Charting China’s changing pharma patent landscape

Charting China’s changing pharma patent landscape

China’s attempts to strengthen IP protection and harness innovation have accelerated in recent years. With the country emerging as a critical market for the pharmaceuticals industry, it is crucial to take stock of how these reforms affect the unique challenges faced by life sciences innovators

Already the world’s second largest healthcare economy, China is growing rapidly in importance as a market for innovative drugs and a hub for pharmaceuticals innovation and manufacturing. Worth $122.6 billion in 2017, the country’s pharmaceuticals market is expected to reach as much as $175 billion in value by 2022. And with an ageing population and only 6% of the country’s gross domestic product (GDP) currently being spent on healthcare, such increases are likely to continue for the foreseeable future.

As such, China has a central position in the business strategies of international pharma companies, with the American Chamber of Commerce in Shanghai’s 2018 China Business Report finding life sciences to be one of the best-performing sectors among US companies in the country; 93% of respondents in the industry reported growth, while 87% described themselves as optimistic about market conditions in the country – more than in any other sector. Merck’s CEO and chair Stefan Oschmann recently described China as “by far the most promising market” for the company.

However, life sciences companies could be forgiven for having concerns about China’s IP system. The country was seen for many years as the ‘Wild East’ of intellectual property. Low damages, a lack of expertise among the judiciary and weak enforcement measures all created significant challenges for rights holders seeking to tackle infringers; while significant patentability and filing restrictions, as well as a lack of regulatory data protection and patent-term extensions, have limited the rights available to innovators.

Such shortcomings would be particularly problematic for biopharma companies, which – due to a combination of high R&D costs and the relatively low cost with which copycat drugs can be produced – depend on effective patent protection more than companies in any other sector, while requiring an IP system to make allowances for their unique regulatory challenges.

Fortunately, China has taken steps to encourage innovation and strengthen its IP system as part of its efforts to transition from a middle-income to a high-income economy. Its first national IP strategy in 2008 established the aim of creating “a country at a comparatively high level in terms of the creation, utilisation, protection and administration of IP rights by 2020” – an objective reaffirmed in the 2013 and 2017 iterations of the strategy. Efforts to improve the country’s patent regime have reached a crescendo since 2017, with a raft of legislative, judicial and administrative reforms – including some of those most desired by biopharma innovators – being implemented or proposed.

Nevertheless, China remains a challenging and idiosyncratic jurisdiction for life sciences innovators, whose representatives continue to express serious concerns about the country’s IP regime. And with strong political forces pushing back against patent reform in the healthcare sector, it is not obvious what the future holds for pharmaceutical patents.

It is crucial therefore for pharma patent professionals to study the contours of China’s patent landscape, take stock of recent shifts in the terrain and understand the forces that will continue to reshape it in years to come.

Administrative enforcement and punitive damages

Over the past two years, Chinese authorities have implemented or committed to several pro-innovator reforms to the country’s patent system, aimed at boosting enforcement mechanisms and strengthening available IP rights. But many of these changes appear designed to help rights holders in other sectors and are unlikely to bring significant benefits to life sciences companies.

For example, there are plans to ramp up penalties for bad faith/wilful infringement. In December 2018, 38 government agencies – including the newly established National Intellectual Property Administration (CNIPA), the National Development and Reform Commission (NDRC) and the People’s Bank of China – announced severe new punishments for “serious” patent infringers under China’s controversial new social credit system. Acting in bad faith, obstructing evidence collection or repeated infringement, a memorandum of understanding said, will prompt a wide range of potential penalties including restricted access to government funding, increased supervision and travel restrictions.

This coincides with similar steps proposed in a draft patent law amendment released for public comment by the National People’s Congress at the start of this year. The draft proposes to increase punitive damages from four times to five times illegal earnings or from Rmb200,000 ($30,000) to Rmb250,000 ($37,000) if illegal earnings are below a certain threshold. It contains provisions to expand the enforcement abilities of administrative authorities, giving CNIPA and local IP offices the power to seal infringement verdicts and order the seizure of infringing products. The proposals moreover extend the statute of limitations to three years and tilt the burden of providing information necessary to determine damages in favour of plaintiffs.

Figure 1. All invention patent cases involving foreign parties (all courts) in 2016, by industry.

