Counterfeit Pharmaceuticals in China: an Update OneYear Later

Counterfeit Pharmaceuticals in China: an Update One Year Later

In December 2008, we published a long article detailing the state of counterfeit pharmaceuticals in China, as well as efforts by the Chinese government to crack down on this dangerous trade. Now, almost a year later, we take a look at the recent changes in the pharmaceutical anti-counterfeiting regime.

Introduction

On 15 January 2009, Kevin Xu was sentenced to prison for six-and-a-half years for the distribution of counterfeit and misbranded drugs. Mr. Xu's company, based in northern China, exported fake drugs to both the U.S. and U.K. markets, oftentimes using the Internet to sell abroad.

The case highlights both the persistence of the counterfeit pharmaceutical problem in China and its global reach. It also underscores another problem as Mr. Xu was not sentenced in China, but rather in a U.S. federal court. It was not until Mr. Xu set foot in Texas to meet with undercover agents that he was seized and tried for his heinous crimes. His company in China had the capacity to manufacture large quantities of fake drugs with labels largely indistinguishable from legitimate products from such giants as Pfizer and Eli Lily. And yet the enforcement environment in China was apparently unable to deter his illegal activities.

Meanwhile, back in China, incidents of injury and death owing to counterfeit drugs continue, with local companies increasingly targeted by pirates. In January 2009, a fake diabetes drug was deemed responsible for the death of two patients in the Xinjiang Uyghur Autonomous Region. The drugs had been labeled "Guangxi Pingnan Pharmaceutical" though according to investigators the company did not manufacture the drugs at issue. 

China's Recent Anti-counterfeiting Efforts

Despite the bad press, significant legislative and regulatory measures have been released in the past ten months, signaling the Chinese government's continuous commitment to tackling the fake drug problem. Listed below are the significant measures instituted in 2009.

Final SPC/SPP Interpretations regarding Criminal Fake Drug Cases Adopted

Our article last year highlighted the draft State Food and Drug Administration ("SFDA"), Supreme People's Court ("SPC") and Supreme People's Procuratorate ("SPP") Interpretations which clarified circumstances surrounding the application of China's criminal law to the production and sale of fake and substandard medicine. In January 2009, the SPC adopted the final version of the "Interpretations of the SPC and the SPP Concerning Several Issues Relating to the Specific Application of the Law in Criminal Cases Involving the Production or Sale or Fake or Substandard Drugs ("SPC Interpretations"), and it came into effect on 27 May 2009.

The final version contains a few notable changes from the draft Interpretations released in 2007. First, it reduces the number of circumstances in which the sale or production of fake or substandard goods will be "sufficiently harmful to pose a serious health threat", and therefore trigger criminal liability. The 2007 draft Interpretations included several general circumstances, such as "containing other chemical ingredients not allowed under national drug standards" or "lacks the effective ingredients indicated." Instead, the SPC Interpretations list five explicit circumstances, and one catch-all provision, all of which were present to some degree in the Draft. Those remaining provisions have largely been unchanged, but there are some small changes. For example, production or sale of substandard or fake drugs targeting certain demographics, such as pregnant women and infants, will trigger criminal liability. The SPC Interpretations add "older children" and "critically ill persons" to the list.

Another notable change is the expansion of consequences which will categorize a crime as having caused "exceptionally serious harm to health". The draft Interpretations consider serious disability or serious harm to three or more persons, or minor injury to ten or more persons as "exceptionally serious". The SPC Interpretations adopted in January are far more refined, detailing as "exceptionally serious" such situations as "medium disability in three or more persons" and "organ tissue damage leading to serious dysfunction in three or more persons."

In addition to the changes above, the SPC Interpretations limit the liability for medical institutions that use or sell fake or substandard goods. The draft Interpretations included criminal liability for "storage" of the drugs as well.

Finally, the SPC Interpretations expand the scope of accomplice liability for the production and sale of fake or substandard drugs by including the provision of publicity, such as advertising. Under the SPC Interpretations, companies or individuals who know or ought to know that the drugs they are advertising are fake and/or substandard shall be treated as an accomplice to the crime.

SFDA Notice Regarding Criminal Transfers

Right on the heels of the above SPC Interpretations, the SFDA released a Notice Regarding Proper Handling of the Transfer of Suspected Criminal Cases Involving Pharmaceutical Products ("SFDA Transfer Notice"). The SFDA Transfer Notice is intended to combat the widespread practice of administrative enforcement agencies refusing to transfer criminal cases, because doing so forfeits their ability to levy a fine.

According to the SFDA Transfer Notice, when the provisions of the SPC Interpretations adopted in January are present, the local FDA must transfer the case to public security officials for their handling. Failure to do so results in liability for the individual or individuals responsible. In addition, the SFDA Transfer Notice details the procedural aspects of transferring cases, indicating how evidence and other materials are to be transferred, as well as procedures for notifying higher-level FDAs where circumstances are particularly egregious.

