Measures For Supervision And Administration Of Online Sales Of Drugs: Analysis Of Key Aspects And Impacts

Background

Fast-growing e-commerce has changed lifestyles and invented new ways of consumption, amid which demand has rapidly increased for Internet-based medical services such as online drug sales and online medical diagnosis. Since the regulation and promotion of "Internet-based healthcare services" was included as part of the Outline of the "Healthy China 2030" Plan, China's Internet healthcare industry has been flourishing, channeled by a series of favorable policy decisions. In the meantime, buoyed by a boom in Internet hospitals and online diagnosis and treatment services, as well as a boost in prescription outflows and volume-based procurement of drugs, the online drug sales market is expected to expand unabated.

The evolution of regulatory policies in China related to online drug sales has been long and convoluted. On the whole, the Chinese government has been open to the online sale of drugs, signaled by the release of the Interim Provisions on the Examination and Approval of Online Drug Transaction Services, an upfront regulatory move toward online drug transaction activities as early as 2005. However, as opposed to an open attitude, regulators tended to be conservative in their actual supervision of online drug sales activities. For example, with respect to online sales of prescription drugs, the industry's most controversial issue, the Provisions for Supervision of Drug Distribution (effective as of 2007) are in place to prohibit drug manufacturers and distributors from selling prescription drugs directly to the public over the Internet. In addition, there used to be a prolonged silence at the law-level legislation on the direct regulation of online drug sales activities, as it was not addressed in the Drug Administration Law of the People's Republic of China ("Drug Administration Law") before its amendment in 2019.

The silence was broken in recent years with legislative progress in online drug sales regulation. On December 1, 2019, the current Drug Administration Law formally entered into force, delineating for the first time a clear, holistic regulatory framework on online drug sales at the law-level legislation. With respect to the scope of drugs permitted for online distribution, Article 61 of the amended Drug Administration Law clarifies that drug marketing authorization holders ("MAHs") and distributors are permitted to engage in online drug sales except for those drugs subject to special administration by the State, provided that they comply with relevant provisions of the Drug Administration Law and administrative measures formulated by competent regulatory authorities. Also, online drug trading platform providers ("third-party platforms"), as key participants in online drug sales, are subject to several obligations under Article 62, such as filing, examination, supervision, and management of online drug sales on their platforms; Article 131 further sets out legal liabilities imposable on third party platforms which fail to perform these obligations. Thus, the fundamental principles of online drug sales regulation have been established after the current Drug Administration Law entered into force, although industry players have expected and long awaited detailed administrative measures.

On April 15, 2021, the General Office of the State Council issued the Opinions on Helping Ensure Stability on the Six Fronts and Security in the Six Areas and Further Improving the Work Related to the Reforms to "Streamline Administration, Delegate Powers, Improve Regulation and Strengthen Services" ("Work Opinions"), further clarifying the keynote for the regulation of online sales of prescription drugs: On the condition that the authenticity and reliability of electronic prescription sources are guaranteed, prescription drugs are permitted to be sold online, except for those subject to special administration by the State.

On September 1, 2022, the State Administration for Market Regulation ("SAMR") formally issued the Administrative Measures for the Supervision of Online Drug Sales Drug ("Administrative Measures"), following several drafts for public comment. The Administrative Measures will come into force on December 1, 2022, and provide detailed rules for implementing the principles of online drug sales regulation established in the current Drug Administration Law.

In this commentary, we summarize and comment on key aspects covered by the Administrative Measures.

Key subjects of online drug sales

The key subjects engaging in online drug sales include online drug distributors and third-party platforms. Online drug distributors comprise MAHs (manufacturers of traditional Chinese medicine (TCM) decoction pieces are included as an equivalent), drug wholesalers, and drug retailers. The following table provides detailed information of the three types of online drug distributors in terms of their qualifications, distribution requirements, and regulatory departments:

