China on the Move: New Level of Opening up in Health Care Sector

China’s innovative drug market is projected to grow from RMB 709.7 (USD 99) billion in 2023 to RMB 753.4 (USD 105) billion in 2024, drawing mixed reactions from international pharmaceutical companies. On one hand, a number of multinational companies exercised lingering caution over additional investments in China. For example, in August, UCB divested part of its mature neurology and allergy products as well as a manufacturing site to private equity, CBC and Mubadala. Kyowa Kirin sold its China business to Hong Kong’s WinHealth Pharma Group Co. Limited. On the other hand, Bayer and Eli Lilly both made similar moves to put new money in startups through Bayer Co. Lab, and early drug research in Beijing and manufacturing in Suzhou, respectively.

Chinese policymakers are keen to attract foreign investment by easing regulations to foster innovation, marking a shift from previous regulatory restrictions on cross-border research and development. This year, “innovative drugs” were highlighted in the government’s work report for the first time. In 2023, over 220 innovative drug licensing and partnership deals were made, totaling RMB 266 (USD 37) billion.

Recently, the Chinese government has taken steps to boost the health care sector and encourage international cooperation. These measures are reshaping the industry and creating new opportunities for market players. Key regulatory developments include:

• Removing barriers for foreign investment in cell and gene therapy (CGT) and medical institutions in select areas.
• Releasing its first draft of the Medical Device Administration Law, aiming to encourage innovation in the medical industry.
• Developing a negative list for data export, further relaxing the requirements for cross-border data transfer in the pharmaceutical industry.
• Releasing draft guidelines to prevent commercial bribery in the pharmaceutical industry.

Lift Barriers for Foreign Investment in Cell and Gene Therapy and Hospitals

Foreign investment in human stem cells, gene diagnosis, and treatment technology development and application has long been prohibited in China primarily due to biosecurity and ethical concerns, particularly regarding the genetic and genomic data control,[1] while medical institutions are restricted to joint ventures. These limitations remain in the Special Administrative Measures for Foreign Investment Access (Negative List) (2024 Edition) (2024 Negative List) released by China’s Ministry of Commerce (MOFCOM) and National Development and Reform Commission (NDRC) Sept. 8, 2024, which took effect nationwide Nov. 1, 2024.

However, China is initiating changes in select areas and cities. A new circular released by MOFCOM on Sept. 8 allows foreign-invested enterprises (FIEs) to engage in CGT businesses within selected free-trade zones (FTZs) and permits wholly foreign-owned hospitals in certain cities.

Key takeaways from the Circular:

1. Allowing FIEs to engage in CGT in 4 FTZs: The Circular permits FIEs to develop and apply human stem cell and gene technologies in the Beijing, Shanghai, Guangdong, and Hainan FTZs. These activities aim for “product registration, marketing, and production.” Approved products can be used nationwide.

International CGT players might explore opportunities such as investing, forming new entities, engaging in mergers and acquisitions, or relocating businesses to the above four FTZs. These investment activities could encompass various CGT-related fields, including iPSCs, CAR-T, TCR-T, CAR-NK, TILs, mRNA, gene sequencing, and in vitro diagnostics (IVD/LDT). The Circular will also enable China-based biopharmaceutical companies to attract foreign investment directly by establishing or relocating the subsidiaries into four FTZs, thus eliminating the necessity to construct a variable interest entity (VIE) structure.

Nevertheless, opportunities come with compliance challenges. The Circular specifies that FIEs intending to participate in the CGT pilot program must adhere to applicable regulatory requirements relating to the management of human genetic resources (HGR), good clinical practice, good manufacturing practice, good supply practices, and ethical review, etc. Foreign investors should pay particular attention to HGR and data security regulations when conducting CGT business in China:

– HGR regulations require pre-approval from the Ministry of Science and Technology (MST) for collection, use, and export. Foreign entities can only use HGR through cooperation with Chinese entities. Multi-center trials for China marketing authorization need MST pre-recordation.

– Human genetic and genomic data are generally classified as sensitive personal data under China’s privacy regulations. The export of such data requires clearance from the Cybersecurity Administration of China (CAC). Additionally, when this data is aggregated to a certain volume or reaches a specific level of accuracy, it is further classified as “key data” and becomes subject to more stringent regulations.

