Life Sciences 2018 Comparisons

Last Updated July 20, 2018

Contributed By Global Law Office

Law and Practice

Authors



Global Law Office is the first Chinese law firm. Its history dates back to 1979, when it became the first law firm in the PRC. Global Law Office is one of the largest Chinese law firms. It has more than 350 lawyers practising in Beijing, Shanghai and Shenzhen offices, most of whom have gained qualifications and hands-on experience in law schools and firms throughout Asia, North America, Europe and Australia. Global Pharmaceutical and Healthcare (P&H) practice group is one of the leading advisers in China as this group has not only premium knowledge but also thorough understanding of the practice of P&H industry. We have provided ‘one-stop’ legal services for every area of the P&H industry, including drug R&D, clinical research organisations (CRO), pharmaceuticals, life sciences, biotechnology, medical devices, supply producers and distributors, hospitals and other healthcare-providers, as well as various investment funds in the P&H sector. Global advises clients on challenging P&H legal issues such as regulatory compliance, structuring transactions and contractual arrangements, realisation of pipeline and geographic expansions, capital-raising and project-financing, mergers and acquisitions, reorganisations, IP protection, licensing and distribution arrangements, settlement of disputes involving adverse effects in clinical trials and medical treatment, etc.

The regulatory framework for life sciences can be divided into two parts: pharmaceuticals and medical devices. The main sources of law that govern pharmaceuticals are as follows: 

  • Drug Administration Law of China [Draft Revision in 2017 under Public Consultation Stage];
  • Drug Production Supervision and Management Measures; 
  • Good Manufacturing Practices; and
  • Good Supply Practice for Pharmaceutical Products.

Other legislation and regulations that also cover pharmaceuticals include:

  • Administrative Licensing Law of China; 
  • Advertisement Law of China; 
  • Regulations for the Implementation of the Drug Administration Law of China;
  • Measures for the Administration of Drug Registrations (2007) [Draft Revision in 2017 under Public Consultation Stage];
  • Management Measures of Drug Distribution Licence;
  • Measures for the Supervision and Administration of Circulation of Pharmaceuticals; 
  • Measures for the Administration of Internet Drug Information Services; 
  • Measures for the Reporting and Monitoring of Adverse Drug Reactions; 
  • Measures on the Administration of Recall of Drugs; 
  • Interim Measures for the Administration of Internet Advertisements;
  • Measures for Examination of Drug Advertisements;
  • Standards for Drug Advertisement Censorship and Publishing; and 
  • Administrative Measures for the Import of Drugs. 

The legislation and regulations that cover medical devices are as follows:

  • Measures for Supervision and Administration of Medical Device Production; 
  • Good Manufacturing Practices for Medical Devices;
  • Regulations on the Supervision and Administration of Medical Devices;
  • Measures for the Supervision and Administration of Medical Devices;
  • Methods of Quality Supervision and Administration of Medical Devices;
  • Measures for the Examination of Medical Device Advertisements;
  • Standards for the Examination and Release of Medical Device Advertisements;
  • Clinical Trial Quality Management Standard for Medical Devices;
  • Administrative Measures for the Registration of Medical Devices;
  • Measures for Unannounced Inspections of Pharmaceutical and Medical Devices;
  • Measures for the Administration of Medical Device Recalls; and
  • Classification Catalogue of Medical Devices.

The foremost regulatory body for pharmaceuticals is the China Food and Drug Administration (CFDA), which regulates areas such as product quality and safety issues. Furthermore, the National Development and Reform Commission (NDRC) deals with antitrust issues such as price-related monopolistic conduct; the State Administration of Industry and Commerce (SAIC) controls false or improper pharmaceutical advertising; the Public Security Bureau (PSB) regulates any criminal investigation into pharmaceuticals, such as commercial bribery; the Ministry of Health (MOH) is involved in the regulation of public health, public hospitals and rural health insurance, and controls clinical trials in hospitals; the Ministry of Finance (MOF) covers routine budget and national programmes; the Ministry of Human Resources and Social Security (MOHRSS) regulates basic medical insurance for urban employees and residents; and the Ministry of Civil Affairs (MoCA) regulates medical financial assistance for the poor. 

