China: 2016 Compliance Enforcement In The Pharmaceutical Industry

Last Updated: 25 January 2017
Article by Fu Changyu, Yang Fan and Liu Yiyi

Last year ushered in an abundance of new laws and regulations for the pharmaceutical industry in China. Various pharmaceutical policies, including national laws and regulations as well as local supporting policies such as the dual-invoice system, the generic drug conformance assessment, the clinical trial data verification and the production process verification, the drug priority approval and the marketing authorization holder system, have plunged China's pharmaceutical industry into the deep end for reform. At the same time, the State Food and Drug Administration (referred to as "CFDA"), the State Administration for Industry and Commerce (referred to as "SAIC"), the National Development and Reform Commission (referred to as "NDRC") and the National Health and Family Planning Commission (referred to as "NHFP") and other authorities have fully regulated the enterprises in the industry from a variety of perspectives, strengthened law enforcement and put forward stricter requirements on corporate compliance.

Anti-Commercial Bribery Compliance

At the end of 2016, CCTV devoted several days to coverage of a report on drug prices and health care reform, propelling issues of bribery of doctors by pharmaceutical companies once again into the limelight and raising public concern. The Discipline Inspection Office of the NHFP issued an emergency document, requiring immediate investigation into the events involved in the report, and pledged that it would strictly regulate the worrying trends in pharmaceutical sales and medical services. Government representatives from a variety of locales responded to allegations in the CCTV report. CCTV's "cyclone" indicates that commercial bribery by pharmaceutical companies will continue to be the focus of law enforcement in 2017. Pharmaceutical companies must continue to improve their compliance systems and practices in light of the new regulations, policies and regulatory trends.

On November 23, 2016, the State Council approved the Law against Unfair Competition (Revised Draft) (referred to as "Revised Draft for Review") and submitted it for review to the National People's Congress. The Anti-Unfair Competition Law has been one of the important legal bases for law enforcement authorities to identify and punish commercial bribery. The approved Revised Draft for Review lists the specific types of commercial bribery and clarifies that both giving and commitment to give economic benefits may constitute commercial bribery. At the same time, the Revised Draft for Review expands the scope of a recipient of commercial bribery to include any third party that may affect the transaction, and re-defines the "use of property or other means of bribery" in the original provisions as "economic benefits". These new components bring new challenges to corporate compliance. Pharmaceutical companies should review and improve their compliance policies and practices in accordance with the new regulatory requirements, in particular the rules governing the interactions of employees with medical institutions and healthcare professionals.

In addition, it may be problematic to provide doctors with sponsorships or subsidies to attend academic meetings. This has been common in previous practice. To reduce the compliance risk, pharmaceutical companies usually pay conference registration fees directly to conference sponsors, and pay for doctors' transportation and accommodation costs for attending such meetings through third parties (such as conference organizers, travel agencies etc.). Given that the doctors did not directly receive any money, law enforcement authorities had previously less concerned about such behavior. However, in the new regulatory environment this is likely to have changed, especially given the clarification that property benefits in the crime of bribery include material benefits that can be converted into money such as home improvements, debt relief, and other benefits that require payment of money such as membership services, travel etc. in the Interpretations of the Supreme People's Court and the Supreme People's Procuratorate on Certain Issues Concerning the Application of Law in Handling Criminal Cases Involving Embezzlement and Bribery promulgated and implemented on April 18, 2016. Therefore, the registration, transportation and accommodation expenses covered by the pharmaceutical companies for doctors may also be interpreted as "property benefits". In the future, pharmaceutical companies should pay close attention to the possibility that law enforcement authorities may question or penalize such conference sponsorships for doctors.