However, certain matters remain pending further clarification and elaboration from China’s policymakers. For instance, it remains unclear in the Circular whether the clinical trial institutions that FIEs collaborate with must be situated within the four FTZs, and whether contract development and, manufacturing organizations (CDMO) engaged by the pharmaceutical companies are also required to be located within these FTZs or not. Market participants may anticipate subsequent policies or documents from Chinese governors to address these concerns.

2. Wholly Foreign-Owned Hospitals in Selected Cities: The Circular allows wholly foreign-owned hospitals in nine cities, including Beijing, Shanghai, and all of Hainan Island, excluding traditional Chinese medicine and public hospital mergers. Conditions and procedures will be announced separately.

Similar policy for establishing wholly foreign-owned hospitals was once introduced by the National Health and Family Planning Commission and MOFCOM in 2014. However, this policy was shelved when medical institutions were listed as a restricted area for foreign investment in the 2015 Foreign Investment Negative List. Compared with the 2014 policy, the Circular not only increases the number of piloting cities but also provides clearer guidelines on the permissible scope of foreign investment.

Wholly foreign owned hospitals may also face different compliance challenges, particularly in areas such as health data regulation and obtaining pre-approval for providing medical care services. Investors should closely monitor the development and implementation of relevant policies to stay informed about regulatory changes and ensure compliance, especially the subsequent implementing policies released by local governments in these areas.

China to Overhaul Medical Device Regulatory Framework: A New Era of Innovation and Compliance

On Aug. 28, 2024, China’s National Medical Products Administration (NMPA) released the draft Medical Device Administration Law (MDAL) for public comment, signaling significant changes to China’s medical device regulations. This draft law elevates the existing regulations to a statutory level, highlighting China’s focus on innovation and international collaboration.

The MDAL draft includes 11 chapters covering the full lifecycle of medical devices: R&D, marketing approval, manufacturing, operations, import/export, and vigilance/recall.

1. Innovation Support: The MDAL draft promotes the development of medical devices using advanced technologies and materials, prioritizing clinical value. It encourages collaboration between the NMPA, National Health Commission (NHC), and National Health and Security Administration (NHSA) to support reimbursement and procurement of innovative devices. The NHSA will facilitate price negotiations, and the NHC will guide health care institutions in prioritizing these devices.

2. Transferable Marketing Authorizations: The MDAL draft allows the assignment of marketing authorizations for medical devices for the first time. Marketing authorizations of medical devices, unlike drugs, cannot be transferred between different entities under the current regulatory framework under China’s current regulations. The MDAL draft explicitly states that marketing authorizations can be assigned and the NMPA will issue specific implementing measures (Article 58). This flexibility is poised to benefit R&D-focused companies by enabling them to transfer product rights and marketing authorizations, thereby fostering a more dynamic and competitive market environment.

3. Flexible Standards: Unlike regulators in the United States and European Union, the NMPA has been using compulsory product standards as a bar to entry for domestic and imported medical devices. Under Decree 739, medical devices must comply with mandatory national standards for medical devices or the mandatory industry standards in the absence of national standards. The MDAL draft proposes a shift from compulsory to recommended national standards in the absence of mandatory ones, aligning more closely with international practices, by stating that “medical devices must comply with mandatory national standards. In the absence of mandatory national standards, the adoption of recommended national standards is encouraged.” This change aims to reduce the regulatory burden on manufacturers, potentially accelerating the entry of innovative products into the market.

Nevertheless, the MDAL draft still emphasizes the importance of quality control. For high-risk implants and other devices, non-compliance with country’s compulsory standards can lead to increased penalties (Article 168). Manufacturing or selling non-compliant products will also incur punitive damages (Article 174).

4. Streamlined Clinical Trials: The draft allows for mutual recognition of ethics reviews in multi-center trials, simplifying the approval process and encouraging international trials. Foreign trial data meeting China’s standards can be used for registration.

5. Parallel Approval Process: Under Decree 739, an imported medical device must be approved in the country of origin before it can be approved in China, unless the product at issue is an innovative device. The MDAL draft proposes to remove this requirement for country-of-origin approval (Article 47). An imported medical device can undergo the regulatory review and approval process in China in parallel to the same in other countries and shorten the time to market in China.

6. Enhancing Accountability with Increased Liability for Local Deputies: Foreign marketing authorization holders (MAHs) are required to appoint a local legal entity in China, referred to as a “domestic agent” under Decree 739, to handle the registration and recordation of their medical devices. This local deputy had limited liability but effectively acted as the MAH for imported devices in China.

