New Opportunities in China’s Healthcare and Pharmaceutical Industries

Tag：compliance and regulatory-investment compliance, healthcare and pharmaceuticals-pharmaceuticals and medical devices

This article is contributed by Ms. HUANG Jianwen, who was invited by The Legal 500 as the exclusive contributor of the Healthcare & Life Sciences: PRC Firms Focus On feature for China.

In recent years, China’s healthcare and pharmaceutical industry has continuously introduced various incentive policies to optimize the environment for foreign investment. Under the dual stimulation of the internal market and policies, China’s healthcare and pharmaceutical industry has achieved rapid development. In 2022, China ranked among the top in the world in terms of active pharmaceutical transactions, with the total transaction value reaching 34.6 billion USD, up by 10% year-on-year[1].

This article reviews the new regulations and policies in China’s healthcare and pharmaceutical industries in recent years from five aspects: (1) Reform of the regulatory system of drugs and medical devices in China; (2) Addition of new entries of the pharmaceutical industry to the Catalogue of Encouraged Foreign Investment Industries (鼓励外商投资产业目录); (3) New regulations on online drug sales; (4) Implementation of Internet hospital supervision policies; and (5) Allowance of Hong Kong and Macao MAHs (as defined below) to entrust cross-border production.

I. Reform of the regulatory system of drugs and medical devices in China

In August 2015, the State Council of the PRC issued the Opinions on the Reform of the Evaluation and Approval System for Drugs and Medical Devices (关于改革药品医疗器械审评审批制度的意见), which kicked off the regulatory system reform of drugs and medical devices. In October 2017, the General Office of the CPC Central Committee and the General Office of the State Council further issued the Opinions on Deepening the Reform of the Evaluation and Approval System and Encouraging the Innovation of Drugs and Medical Devices (关于深化审评审批制度改革鼓励药品医疗器械创新的意见), which accelerated China’s reform of the regulatory system of drugs and medical devices.

Echoing this development, the National Medical Products Administration of the PRC (“NMPA”) joined the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (“ICH”) in 2017 and was elected as a member of the ICH Management Committee in 2018, further aligning China’s drug registration and administration system with international standards.

Prior to the implementation of the Plan for the Pilot Plan on Drug Marketing Authorization Holder System (药品上市许可持有人制度试点方案) (“Pilot Plan”) issued in 2016, China’s drug marketing authorization and manufacture license were bound to each other. In other words, only enterprises with the capacity to manufacture drugs or medical devices may be granted marketing authorization for their drugs or medical devices. After the issuance of the Pilot Plan, ten provinces (municipalities), including Beijing, Shanghai, and Guangdong, implemented a new drug marketing authorization holder system on a trial basis, under which the marketing authorization and the manufacture license are independent of each other (“MAH System”). After the new Drug Administration Law of the People’s Republic of China (“Drug Administration Law”) came into force on December 1, 2019, China fully implemented the MAH System nationwide.

Under the MAH system, an enterprise or a drug research and development institution without manufacturing capacity can also be a drug marketing authorization holder (“MAH”). Except for drugs that are explicitly prohibited by law from manufacture entrustment[2], MAHs are allowed to entrust enterprises with the corresponding manufacturing qualifications to manufacture all other drugs. However, MAHs still need to be responsible for non-clinical research, clinical trial, manufacture and distribution, post-marketing research, and monitoring, reporting and handling of adverse drug events, etc[3].

Similar to the drug MAH System, the newly revised Regulations on the Supervision and Administration of Medical Devices (医疗器械监督管理条例), which came into force on June 1, 2021, also implemented, on a nationwide basis, a medical device registrant (filing applicant) system under which the marketing authorization and the manufacture license are independent of each other. In addition, the Drug Administration Law newly revised in 2019 has, for the first time, clarified the transferability of drug marketing authorizations on the legislative level[4], making marketing authorization of drugs one of the newest forms of transferrable assets. However, up to now, there is no explicit legal basis for the transfer of marketing authorizations for medical devices in China.

In recent years, in addition to the fundamental laws and regulations in the regulatory system of drugs and medical devices, NMPA has revised and improved a series of supporting regulations, including Provisions for Drug Registration (药品注册管理办法), Provisions for the Supervision and Administration of Drug Manufacturing (药品生产监督管理办法), Provisions for Medical Device Registration and Filing (医疗器械注册与备案管理办法), Provisions for Supervision and Administration of Medical Device Manufacturing (医疗器械生产监督管理办法), etc. Today, China’s regulatory system of drugs and medical devices has undergone profound changes and is further in line with international practices.