Dual-invoice System

In 2016, the "dual-invoice system" is one of the big buzzwords for the entire pharmaceutical industry. "Dual-invoice system" refers to issuing one invoice from the drug manufacturer to the distributor and one invoice from the distributor to the medical institutions. Following the promulgation of the pilot policies or draft opinions regarding the "dual-invoice system" in Fujian, Anhui, Hunan, Qinghai, Shaanxi, Chongqing and other local governments, on January 9, 2017, the NHFP officially published the Implementation Opinion on the Adoption of the "Dual-invoice System" in Public Medical Institutions' Drug  Procurement (Trial). The NHFP clearly requires public medical institutions to gradually implement the "dual-invoice system" in drug procurement and encourages other medical institutions to do so and the "dual-invoice system" should be fully implemented nationwide in 2018.

The "dual-invoice system" requires drug manufacturers and drug distributors to issue VAT special invoices or VAT ordinary invoices in accordance with the law. Drug manufacturers or the wholly-owned or controlled distribution company set up by a science-industry-trade integration group enterprise which sells only drugs produced by the enterprise (group) (only 1 distribution company nationwide), and general distributors of imported drugs (only 1 general distributor nationwide) are considered the drug manufacturers. Internal distribution of drugs from pharmaceutical distribution group enterprises to its wholly-owned (controlled) subsidiary or between its wholly-owned (controlled) subsidiaries may not be considered as one invoice, but a maximum of one invoice is allowed to be issued. Under the dual pressure of "dual-invoice system" and "VAT reform", the "invoice-fabrication" (i.e. falsely making out VAT invoices) became the focus of illegal activities investigated and punished in the field of drug distribution in 2016. In September 2016, Shanghai Fudan Forward Pharmaceutical Co., Ltd. was fined by the tax authorities (including state and local tax authorities) for a total of 267 million RMB for its serious act of false invoicing during 2009 to 2015, becoming one of the cases which imposed a large fine in the pharmaceutical industry.

Under the requirement of the "dual-invoice system", drug distribution enterprises must require an invoice when purchasing drugs from the drug manufacturers. When receiving drugs, they must identify the invoice, the goods list of the supplier and the varieties, specifications and quantity of the drugs actually purchased, verify the aforementioned and set up records of receipt of the drugs purchased, ensuring the consistency between the invoice, goods and records.

Due to the limited coverage of pharmaceutical distributors, drug manufacturers may need to engage many distributors in different regions to distribute and sell drugs, which will greatly increase the cost and the difficulty of drug manufacturers to manage distributors. In the past few years, in order to reduce the risk of commercial bribery, many multinational pharmaceutical companies have substantially reduced the number of first-level distributors, and managed sub-distributors through first-level distributors. This kind of business model is clearly unable to meet the requirements of the dual-invoice system, so these multinational pharmaceutical companies will need to re-construct its distribution systems based on the actual situation and sign distribution agreements with the previous sub-distributors and manage them directly. Although the current "dual-invoice system" mainly focuses on drugs and medical supplies, in the future it may also be implemented in the fields of other medical devices. Other medical device manufacturers also need to prepare in advance for the "dual-invoice system."

Drug Quality Compliance

The "Shandong vaccine incident" has raised serious concerns from the whole society on drug safety issues. It also pressured the drug regulatory authorities to make a determined effort to strengthen their supervision. Drug regulatory authorities have controlled the quality of drugs marketed in various fields and all dimensions, including drug R&D, registration, production and distribution. In the R&D and registration phase, the verification of clinical data and the evaluation of the quality and efficacy of generic drugs jointly brought a "storm" to industry regulation in 2016. At the same time, to address non-compliance issues related to drug products approved before 2007 which are not produced in accordance with the approved production process, or have changed their production process without following required research or filing processes, CFDA has officially launched the drug production process verification initiatives.