The decisions of the CFDA and other administrative bodies can be challenged through administrative litigation procedures, in accordance with the Administrative Procedure Law (hereinafter referred to as APL), Article 2 of which makes a general provision that “A Citizen, a legal person or other organisations have the right to litigate a lawsuit to the people’s courts in accordance with this Law once they consider that a concrete administrative action by administrative organs or personnel infringes their lawful rights and interests.”

Specific legislation regarding pharmaceuticals also provides mechanisms for challenging  the CFDA's decisions. For example, the Measures for the Administration of Drug Registrations enacted by the CFDA provide a “Second Review” procedure for drug registration applicants who receive a decision of disapproval, and the CFDA will then make a second review decision after reconsideration based on the original application materials.

In China, pharmaceuticals are defined by the Drug Administration Law China as “articles which are used in the prevention, treatment and diagnosis of human diseases and intended for the regulation of the physiological functions of human beings, for which indications, usage and dosage are established.

Medical devices are defined as any instrument, apparatus, appliance, material, in vitro diagnostic reagents and calibration substances and other similar substances and related articles, including the necessary computer software.

Nutritional products are officially termed “Health Foods” in China and are defined in the National Food Safety Standard Health Foods (GB 16740-2014) as food products that claim to have specific health functions, or to supplement the intake of vitamins or minerals. Health food is suitable for consumption by specific groups of people and regulates human body functions but is not used for the purpose of treating disease.

The borderline between drugs and health foods in China is that drugs are used for treating human diseases, whereas health foods are not. 

The borderline between drugs and medical devices in China is that the effect of medical devices is primarily obtained physically, not pharmacologically, immunologically or metabolically. 

Besides the direct application of the definitions provided in the relevant legislation, an applicant may file an appeal for administrative reconsideration or an administrative lawsuit at people’s court if the classification by the competent authority in the product registration/authorisation is not in their favour.

Functional foods or nutraceuticals refer to Health Foods in China. 

The National Food Safety Standard - Health Foods (GB 16740-2014) defines the scope, definition, technical specification and labelling requirements for health foods. In general, all ingredients, including both active and functional ingredients, as well as excipients, must comply with this food safety standard.

Health foods are administrated by the CFDA, which uses a registration system to verify their safety, efficacy and quality. The Administrative Measures on the Registration and Record Filing of Health Foods has been in force since 1 July 2016 for the purpose of comprehensively regulating the registration, production, operation and supervision of health food businesses. 

Medicated food is officially termed “Foods for Special Medical Purpose (FSMP)” and is defined in the Administrative Measures of FSMP Registration as foods that are made from a special processing formula and are used to meet the special dietary need for people who have limited feeding, digestion absorption disorders, metabolic disorders or specific disease condition. 

Before the Administrative Measures of FSMP Registration was introduced on 1 July 2016, FSMP was listed as a drug in China. Currently, FSMP must be used either unaided, or with other food, under the supervision of physicians or clinical nutritionists. FSMP is considered a food and not as a drug and, as such, is prohibited from being a replacement for drugs, so cannot claim to prevent or treat disease.

In China, drugs are classified as either prescription drugs, which can only be obtained by means of a physician's prescription, or as over-the-counter drugs (OTC), which can be obtained without a prescription – for example, buying paracetamol in a pharmacy. OTC drugs are further divided into Class A and Class B OTC drugs, according to their risk level. 

Medical Devices (including in vitro diagnostic reagents – "IVD") are divided into Class I, Class II and Class III, based on the identified risks associated with the devices. There are higher controlled requirements if the product is classified at a higher level, such as class II or class III.

The Classification Catalogue of Medical Devices, which was updated in 2017 and comes into effect on 1 August 2018, can be used by applicants to decide in which class a device belongs, in addition to using the CFDA's device classification notices, and Classification Rules for Medical Devices issued in 2015.  

The New Catalogue does not include classification for IVDs, so the specialised IVD sub-catalogue issued by CFDA in 2013 and relevant distributed CFDA notices should be considered when determining the classification for any IVD. Lastly, the New Catalogue does not cover any combination device products.

Clinical trials are regulated by the CFDA’s Drug Registration Rules and the Good Clinical Practice (GCP), which is the standard for the whole process of clinical trials, including project design, implementation, monitoring, inspection, records, summary and analysis report.

