New Circular on Chinese Generic Pharmaceutical Manufacturers


Non-Chinese companies seem to have new opportunities to acquire Chinese generic pharmaceutical manufacturers through transfer of technology thanks to GMP reform.

Recently, the State Food and Drug Administration (“SFDA”) issued two circulars (the “Circulars”) concerning the implementation of GMP standards:

– “Circular concerning promotion of implementation of new GMP and upgrade of pharmaceutical industry” (Guoshiyaojianan No.[2012]376) promulgated on 21 December 2012; and

– “Circular concerning technology transfer during the implementation of new GMP” (Guoshiyaojianzhu No.[2013]38) promulgated on 22 February 2013.

Two important points are worth noting in the Circular of 21 December 2012 and the Circular of 22 February 2013. Both Circulars contain more detailed provisions:

(1) Enhancement to achieve GMP standards without compromise

The current implementation of the GMP standards (revised and effective as of 1 March 2011) is not optimistic. SFDA reminds those enterprises that have not complied with GMP that they should not expect SFDA to lower the standards. The GMP changes must be implemented on time.

(2) Possibility to transfer marketing authorisation to other manufacturers

Those manufacturers who have no intention or are not capable of complying with GMP standards may transfer their marketing authorisation to other manufacturers who have already complied with the GMP through the transfer of pharmaceuticals technology.

1. Background information on GMP

Effective as of 1 March 2011, the GMP changes mainly focus on the improvement of administration, equipment and facilities. As a result of such changes, pharmaceutical manufacturers have to invest a considerable amount of capital to recruit qualified employees, purchase equipment and even rebuild the premises to meet the new standards. For instance, under the GMP changes, a sterilization process for lyophilized powder for injection is forbidden at the end of manufacturing, and as a result, equipment used to enhance the sterilization during manufacturing processes must be installed. According to one officer of SFDA, the GMP reform is aimed at bringing the standards of Chinese pharmaceutical manufacturers closer to the European standards.

As the GMP standards are not easy for Chinese companies to follow, SFDA set some deadlines in order to encourage manufacturers to speed up the implementation.

(1) Update deadline

The existing pharmaceutical companies must update their manufacturing conditions to comply with the GMP standards before the following deadlines.

Update deadline
Sterile pharmaceutical manufacturers, such as blood products, vaccines, injections etc 31 December 2013
Other pharmaceutical manufacturers 31 December 2015

Manufacturers who fail to comply with the GMP standards after the update deadline will face the following legal consequences:

– cessation of manufacturing;

– suspension of pending related drug registration assessment applications;

– refusal to accept new applications for drug registration.


Transfer deadline

After the update deadline expires, the alternatives granted to those companies are:

– either continue to apply to obtain GMP approval, and thus be entitled to start manufacturing again; or

– apply for transfer of marketing authorisation to other manufacturers through transfer of pharmaceutical manufacturing technology within a transitional period of one year.

Transfer deadline
Sterile pharmaceutical manufacturers, such as blood products, vaccines, injections etc 31 December 2014
Other pharmaceutical manufacturers 31 December 2016

After the two transfer deadlines expire, SFDA will no longer accept applications for transfer of marketing authorisations through the transfer of pharmaceutical technology. Those manufacturers will be obliged to either continue their GMP applications or terminate their activities.

2. Opportunity to obtain marketing authorisation for generic pharmaceuticals

More and more non-Chinese pharmaceutical manufacturers are facing patent cliffs in China. It is estimated that from 2011 to 2015 there will be a peak for the expiration of patents. Furthermore, China will soon become the world’s second biggest pharmaceutical market due to its tremendous market size.

Non-Chinese pharmaceutical companies are trying to solve the “patent cliff” problem. Furthermore, non-Chinese pharmaceutical companies are also seeking to enter the market for generic pharmaceuticals in China in view of the potential profits. Recent examples include the establishment of a joint venture between Pfizer and Hisun Pharmaceutical companies in 2012, the acquisition of BeiKang Pharmaceutical by AstraZeneca in 2012 and the construction of a new generic pharmaceutical manufacturing plant for AstraZeneca at China Medical City in Taizhou in January 2013.

In the meantime, the GMP requirements are obliging Chinese domestic pharmaceutical manufacturers to find a good buyer so that they can exit the market. The transfer deadlines provide promising opportunities for both parties to reach a deal in the Chinese generic pharmaceutical manufacturing industry.

(1) Legal structure to obtain marketing authorisation

PRC Law prohibits the sale of pharmaceutical market authorisations unlike in the EU. In order for a non-Chinese company to obtain a marketing authorisation from a Chinese pharmaceutical manufacturer, the foreign company may opt for one of the following legal structures:

(a) Equity deal

The equity deal is the most efficient method to obtain marketing authorisation. A foreign company may directly purchase the equity of a Chinese pharmaceutical manufacturer and convert it into a foreign invested pharmaceutical manufacturer. Since the foreign company owns all the equity in this target company, all marketing authorisations under such a target company will remain valid.