With respect to third-party platforms, an earlier draft revision to the Regulations for the Implementation of the Drug Administration Law of the People's Republic of China added a provision as Article 83, stipulating that "third-party platform providers shall not directly engage in online drug sale activities", which aroused heated discussion in the industry. The Administrative Measures are silent on this issue, while the National Medical Products Administration ("NMPA") only mentions in its official policy interpretation that enterprises engaging in online drug sales must have a brick-and-mortar presence. As we understand, under the Administrative Measures, third-party platforms without a drug distribution license can only provide sites for online drug distribution or provide services such as facilitating transactions as a go-between, but cannot enter into online transactions directly as the buyer or seller of drugs. Nonetheless, the Administrative Measures do not confront the question of whether third-party platform providers are allowed to acquire a drug distribution license and directly engage in online drug sales. Given that third-party platforms are held responsible for examining, supervising, and administering online drug distributors under the Drug Administration Law and the Administrative Measures, and thus are vested with a regulatory role that requires impartiality, a third-party platform may face conflict of interest issues and even compliance hurdles if it were to directly sell drugs on its self-owned platform. It is safer for a third-party platform desiring to directly sell drugs online to have a standalone drug distributor affiliate company, which acts to distribute drugs on a platform provided by its affiliate company, in strict compliance with the obligations of online drug distributors and third-party platforms under the Administrative Measures. Nevertheless, further exploration is needed to determine whether such standalone drug distribution companies and the other third-party platform providers within the same company group can satisfy relevant compliance requirements, by taking approaches such as installing internal firewalls.

Scope of drugs permitted for online distribution

At the emerging stage of "Internet + drug circulation", online drug sales were tightly regulated, where the sales of prescription drugs on the Internet was entirely prohibited. Regulations such as the current Drug Administration Law and the Work Opinions gradually expanded the scope of drugs permitted to be sold online. The Administrative Measures, consistent with the current Drug Administration Law, only impose an explicit ban on online sales of medicines subject to special administration by the State, such as vaccines, blood products, narcotic drugs, psychotropic substances, toxic drugs for medical use, radioactive drugs, and pharmaceutical precursor chemicals, and those prohibited for online sales as provided for in a detailed catalogue to be developed by the NMPA.

However, the opening up of drug categories permitted for online sales is only the beginning. In regard to the online sales of prescription drugs and other drugs with higher risks in clinical use, online drug distributors, third-party platforms, Internet hospitals, and other participants in the Internet healthcare industry will share challenges arising from drug storage, transportation, clinical use, adverse drug reaction monitoring, and other aspects of online drug sales, which also open doors for in-depth advancement of the Internet healthcare industry.

Primary responsibilities of online drug distributors

Chapter II of the Administrative Measures specifies the primary responsibilities of MAHs, drug wholesalers, and drug retailers engaging in online drug sales to regulate their relevant practices. In addition to the general responsibilities of all online drug distributors, the Administrative Measures further set out special obligations to be fulfilled by online drug retailers. The following table provides a breakdown of these responsibilities and obligations.

Notably, under the Administrative Measures, online drug retailers are required to establish an online pharmaceutical service system. In this regard, Article 52 and Article 58 of the current Drug Administration Law provide that enterprises engaging in drug distribution should be staffed with legally qualified pharmacists or other pharmaceutical professionals who will be responsible for drug management, prescription review and dispensing, providing guidance for rational use of drugs, etc. In addition, as provided in the NMPA's Circular on Regulating Licensed Pharmacist Staffing in Drug Retailers issued in 2020, "In principle, drug retailers dealing in prescription drugs and Class A OTC drugs shall be staffed with licensed pharmacists; drug retailers only dealing in Class B OTC drugs shall be staffed with business personnel who have passed examinations organized by relevant drug administrations." Following the above, Article 10 of the Administrative Measures require online drug retailers to "establish an online pharmaceutical service system where legally qualified pharmacists or other pharmaceutical professionals shall be responsible for examining and dispensing prescriptions, giving guidance for rational use of drugs, etc.", showing consistency in China's regulatory requirements for online and offline drug sales.

