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(Reuters) – China has overhauled parts of its intellectual property laws to allow its drug makers to make cheap copies of medicines still under patent protection in an initiative likely to unnerve foreign pharmaceutical companies.

The Chinese move, outlined in documents posted on its patent law office website, comes within months of a similar move by India to effectively end the monopoly on an expensive cancer drug made by Bayer AG by issuing its first so-called “compulsory license”.

The action by China will ring alarm bells in Big Pharma, since the country is a vital growth market at a time when sales in Western countries are flagging.

The amended Chinese patent law allows Beijing to issue compulsory licenses to eligible companies to produce generic versions of patented drugs during state emergencies, or unusual circumstances, or in the interests of the public.

For “reasons of public health”, eligible drug makers can also ask to export these medicines to other countries, including members of the World Trade Organisation.

Compulsory licenses are available to nations to issue under WTO rules in certain cases where life-saving treatments are unaffordable.

“The revised version of Measures for the Compulsory Licensing for Patent Implementation came into effect from May 1, 2012,” China’s State Intellectual Property Office said in a faxed statement to Reuters.

The changes can be found on the website of China’s State Intellectual Property Office at link.reuters.com/tus68s

China is known to be looking at Gilead Sciences Inc’s tenofovir, which is recommended by the World Health Organisation as part of a first-line cocktail treatment for AIDS patients, two sources with direct knowledge of the matter said.

China’s generic drug makers were getting ready to produce tenofovir, they added.

At a drug access workshop hosted by the United Nations and health activists in Bangkok in early June, Chinese officials spoke of the changes to its patent law. Officials from Cambodia, India, Indonesia, Malaysia, Myanmar, the Philippines, Thailand and Vietnam also participated in the meeting.

“In May 2012, China created a change in their IPR (intellectual property rights) legislation to be able to issue compulsory licenses. China is considering further strengthening its legal framework, so as to make use of legal space to produce generic drugs,” said Bob Verbruggen, senior adviser for the UNAIDS Asia Pacific office, who was present at the workshop.

“China’s action plan at the workshop seemed to confirm that it intends to become a generic producer for the domestic and international market,” he told Reuters by telephone.

CHINA PREPARED LONG AND HARD FOR THIS

China’s move follows India’s granting of a compulsory license in March to local generic drugs firm Natco Pharma to manufacture Bayer’s cancer drug Nexavar, used for treating kidney and liver cancer.

However, China had signaled interest in the idea from at least 2008-2009, when its State Intellectual Property Office invited foreign experts to Beijing to show Chinese officials how to prepare the legal grounds for issuing compulsory licenses.

“They wanted to know the legal perspective … They wanted to know about Thailand’s IP Act that allowed us to make a CL (compulsory license) under the law for public interests, in an emergency,” said Vithaya Kulsomboon, associate professor at Thailand’s Chulalongkorn University, who was invited to Beijing at the time.

Kajal Bhardwaj, a legal expert from India who is working on health, HIV and human rights trade laws, said China’s move was well within the limits of international trade agreements.

“CLs have previously been issued in the region by Malaysia, Indonesia, Thailand and India. CLs have also been issued on multiple occasions by developed countries including the U.S. and EU member countries,” Bhardwaj said.

“It is very encouraging that China is seeking to ensure that this right … is reflected in its legal regime on intellectual property,” she added.

SABRE-RATTLING

China’s stable of generic drug makers has been producing the key ingredients – or active pharmaceutical ingredients (APIs) – in medicines for years, exporting them to foreign drug makers, which then sell the patented finished products back to China at prices which the average Chinese citizen often cannot afford.

In particular, the government is struggling to provide newer HIV drugs, such as Gilead’s tenofovir, known by its brand Viread and which had worldwide sales last year of $737.9 million.

China’s government, initially slow to acknowledge the problem of HIV/AIDS in the 1990s, now admits to having a ballooning number of HIV/AIDS cases.

Although Gilead moved to share its intellectual property rights on its medicines in a patent pool with generic drug makers from many countries last July in return for a small royalty, China was excluded, which meant it had to continue paying high prices for tenofovir.

Since the change in China’s patent law, Gilead has offered certain concessions, including giving China a substantial donation of tenofovir if it continues to buy the same amount, said Paul Cawthorne, coordinator for Medecins Sans Frontieres’ Access Campaign in Asia.

“This is all a negotiation game; this offer from Gilead came about once the news that the Chinese was considering issuing a CL came out. The end game is okay, you get a better deal or you use the CL, it’s a strategy that many countries use,” he said.

Gilead in Hong Kong declined to comment. No one was immediately available to comment at its head office in California.

All eyes are now trained on how China battles it out with big foreign drug exporters, especially from 2013 when the Geneva-based Global Fund to Fight AIDS, Tuberculosis and Malaria will no longer give grants to China to fight HIV.

(Reporting by Tan Ee Lyn in Hong Kong and Beijing newsroom; Additional reporting by Ben Hirschler in London; Editing by Anne Marie Roantree and David Cowell)