The GCP defines the parties’ responsibilities, and states that the Clinical Sponsor will ensure the authenticity, integrity and standardisation of the clinical trial data, supervise the implementation of the clinical trial, and bear legal liability for the reliability of the application materials and the test data. The Clinical Investigator ensures that testing behaviours conform to the GCP regulations and that the test data is true, complete, standardised and traceable, as well as assuming direct legal responsibility for the authenticity, integrity and standardisation of the clinical trial data. The Clinical Monitor serves as the main link between the Sponsor and the Investigator, and follows the standard operating procedures, supervises clinical trials, and ensures the implementation of the clinical trial plan. 

An Independent Ethics committee (IEC) must also provide approval that the Clinical Subject’s rights and interests are fully protected and file the approval with the CFDA. Furthermore, Subjects should join the trial voluntarily, and be able to withdraw from the test at any time, at any stage of the trial, without discrimination or retaliation. 

The process for obtaining authorisation to perform a clinical trial is as follows: 

  • review of the application by the CFDA's Administrative Services Centre (for imported pharmaceuticals) or the provincial FDA where the manufacturer is located (for locally produced pharmaceuticals);
  • the testing of samples by a relevant drug control institute to confirm they are in line with the quality standards; a technical review by the Centre for Drug Evaluation, which includes evaluation of the test report and clinical data; and
  • an administrative review and issue of the clinical trial authorisation by the CFDA.

The results of clinical trials are made publicly available on the Drug Clinical Trial Registration and Information Platform (www.chinadrugtrials.org.cn) under the CFDA. The details published include the drug name, indication, information about the sponsor, information about the study information, information about the investigator, the status of the study and whether the test was a pass, or not a pass.

There are no specific restrictions for the use of online tools to support clinical trials (for example, for recruiting or monitoring purposes), other than general personal information protection and other legal requirements.

Data resulting from clinical trials will be considered as personal data, or the sub-category of sensitive personal data.

If the resulting data contains personal data then it will generally not be transferrable to a third party or an affiliate, other than in certain exceptional cases – eg, if the test subjects have provided informed consent for the data to be transferred to an affiliate for research purposes. 

The CFDA’s Guidelines for Clinical Trial Data Management sets out the requirement for the protection of clinical trial subjects' privacy. It provides that a database shall employ technical measures to exclude the disclosure of private information, such as name, birthday and address, insofar as doing so does not affect the data completion or violate GCP principles. 

The creation of a database containing personal or sensitive data will also be subject to privacy protection rules and cybersecurity requirements, as well as special restrictions on cross-border transactions. For example, through an approval mechanism, the Interim Measures for the Administration of Human Genetic Resources strictly control any export of important human genetic resources – such as human organs, tissues, cells, blood specimens, preparations of any types or recombinant DNA constructs – outside the territory of China or the provision of such human genetic resources to foreign institutions or individuals.

If a product contains an Active Pharmaceutical Ingredient (API), it will be regulated as a pharmaceutical; if it does not, then it can be classified as a medical device. 

There are classification rules for pharmaceuticals, and an assessment will be made by the Centre of Drug Evaluation (CDE). An applicant will self-evaluate if they submit a New Drug Approval (NDA). 

The process is the same for medical devices, except an assessment is made by the Centre for Medical Device Evaluation (CMDE).

There is a drug-registration system currently in effect in China. The different types of drug registration applications in China are as follows:

  • “new drug application" (NDA) for a drug that has never been marketed within the territory of China; an NDA also applies to a drug that has already been marketed but that has changes in the dosage form, route of administration or indications;
  • “generic drug application” for the production of a drug with established national standards, which has been marketed upon the approval of the CFDA, and which will get a Pharmaceutical Product Licence; and
  • “Imported drug application” (including foreign new drugs) for the marketing in China of a drug produced overseas.

All biological products shall be registered according to the New Drug Application procedure. 

Class-1 medical devices are managed by record-filing, while Class-2 and Class-3 medical devices are managed by registration and the issuance of a Medical Device Registration Certificate.

China does not have a market-authorisation system in place like many Western countries, but there has been a pharmaceutical Market Authorisation Holder (MAH) pilot system in place in ten cities (Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong and Sichuan) since 2016. The programme is due to finish in 2018, after which it may be adopted nationally.

A pilot of the MAH system for medical devices was launched in the Shanghai Free Trade Zone (FTZ) in 2017, but it remains uncertain whether it will be launched nationally in the near future.