The Administrative Measures also set forth requirements to regulate drug delivery in online drug retailing. Prior to the Administrative Measures, there was no clarification under the Good Supply Practice for Pharmaceutical Products ("GSP") or other regulations in China to regulate end user delivery in drug retailing. The current GSP only requires enterprises in general to take effective quality control measures during drug transportation to ensure the quality of drugs, and to develop a drug tracking system to realize the traceability of drugs. It also sets out detailed quality control requirements for drug transportation and delivery in drug wholesale activities. In addition, the current Drug Administration Law stipulates that, where MAHs, drug manufacturers, or drug distributors entrust a third party to store or transport drugs, they are required to assess the entrusted party's quality assurance and risk management capacity, sign an entrustment agreement with the entrusted party to specify matters such as drug quality accountability and operation procedures, and supervise the entrusted party. In our opinion, drug retailers, as the party carrying out drug distribution and holding a drug distribution license, should be responsible for ensuring that their drug transportation and delivery meets GSP standards and other relevant requirements. However, the absence of more specific rules gave rise to controversy over the legality of a widely adopted business model in practice where online drugstores would use courier services to deliver drugs to consumers. For now, the Administrative Measures provide a response to this gap. Article 14 of the Administrative Measures clearly requires that online drug retailers be responsible for the quality and safety of drug delivery, that appropriate transport methods and facilities be selected according to the quantity of drugs, the distance and duration of transportation, temperature and humidity requirements, etc., and that drugs being delivered be placed in separate spaces and clearly marked, so as to ensure that relevant requirements are met and the entire delivery process is traceable. Article 14 also expressly allows online drug retailers to entrust drug delivery to a third-party service vendor, where they shall examine the quality control system of the entrusted vendor, enter into a quality agreement with the entrusted vendor to specify such matters as drug quality accountability and operation procedures, and supervise the entrusted vendor. In addition, Article 17 of the Administrative Measures requires third-party platforms to establish a system to manage delivery of drugs sold on their platforms. Thus viewed, the Administrative Measures in fact recognize the widely available business model adopted by online drug retailers in practice, and meanwhile specify the obligations and responsibilities of online drug retailers and third-party platforms in their business activities under this model. We will also keep a close eye on more specific delivery requirements regarding online drug retailing, which will be issued by the NMPA in the future.

Regulation on online sales of prescription drugs

As mentioned above, the online sale of prescription drugs remains a controversial issue in China, as it was explicitly prohibited by the Provisions for Supervision of Drug Distribution, a department-level regulation. The prolonged ban has only been relaxed gradually in recent years. As amended in 2019, the Drug Administration Law does not contain a provision proposed in an earlier draft that would have prohibited drug distributors from "directly selling prescription drugs through third-party platforms for online drug sales". The 2021 Work Opinions give a conditional nod to online sales of prescription drugs with certain exceptions, while the Administrative Measures further affirm the legality of selling prescription drugs over the Internet. Although the Provisions for Supervision of Drug Distribution are still in force, the Administrative Measures, of equal effect as another department-level regulation, should prevail based on the conflict of laws principle that "the later prevails over the earlier in conflict of laws of the same level". While recognizing the legality of online sales of prescription drugs, the Administrative Measures further set out relatively rigorous requirements for the management of online sales of prescription drugs to ensure safe use of drugs by patients.

I. Prescription management

With respect to prescription management, Article 9 of the Administrative Measures stresses that, where prescription drugs are sold to individuals over the Internet, the authenticity and reliability of prescription sources must be ensured, and a real-name authentication system must be adopted. Online drug retailers accepting electronic prescriptions are required to enter into agreements with the electronic prescription providers, examine and dispense prescriptions in strict accordance with relevant provisions, and mark used electronic prescriptions to avoid repeated use of such prescriptions. Third-party platforms that accept electronic prescriptions are required to verify information of the electronic prescription providers and enter into agreements with them. The Administrative Measures also allow online drug retailers to accept photocopies of paper prescriptions, provided that they must take effective measures to avoid repeated use of such prescriptions.

"Repeated use of prescriptions" and the way to avoid it remains a widely discussed issue in the industry. Article 9 of the forthcoming Administrative Measures, compared with its public comment draft in 2020, provides more specific and rigorous rules, which give clearer instructions for online drug retailers and third-party platforms to perform their obligations related to prescription management. It also emphasizes use of the real-name authentication system when managing prescriptions and requires effective measures to be in place to avoid the repeated use of prescriptions. These rules show a prudent attitude held by the Chinese government toward online sales of prescription drugs.