Source: Jacqueline Lui and Libin Jin writing for IAM, 29 March 2018

This focus on punishing repeat or bad-faith infringers fails to address the enforcement issues that most concern pharma patentees, whose important disputes usually involve generic life sciences companies, which are likely to be placed into that category. Punitive damages may be useful to patent owners in some sectors, but do not play a major role in typical innovator versus generic disputes.

While damages awards can be meaningful to pharma rights holders, they are usually inadequate to remedy infringements in a sector where even a temporary loss of exclusivity can cause significant and irreparable harm. This means that getting an infringing product removed from the market in a timely fashion – or preventing it from being put on sale in the first place – is of the utmost importance to life sciences rights holders.

“If a patent-infringing pharmaceutical product is put on the market, the original drug will quickly lose market share, which is almost impossible to get back,” explains David Shen of Allen & Overy’s Shanghai office. “So you have irreparable harm if the infringement is not stopped right away. It typically takes one or two years to win an infringement case, by which point no effective remedy is available, so you cannot depend on damages.”

The emphasis on administrative patent enforcement will not be welcomed by branded biopharma companies either. Having become by far the most widely used procedures for patent enforcement in recent years, such mechanisms involve the CNIPA or local IP offices investigating infringement complaints by interviewing the alleged perpetrators, and inspecting and seizing products.

The advantage of such proceedings is that they are relatively quick and cost-effective, notes Tim Jackson, head of patent strategy and development at Rouse. However, no significant fines or damages are awarded and administrative authorities will accept only clear-cut cases. As such, the proceedings are singularly ill-suited to legally and technologically complicated patent cases, such as those that affect pharmaceuticals innovators.

Hogan Lovells’ Andrew Cobden comments: “Most lawyers would recommend that clients who own complex technologies use civil litigation. The kind of cases a pharma company is likely to be involved in would not be suited to administrative enforcement.” Shen agrees. “Lots of people are questioning the wisdom of giving the patent office more enforcement powers. Most parties in the life sciences would rather have the courts deal with enforcement actions and are worried that administrative authorities will make the wrong decisions.” As such, any development of administrative enforcement at the expense of improving judicial dispute resolution mechanisms will be to the detriment of life sciences rights holders.

Rise of specialist IP courts

Of more importance to pharma innovators is the January 2019 establishment of a new IP division of the Supreme People’s Court. Intended to function much like the US Court of Appeals for the Federal Circuit, the new division will hear appeals on patent validity and infringement decisions handed down by lower judicial and administrative authorities.

This continues a trend towards judicial specialisation in intellectual property, which saw the establishment of new specialist IP courts in Beijing, Guangzhou and Shanghai at the end of 2014 and beginning of 2015, so that disputes could be adjudicated with greater expertise, consistency and efficiency. These have proved enormously popular, with over 11,000 patent cases heard in 2015 alone.

This constitutes progress for life sciences innovators, whose disputes tend to be legally and technologically complex and whose patents are often extremely valuable. The USPTO’s former senior counsel for China, Mark Cohen, has described the Supreme People’s Court’s new IP division as “a much awaited, historic and potentially disruptive breakthrough in the China IP litigation system” whose creation could correct anti-foreign bias in the system by weakening the influence of local interests.

Cobden tells IAM that IP courts have already had a positive impact on pharma patent litigation: “There have been a lot of improvements to IP enforcement in the past five years. Previously, rights holders thought it might be difficult to win, but that has changed quite a lot. Pharmaceutical companies are becoming more inclined to enforce their rights… Setting up the IP courts has made a big difference. The quality of decision making has gone up, as have the amount of damages.”

Jackson agrees. “The IP system here is growing in perceived quality and reliability. The decisions are becoming more reliable and predictable and they will become even more so with the creation of the IP tribunal at the Supreme People’s Court. The judges are well trained now and know what they are doing. This will benefit pharmaceuticals companies.”

Since 2014, data on patent litigation has been more available to international observers. And what it reveals should reassure foreign rights holders. In 2016, 29 out of 64 first-instance patent infringement cases (across all industry sectors) involving a foreign party as plaintiff resulted in a win for the international party, while 24 were withdrawn and only eight were lost.