The SFDA Notice is an important step, but whether it results in a significant increase in criminal transfers remains to be seen. Requiring transfer of cases to public security bodies is critical, but the SFDA Notice does not (and cannot) deal with the inherent structural problem: Administrative agencies at lower levels depend on fines to finance their operations. Until agencies, such as the local FDAs, are compensated for the cases they transfer, meaningful change remains to be seen. Indeed, nationwide statistics for 2008 showed a 60% decline from 2007 in the number of criminal cases transferred from Administration for Industry and Commerce (AIC). The SFDA Notice is both timely and appropriate, but may not be enough.

New GMP Standards

In September 2009, the SFDA released a draft revision to the country's  Good Manufacturing Practices (GMP) for Pharmaceuticals regulation. The 100-plus page draft lays out higher standards for pharmaceutical producers, detailing requirements for all elements of pharmaceutical production, from training to machinery to ingredients and documentation. The draft, which will remain open for comment until November 2009, addresses areas under-emphasized under the current regime. In particular, the regulations place greater emphasis on training and the management of human elements, rather than focusing solely on hardware. For example, the drafts require that every registered producer staff at least individual responsible for maintaining compliance. In addition, they increase the amount and scope of punishments for violations, acknowledging that enforcement under the current scheme remains insufficient.

Inter-agency Campaign against False Advertisements and Use of Postal System

Our earlier article recommended that SFDA work together with other agencies, such as the Ministry of Public Security ("MPS"), the State Postal Bureau, and the General Administration of Customs ("GAC"), to effectively curb the scope of counterfeit production as well as distribution.

In September 2009, the Ministry of Health ("MOH") announced the launch of a nationwide campaign to crack down on false or misleading advertisements, as well as the distribution of counterfeit and fake medicines through post and other courier services. The campaign is a joint project of 13 bureaus, including the MOH, the Ministry of Industry and Information Technology, the Ministry of Public Security, the Ministry of Supervision, the Ministry of Finance, the Ministry of Commerce, GAC, the State Administration for Industry and Commerce, the State Administration of Radio, Film and Television, the Legislative Affairs Office of the State Council, the China Banking Regulatory Commission, the State Postal Bureau and the SFDA. 

The campaign, which will conclude in June 2010, focuses on four major areas of concern:

A.   The campaign will crack down on the distribution of false advertising and illegal sales of pharmaceuticals on the Internet. The use of the Internet to advertise and sell counterfeits is a problem for all sectors, but the medium has been especially attractive to purveyors of fake drugs. From "all- natural" Viagra-replacements to cures for cancer and AIDS, misleading pharmaceutical advertisements not only lead to illegal sales and potential health problems, but are often propagated as fact in communities without adequate access to trained medical professionals.

B.   The campaign will root out use of the postal service and courier companies by companies or individuals involved in the production and distribution of fake drugs. It will target those entities which continue to provide postal and courier services to known counterfeiters, as well as those who "should have known" that their customers were up to no good.

C.   The campaign will focus on the content of drug advertisements in all mediums, pulling advertisements which contain misleading information, or employ such tactics as disguising advertisements as newspaper or magazine articles or advertisements which certify the efficacy of drugs in the name of certain consumers, victims or medical specialists.

D.   The campaign will increase supervision on the channels through which medical facilities (such as hospitals, clinics and pharmacies) purchase their drugs, focusing primarily on the use of the postal system to acquire medicines. This facet of the campaign will also examine closely how these institutions market and sell drugs, hoping to eliminate the use of medical experts to promote drug sales.

The campaign is precisely the sort of inter-agency cooperation that is necessary to tackle the widespread and serious nature of counterfeit pharmaceuticals. The focus on postal and courier services is a particularly important element, since the Internet has allowed counterfeiters to bypass large distribution agents (with access to customers) and simply market directly to customers or retailers. These purchases are often smaller and, by using the postal service or local courier, they can pass below the radar of Customs or even the police.

The efficacy of the campaign, however, remains to be seen. By announcing these measures, the government effectively informs savvy counterfeiters of their plans, including when increased scrutiny will come to an end. There is no doubt that the campaign will benefit Chinese consumers. But, the government, including SFDA, must continue its regulatory push to create permanent structural changes to deal with the spread of counterfeit drugs. Hopefully, the investigatory and enforcement experience gained during the 10-month campaign will inform future anti-counterfeiting legislation.

Conclusion

The foregoing regulatory measures are only a small slice of the SFDA's efforts in 2009. The agency has released countless Notices and Regulations regarding all aspects of pharmaceutical manufacturing, registration, and distribution. Yet, as indicated in our report last year, the counterfeit pharmaceutical problem in China is so pervasive, so complex, and so destructive, that effective countermeasures required both domestic, inter-agency cooperation, but also coordination with both international organizations and other nation states. The 13-member joint-ministry campaign is exactly the type of cooperation required to an effective enforcement against fake drug manufacturers and distributors. But, the coordination among these agencies must extend beyond the initial campaign. Lessons learned during the 10-month campaign should lay the groundwork for an effective enforcement infrastructure dedicated to long-term anti-counterfeiting. In the meantime, enforcement agencies of other nations should continue to cooperate with China in seeking to stem the flow of counterfeit and shoddy medicines abroad.