II. Information display and sale process

In respect of information display for prescription drugs, online drug retailers will be subject to strict requirements under Article 13 of the Administrative Measures, which include:

• On each drug display webpage, highlighting risk warning messages such as "prescription drugs must be purchased and used on the strength of prescriptions under pharmacists' instruction";
• Separately displaying prescription drugs and OTC drugs, and prominently labelling prescription drugs and OTC drugs on their respective webpages;
• No publication of the package, label, or other information of prescription drugs on the homepage or start page for prescription drug sales;
• No display of information such as the IFUs of prescription drugs and no provision of any service related to the purchase of prescription drugs without the review and approval of relevant prescriptions.

Article 13 of the Administrative Measures effectively echoes relevant provisions in the current Advertising Law and other rules and regulations concerning prescription drug advertising. Both the Advertising Law and the Interim Measures for Examination and Administration of Advertisements of Drugs, Medical Devices, Health Food and Formula Foods for Special Medical Purposes stipulate that prescription drug advertisements can only be published in professional medical or pharmaceutical journals jointly designated by the National Health Commission of the PRC and the NMPA. In practice, however, some online drug sellers display the package and IFUs of prescription drugs on their webpages purporting to "protect consumers' right to be informed", which is a common but controversial practice given that it may violate the above regulatory rules on prescription drug advertising. The forthcoming Administrative Measures provide a clear direction for parties concerned to legally display prescription drug information, and confirm that drug distributors who engage in such direct display practices will face compliance risks.

As we understand, pursuant to Article 13 of the Administrative Measures, only the generic name, brand name or similar information of a prescription drug can be directly displayed to the public on the homepage and start page for its sales; other information such as the IFUs can only be provided to consumers who have had their relevant prescriptions reviewed and approved. In our opinion, however, Article 13 also invites questions that remain to be further clarified by regulatory authorities in the future – questions such as: Which specific information can be publicized on the homepage and start page for selling a prescription drug? Can information such as drug specifications and indications be publicized? How to define the scope of "the homepage and start page for selling a prescription drug"? Does it mean that online drug sellers can attach a link on the drug selling interface which directs to a webpage, where the package, label, and other information of a prescription drug can be displayed?

As for the sale process of prescription drugs, before the Administrative Measures, online sales of prescription drugs in China mostly followed a "drug first, prescription second" pattern, where consumers search, find, and order prescription drugs on the platform before relevant prescriptions are issued through doctors' inquiry and affirmation at the payment step. This pattern will be replaced by a "prescription first, drug second" model stressed by the Administrative Measures, where prescription approval will come before the order and purchase step and serve as a prerequisite to entering that step. This change is consistent with existing rules such as the one stipulated in the Rules for Supervision and Administration of Online Medical Diagnosis (for Trial Implementation) issued for immediate implementation in February 2022, where "provision of prescription drugs to patients before the issuance of the corresponding prescriptions is strictly prohibited". Thus, as we understand, after the Administrative Measures enter into force, consumers who wish to purchase prescription drugs online will need to follow the process below:

• Search for the drug name to find the prescription drug they need, and click the relevant link to open the relevant webpage;
• File for prescription review and obtain a pharmacist's approval of the prescription;
• Obtain access to the IFUs and other information of the prescription drug, and make an order for purchase.

In addition, prior to the sale of prescription drugs, online drug retailers should fully inform consumers of relevant risk warnings, which consumers should confirm as a sign of their acknowledgement.

Obligations of third-party platforms

Third-party platforms, as key responsible entities engaging in online drug sales, are subject to certain obligations under the current Drug Administration Law to supervise and administrate online drug selling activities. The forthcoming Administrative Measures implement the platform obligation requirements set forth in the Drug Administration Law and make further refinements, particularly emphasizing platforms' internal management obligations to consolidate their role as responsible subjects in online drug sales, which will serve to enhance the orderly development of online drug sales.

