China's announcement that it will set up a resolution mechanism for drug patent disputes and increase legal protection for patents could encourage overseas pharmaceutical companies to release more novel medicines in the country, experts said.

The announcement came as part of what U.S. and Chinese officials said is the first phase of a broader trade pact.

Tighter intellectual property protection is in line with other recent reforms in China, said Jay Lee, a Hong Kong-based equity analyst at investment research and management company Morningstar. He said the new measures will "move China's drug industry up the innovation curve and reduce dependence on generic drug sales."

The changes include patent holders receiving notifications when another party seeks approval for a treatment that can potentially infringe their patents. They will also have enough time to take action against copycat products before they reach the market.

The trade deal statement did not clarify what is considered "enough time."

In the U.S., a company has 45 days to file a lawsuit after notification of a patent infraction, according to the Food and Drug Administration's website.

In addition, China will also allow a product patent to be extended up to a maximum of five years but not longer than 14 years from the date the product received marketing approval, according to the trade deal statement.

"It's a new stage for China," said Zhang He, a senior partner with Beijing-based Tian Tai Law Firm, adding that previous multilateral agreements and collaborations involving China have typically focused on improving trade. He said the greater patent protection will encourage more companies to release innovative drugs in China.

A U.S. government statement noted "these high-standard provisions will help secure a level playing field for American companies and preserve American competitiveness."

Ongoing drive

The proposed measures can be viewed as part of a broader drive in recent years by China, which boasts the world's second largest pharmaceutical market, to make medicines more affordable for its population while encouraging innovation in treating diseases ranging from cancer to diabetes.

Those efforts include an expanded procurement policy aimed at ensuring public hospitals buy generic therapies in bulk from companies at very low prices; the inclusion of cutting-edge cancer treatments in the national drug reimbursement list; and accelerating the new drug approval process.

Overseas drugmakers launched 45 drugs in China in 2018, compared to just four in 2016, according to data compiled by McKinsey & Co.

It remains to be seen how the new patent rules are implemented, Will Cai, a Hong Kong-based partner with law firm Cooley LLP, said. Implementation will be complex as it involves different government departments and amendments to existing regulations, he added. "It will affect negotiations [between China and the U.S.] in the future," he said.

Cai said implementation of the new provisions can hopefully ease long-standing concerns from overseas companies, some of which previously balked at launching their own products in China or partnering with Chinese companies because of patent protection concerns.

Generic drug producers could resort to reverse engineering technologies to figure out the ingredients of a patented therapy and produce a cheaper version. In the past, an international pharmaceutical company operating in China could spend years in expensive litigation in an attempt to stop such companies from violating a patent, Zhang said.

Easing concerns

Drug developers are also likely to welcome the longer patent protection on new therapies.

Samantha Du, chairman and CEO of Shanghai-based Zai Lab, said in an interview with S&P Global Market Intelligence in May 2019 that the drug approval process was quite long and regulators should consider increasing the patent protection period to compensate for the long wait for approval.

A drug's patent, which expires in 20 years in China, starts from the date the patent application is filed, according to Zhang. Earlier, the application could take several years to win approval, leaving the drug very little time to enjoy patent protection.

In the U.S., the patent on a drug can be extended by up to a maximum of five years but not longer than 14 years after it receives marketing approval, according to the FDA's website.

"China is now clearly on board with protecting the intellectual property relating to branded drugs—by making sure drugmakers have a chance to defend their intellectual property from potential infringement, or extending patents for products that have unusually long review times, or taking action against counterfeit medicines," said Karen Andersen, Chicago-based biotechnology strategist of Morningstar.

"To me this just clarifies that China wants to have a similar system for defending intellectual property surrounding novel medicines as the U.S. already does," she said.

Along with the new announcements, an amendment to the Drug Administration Law in December 2019, is also likely to bolster the confidence of overseas companies seeking to introduce more innovative treatments in China, said Zhang. The amendment grants companies the right to decide how a drug will be manufactured in the country as well as who manufactures it, he said.