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Politics, Policy & Law

China’s Hatch-Waxman Act: Not there yet: Guest Commentary

China’s latest IP reforms won’t protect innovators as much as hoped — companies better get ready

China’s latest IP reforms won’t protect innovators as much as hoped — companies better get ready.

Nov 4, 2020 | 9:13 PM GMT

On Oct. 17, China amended its patent law and introduced patent linkage and patent term extension to strengthen protection of pharmaceutical inventions. Unfortunately, the long-awaited changes are unlikely to provide innovators with much respite from generic challengers.

If anything, the new law, which will take effect in June 2021, more likely will buttress the patent cliff China is carving to drive drug prices down.

Patent linkage allows originators of new small molecule and biologic products to seek judicial or administrative intervention before marketing approval of generic drugs or biosimilars. Patent term extension would allow innovators to restore up to five years of patent life lost due to delay caused by the marketing approval and patent examination process.

In the U.S., these two innovation-friendly provisions were enacted in 1984 in the Hatch-Waxman Act, which is widely recognized as the law that has propelled the emergence and growth of the modern biopharmaceutical industry in the U.S. and for the world.

The biopharmaceutical industry had high expectations for China’s Hatch-Waxman Act, not least because patent linkage and patent term extension are important parts of the U.S.-China Phase One Trade Agreement signed in January 2020.

Industry thus was primed for stronger protection of drug patents when China’s regulators responsible for implementing pharmaceutical patent protection, the National Medical Products Administration (NMPA) and the China National Intellectual Property Administration (CNIPA), jointly issued the “Draft Measures” for implementing patent linkage in September.

Innovators were disappointed to see details that dashed their expectations.

Devil in the details

Biologics are given much less protection than small molecule drugs. Only sequence structure patents can be listed in the China equivalent of the Orange Book. Moreover, the NMPA will not stay marketing approval of a biosimilar while the innovator waits for a judgement.

For small molecule drugs, the NMPA will only stay marketing approval of a generic for nine months while the innovator waits for a judgement. It takes the Beijing IP Court, China’s first and most distinguished IP court, more than 20 months on average to reach a judgement in pharmaceutical patent infringement cases.

The NMPA can resume reviews of generic drug applications after the nine-month stay. Once a generic drug has received market approval, a victory by the innovator would not reverse the approval. This means the generic maker could win in patent linkage litigation simply by prolonging the lawsuit beyond the relatively short stay period. 

The first generic drug developer to successfully challenge the innovator’s patent will be granted 12 months of exclusivity before other generic applications can be approved. 

In comparison, the Hatch-Waxman Act provides a 30-month stay period for innovators and a six-month exclusivity to the first successful generic challenger. China’s incentive structure (nine months to the innovator, 12 months to the first generic) is a reverse image of the incentive structure in the U.S. (30 months to the innovator, six months to the generic).

A draft judicial interpretation from the Supreme People’s Court in China could further deter innovators from enforcing their legal rights. The interpretation would allow a generic drug challenger to sue the innovator for damages caused by an NMPA stay due to patent linkage litigation, and for legal fees.

Innovators hope their comments on the Draft Measures will be heard by the NMPA and CNIPA. It is encouraging that voices for innovation are now coming from trade associations in China such as the PhIRDA, whose members are China-based innovators that count on strong IP protection for their new drugs. It would be a boon if domestic and international innovators could align their positions and propose innovation-friendly rules to the NMPA and CNIPA.

A steep patent cliff

Some commentators have suggested that innovators should be consoled by the fact that the Draft Measures represent an incremental improvement to China’s pharmaceutical IP protection system.

The practical question is: Will such improvement make a difference for innovators in today’s operating environment in China, where the government uses Volume-Based Procurement (VBP) of generic drugs to cut prices to the bare bones?

Not long ago, patenting was an afterthought for executives responsible for growing pharmaceutical businesses in China because the country was largely a branded generics market — sales could and often did keep growing after patent expiration. This phenomenon ceased in 2018 with the establishment and increasing use of VBP by the National Healthcare Security Administration (NHSA).

The NHSA regulates reimbursement of drugs dispensed in Chinese hospitals. Under VBP, the agency identifies off-patent drugs for nationwide hospital procurement, sets ceiling prices, and invites bids. A small number of suppliers with low tender prices are selected as winners and all others are excluded from the majority of the hospital market.

In the latest VBP round, 56 molecules worth around $8 billion in China sales were open for bidding, generating 191 winning bids for 55 products. The average price cut was 72%. Metformin rapid release tablet, for Type II diabetes, had a ceiling price of RMB 0.20 per pill. The lowest bid came in at RMB 0.015 per pill, a 92% cut from the ceiling.

In practice, VBP has created a steep patent cliff in China. An example is Xeljianz tofacitinib for rheumatoid arthritis, from Pfizer Inc. (NYSE:PFE), which posted over $2.2 billion in global sales in 2019. 

Generic drug companies challenged the tofacitinib patent shortly after Pfizer China launched the drug in the country in March 2017. CNIPA invalidated the patent in August 2018. The first generic received marketing approval in September 2019, followed by several others. The NHSA put tofacitinib on the latest VBP list, generating four winning bids. The lowest price was RMB 1.60 per pill, representing a price cut of 98%.

The outcome means Xeljianz had a Pharmaceutical IP Index (PII) value of only 2.6 years in China as measured by the duration between the innovator’s launch and the first generic launch.

Tofacitinib is not an isolated case. Pharmaceutical patent invalidation is a real and present danger in China. In the three years between 2017 and 2019, CNIPA rendered 123 decisions on the validity of pharmaceutical patents. Only 29% of the challenged patents survived unscathed with all the claims upheld; 46% were invalidated in their entirety; 25% were partially invalidated. In 81% of the cases of total invalidation, CNIPA agreed with the challenger’s argument that the invention lacked “inventive step.”

If the invalidation rate of pharmaceutical patents in China stays at this high level, the benefit of patent linkage and patent term extension will be illusory.

As the world’s second largest pharmaceutical market, China will keep attracting new drugs from innovators. Yet it is prudent for business leaders to be clear eyed about the latest round of pharmaceutical IP reform in China.

Now is the time for innovators to prepare their China patent portfolio in anticipation of the enactment of the new patent law on June 1, 2021. They need to adapt their patents for listing in the China version of Orange Book and prepare for challenge from generic drug companies.

And they should make their voice heard in the rule making process for China’s Hatch-Waxman Act.

Anthony Chen is a partner at the Jones Day in Shanghai. He is an advisory member of the U.S.-China IP Cooperation Dialogue organized by the U.S. Chamber of Commerce and Renmin University of China.

The views and opinions set forth herein are the personal views or opinions of the author and they do not necessarily reflect views or opinions of the law firm with which he is associated, any of the organizations of which he is a member, or the views of BioCentury. 

BioCentury & Getty Images

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