Strengthening and expanding IP protections

Several recent proposals promise to expand and strengthen IP rights in China. New patent examination guidelines were implemented in April 2017, allowing (for the first time) post-filing experimental data to be submitted in support of the sufficiency of disclosure requirement for patent applications. This was developed further by August 2018 draft guidelines from the Supreme People’s Court on patent examination and administrative validity hearings, which also proposed liberalising the patent office’s approach to allowing patent claim and specification amendments.

This especially benefits life sciences companies, whose long and complicated R&D processes mean that much of the data relating to an invention is acquired at a later stage than in other sectors and long after the early point at which it is desirable to file a patent application.

The pending draft patent law amendments also seek to extend the IP rights of drug innovators by introducing patent-term extensions of up to five years to compensate companies for time spent completing lengthy regulatory approval processes. This will increase the length of on-market exclusivity for many innovative drug products, bringing substantial commercial benefits, especially given the fact that a drug’s profitability tends to be at its highest towards the end of its patent term.

However, products will not be permitted more than 14 years’ total exclusivity following market launch, and extensions will be available only to drugs whose market approval was applied for in China at the same time as in other jurisdictions. It is not yet clear whether patent-term extensions will be available only for new active ingredient patents or whether second medical uses, new formulations and other drug-related inventions will be eligible – as they are in most developed economies.

The growing importance of China’s healthcare market

  • According to IQVIA, China’s pharmaceutical market was worth $122.6 billion – the second largest in the world
  • The value of the market is expected to rise to between $145 billion and $175 billion by 2022
  • China’s pharmaceutical market grew 9.4% in 2013-2017, according to EFPIA figures
  • 93% of US life sciences companies operating in China reported growth in sales, according to the American Chamber of Commerce in Shanghai
  • Only 6% of current GDP is spent on healthcare

Regulatory data protection on the cards?

Another reform keenly desired by biopharma innovators – the introduction of regulatory data protection – may also be on the cards. In May 2017, the China Food and Drug Administration (CFDA) proposed introducing six years of regulatory data protection for new drugs in China and suggested introducing a 10-year data exclusivity period for new drugs treating paediatric or rare diseases, a three-year period for improved drugs treating paediatric and rare illnesses, and 10 years’ protection for innovative biologics. Protection will also be given to data related to new drugs that enter China within one year of entering other markets – with any delay in marketing application after that window being deducted from the drug’s period of data exclusivity.

In April 2018, the CFDA published a draft guideline for implementing new rules on data exclusivity. Though echoing the first document in many respects, it proposed extending data protection for innovative biologics to 12 years and elaborated further rules that would reward early marketing approval application in China, as well as the use of clinical data produced within the country.

If implemented, these proposals would confer proprietary rights over expensively produced clinical data, thereby mitigating the effects of regulatory delay, and potentially extend the length of de facto market exclusivity for some innovative products. However, there has as yet been no clear undertaking from the government to act on these proposals, so innovators should watch closely for further developments.

Continuing problems

Despite recent progress, there remains a plethora of IP problems facing biopharma rights holders in China that have yet to be adequately addressed.

Janet Xiao of Morrison Foerster identifies the country’s stringent patentability restrictions as one such issue. “Several important types of innovation cannot be patented in China. Methods of treatment and diagnostic methods cannot be protected, for example. In certain circumstances, it is possible to get around this by writing the claims to a different format but it is very difficult in a treatment aimed at a specific sub-population of particular dosing regimen,” she notes. “This could increasingly be a problem because a lot of cutting-edge innovation in the drug field has to do with precision medicines and biomarkers, for which you cannot get patents. Rather than having these blanket prohibitions, China should become more nuanced in its patentability rules.”

She also points out that China’s restrictions on the use of post-filing data are still among the most restrictive of any jurisdiction in the world. “They have started to soften these requirements, with the new guidelines for example, but the law itself has not changed and in reality it is still very difficult to introduce post-filing data.”

In this, she echoes the Pharmaceutical Research and Manufacturers of America (PhRMA), which in its 2018 submission to the Office of the US Trade Representative’s Special 301 report on intellectual property complained that “SIPO does not consistently accept data generated after a patent is filed during patent prosecution to describe inventions or satisfy inventive step requirements. This practice has caused significant uncertainty about the ability to obtain and maintain biopharmaceutical patents in China and caused denials of patents on new medicines in that country that received patents in other jurisdictions.”