The drug approval number, Import Drug Licence or Pharmaceutical Product Licence and the Medical Device Registration Certificate issued by the CFDA are valid for a period of five years, and can be renewed by an application for re-registration, which will then extend the validity for another five years if granted. 

It is possible for the approval documents to be revoked if authorities find that there is a safety issue, non-compliance or a false labelling/production issue. There is no specific provision requiring the approval to be revoked for failure to place the product on the market within a certain time. 

The outline of the procedure for obtaining a drug registration licence is as follows:

  • the Applicant submits a registration application and other files; the provincial CFDA reviews and checks the application, and sends it to the CDE for technical review;
  • once the review is passed, the CDE informs the State Drug Certification Centre to conduct an on-site examination of the manufacturer and a sampling check; and
  • the CFDA then issues certificates accordingly, as well as the approval number for those well-equipped with GMP and relevant manufacturing conditions.

Class I medical devices do not need to be registered with the CFDA; instead, a notification is filed with the relevant local level CFDA. 

For those Class II and Class III devices that have no clinical trial requirement, the steps for obtaining a Medical Device Registration Certificate are as follows:

  • Chinese specification drafting (dossier preparation and specification drafting);
  • sample testing;
  • filing with the CFDA (CFDA preliminary review and acceptance notice);
  • CMDE review; the CMDE will issue a supplementary notice;
  • supplementary dossier preparation;
  • further CMDE review; and
  • CFDA final review and granting of the registration approval.

However, certain high-risk devices (eg, some Class III devices) may require clinical trials. 

There is no mandatory requirement for clinical trials to be conducted on the paediatric population, but the CFDA encourages this practice through priority approval procedures that ensure drugs or medical devices that the CFDA considers important (including those targeted at the paediatric population) are reviewed more expeditiously than general applications. 

The procedure for the variation of a marketing authorisation that has previously been granted is called “supplemental applications” - after the application for a new drug product, generic drug product or imported drug product has been approved, the applicant files a registration application to amend, change or cancel the matters or contents that have been approved. The CFDA will issue the Approval for Supplementary Drug Application and a drug approval document number if the supplemental application is approved. 

Transfer of the market authorisation is only possible under the MAH Pilot System, which enables either the Holders or Applicants to change Applicants, Holders or Entrusted Manufacturers, by way of submitting supplementary applications whilst the review/evaluation period of drug registration is underway, or after the drug marketing applications are approved. Local CFDAs will review the application first, they will then send to the CFDA for the last review and approval. 

There are certain circumstances where the CFDA will provide special approval to supply pharmaceuticals and medical devices that are not subject to marketing authorisation to patients; an example is drugs for clinical trials. 

The CFDA also published draft legislation for comment – “Expanded Access to Clinical Trial Drugs for Compassionate Use” – on 20 December 2017, proposing to give patients in desperate need expanded access to unapproved drugs that have gained preliminary safety and efficacy data in clinical trials. Patients would be evaluated by doctors, who will assess whether the benefits outweigh the risks in each case. The pharmaceutical companies, instead of the patient, will apply to the CFDA for the compassionate use of the drug.

Pharmacovigilence is defined as the pharmacological science relating to the detection, assessment, understanding and prevention of adverse effects, particularly long-term and short-term side effects of medicines.

Technovigilance is defined as the pharmacological science relating to the detection, assessment, understanding and prevention of adverse incidents, particularly long-term and short-term side effects of medical devices.

Under the MAH Pilot System, the Market Authorisation Holder is responsible for all ongoing obligations for the entire life cycle, including production, distribution, promotion, etc. 

Post-marketing in China mainly includes Phase IV Clinical Trial, which refers to the post-marketing study of a new drug. The purposes are to assess therapeutic efficacy and adverse reactions when a drug is widely used, to evaluate overall benefit-risk relationships of the drug when used among the general population or specific groups, and to adjust the administration dosage, etc. Phase IV Clinical Trial is part of the obligations imposed for a New Drug Application. 

Information about pending applications for drug registration can be accessed by third parties from the CDE’s website (www.cde.org.cn) and the CFDA’s website (http://www.sda.gov.cn). 

If an application has been granted, third parties can access the information about the approved product on the CDDA’s database. Such information includes the licence number, the product unique identification code, the name and trade name, etc. 

