenses “shall mainly be exercised for the supply to the domestic market” [sic], excluding any efforts to combat anti-competition monopolization actions (Article 48) and efforts to treat public health concerns (Article 50). Now that China has opened its doors to producing generic copies of patented drugs, experts have predicted that big-pharma’s reliance on patent income to drive their operations will have to change. A new business model that takes into account the changes in copying and distributing drugs under patent may be required.

An important concern that does not seem to be as widely discussed in the press and in the pharmaceutical industry is the relative competency of Chinese drug manufacturers to produce a quality copy of patented medicines. One may argue that since the active ingredients in patent-protected drugs are already produced in the country, there is no reason why the assembly of these active pharmaceutical ingredients should be any more challenging to produce. However, with China’s spotty track record in the manufacturing of items for consumption (including the baby milk-powder scandal and the more recent gutter oil scandal), it is not entirely certain how successful the government will be in regulating and monitoring the production standards of its pharmaceutical goods. The Office of the United States Trade Representative recently issued a special report on developments in intellectual property rights and enforcement, singling out China as an area of concern for the production of inferior active pharmaceutical ingredients using hazardous chemicals that are hidden from regulatory oversight. This is alarming when one considers that China’s new legislation seems to suggest it may export its pharmaceutical goods to other countries for humanitarian reasons.

While many of the effects of these changes in China’s patent legislation have yet to be seen, these new developments certainly represent an important period of transition in China’s legal arena.

Fan Hannah Lan is a JD candidate at Osgoode Hall Law School.