This exacerbates the serious problem that rights holders have with China’s very high inventive step standard and the correspondingly high patent invalidation rate of the Patent Re-examination Board (PRB). “Things are not great at this point,” Shen laments. “There is an extremely high invalidation rate – way higher than in most Western jurisdictions. The PRB takes a very aggressive view on patentability and imposes a high inventive step standard. This makes patents harder to enforce and reduces the value of those assets. Despite recent patent office guideline changes, little has changed in this respect.”

Difficulties obtaining adequate remedies

Another major problem for pharma and biotech innovators is the difficulty of getting an infringing product removed from the market quickly and the fact that it is impossible to prevent it from being launched in the first place.

There have been serious concerns among patentees about their ability to obtain preliminary injunctions in China. Last year, PhRMA complained that “although China’s laws and regulations provide for injunctive relief, in practice injunctions are rarely if ever granted in the context of preventing premature follow-on product market entry, due to high procedural barriers”.

Shen agrees with this analysis. “While the courts are willing to grant permanent injunctions when you win a case on the merits, preliminary injunctions are still difficult to obtain overall,” he observes. “It does occasionally happen, as in Apple v Qualcomm. But judges are very reluctant to grant injunctions when they have not yet assessed the case on its merits, especially given that they are heavily dependent on advice from technical experts.”

This problem has been acknowledged by authorities; the Judicial Committee of the Supreme People’s Court issued a new set of rules late last year regarding the grant of preliminary injunctions in IP disputes. On the face of it, these rules could make it easier for plaintiffs to succeed in removing allegedly infringing products from the marketplace prior to a judgment on the merits where that infringement could cause irreparable harm. For example, they require courts to consider evidence regarding reduction of market share. But it is unclear at this stage how courts will balance this requirement against other factors, such as the obligation to take public interest considerations into account.

Patent linkage abandoned?

Given the difficulty of obtaining preliminary injunctions, biotech and pharma innovators will have been especially disappointed that planned patent law reforms in China do not include the creation of a US-style patent linkage system, which would have given innovators the chance to litigate patent infringement allegations prior to marketing approval.

Such a system was previously proposed by the CFDA, which expressed a commitment to patent linkage in a May 2017 document and in a special opinion issued in October 2017. The National People’s Congress also stipulated the adoption of patent linkage in a 2018 draft drug administration law. It was proposed that China would create its own version of the US Orange Book, listing patents relevant to innovative drugs; that generics would be required to declare that their products do not infringe such rights before obtaining marketing approval; and that originators would have the opportunity to initiate litigation, leading to a stay of marketing approval for up to two years.

The creation of patent linkage would constitute a significant stride forwards for industry rights holders, not only marking a clear pro-patent shift by Chinese authorities but also addressing the distinctive IP issues that confront inventors in the sector. It would provide an effective way of obtaining temporary restraining orders while patent litigation plays out and before irreparable harm is done to the patentee. As such, PhRMA welcomed these proposals, saying that the establishment of an Approved Drug List akin to the Orange Book would “provide greater certainty to innovators and generic manufacturers alike regarding the patent status of approved medicines and facilitate effective patent enforcement”.

However, plans to implement patent linkage in China seem to have ground to a halt. In 2018, provisions needed to lay the foundations for linkage (eg, the introduction of “artificial infringement”) were left out of an August State Council notice on healthcare reform. Patent linkage has now been omitted from the proposed patent law amendments, while no mention of it was made in the memorandum of understanding signed by 38 government agencies.

Andrew Cobden

Andrew Cobden

Counsel, Hogan Lovells’ Hong Kong office

“There have been improvements to IP enforcement in recent years ”

Resistance to pharmaceutical patent reform?

Pessimistic innovators may wonder whether the apparent u-turn on patent linkage indicates that the government in fact has a more ambivalent, less innovator-friendly approach to pharmaceutical patent reform than it appeared to have last year and than it has demonstrated towards other industry sectors.

One possible explanation for patent linkage being sidelined is the dismissal of CFDA chief Bi Jinquan, who was the main advocate for the policy, following his involvement in the country’s 2018 vaccine scandal. The sacking of one of China’s most influential pro-patent reformists may have had – and could continue to have – a significant impact on government IP policy.