The MDAL draft introduces increased accountability by renaming the local deputy as the “domestic responsible person,” who must possess a medical device manufacturing or operation license (Article 47). The draft also mandates joint liability for both the local deputy and the foreign MAH, ensuring full compliance throughout the product's life cycle. This includes responsibilities like adverse event reporting, product recalls, post-approval studies, maintaining an effective quality management system, and cooperating with regulatory authorities during enforcement actions (Article 88). If the foreign MAH fails to comply with the MDAL, the local deputy will face the same administrative penalties (Article 167).

In summary, the MDAL draft represents a major shift in China’s medical device regulations, promoting innovation and collaboration. Stakeholders are encouraged to review and provide feedback to balance innovation with compliance effectively.

Beijing Eases Data Export Controls for Pharmaceuticals in FTZ

On Aug. 26, 2024, the local regulator of cyber and data security of China's capital city, Beijing Cybersecurity Administration, released its own negative list for data export, namely, China (Beijing) Pilot Free-Trade Zone Data Outbound Management List (Negative List) (2024 Edition) (Beijing Negative List).

Pursuant to the Provisions on Promoting and Regulating the Cross-border Flow of Data (the Provisions) released by the CAC in March 2024, the provincial FTZs in China are granted the authority to formulate their own outbound data negative list, where the data beyond the negative list will not be subject to CAC clearance when transferred abroad.

Compared to the lists from Tianjin and Shanghai FTZ, the Beijing Negative List offers significant advancements for pharmaceutical data exports:

1. Clarified Definition of Important Data: The definition of important data has historically been unclear in China’s data regulations, lacking identifiable thresholds. The Beijing Negative List clarifies this by specifying the types of data that are considered as important data in the pharmaceutical sector:

– 100k Threshold. Data from over 100,000 individuals, including diagnosis, treatment, health condition, and drug experiment data, is classified as important.

– Biometric data and medical resource data for specific fields, groups, and regions above a certain scale: according to Beijing Negative List, biometric data refers to data that includes physical, physiological, or behavioral aspects, while medical resource data includes the number of health care institutions, beds, and personnel. However, the Beijing Negative List does not specify the specific threshold referred to by a certain scale in such scenarios, nor does it provide examples for specific fields, groups, or regions.

– Export Control Data. Data under China’s Catalogue of Prohibited and Restricted Technologies for Export.

2. Raised Thresholds for CAC Clearance:

– Under the current regulations, (i) exporting personal data (excluding sensitive personal data) of no less than one million individuals, or sensitive personal data of no less than 10,000 individuals within one natural year will be subject to the mandatory security assessment by CAC, while (ii) exporting personal data of no less than 100,000 individuals or sensitive personal data less than 10,000 individuals (i.e., even sensitive personal data of one single person) will be subject to executing standard contractual clauses (China SCCs) and filing with CAC. However, patient data and data related to health care professionals (HCPs) is likely to be deemed sensitive data according to China’s privacy regulations, thus raising the compliance costs for health care companies.

– The Beijing Negative List increases thresholds for exporting:

• Patient data in clinical trials and R&D

• Patient data in pharmacovigilance, complaints, and inquiries

• Data of health care professionals and related personnel

• ID or bank information of health care professionals and related personnel

In summary, the Beijing Negative List eases personal data export restrictions, reducing compliance burdens for multinational pharmaceutical companies in the Beijing FTZ. Notably, Bayer has already filed under this list, becoming the first company to export data under the new policy.

China Issues Draft Compliance Guidelines for Health Care Companies on Commercial Bribery

On Oct. 11, 2024, China’s State Administration for Market Regulation (SAMR) released the draft Compliance Guidelines for Healthcare Companies to Prevent Commercial Bribery Risks (Guidelines). These Guidelines align with U.S. anti-corruption principles and address specific challenges in China’s health care industry. Upon finalization, they will be essential for health care manufacturers in China.

Key highlights of the Guidelines:

1. Nine High-Risk Areas for Enforcement: The Guidelines identify nine high-risk activities involving health care professionals (HCPs), and reveal SAMR’s likely areas of focus for future enforcement actions, including (1) fees-for-service for HCPs; (2) sponsorships, donations, and grants to health care organizations (HCOs); (3) hospitality and entertainment; (4) academic meetings and exchanges; (5) distributor and third-party discounts, rebates, and commissions; (6) provision of free samples; (7) clinical research; (8) outsourcing services to vendors; and (9) retail sales.