The announced inspection that began in 2015 became an important method of supervision in the year of 2016. Ginkgo biloba, bovine blood and other major drug safety issues found through these inspections led directly to the punishment of non-compliance enterprises. In the manufacturing field, these inspections in 2016 mainly focused on the biochemical drugs, Chinese medicine extracts and injection enterprises, among which the unannounced inspections of raw materials and excipients of biochemical drugs were strengthened. As of December 2016, the CFDA audit center examined a total of 611 enterprises/varieties and dispatched 515 inspection teams. In the distribution field, in response to the "Shandong vaccine incident", the government no longer allows pharmaceutical wholesalers to distribute vaccine products. At the same time, CFDA launched unannounced inspections for drug distribution companies. According to incomplete statistics, in 2016 more than 1,500 GSP certificates were revoked and withdrawn (including wholesale and retail). In 2017, for drug quality supervision it is expected to maintain this pressure and unannounced inspections will become the norm. Drug manufacturers and drug distributors must fully implement requirements of drug manufacturing and drug distribution regulations and ensure the continuous compliance, data integrity, authenticity and traceability of the manufacturing and distribution process.

Antitrust Compliance

The pharmaceutical and medical device industry has always been the focus of antitrust law enforcement. As early as 2013, as the party to "China's first vertical monopoly case", the court ruled Johnson & Johnson was required to compensate its distributors because it "set forth the minimum re-sale price". In December 2016, the news that a multinational medical device company was fined by the NDRC for 118.5 million RMB once again made antitrust compliance the focus of the pharmaceutical and life science industry. NDRC found that the company's agreement constituted a monopoly with its counterparties through its distribution agreements, e-mail notifications and oral consultations, limiting the relevant medical device resale price, the tendering price and the minimum price selling to hospitals, and it was implemented by including manufacturing and distribution product price list for all distribution stages, internal assessment and withdrawal of low-price bid by distributors. The company also adopted vertical restrictions on target customers and sales areas as well as restrictive measures on competing products, which further strengthened the effect of the vertical price monopoly agreement.

The price maintenance measures identified by NDRC are commonly seen in the pharmaceutical and medical device industry, therefore NDRC's punishment on this company could also be treated as the disapproval of such product price control measures in the industry, which indicates that antitrust enforcement in pharmaceutical and medical device industry may become the norm. In order to deal with the increasing risk of antitrust compliance, pharmaceutical and medical device companies should conduct a comprehensive assessment of their sales model, in particular reviewing and revising the restrictions and non-competition clauses relevant to product prices, sales areas and target customers in the distribution agreement, strengthening the construction of anti-monopoly compliance system, and actually implementing the antitrust compliance system to the business activities through antitrust compliance training to the management and staff and day-to-day implementation and monitoring systems.

Advertising Compliance

The newly revised Advertising Law officially came into effect on September 1, 2015. The revised Advertising Law raised specific regulatory requirements for advertising contents of the pharmaceuticals, medical devices, health food and medicines, clearly defined the meaning of false advertising, raised the standard fines, added new administrative penalties including the revocation of their business license, the revocation of their advertising approvals and the rejection of their advertising applications from the breaching party for one year and stressed the criminal responsibility. This Advertising Law known as "the most stringent one in history" became one of the highlights of law enforcement for pharmaceutical companies in 2016. The number of cases that drug regulatory authorities and the Administrations of Industry and Commerce punished pharmaceutical enterprises for violation of advertising law as well as the amount of penalties increased significantly.

The Interim Administrative Measures for the List of Dishonest Enterprises Committing Serious Illegalities published by the State Administration for Industry and Commerce on December 30, 2015 clearly stipulates that any enterprise which received three or more administrative penalties within two years due to false advertising, or which posted the false ads for goods or services related to consumers' life and health, thus causing personal injury or other serious adverse social impacts will be included in the list of dishonest enterprises committing serious illegalities (also known as the "blacklist"). Although there are no clear provisions prohibiting or restricting pharmaceutical companies on the blacklist to participate in the hospital bidding process, these companies will be the focus of supervision and regulation by the Administrations of Industry and Commerce, and face joint enforcement actions by multiple authorities.