Indeed, there are strong currents in Chinese politics that might cause authorities to be reticent about further strengthening pharma IP rights. For instance, China’s large generic drug industry – which opposes patent linkage because of the restrictions it places on market launch – is a powerful lobby in national politics.

Generics play an important role in the Chinese economy, putting domestic pharma innovators in the shadow. They also account for an increasing number of overseas drug approvals, with 38 Chinese-produced copycats given the green light by the US Food and Drug Administration in 2017 – 22 more than in 2016. Engaging in high-value manufacturing, these imitators are a key focus of the government’s Made in China 2025 strategic plan to increase the value of the country’s industrial activities to help it transition from a middle-income to a high-income economy.

Back in December, Shen told IAM: “At the moment [the influence of domestic innovators] is not sufficient to outweigh local generics. Foreign innovators do not play a role in this [patent linkage] debate at all; it is about the balance of influence between domestic generics and innovators.”

An ambivalence about pharma patents may also be engendered by the country’s understandable focus on expanding access to medicine among the Chinese population. “There is a strong public mood in favour of promoting access to pharmaceuticals,” Jackson explains. “A recent film called Dying to Survive had a massive impact, clearly hitting a nerve with the public.” The film in question – seen by many as one of China’s best recent movies – is based on the true story of a Chinese man suffering from leukaemia, who smuggles cheap cancer treatments from India for Chinese patients.

Janet Xiao

Janet Xiao

Partner and co-chair, global life sciences, Morrison Foerster

“Methods of treatment and diagnostic methods cannot be protected”

A balancing act

This is not to say that generic industry interests will always prevail over those of innovators, or that we cannot expect to see further pro-pharma-patent reforms. China’s domestic innovative drug sector is also growing at a fast rate, with large companies like Jiangsu Hengrui and Sino Biopharmaceuticals investing heavily in new drug development. In September 2018, Chi-Med’s Elunate became the first ever drug developed in China to gain regulatory approval for a major cancer treatment indication. And early this year, Stefan Oschmann, CEO and Chair of Merck KGaA, said China was bound to produce a top 50 pharma innovator in the coming years.

According to one recent study, Chinese inventors – though many are based at research institutes rather than for-profit companies – are now the second largest national group of biopharma patent filers in the world after US innovators, having been ranked in 16th place 20 years ago. In addition, China broke into the Global Innovation Index’s top 20 most innovative economies for the first time in 2018.

Key recent patent policy developments for the pharma industry

  • 2014/2015 – Specialist IP courts established in Beijing, Shanghai and Guangzhou
  • April 2017 – New patent examination guidelines allowing post-filing experimental data implemented
  • May 2017 – China Food and Drug Administration (CFDA) proposes enhanced regulatory data protection and patent linkage
  • April 2018 – CFDA publishes guidelines on the implementation of regulatory data protection reforms
  • August 2018 – Supreme People’s Court publishes draft guidelines on patent examination and administrative validity hearings
  • August 2018 – CFDA chief and patent reform champion Bi Jinquan forced to resign during the so-called ‘vaccine scandal’
  • August 2018 – State Council notice on medical sector reform fails to include provisions for patent linkage
  • December 2018 – 38 government agencies sign memorandum promising new punishments for “serious” patent infringers
  • January 2019 – Draft patent law amendments published by National People’s Congress
  • January 2019 – New IP division of Supreme People’s Court (or ‘China’s Federal Circuit’) established

The government is already keen to encourage the further development of this sector, whose influence in national politics is likely to increase steeply in years to come. Xiao comments: “There are many competing influences on healthcare and IP policy. Generics have had a big influence, but there is more and more emphasis being placed on encouraging innovators. It is recognised that you cannot continue to develop economically if you rely on copying others. There is definitely a driving force within China pushing for more innovator protection.”

Providing IP and other safeguards for drug innovators is also necessary to achieve the objectives laid out in the Healthy China 2030 plan, which seeks to improve the country’s healthcare by increasing access to cutting-edge treatments from around the world. “There is clearly a real drive to improve access to pharmaceuticals in China,” argues Jackson. “Drugs are being released here faster than ever before… It is not in China’s interest to have a poorly functioning pharma IP litigation system. It will make innovators nervous and they will not release their products here. China is working hard to remove negative perceptions.”