Within the context of Chinese law, drug/medical device approval information is government information. The Regulations of the People's Republic of China on the Disclosure of Government Information forbid government bodies from publicising any government information involving a State secret, trade secret or personal privacy without the consent of the right-owner, unless such disclosure is consistent with public interests.

Therefore, access to confidential or private information is generally forbidden unless the third party can persuade the CFDA that the disclosure is for the purpose of public interest.

Online platforms and medical apps are regulated by the Medical Device Software Registration Technical Review Guidelines, the Mobile Medical Device Registration Technical Review Guidelines and the Medical Device Cybersecurity Registration Technical Review Guidelines. 

"Mobile Medical Device" is defined as equipment or software that combines a medical use with a non-invasive mobile computing terminal such as computers, smartphones and smart watches. Mobile medical devices should contain medical device software or are themselves standalone software.

The Drug Administration Law of China provides for administrative penalties for producing or selling counterfeited drugs: illegal gains shall be confiscated, fines shall be imposed, the approval documents will be withdrawn and an order may be given to suspend production or business operation for rectification. In more serious circumstances, the drug manufacturing licence or the drug distribution licence may be revoked, or the CFDA would transfer the case to the public security bureaus if said deficiencies constitute crimes. 

The Criminal Law of China states that it is an offence to manufacture or sell fake or inferior drugs that are harmful enough to seriously endanger human health, with a penalty of imprisonment.

The Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPS Agreement) sets out the provisional measures and special requirements related to border measures and criminal procedures against counterfeited products. The obligations outlined by the TRIPS Agreement are followed by China as a member of the WTO.

China Customs has introduced regulations to enable the recordal and enforcement of IP rights. Even though it is not mandatory, the recordal of IP rights with Chinese Customs is advised in order to obtain its assistance.

Customs recordal is available exclusively online and covers:

  • trade marks registered in China;
  • patents (including designs, inventions and utility models) issued by SIPO; and
  • any copyrightable subject-matter, provided that the work is deemed protected in China.

After being recorded, a rights-holder can apply to Customs to seize identified potentially infringing goods, or Customs may seize potentially infringing goods of its own volition.

Should customs officials suspect infringing goods, they will detain these and order the rights holder to confirm whether the goods are counterfeit. Verification must be provided within three working days. If the rights-holder confirms that the shipment is authorised, Customs will release the goods. However, if the rights-holder confirms that the shipment is counterfeit, Customs will seize the goods, subject to the rights-holder’s payment of a bond.

The prices of pharmaceuticals were previously directly controlled by regulations that set the maximum retail price for all drugs, except narcotics and Class 1 psychoactives. However, in 2015, the National Development and Reform Commission (NDRC) issued a drug price reform policy allowing the centralised drug procurement system, the basic medical insurance system and market forces to determine the drug prices. Also, the relevant authorities will closely monitor the margins of distributing levels for antitrust purposes. 

Medical devices are not subject to any pricing regulations, so prices for medical devices are set by the device manufacturers based upon manufacturing costs and market demand. 

Pharmaceutical sales are controlled by the bidding procedure that is organised for the centralised procurement of public hospitals in China. Sales to private hospitals are not controlled. 

The NDRC has started a pilot scheme of price negotiation with several MPCs on some expensive drugs for lung cancer, chronic hepatitis B, etc. The negotiation allows the drugs to be included in the National Drug Reimbursement List (NRDL) in exchange for a reduction in the drug price. However, the price negotiation is only at a trial stage and has not covered initial price negotiation for newly launched drugs or medical devices. 

Whilst there is no legal requirement to use prices in other countries as a benchmark as is the case in the US, there could well be reference to prices in other countries in practice. 

If pharmaceuticals are listed on the NRDL or the Provincial Reimbursement Lists (PRDL), they can be reimbursed from the Basic Medical Insurance (BMI) funds. 

The drugs on the NRDL are separated into Class A and Class B pharmaceuticals, with Class A drugs primarily composed of older, generic drugs that are wholly reimbursable. Class B drugs mainly consist of premium and innovative drugs, and as such are only partially reimbursable (10%-90%).