2. Compliance in Academic Visits: Academic visits, a key communication channel between pharmaceutical companies and HCPs, are high-risk for bribery. Only “medical representatives” and “medical device promoters” can engage in these activities, and companies must register and disclose these personnel. Sales tasks are prohibited during visits, and visiting personnel must not influence medical product use or offer improper benefits.

In practice, many companies and service providers use unregistered personnel for hospital visits, with some teams engaging in dual-role promotions. These practices will face stricter regulation in the future.

The Guidelines provides the dos and don’ts for academic visits:

– Dos: Medical representatives and medical device promoters can communicate with HCPs, provide academic materials, offer technical consultations, and conduct academic promotions.

– Don’ts: (1) pharmaceutical companies cannot assign sales tasks to their visiting personnel; (2) visiting personnel must not interfere with or influence the rational use of medical products by HCPs; (3) visiting personnel are prohibited from using visits as a pretext to collect or request prescription information; (4) visiting personnel must not offer HCPs any financial or other improper benefits to induce prescriptions, recommendations, use, or procurement of medical products.

3. Guidelines for Free Provision of Medical Equipment: The free provision of medical devices is tightly regulated, allowed only under fair competition and legitimate reasons, such as product improvement or clinical trials. Companies must clearly define ownership, review projects, and maintain documentation to ensure proper equipment use. Non-compliance includes using free equipment to secure high-priced agreements or influence tender outcomes.

4. Regulation for Academic Events: Since the anti-corruption campaign in the pharmaceutical sector began in the second half of last year, the academic conferences sponsored or organized by pharmaceutical companies have witnessed a significant decrease in number. Now, the Guidelines explicitly allow pharmaceutical companies to pay HCPs for lecturing or research services based on genuine, reasonable, and lawful business needs and also set out specific compliance requirements for hiring HCPs for consulting services:

– Purpose of lecturing or research: must be based on genuine, reasonable, and lawful business needs. Cannot be used to reward or induce HCPs to prescribe, recommend, promote, procure, or use the company’s medical products.

– Selection of key opinion leaders: shall be based on objective criteria such as professional knowledge, skills, and experience.

– Compliance with regulations: the events must adhere to the relevant regulations of the health care institution where the HCP is employed.

– Payment rate: pharmaceutical companies should set reasonable fee standards, considering factors like project scale, service duration, and professional level, and refer to relevant regulations or market fair prices. It is prohibited to provide improper benefits under the guise of consulting services.

– Frequency and total fees: companies are advised to reasonably limit the number of times a single HCP is hired and the total consulting fees paid within a certain period.

– Recordkeeping: companies should maintain detailed records of the HCP’s services, outcomes, and specific service details.

– Payment Method: it is recommended to use wire transfers and avoid payments in cash or cash equivalents.

5. Strictly Defining Compliance Scenarios for Free Provision of Medical Equipment: Health care companies often provide medical devices to health care institutions for various purposes, such as clinical trials or equipment placement with consumable purchases, which would raise compliance concerns.

The Guidelines strictly limit the scenarios where free provision of medical devices is allowed. Companies can only provide devices (including related consumables and accessories) for free under fair competition conditions and for legitimate reasons that promote the correct, safe, and effective use of the product or for pre-market clinical trials. Legitimate reasons include collecting feedback for product development and improvement, facilitating performance evaluations by health care institutions, enhancing HCP efficiency in using the product, and conducting patient education.

The Guidelines also require health care companies to clearly define the ownership of the free device in contract, carefully review the free provision projects, establish and implement effective tracking procedures, and retain relevant documentation to ensure the proper use of the provided equipment.

The Guidelines specify non-compliant scenarios for free provision of medical equipment, such as using free equipment to secure agreements for purchasing related consumables, accessories, drugs, or services at high prices, influencing tender results, or providing illegal benefits to health care institutions. Companies should also be aware that providing medical equipment at below-market prices to gain competitive advantage or business opportunities poses a commercial bribery risk, even though the Guidelines do not explicitly address this practice.

The Guidelines, once finalized, will significantly impact the industry. Pharmaceutical and medical device companies should monitor development of the Guidelines.

[1] Please refer to our July 2022 GT Advisory: China on the Move: China’s Proposed Implementing Regulation Over Human Genetic Resources.