The introduction of a five-year patent term extension is a clear illustration of the government’s commitment to strengthening protections for biopharma rights holders. “Ten years ago, there was very little support for a patent term extension,” Xiao points out. “In 2008, the government introduced the Bolar exemption and was focused on encouraging the generic companies. Now things have changed.”

This coincides with several recent pro-innovator regulatory reforms, such as the removal of tariffs on cancer therapies, the removal of the requirement to repeat drug trials in China before regulatory approval and the introduction of an accelerated approval process for new drugs to treat rare diseases.

Indeed, it is unclear how much significance should be ascribed to the absence of patent linkage in recent reform proposals. “The idea to implement patent linkage in China is very new; and it is very difficult to put this into law,” Xiao maintains. “Patent linkage is very complicated – it took several years for the United States to develop its system – so its omission may reflect the fact that the details are still being worked out.”

Jackson makes a similar point: “The current set of proposed patent law amendments are mainly changes to process. Patent linkage is a much more nuanced issue and it may be that its absence from the recent proposals is simply to allow time for the implications of such a change to be fully considered… Another possible reason for the lack of inclusion could be the requirement for patent linkage in the suspended intellectual property chapter for the CPTPP [the Comprehensive and Progressive Agreement for Trans-Pacific Partnership]. There have been reports that China is considering joining this regional trade agreement and negotiations could include this as a cross-chapter trading chip.”

He concludes: “I wouldn’t be surprised to see patent linkage return as a proposal at a later date. If the Chinese government can be convinced that a patent linkage system will actually improve access to pharmaceuticals, then it will probably resurface.”

In the final analysis, Chinese authorities are seeking to strike a balance – between economic growth achieved by supporting established generic companies and growth realised by stimulating the nation’s innovative biopharma sector; and between improving access to medicine by supporting cheaper unpatented drugs and achieving that aim by encouraging the producers of innovative drugs to launch their products in China.

It is difficult to predict exactly what balance will be struck and how it will evolve over time but the direction of travel will likely be favourable to pharmaceuticals rights holders, whether reforms take the shape of a single large step (eg, patent linkage) or a longer series of smaller steps.

“In the high-tech space, China is already a major venue for patent litigation, like the United States, the United Kingdom and Germany,” says Cobden. “The question now is whether China catches up in the life sciences area. This will inevitably take time, but I cannot see why it would not get there.”

Avoiding patent pitfalls

In the meantime, pharma originators must approach IP matters in China as they would in any other country, seeking to understand the idiosyncrasies of the law and planning accordingly. In this respect, a few important points need to be borne in mind.

“Everything is front-loaded in Chinese patent litigation,” observes Jackson. “It is very difficult to change your case as you go through, and there is no discovery or cross-examination. You have to have your case ready to go at the beginning; you have to be able to prove infringement.”

Originators should also think about the possibility of disputes at the prosecution stage. “Make sure you use the appropriate windows for amendment and remember that support requirements are very stringent… In China, if you have five narrow patents, that is often better than one broad one, because – if they are well-supported – they will be more difficult to attack.”

Finally, Jackson adds: “Make sure your translation says what you think it does. There is a lot of price pressure on translations, but if you do not get them correct, you have nothing.”

Action plan

With China now one of the world’s most important healthcare markets, it is crucial for pharmaceuticals originators to take stock of drastic recent changes to the country’s patent landscape, their specific impact on life sciences companies and how the situation is likely to change in the future.

  • The establishment of a so-called ‘Chinese Federal Circuit’ is a boon for pharma companies, whose innovations are highly complex and whose patents are commercially crucial.
  • Key pharma IP concerns are set to be addressed, with the introduction of patent-term extensions and proposals for effective regulatory data protection.
  • However, the much-anticipated introduction of patent linkage seems to have stalled, reminding us of the continuing influence of domestic generic companies.
  • Problems relating to patentability, post-filing data, the invalidation of pharma patents and difficulties obtaining interim injunctions continue to affect life sciences innovators.
  • Things are likely to keep improving from a rights holder’s perspective, even if at a slower pace than some hope for.

Unlock unlimited access to all IAM content