The NRDL is set by central government agencies, including the NDRC, CFDA, MOHRSS and Ministry of Finance. In deciding coverage and inclusion, the expert advisory board made up of government and outside experts takes into account these criteria, in the following order of importance: 

      1. clinical need and utilisation;
      2. safety and efficacy;
      3. reasonable pricing, compared to other products in the same therapeutic area;
      4. average total cost;
      5. number of years on the market; and
      6. cost-effectiveness (health economics).

In 2017, the MOHRSS updated the NRDL with a further 36 new therapies; the prices of these drugs were cut by an average of 44% in exchange for listing the new drugs on the NRDL.

If pharmaceuticals are not listed on the NRDL, it is still possible to secure PRDL listing by negotiating with the provinces on an individual basis, as provincial payers are more willing to consider the value proposition of products supported with strong health economics. 

Physicians prescribing pharmaceuticals are regulated by having to choose any prescribed drugs from the NHRL list, which stipulates which products can be paid for by public insurance; outside of this list, payment will have to come from a patient’s private funds.

Furthermore, there is a limitation on the quantity that physicians can prescribe (eg, they can only initially give a prescription for a short period of time), so that they cannot oversubscribe. Also, since 2013 the MOHRSS has been working on having an IT platform installed in all computers in public hospitals to monitor which drugs are being prescribed, as well as their quantity. 

If the funding for the drugs is coming from commercial insurance or a patient’s private fund, there are not many restrictions on what drugs can be prescribed by physicians. Restrictions apply to the purchase of prescription drugs from a pharmacy, in that the pharmacies need to follow the doctor’s prescriptions, but the purchase of OTCs is not regulated as strictly. 

The promotion and advertising of both prescription products and OTC products are regulated by the Advertising Law, the Drug Administration Law, the Rules for the Examination of Pharmaceutical Advertisements, and the Examination and Release Standards of Pharmaceutical Advertisements.

The promotion and advertisement of medical devices are regulated by the Advertising Law, the Examination and Release Standards of Device Advertisements, the Measures for the Administration of Device Advertisements, the Rules for the Examination of Device Advertisements, and the Regulations on the Supervision and Administration of Medical Devices.

All advertising of both pharmaceuticals and medical devices requires prior approval from the provincial CFDA, which is then filed with the local AIC. Advertisements that only advertise the product name of OTC drugs or medical products are the exception in that they do not require approval, but still need to be filed with the local AIC. 

Promotion activities regarding drugs and medical devices do not currently require authorisation. However, for drug promotions, the CFDA’s recent draft regulation on the Registration and Record-filing of Medical Representatives provides for a registration mechanism that requires medical representatives to be registered with the CFDA before engaging in promotion activities with healthcare-providers (HCPs). Such promotion activities can only include making academic promotions, providing technical consultation, assisting medical staff in using drugs properly, collecting and giving feedback on the use of drugs in clinical treatment and the adverse effects of drugs, etc. 

AdvaMed is the self-regulatory body for medical devices, and the R&D-based Pharmaceutical Association in China (RDPAC) is the self-regulatory body for pharmaceuticals. The AdvaMed Code of Ethics on Interactions with Health Care Professionals in China explains and distinguishes proper activity between healthcare professionals and representatives of AdvaMed member companies in the medical devices sector in China.

RDPAC also regulates the conduct of pharmaceutical promotion and marketing based on the Code of Practice on the Promotion of Pharmaceutical Products. Any member of RDPAC can lodge a complaint to the competitor’s compliance department; if this fails to yield an acceptable result, the competitors can file a complaint to the RDPAC office, advising of any potential misconduct.

A range of sanctions or provisional safety measures can be taken when promotional and advertising regulations are breached. 

Administrative penalties include the revocation of the advertising licence (and in some cases the refusal to accept an application for a licence for one to three years), stopping the publication of the advertisement, the confiscation of advertising incomes, fines, and the publication of a blacklist containing the offending companies and details of the offending advertisement on the websites of the AIC or CFDA. 

In situations where advertisements are found to have intentionally exaggerated therapeutic effects by using absolute terms, the local AIC shall suspend distribution of the drug in the jurisdiction and make the company publish a notice of correction in local media.

Advertising and promotion regulations can be enforced by competitors, consumers and any third parties or bodies; essentially, anyone can report any potentially offending promotional activities, and urge authorities to start an inquiry or administrative proceedings. 

