Original Innovation” (“the Circular”). The Circular underlines major policy changes since the year of 2016 which have set forth new rules to upgrade the entire healthcare business in consistence with a set of regulations already in effect.
Prior to this Circular, “the 13th Five Year Plan for Economic and Social Development of the People’s Republic of China (2016-2020)” has officially announced that the industry of biopharmaceuticals is a key focus of policy supports and a variety of drug products are explicitly identified in the Plan as “of strategic importance”, i.e. antibody immune-conjugated agents, new novel targeted molecular drugs, new structural therapeutic protein, new generation vaccine, polypoptide drugs and customized therapeutic drugs. This chapter of the Five Year Plan has four purposes: (i) to seize opportunities in the global pharmaceuticals market; (ii) to address critical issues due to demographic changes; (iii) to provide the most possible treatments for incurable critical and rare diseases; and (iv) to comprehensively upgrade the healthcare service system of China.
To this end, the Circular aims to improve the administrative efficiency of clinical trial approval and encourages R&D institutes to carry out clinical trials within their own organizations for the treatment of critical and rare diseases (contingent clinical trials) before obtaining the clinical trial permit as long as the SOP can be strictly followed. Such R&D institutes are obliged to report any irregularity or anomaly occurred during clinical trials to China Food and Drug Administration (CFDA) and to commence immediate remedy in such cases. Data collected during this kind of clinical trials will be accepted by CFDA for drug product-related assessment and approval. Data of clinical trials from foreign CROs and overseas pre-trial study will also be taken into account for the assessment and approval of drug products by CFDA.
To ensure the safety and stability of such contingent clinical trials, the Circular suggests that at every phase before filing for an approval of CFDA, every CRO shall establish its own ethics committee since the beginning of any drug-related research, pre-trial study and clinical trial in compliance with the Declaration of Helsinki. Notably, bioequivalence test (BE) is not required on certain conditions. The requirements and conditions for BE exemption are elaborated in CDFA Notice No.87【2016】, according to which a communication protocol is now available for pharmaceuticals companies to make enquiry prior to the official application of BE exemption.
The new regulations immediately benefited major market players with business strength and technology resources. On 12th Dec, 2017, Bayer announced to have been granted approval by CFDA for the marketing of its oral targeted drug “Regorafenib” (trade name “Stivarga”) in China. Stivarga is the first and only targeted drug for MCRC and GIST approved by CFDA over the past decade during which period the healthcare regulators of China had retained a conservative perception on novel targeted drugs, in particular those concerning humanized novel immuno-regulatory molecules and the cloning of human-cells, regardless of their clinical results and safe use in any market overseas. Notably, this time, Stivarga was granted approval by CFDA for marketing only 7 months after it was approved by the Food and Drug Administration of the United States (FDA) for the treatment of HCC. 
In the pharmaceuticals business, the capability in fundamental sciences, research and development is the core competitiveness that may give a company unparalleled advantages. However, in China, scientists, inventors, researchers in R&D institutes and academic in institutions of higher education can’t participate directly in the commercialization of any drug products attributed to their work. The current legislations (“Patent Law”, “Labor Contract Law” etc.,) are also not in their favor. There was once a solicitation for comments on the first draft of “Ordinance on Service Invention” in 2012 which has not been issued until now due to the complexity of interests and conflicts. In some universities plagued with corruption and plagiarism, the motivations of academic and researchers are completely demolished.
Pertaining to this reality, on 26th May, 2016, the General Office of the State Council issued a Notice (No.14【2016】) to initiate the implementation over a trial period of the Marketing Authorization Holder (MAH) in ten cities, to be concluded on 4th November, 2018. The Circular reaffirms and corresponds to this Notice that MAH will be further promoted to provide incentives for R&D institutes and inventors, equally, they will bear the joint liability of quality assurance with contract manufacture organizations (CMO) and be accountable for manufacture supervision. MAH has changed the former practice in China that R&D institutes and inventors were not entitled to the application for GMP or new drug approval (including DAN). They could only assign CMOs to manufacture pharmaceutical products through profit sharing which is substantially controlled by the CMOs. Now qualified R&D institutes can run their own business without barrier, eligible individuals can also acquire the credential of MAH. After the promulgation of this Notice, CFDA had received 560 MAH applications in 2016 among which 128 were approved.
Another highlight of the system reform is CFDA Notice (No. 100【2017】) on the initiation of Generic Equivalence Assessment (“GEA”). The Notice mandates that all chemical drugs and oral drugs listed in the “National Catalogue of Medicine 2012” which were approved before 2007 shall pass GEA by the end of 2018. The criteria and procedure are specified in CFDA Notice No.61【2016】and CFDA Notice No.99【2016】.
In particular, CFDA Notice No. 100【2017】emphasizes the preferential terms for Chinese domestic pharmaceuticals companies, if their drug products have already been approved for marketing in US, Japan or the European Union, such drug products shall be deemed as approved by CFDA GEA, even if they are not yet available on the domestic market. The most significant impact business wise is the priority given to the pharmaceuticals company whose generic drug product is the first of a kind to pass GEA in conformance with the original drug that in the subsequent 3 years (the duration of exclusivity) upon the issuance of this GEA approval, CFDA will not accept any GEA application of the same drug from other companies. 