II. Addition of new entries of the pharmaceutical industry to the Catalogue of Encouraged Foreign Investment Industries

1. What preferential policies are foreign investors entitled to by investing in the industries set out in the Catalogue of Encouraged Foreign Investment Industries?

The industrial regulatory policies for foreign investment in China include not only the “negative list” for prohibited and restricted industries, but also the “encouraged catalogue”. As one of China’s major policies to promote foreign investment, foreign investors investing in the industries listed in the Catalogue of Encouraged Foreign Investment Industries can mainly benefit from the following three policies[5]:

• For equipment imported for self-use within the total investment amount, customs duties are exempted, except for certain products that are not exempted according to the national regulations in China[6];
• For encouraged industrial projects with intensive land use, land can be supplied with priority, and the price for land transfer can be discounted at no less than 70% of the national minimum price standard applicable to the transfer of industrial land in the corresponding location; and
• For foreign investment in the western regions and Hainan Province, enterprise income tax is reduced by 15%[7].

2. What are the changes in the pharmaceutical industries in the latest version of the Catalogue of Encouraged Foreign Investment Industries?

The latest version of the Catalogue of Encouraged Foreign Investment Industries (“Catalogue 2022”) was issued by the PRC National Development and Reform Commission and the PRC Ministry of Commerce on October 26, 2022 and came into force on January 1, 2023. The main structure of Catalogue 2022 remains unchanged compared with the 2020 version and consists of two parts: (1) the National Catalogue of Encouraged Industries for Foreign Investment (全国鼓励外商投资产业目录), which applies to foreign investment in the whole country; and (2) the Catalogue of Industries for Foreign Investment in Central and Western China (中西部地区外商投资优势产业目录), which applies to foreign investment in the central and western regions, north-east regions, and Hainan Province.

Compared with the 2020 version, the Catalogue 2022 has 239 newly-added entries, among which the newly-added entries related to the pharmaceutical industry are partially listed below:

a) Newly-added entries related to the pharmaceutical industry under the National Catalogue of Encouraged Industries for Foreign Investment:

• Research, development and production of cell therapy drugs (except for investment in areas where foreign investment is prohibited);
• Development and production of drugs for rare diseases and pediatrics;
• Development and production of pharmaceutical manufacturing-related consumables, including separation and purification media, solid phase synthesis media, chiral resolution media, and drug impurity control and detection consumables, etc.;
• Research, development and manufacturing of smart healthcare products for the elderly (e.g. supplies and ancillary products, medical devices and rehabilitation devices, smart and wearable devices for the elderly, etc.).

b) Newly-added entries related to the pharmaceutical industry in Hainan Province under the Catalogue of Industries for Foreign Investment in Central and Western China:

• Production and processing of new medical devices, equipment and medical materials, especially for items with independent intellectual property rights;
• Outsourcing services for medical devices (contract research organizations, contract development and manufacturing organizations);
• Medical consulting services;
• High-end professional medical treatment, rehabilitation, nursing and other medical and health services.

III. New Regulations on Online Drug Sales

After a lengthy period of exploration by the State Administration for Market Regulation, Provisions for Supervision and Administration of Online Drug Sales (药品网络销售监督管理办法) (“Provisions for Online Drug Sales”) came into force on December 1, 2022. As the departmental rule specifically regulates online drug sales, its implementation provides guidance on how to carry out online drug sales in compliance in China.

1. What entities can carry out online drug sales in China?

According to the Provisions for Online Drug Sales, entities entitled to engage in online drug sales include[8]:

a) Drug MAHs: Drug MAHs are only allowed to sell the drug for which they have obtained a drug marketing authorization. To sell drugs to individuals, an additional retail qualification needs to be obtained;

b) Drug distributors: Drug distributors shall carry out online drug sales in accordance with their approved business model (wholesale or retail) and within their approved business scope; and

c) Manufacturers of traditional Chinese medicine (“TCM”) decoction pieces: Manufacturers of TCM decoction pieces shall abide by the relevant obligations imposed on the drug MAH when selling their decoction pieces, including overseeing the whole manufacture and distribution process and establishing a tracing system for decoction pieces to ensure the safety, effectiveness, and traceability thereof[9].

