China’s new patent regulations allowing the government to force drug companies to grant compulsory licenses for generic versions of their products if it is deemed to be in the “public interest” has the pharmaceutical industry worried about where China will draw the line, attorneys said.

The new regulations issued by China’s State Intellectual Property Office last month say the government can order compulsory licenses for generic drugs when there is a “national emergency or any extraordinary circumstances, or for public interest purposes.”

What constitutes the public interest is very much open to interpretation and appears to give the Chinese government broad leeway to order drug companies to allow generic versions of drugs that are still covered by patents, said Lisa Haile, co-chairwoman of the global life sciences sector at DLA Piper.

“The concern here is: Where do you draw the line?” she said. If the government decides that the public interest is simply in making expensive, life-saving drugs less costly, many products could be affected, she said.

Other countries, including Japan, have similar rules allowing for compulsory licenses, but they are rarely used, said James Klaiber of Pryor Cashman LLP. China raises special concerns given the size of the market for pharmaceuticals there and the country’s reputation on intellectual property protection, he said.

“The thing about China is that it really is something of a wild card in terms of IP rights,” he said.

China’s announcement came shortly after India’s patent office ordered Bayer AG in March to grant an Indian generics maker a compulsory license for the cancer drug Nexavar, ruling that it was too expensive for most people to afford.

Bayer is challenging that decision with India’s intellectual property appellate board, arguing that the decision damages the international patent system.

Haile said the India case shows some countries are willing to grant compulsory licenses based not on a national emergency or other extreme circumstance, but just because they believe important drugs should be cheaper.

“The fact that India did that worries me about what China might do,” she said.

Other countries, including Thailand, have issued compulsory licenses for generic versions of expensive HIV drugs in the past, and some countries like Japan have rules on the books that allow for compulsory licenses but have never actually issued any, attorneys said.

The fact that China’s own branded pharmaceutical industry is only in its early stages could influence the calculus about the country’s willingness to impose compulsory licenses, Klaiber said.

“The Chinese industry is just getting on its feet, but the pharmaceutical industry in Japan is well developed, so it’s not interested in having compulsory licenses granted,” he said. “China is another story.”

The Chinese government is reportedly negotiating with Gilead Sciences Inc. for lower prices on the HIV drug Viread to address its growing HIV problem. The threat of compulsory license can provide a “very powerful bargaining chip” in such negotiations, said Michael Rothwell of Adli Law Group PC.

But for China to shift from using compulsory licenses as a threat to actually ordering them, “would be belligerent; it really would,” he said, so it is difficult to imagine the Chinese government taking that step.

Many foreign drug companies have contracted with Chinese companies to make key ingredients of their drugs for years, Rothwell said, so if compulsory licenses were imposed, those companies quickly and easily could begin making generic versions.

“Branded companies are very heavily involved in the Chinese market, so if China were to do this, it may be viewed as a betrayal of sorts, given all the collaboration,” he said. “Branded companies are going to do everything in their power to prevent the issuance of these licenses.”

Given what is known about the new regulations, it is not clear what recourse, if any, a foreign drug company would have to challenge a compulsory license in China, Haile said.

“As far as I’m aware, the branded company has no say in this,” she said.

Haile added that beyond the business impact for the patentee, the prospect of a slew of new Chinese-made generic drugs raises other concerns, such as quality control problems, given the widespread recalls of tainted Chinese products in recent years, and the potential that the new generics will end up in the U.S. market.

The strength of the pharmaceutical industry means that any Chinese compulsory license that impacted an American drugmaker almost certainly would attract the attention of the U.S. government and spark international trade tensions, Klaiber said.

“I believe that when China unilaterally changes its laws to make U.S. patents weaker, that would be something the U.S. trade representative would get involved in,” he said.

Though the idea of China unilaterally revoking patent protection for blockbuster drugs is worrisome for the pharmaceutical industry, Klaiber said that the potential for dramatic fallout means that it is not a step China is likely to take lightly, if at all.

“I think this could be a big deal, but what I’ve been advising clients is let’s take a wait and see attitude before we get too upset about it,” he said.