Consumers can also file a civil case against the manufacturer or distributor if their legitimate rights and interests are infringed upon, on account of drugs supplied by manufacturers or sellers using false advertisements or other false publicity means. 

RDPAC provides for a number of sanctions, including ordering a written and signed statement by the GM of the Offending Company that commits said company to an immediate cessation of the practice in question, as well as actions taken or to be taken to remedy the breaching conduct. In the case of a minor breach, a fine of RMB20,000-30,000 may be imposed on the Offending Company, which should be paid within ten days of the Panel Decision, and marked as “damage” on the receipt thereof by the Office. 

For a repeated breach, a suspension of membership for six to 24 months may be imposed on the Offending Company may require them to employ a third-party auditor to review its Company SOP in light of the RDPAC Code of Practice. This process should last no more than 90 days from the date of the Panel Decision. 

If there is an egregious breach and a lack of intention to correct or remedy the wrongdoing on the part of the Offending Company, a written report of the breach and sanctions imposed should be prepared by the Office and notified to the Headquarters of the Offending Company.

The Administrative Measures on Accepting Donations for Public Welfare by Healthcare Entities governs donations to healthcare professionals. 

Donations cannot be made to an individual, but can be made to organisations. Furthermore, healthcare-providers may not accept a donation that is, in exchange for economic benefits, illegal, for commercial profit,  for goods or services, or for any intellectual property. 

There is no specific threshold or description for gifting and sponsorship under the Chinese law. There are general requirements for gifting, but nothing in regards to the value of gifts.

The RDPAC code states that occasional items to benefit patients or that serve a genuine educational function can be provided; items such as alcohol, tobacco, cash, gift cards, or other cash equivalents are not permitted. Also, no items capable of use for non-educational, non-patient-related purposes are permitted (such as smartphones, tablet computers, laptops).

Furthermore, whilst it is permissible to provide branded promotional items if they are related to the healthcare-provider’s practice (such as stationery items, USB drives, mouse pads, and other items bearing a company’s logo), such items are limited to a value of RMB200 or less.

Common issues that can be encountered in the promotion and advertising of pharmaceuticals and medical products include:

  • misleading or fraudulent promotion where medical products have been promoted with false information;
  • commercial bribery as a consequence of illicit payments being made to public healthcare-providers;
  • companies failing to obtain CFDA authority prior to the use of promotional materials; and
  • non-compliance of third parties, for example falsification of VAT invoices by intermediary parties. 

The advertising of pharmaceuticals and medical devices is also subject to the Consumer Protection Law, specifically where there have been any misleading or fraudulent promotional activities. 

Companies must not publicise their medical products in an untruthful or misleading manner, and thereby must not boost sales by falsifying transaction volume. Also, prices should not be falsely marked as “clearance price”, “lowest price” or “promotion price” if this is not true. 

Substandard products shall not be sold as regular goods, and companies shall not exaggerate or conceal information that is material to consumers (for example, regarding quality and functionality).

Before manufacturing pharmaceutical products, companies must first gain authorisation from the CFDA and obtain both a Manufacturing Permit and a Good Manufacturing Licence certificate (GMP).

In order to become qualified in China, a pharmaceutical or medical device manufacturer has to comply with certain conditions, including:

  • establishing a quality assurance system with the support of a complete documentation system; 
  • making satisfactory arrangements to ensure that the drugs are stored, distributed and subsequently handled safely;
  • establishing a personal hygiene operation procedure to minimise risks of contamination in drug production caused by employees;
  • designing premises, facilities and equipment to minimise the risks of contamination and cross-contamination; and
  • ensuring that storage areas have sufficient capacity to allow orderly storage of the various categories of materials and products.

To obtain authorisation for pharmaceutical drugs, the applicant first submits an application to their provincial CFDA for the approval of the pharmaceutical manufacturing permit. The CFDA will then arrange an on-site inspection and, if the company is successful, a manufacturing permit will be issued within 30 working days. The applicant then obtains a domestic drug licence for the active pharmaceutical ingredients and finished products from the CFDA. Within 30 days of the domestic drug licence being issued, the applicant can apply to be GMP certified, after which a further on-site inspection will be undertaken and, if successful, the applicant will receive a GMP certificate. 

The manufacturing licences for both pharmaceuticals and medical devices are valid for a period of five years, and must be renewed before they expire. 