2. Which kinds of drugs are prohibited from being sold online?

In China, not all drugs can be sold online. According to the Provisions for Online Drug Sales, vaccines, blood products, narcotics, psychotropic substances, toxic drugs for medical use, radioactive drugs, pharmaceutical precursor chemicals and other drugs under special management by the country are prohibited from being sold online. The specific catalogue of such drugs is formulated by the NMPA. On November 30, 2022, the NMPA issued the List of Drugs Prohibited from Selling Online (the First Edition) (药品网络销售禁止清单（第一版）), implementing a “negative list” for the administration of drugs sold online.

3. What special regulatory requirements are imposed on selling prescription drugs online?

The Provisions for Online Drug Sales expressly permit selling of prescription drugs online at the departmental rule level for the first time, and set out compliance requirements for selling of prescription drugs online, specifically:

• In terms of prescription management: Enterprises engaging in online drug sales and third-party platforms shall establish and implement the management systems for prescription examination and real-name purchase of prescription drugs, and engage legally qualified pharmacists to examine and dispense the prescriptions. Before the prescription examination is passed, no services related to the sales of prescription drugs shall be provided. Those selling prescription drugs to individuals through the Internet shall sign an agreement with medical institution or electronic prescription circulation platform and ensure that the sources of prescriptions are authentic and reliable, etc.
• In terms of information display: Enterprises engaging in online drug sales and third-party platforms shall highlight the risk warning information, such as “the prescription drugs must be purchased and used with prescription under the guidance of pharmacists”, on each drug display webpage, and shall display prescription drugs and non-prescription drugs separately. Information such as packages or labels of prescription drugs shall not be directly displayed in public on the main page and the home page of prescription drug sales, and information such as package inserts shall not be displayed before the prescription examination is passed.

IV. Implementation of Internet hospital supervision policies

The outbreak of COVID-19 has accelerated the development of “Internet Plus” medical services, an emerging business model combining information technology with traditional healthcare industries. Statistics from the PRC National Health Commission show that by the end of 2021, the number of China’s online medical users reached 298 million, a surge of 83.08 million from 2020, accounting for 28.9% of the total number of Internet users. With more patients and users becoming aware of online medical treatment, the market for Internet-based medical services will continue to expand steadily.

On July 17, 2018, the PRC National Health Commission, together with the National Administration of Traditional Chinese Medicine, formulated the Administrative Measures for Internet-Based Diagnosis (for Trial Implementation) (互联网诊疗管理办法（试行）), the Administrative Measures for Internet Hospitals (for Trial Implementation) (互联网医院管理办法（试行）) and the Good Practices for Telemedicine Services (for Trial Implementation) (远程医疗服务管理规范（试行）), establishing a basic legal framework for China’s Internet-based medical services sector. On February 8, 2022, the Detailed Regulatory Rules for Internet-Based Diagnosis (Trial) (互联网诊疗监管细则（试行）) (“Detailed Regulatory Rules”) was issued, further elaborating on the regulations on Internet-based medical services. The Detailed Regulatory Rules specify that the basic principle for the regulation of Internet-based diagnosis is to carry out online and offline regulation in an integrated manner with localized supervision as the main task, offline medical institutions as the basis and information technologies as the support. The Detailed Regulatory Rules also highlight the core position of offline medical institutions in the Internet-based diagnosis, and the regulatory requirement that the Internet-based diagnosis services should be of the same quality as those provided by offline medical institutions.

1. What are the operation models of Internet hospitals in China?

According to Administrative Measures for Internet Hospitals (for Trial Implementation), Internet hospitals currently have two main operation models: (1) an independent Internet hospital affiliated to an offline medical institution set up by a third-party institution (usually an Internet information technology company, a medical device company, etc.), and (2) an associated Internet hospital under an offline medical institution. The second model is divided into two sub-modes: (1) an associated Internet hospital independently set up by an offline medical institution, and (2) an associated Internet hospital jointly set up by an offline medical institution and a third-party institution.