The Interim Measures for the Administration of Internet Advertisements promulgated by the State Administration for Industry and Commerce in July 2016 provides that advertisements for medical, pharmaceuticals, formula foods for special medical purposes, medical devices and other medical products or services shall not be published before examination and approval. As a result, the advertisements of these products through website, APP and e-mail, as well as the search results with ads presented through search engines all become subject to review and approval. In practice, many pharmaceutical and medical device companies use APPs or the WeChat platform to promote drugs and medical devices. The promotion information including those sent in the form of health or regimen information, drug information on website platforms and APPs, videos containing drug advertising information, H5 pages and RQ codes may also be deemed advertisements by regularity authorities and bring compliance risks under the Advertising Law accordingly.

In response to these new regulatory and enforcement trends, pharmaceutical and medical device enterprises should carefully review the advertisements they are publishing and plan to publish, including product promotion information provided to doctors and product information distributed through various Internet media, and promptly identify and mitigate risks.

Environmental Protection Compliance

As one of the industries strictly regulated in the national environmental protection planning, environmental protection by pharmaceutical companies is receiving more attention and has become an important factor restraining the development of the pharmaceutical industry. In November 2016, under the pressure of severe air pollution and other environmental problems, Shijiazhuang Municipal Government promulgated the Implementation Plan for Carrying out the Sword-cutting Operation on Pollution, and adopted strict control measures on industrial enterprises, especially key industries including pharmaceuticals, requiring all pharmaceuticals manufacturers to stop production and may not resume production without the approval of the municipal government. Thereafter, on November 21, 2016 the State Council issued the Notice regarding the Implementation plan on the Control of Pollutant Discharge Permits and required orderly granting pollutant discharge permits, and strict fulfillment of responsibilities by enterprises and institutions regarding environmental protection. With the intensification of pollution problems, pharmaceutical manufacturers, especially manufacturers of drug materials which emit relatively more pollution, may be required to stop production from time to time for a short or long term or even be closed.

On December 25, 2016, the Standing Committee of the National People's Congress adopted the Environmental Protection Tax Law of the People's Republic of China (referred to as the "Environmental Tax Law"), which becomes the first separate tax law that specifically embodies the "green tax system". It will come into effect on January 1, 2018. Environmental taxes are levied on air, water, solid and noise pollutants discharged directly into the environment. Environmental Tax Law will start from the tax lever, require enterprises which produce more pollutants to pay more taxes and force enterprises to reduce emissions of pollutants. Analysis estimates that the annual environmental tax levied may amount to 50 billion RMB, of which the tax paid by pharmaceutical, chemical and other heavily polluting enterprises may account for 80%. It should be clear that the environmental tax paid by polluting enterprises will not exempt them from the civil liability, administrative liability and other legal liabilities related to the pollutant discharge.

On December 26, 2016, the Supreme People's Court and the Supreme People's Procuratorate issued a judicial interpretation regarding environmental pollution criminal cases and particularly emphasized that the acts of tampering and falsification of automatic monitoring data or interference with automatic monitoring facilities by pollutant dischargers should be deemed as "seriously polluting the environment". Those who implement or participate in the tampering or falsification should be severely punished.

There is no doubt that in the future the pharmaceutical industry will face dual pressures from soaring environmental protections and tightening supervision. A number of pharmaceutical companies will suffer serious administrative punishment, huge civil compensation or even criminal liability as a result of environmental compliance problems. It is of the utmost urgency for pharmaceutical manufacturers to upgrade from its practices of profit-making at the cost of the environment to a conscientiously green approach, and environmental compliance will become much more important.

Prospects for 2017

Over the past few years, a growing number of pharmaceutical and medical device enterprises have realized that compliance risks are one of the biggest risks for business operation nowadays, and compliance work is of unprecedented importance. It could be expected that the pharmaceutical and medical device industry will remain the focus of law enforcement authorities in 2017. Pharmaceutical and medical device enterprises should focus on compliance construction and management in the fields of drug quality, the dual-invoice system, anti-commercial bribery, antitrust, advertising and environmental protection to cope with government's increasing regulatory and law enforcement efforts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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