Under the Administrative Measures, third-party platforms are required to perform the following administrative obligations:

Legal liability and law enforcement

The Administrative Measures set forth many legal liabilities and administrative penalties that may be imposed on MAHs, drug distributors, and third-party platforms who violate their required obligations, which are classified into two main categories. The first category comprises standalone penalties created by the Administrative Measures, including an order for rectification within a specified time limit and a fine ranging from RMB 10,000 to RMB 200,000, which are imposed, for example, on online drug distributors that do not fulfil their obligations in respect of prescription management, pharmaceutical services, information reporting, drug information display, etc., as well as on third-party platforms that fail to perform obligations regarding the drug quality and safety system, record filing, drug information display, among others. The second category contains legal liabilities cited from the Drug Administration Law, with specific penalties determined by the seriousness of relevant circumstances. Parties subject to these liabilities may face heavy fines, revocation of the drug distribution license, and other severe punishments, which will be imposed on, among others, online drug distributors that fail to fulfil their GSP obligations and third-party platforms that fail to perform obligations such as qualification examination, reporting, and ceasing provision of online trading platform services. For example, an online drug distributor that fails to comply with the Administrative Measures and other relevant laws and regulations in terms of drug delivery and retention of sales records and other relevant documents may face severe penalties, such as being ordered to make rectification within a specified time limit, receiving a warning, receiving a fine between RMB 100,000 and RMB 2 million, being ordered to suspend manufacturing and business operations to make rectification, and even having its drug distribution license revoked. Meanwhile, the legal representative, key person-in-charge, directly accountable person-in-charge, and other directly accountable personnel of the online drug distributor may also face severe administrative penalties, such as confiscation of their income derived from the company during occurrence of the illegal act plus a fine between 10% and 50% of the income, and a 10-year to permanent ban on their engagement in drug manufacturing and drug distribution activities. In addition to the aforesaid legal liabilities, according to Article 30 of the Administrative Measures, where potential safety risks are proved by evidence, the drug administration concerned will, in light of the supervision and inspection findings, issue a warning to the online drug distributor or third-party platform concerned, schedule an interview, order rectification within a specified time limit, suspend the manufacturing, sales, use or import of the drugs concerned, or take other appropriate measures.

Moreover, the current drug administration system in operation should also apply to online drug sales activities. The system is established by relevant provisions in a series of effective laws and regulations, including but not limited to the Drug Administration Law, Measures for the Administration of Drug Recalls, Measures for the Administration of Reporting and Monitoring of Adverse Drug Reactions, Good Supply Practice for Pharmaceutical Products, and even such laws as the Criminal Law of the People's Republic of China (Amended in 2020) and the Interpretations of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues concerning the Application of Law to Criminal Cases concerning Drug Safety (2022). Article 32 of the Administrative Measures also provides clarification of this issue, stipulating that where there are provisions in other laws and administrative regulations on punishments for illegal online drug selling behaviors, such provisions shall prevail.

As for law enforcement, under the Administrative Measures, provincial drug administrations will be responsible for investigations and punishment of illegal online drug selling practices carried out by third-party platforms, MAHs, and drug wholesalers, while drug administrations at the municipal and county level will be in charge of investigating and punishing illegal acts of online drug retailers. The delegation of law enforcement authority to local-level governments has proved China's robust law enforcement capacity and strength, which should not be underestimated by entities engaging in online drug sales activities in the future.

Conclusion

Through the Administrative Measures, China officially gives clear guidance on highly controversial issues in the healthcare e-commerce industry, such as online sales of prescription drugs and third-party platform obligations. It also signifies the government's endorsement for boosting the healthcare e-commerce industry in China and will usher in a new stage of development for the industry. The strict obligations assumed by online drug distributors and third-party platforms under the Administrative Measures should not be regarded as a hinderance to industry growth given the truth that, for all industries, without order, long-term and rapid development would be a mere illusion. The Administrative Measures specify clear compliance requirements for online drug sales activities, which will effectively enhance the level of services provided by online drug distributors and third-party platforms and guarantee safe drug use by patients, ultimately promoting the orderly, healthy development of the healthcare e-commerce industry. Relevant participants in online drug sales are advised to proactively adapt to the latest regulatory requirements to ensure the legitimacy and compliance of their drug sales practices, which is essential for their continued and lasting development in the industry.

* Han Kun interns Leyi WANG and Shuwen SUN also contributed to this legal commentary.

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