2. Are there restrictions on foreign investment in Internet hospitals in China?

According to the Special Administrative Measures (Negative List) for Foreign Investment Access (Edition 2021) (外商投资准入特别管理措施（负面清单）（2021年版）) and the Interim Measures for the Administration of Sino-Foreign Equity and Cooperative Joint Venture Medical Institutions (中外合资、合作医疗机构管理暂行办法), only Sino-foreign joint venture medical institutions are allowed in China, and the equity or interests owned by the foreign investors must be capped at 70%. However, in practice, the above restrictions may be disapplied in certain parts of China and to certain kinds of investors. For example, (1) in a Sino-foreign joint venture medical institution established in Sichuan province, the foreign investor’s equity interest is capped at 90% (instead of 70%)[10]; (2) service providers from Hong Kong SAR, Macao SAR and Taiwan region may establish wholly-owned medical institutions in Chinese mainland[11]; and (3) foreign medical institutions may establish wholly foreign-owned medical institutions in the China (Shanghai) Pilot Free Trade Zone upon approval by relevant authorities[12].

V. Allowance of Hong Kong and Macao MAHs to entrust cross-border production

On June 27, 2022, the Department of Comprehensive Affairs of the NMPA issued the Notice of the Department of Comprehensive Affairs of the National Medical Products Administration on Further Strengthening Services Provided to Foreign Invested Enterprises (关于进一步加强外资企业服务工作的通知) (the “Notice”), which supports Hong Kong and Macao drug MAHs and medical device registrants (collectively, the “Hong Kong and Macao MAHs”) to manufacture their drugs and medical devices by qualified enterprises incorporated in the nine mainland cities of the Greater Bay Area (Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing in Guangdong Province).

On June 29, 2022, two days after the issuance of the Notice, the Department of Comprehensive Affairs of the NMPA issued the Implementation Plan for Supporting Hong Kong and Macao Drug Marketing Authorization Holders to Produce Drugs in the Nine Mainland Cities of the Greater Bay Area (支持港澳药品上市许可持有人在大湾区内地9市生产药品实施方案) and the Implementation Plan for Supporting Hong Kong and Macao Medical Device Registrants to Produce Medical Devices in the Nine Mainland Cities of the Greater Bay Area (支持港澳医疗器械注册人在大湾区内地9市生产医疗器械实施方案) (collectively the “Implementation Plans”). The Implementation Plans clarified the scope of application, entrustment procedures, application procedures, documentary requirements, etc., for Hong Kong and Macao MAHs to entrust the manufacture of drugs or medical devices in the nine mainland cities of the Greater Bay Area. The specific plans for entrusting the manufacture of drugs and medical devices by Hong Kong and Macao MAHs across the border have finally been implemented.

The Drug Administration Law newly revised in 2019 and the Regulations on the Supervision and Administration of Medical Devices newly revised in 2021 do not explicitly prohibit manufacture entrustment across the border. However, prior to the issuance of the Implementation Plans, pursuant to the Administrative Measures for Changes after Drug Marketing (for Trial Implementation) (药品上市后变更管理办法（试行）) and the Announcement of National Medical Products Administration on Matters Concerning the Manufacturing of Imported Medical Devices by Enterprises within the Territory of China (国家药监局关于进口医疗器械产品在中国境内企业生产有关事项的公告), if a drug MAH and medical device registrant outside Chinese mainland intend to manufacture drugs or medical devices that have been registered as imported drugs or imported medical devices in Chinese mainland, such drug or medical device shall first be registered as a domestic drug or medical device in Chinese mainland before it can be domestically produced.

The Implementation Plans removed such restrictions to a certain extent. Except for drugs and medical devices explicitly prohibited from being manufactured by entrustment under the Implementation Plans, Hong Kong or Macao MAHs which have obtained imported drug/medical device registration certificates for the Chinese patent medicines, chemical medicines and medical devices, may entrust enterprises with corresponding manufacturing qualifications and registered addresses and manufacturing sites located in the nine mainland cities of the Greater Bay Area to manufacture the registered Chinese patent medicines, chemical medicines and medical devices.

China attaches great importance to the development of the healthcare and pharmaceutical industries, encourages foreign investment in the healthcare and pharmaceutical industries, and continuously improves the investment environment in many aspects, such as innovating regulatory methods, speeding up review and approval, expanding market opening, and promoting the transformation of international rules. As opportunities and challenges are concurrent, China’s healthcare and pharmaceutical industries will be subject to more comprehensive, detailed and stricter supervision with Chinese characteristics. For the enterprise interested in investing in China, it is strongly advised to engage a PRC law firm with rich experience in the healthcare and pharmaceutical industry to ensure full compliance in the investment, operation, exist and other aspects in order to secure ideal investment returns.

*Any reference to “Hong Kong” or “Hong Kong SAR” and “Macao” or “Macao SAR” shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China” and “Macao Special Administrative Region of the People’s Republic of China”.

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