However, the main disadvantage of an equity deal is that foreign companies will have to assume potential risks of liabilities of the target company which may sometimes be unpredictable and detrimental.

(b) Assets deal

Starting from 19 August 2009, it has also been possible to obtain the marketing authorisation of a Chinese pharmaceutical manufacturer through an assets deal (i.e. transfer of pharmaceutical technology) as provided in “Provisions on the administration of registration for pharmaceutical technology transfer” (the “Provisions”).

The transfer of pharmaceutical technology is feasible only under one of the following conditions:

– Transfer of new pharmaceutical technology before the expiry of the monitoring period;

– Transfer of new pharmaceutical manufacturing technology after the expiry of the monitoring period;

– Transfer of a generic pharmaceutical, provided that the transferor and the transferee hold more than 50% of the equity interests of the other, or otherwise 50% equity interests of both transferor and transferee are held by the same manufacturing company (“intra-group transfer”).

That is to say, for generic pharmaceuticals, transfer of marketing authorisation is only feasible among associated companies with a controlling share of more than 50%. Such arrangements are mainly aimed at restructuring Chinese pharmaceutical manufacturers and can therefore be more complicated when applied to non-Chinese companies.

If a non-Chinese company would like to adopt the assets deal through the transfer of pharmaceutical technology, legally speaking, the non-Chinese company will need to adopt either of the following solutions:

Assets deal with downstream transfer of technology

First establish a joint venture with a Chinese pharmaceutical manufacturer, in which the latter holds more than 50% equity, so that the Chinese pharmaceutical manufacturer may transfer its marketing authorisation into the joint venture. Afterwards, restructuring of the shareholding of the joint venture may be considered.

Hybrid approach combining both equity deal and assets deal with upstream transfer of technology

First establish a wholly foreign owned pharmaceutical enterprise to acquire more than 50% equity of a Chinese pharmaceutical manufacturer, so that the Chinese pharmaceutical manufacturer transfers its technology to the wholly foreign-owned pharmaceutical enterprise. The Chinese pharmaceutical manufacturer may be liquidated after the transfer, mainly to reduce the potential risks of liabilities. This solution seems more complicated and risky, when taking into account the equity deal involved and the foreign exchange controls which restrict a foreign-invested company from investing into a Chinese company by using
its registered capital.

(2) New opportunity

According to these Circulars, pharmaceutical manufacturing companies who do not wish to comply with the GMP update can transfer their marketing authorisations to companies who have already complied with the GMP at the given time, through the transfer of pharmaceutical technology. These Circulars thus provide another possibility for a non-Chinese company to obtain marketing authorisations of generic pharmaceutical manufacturers within a given time.

According to a communication from Shanghai FDA, they are waiting for the notice from SFDA on dealing with such applications. We were told that such acquisitions might be possible and even encouraged bearing in mind that the current implementation of GMP is not satisfactory in China.
However it is certain that such a policy is a temporary one.

3. Possibility of using this new policy to obtain marketing authorisations for generic pharmaceuticals

If such Circulars are implemented locally, it is possible for non-Chinese companies to acquire marketing authorisations of a Chinese generic pharmaceutical manufacturer who fails to comply with the GMP standards for whatever reason. The acquisition may be done by one of the following methods:

– If a non-Chinese company has already set up a foreign invested enterprise (“FIE”) in China, use such a FIE to acquire marketing authorisations;

– If a non-Chinese company does not have an established entity in China, first set up a FIE for that purpose.

Time is of the essence for the application when using this approach. A non-Chinese company must take into account the following timing aspects before any decision is made:

– Time to be spent on the negotiation of a memorandum of understanding with the Chinese generic pharmaceutical manufacturer;

– Time to be spent on legal and tax/financial or even commercial due diligence, which is especially important for an assets deal;

– Time to be spent on the negotiation of an assets transfer agreement with the Chinese generic pharmaceutical manufacturer;

– Time to be spent on the establishment of a FIE as well as other related registration formalities so as to enable such a FIE to be qualified as an acquirer under these Circulars (such as purchase of land/leasing, construction/leasing of a factory, environmental assessment formalities, preparation for GMP approval for the FIE.)

Given the above, it seems much easier for a non-Chinese company which already has a FIE to acquire a Chinese generic pharmaceutical manufacturer, although necessary formalities still need to be carried out, such as extending its pharmaceutical manufacturing licence and ensuring the GMP licence is extended to include generic products. While it is not impossible for a non-Chinese company which has not yet established any FIE in China to take such an approach, actions need to be taken as soon as possible in order to avoid missing the transfer deadlines.

In summary, the time left for foreign investors is limited. For sterile pharmaceuticals, time is even shorter. The Circulars make leeway for Chinese generic pharmaceutical manufacturers who are not capable of complying with GMP standards to exit the market. The Circulars also bring new opportunity for those foreign companies who wish to acquire a market share with their Chinese partner to enter the generic pharmaceutical market. Those companies concerned should keep a close eye on the implementation of these Circulars by local authorities and start negotiations with their Chinese partner as soon as possible.