Pharmaceuticals: dealing with generic, fake and grey market drugs in China
In 2015, China became the world’s second largest pharmaceutical market. China’s drug retail market grew by 8% between 2015 and 2019, outperforming the sector’s global growth of 6% during the same period. This rapid growth was the result of a combination of societal and economic factors – China’s aging population, wealth distribution, the shift in urbanisation demographics – as well as bespoke policies and law reforms. As of 2021, and for years to come in the post-pandemic recovery, the Chinese market will remain a key venue for pharmaceutical industry players.
As in many other industries, non-Chinese companies have struggled to understand how to best take advantage of China’s incredible growth and opportunities, while ensuring the durability of their R&D investments. The effective protection of a drug maker’s IP rights is essential to ensure the return on R&D investments and will be a priority for any manufacturer entering or operating in the Chinese market. A sound China-strategy for pharma products must be based on the complex and sophisticated system of IP protection that China has put in place over the past 20 years, and which has seen incredible advancements and refinements. Relevant pieces of legislation for pharmaceutical IP rights protection include the Patent Law, the Trademark Law, the Unfair Competition Law and the Drug Administration Law.
Pharmaceutical innovations are traditionally protected by invention patents registered by their developer. Commercialisation in China of any drug requires the registration of a brand name as a trademark, alongside a marketing authorisation by the relevant authority. Trade secrets related to a drug may also be protected under the relevant provisions of China’s anti-unfair competition legislation, as well as other relevant norms. Enforcement of all these rights must be done promptly and using different channels: administrative authorities, courts and border controls.
This chapter looks at generic, fake and grey market drugs and highlights the relevant norms and procedures for devising a sound protection strategy and avoiding common pitfalls.
Dealing with generic drugs
Manufacturing and distribution of generic drugs are authorised in China upon expiration of their patents. Registration of a drug’s brand name as a trademark, including with Chinese characters, is paramount to avoiding dilution of the brand and preventing loss of market share to generic competitors. The case of Pfizer’s drug Viagra is a famous example of the risk of delaying such registration. Pfizer battled with a Chinese company having pre-emptively registered the drug’s Chinese name, which the public had become familiar with long before the product’s commercialisation in China. To this day, the most common Chinese name for Viagra is not owned by Pfizer.
When it comes to the rules governing the registration of drug brand names as trademarks, the Chinese system is in line with international standards and requires that registered drug brand names respect international non-proprietary names (INN) regulated by the World Health Organisation (WHO). Operating since 1953, INNs facilitate the identification of pharmaceutical substances or active pharmaceutical ingredients: each INN is a unique name that is globally recognised and is public property (eg, paracetamol), and is also known as a generic name. The WHO guidelines on INNs indicate that, in order to prevent confusion, which could jeopardise the safety of patients, trademarks should not be derived from INNs or contain common stems used in INNs (ie, the suffix that helps health authorities around the world identify the basic characteristics and active ingredients of drugs). The INN generic name is then listed in the Chinese national equivalent list, the Chinese Approved Drug Name (CADN), managed by the Chinese Pharmacopoeia Commission.
INNs and CADNs must appear on all pharmaceutical products marketed in China. At the same time, manufacturers should add their brand name, registered as a trademark, to clearly identify their product and distinguish it from generic drugs. Only registered trademarks can be included on drugs marketed in China.
Registration of a drug’s brand name follows the principles and rules of standard trademark registrations. In particular, under Article 11 of the Trademark Law, the trademark should be distinctive. For pharmaceuticals, this means, in particular, that names that are identical or derived from INNs and CADNs cannot be registered and should be refused under this rule. In addition, China adopts a first-to-file principle and only very marginally protects the use of unregistered marks. In the pharmaceutical sector, such use is impossible, as confirmed by the Supreme People’s Court (see Southwest Pharmaceutical Co Ltd v Trademark Appeal Board (2009)), because China’s Drug Administration Law prohibits the use of unregistered trademarks on drugs. Therefore, the use of such marks cannot be used to establish prior rights under the Trademark Law and is left unprotected by the authorities. The only sound strategy, therefore, is the registration of a brand name ahead of any commercialisation in China, and in some instances even long before such commercialisation is planned, to prevent the hijacking of a product commercialised abroad.
A recent example of the importance of protecting a drug’s brand name is the case of Remdesivir, a drug manufactured and patented in the United States and other countries by Gilead Sciences. Remdesivir was identified at the beginning of the pandemic as one of the more promising drugs for covid-19. Around the same time, many applications for the registration as trademarks of REMDESIVIR and ‘瑞德西韦’ (its Chinese official translation) popped up on the China National Intellectual Property Administration database. Both the English and Chinese name are INNs and CADNs, or the generic drug name. In principle, such applications will be rejected under Chinese and international rules. Nonetheless, if granted, they may pose a threat to the recognition of Gilead Science’s product and lead to confusion with generic drugs that may eventually be put on the market.
Dealing with fake drugs
In principle, Article 8 of China’s Drug Administration Law prohibits producing, importing, distributing and using drugs without approval by the relevant authorities. The law provides a definition for ‘fake drugs’, which includes, notably, those imported without drug approval documents, or when such documents are obtained by deception, or such drugs manufactured using active ingredients that have not been reviewed and approved.
Sanctions for violations are substantial and may include fines, punitive damages and revocation of licences for companies and their executives (Article 124). Damages may be equal to 10 times the price of the drug, or three times the loss suffered through the sale of counterfeit or inferior drugs (Article 144).
Nevertheless, three exceptions to the previous rules and sanctions were introduced in the last amendment to the Drug Administration Law and entered into force in December 2019. First, any entity or individual importing a small volume of drugs that have been legally marketed in other countries may incur a mitigated punishment or even obtain exemption from punishment at the authorities’ discretion. Second, medical institutions importing a small volume of drugs for urgent clinical needs should obtain approval from national drug administration authorities, and such drugs should be used in designated medical institutions for specific medical purposes. Finally, individuals importing a small volume of drugs for personal use from other countries, in accordance with relevant applicable rules, are exempt from sanctions (Article 124).
The Drug Administration Law, as modified in 2019, highlights China’s commitment to implementing stringent drugs regulation and supervision, and puts in place a comprehensive system of accountability and legal sanctions of an unequivocally modern standard.
Dealing with grey market drugs
The parallel import of pharmaceutical goods remains a grey area in China’s regulatory landscape. In application of the principle of international exhaustion of trademark rights, goods that have been marketed elsewhere can legally enter the Chinese market. Consequently, the trademark owner has no right to interfere in the resale in China of drugs legally sourced abroad.
Nonetheless, the Chinese legal system offers a series of ways to counter this practice and limit its distortive effects for the manufacturer. A clear registration strategy in China, along with a serious policy of support from the border control authorities, can actively put a stop to the entry of goods, including parallel imports, in particular when their origin or genuine character cannot be clearly established by the importer.
China will continue to offer great opportunities to the pharmaceutical sector in the years to come. In order to seize such opportunities, companies wishing to enter the Chinese market, or foster their presence on it, should devise a sound strategy that clearly protects their intellectual property. Such a strategy should not only focus on patents, but be comprehensive and include the registration of drug brand names as trademarks and an active surveillance of any hijacking attempts, along with a bold anti-counterfeiting campaign targeting fakes and parallel imports.