In most countries, “generic drugs” takes up a large portion of the drug products market. In China, from 2010 to 2015, the market of generic drugs had achieved an annual growth rate of 13.26 %. Of all drug approval numbers issued by the CFDA, 95% were granted to generic drugs (in the US, generic drugs took up 89% of the RX market share in 2016). It is estimated that by the end of 2020, the market size of generic drugs in China will reach CNY 1.4 trillion. However, consequential to the new regulations above, 2016 and 2017 had experienced a drastic decline in generic drugs marketing applications and some pharmaceuticals companies have been confronted with great challenges in sustaining their business for their products fail to reach GEA standards.
Nevertheless, GEA offers significant benefits to domestic Chinese companies who possess good R&D and business strategy. On 26th Oct, 2016, North China Pharmaceuticals Corporation (“NCPC”) announced to have received approval from CDFA for the clinical trial of Capecitabine, for the treatment of stage IV gastric cancer. Capecitabine is a generic drug originally developed by Roche, trade name “Xeloda”. The total sales volume of Capecitabine is CNY 670 million, which takes up 4.3% of the total market size of drugs in oncology, the growth rate of this market will be approximately 23% in the forthcoming years.
The Circular also brings forward the deliberation to establish a mechanism akin to the US Hatch-Waxman Act 1984 (MMA and GAAP Act are yet to come), seeking a balance between intellectual property protection and a more vigorous competition of innovation. It classifies the priority order of drug products in sequence: original drugs, new drugs, imported new drugs, innovative drugs, first generic drugs and generic drugs.
In fact, the Circular is not the first to introduce legislative concepts of IP from the United States. In 2009, the Amendment to the “Patent Law of China” has stipulated an exemption to the rights conferred by patents, which is especially relevant to drugs，【clause (5) of Article 69】, known in the US legal system as “Bolar”. According to this exemption, despite the patent rights, performing research and tests for preparing regulatory approval, for instance by the CFDA, does not constitute infringement for a limited term before the end of the patent term. This exemption allows generic manufacturers to prepare generic drugs in advance of the patent expiration. 
On the one hand, CFDA may require patent information disclosure and patent disclaimer during new drug applications to facilitate R&D incentives and the awareness of IPR, on the other hand, CFDA encourages patent challenges to boost greater market competition, which, to an extent, may enable the social insurance system to provide better medical care within fiscal budget and affordable to more people.
The healthcare service of China has made very positive improvement over recent years. According to the "Report on the Social Insurance Development of China 2016" issued by the Ministry of Human Resources and Social Insurance, 743,920,000 people had been entitled to Urban Residents Basic Healthcare Insurance (URBMI) by 2016. Being the largest national healthcare programme in the world, the New Rural Cooperative Medical Scheme (NRCMS) had covered 2/3 of the rural population by the end of 2014.
On 31st Dec, 2016, Qilu Pharma announced to have received approval to market its first generic novel targeted drug Gefitinib from CDFA. Gefitinib (trade name “Iressa”) is originally developed by British company AstraZeneca for the treatment of breast cancer and NCSLC. After the announcement of this approval, the price of Gefinitib in China dropped from USD 833 to 333. The clinical trials of PD-1 investigative new drugs Nivo Lumab and Pembrolizumab are also ongoing in China.
Despite the progress, the inconvenient truth is that drugs in oncology have always been unaccessible and unaffordable in China. The medical expense worsens the misfortune for families whose loved ones are diagnosed of cancer. Gleevec for example, is a generic drug of which the patent term already expired, its price in China is USD 3,916, in the United States USD 2,266, in Hong Kong USD 3,000 and in India only USD 33. Therefore, it has been a common practice that people start to smuggle oncology drugs from India to China at the risk of criminal prosecution.
In 2015, the "Luyong Case" caused a sensation and great controversy in China. Luyong, a fairly successful entrepreneur who was diagnosed of leukemia, sustained his life by Gleevec (by Norvatis), after having spent USD 100,000 on the drug, he started to use his credit card to purchase generic Gleevec online from India, not only for himself, but thousands of patients diagnosed of the same cancer. He was released free of charge after 15 days of criminal custody. The case attracked the attention of some state leaders and relevant ministries were under great pressure to make immediate rectification. After two years, the Ministry of Health and Family Planning officially released the "Catalogue of Basic Medicine for National Health Insurance 2017", Afatinib "Gilotrif" by Boehringer Ingelheim, Erlotinib "Tarceva" by Roche, Gefitinib "Iressa" by AstraZeneca, Osimertinib "Tagrisso" by AstraZeneca AB and Icotinib Hydrochloride "Comana" by Zhejiang Bettapharma will all be paid by national insurance fund.
Theoretically, it is commonly acknowledged by investors that healthcare is the most promising market in China, while in fact, the short and mid-term success rate is very low from all aspects at all levels, from the comparatively simple manufacture and distribution of medical device and drug products, to the most difficult “vertical industrialization of laboratorial medical sciences”. In this industry, no result is good enough and no performance is satisfactory enough. Investors have to constantly optimize resources and strategy and managements have to self-innovate in a tense environment with always more work. The healthcare system reform of China will lead to a more competitive and brutal market giving opportunities only to a few.