In order to engage in the wholesale trade of pharmaceutical products, a company must obtain both a drug distribution licence and a Good Supply Practice (GSP) certificate.

As with manufacturing permits, the CFDA and local CFDAs are the authorities in charge of granting authorisation. 

To obtain the drug distribution licence and GSP certificate, the applicant must first submit an application to the local CFDA for their approval to prepare to establish themselves as a pharmaceutical wholesaler; a decision should be given in writing to the applicant in 30 working days. If approval for preparation to establish themselves as a pharmaceutical wholesaler is granted, the applicant can then apply for the drug distribution licence and a GSP certificate. The applicant will then be subject to an on-site inspection for the GSP and, after a review, the CFDA will respond within 30 days and issue the applicant with a drug distribution licence and a GSP certificate. 

The process for the distribution of medical devices, as with the manufacturing process, is very similar to the process outlined above for pharmaceuticals. Class I devices do not require a licence – they only need to carry out record filing with the local CFDAs. Class II and III devices are required to go through the same examination and approval procedures as mentioned above. 

Some of the general requirements for obtaining a distribution licence are: 

  • qualified management and staff with relevant educational qualifications;
  • that there are good product-quality management systems in place; 
  • suitable technical training and after-sales service capabilities; and
  • suitable premises, equipment, warehouse and a hygienic environment. 

The distribution permit is valid for a period of five years, and must be renewed before it expires. 

There are two different types of pharmaceuticals: prescription drugs and over-the-counter (OTC) drugs. OTC drugs are further classified as Class A and Class B OTC drugs. Prescriptions are only allowed to be sold as prescribed by a physician, whereas Class A and Class B OTC drugs are able to be sold to patients as advised by pharmacists. 

The Drug Administration Law of China, the Customs Law of China and various regulations published by China Customs govern the import and export of pharmaceuticals and medical devices.

The government entities in charge of applying and enforcing import regulations are the CFDA, the Inspection Bureau (China Inspection Quarantine) and China Customs.

The importer must be a licensed distributor with a Drug Distribution Licence or a Medical Device Distribution Licence issued by the CFDA, and must be registered with the Ministry of Commerce (MOC) for import business.

Imported pharmaceuticals must first be registered with the CFDA and obtain an imported drug registration certificate from the CFDA.

However, pharmaceuticals can be imported into China without a drug registration certificate in either of the following scenarios: 

  • if the CFDA considers the drug to be safe, effective, and urgently needed (even if the drug is not approved in the country or region where it is being produced); or
  • if  medical institutions apply to the CFDA for permission to import a small number of drugs that are necessary and urgently required.

In certain circumstances, provinces may issue one-time import registrations which allow a drug to enter China without an import certificate. For example, in Guangdong province, the following may be approved for import by the CFDA without an import certificate:

  • drugs that are necessary in major disasters and epidemics;
  • drugs that are needed for special and urgent treatments;
  • donated drugs – for example, donated drugs from overseas to be used in natural disaster relief; and
  • sample drugs.

In China, only some special drugs are free from import tax, such as hormonal contraceptives and drugs for AIDS. A 5%-8% import tax is imposed on most drugs.

China publishes a list of products with import tax rate on the China Customs official website – customs.gov.cn. 

The exportation of intangibles (eg, software and technology) is controlled in China by the Technology Import & Export Regulations and the Cyber Security Law.

On 16 June 2017, the MOC released a draft of the Export Control Law. Whilst other regulations have previously covered dual-use exports, this will be the first that directly addresses the issue, and defines “dual-use” as “goods, technologies, services, or other items that have civil uses, and also have military use or enhance military potential, particularly the design, development, production, or use of weapons of mass destruction”. According to the Draft Law, exports of dual-use goods will be managed through a system of controlled items, and an export permit must be obtained from the competent authority.

The draft Export Control Law covers dual-use items, military use items, nuclear materials and other items relevant to national security. It does not specify whether biological materials, toxins, genetically modified organisms, pathogens and chemical products fall into the category of “items relevant to national security”. However, the export of animal genetic resources and human genetic resources is controlled specifically by existing legislation, as follows: 

  • the import and export of animal genetic resources is subject to approval from the Ministry of Agriculture, according to the Measures for Examination and Approval of the Entry and Exit and the Foreign-related Co-operative Research and Utilisation of Livestock and Poultry Genetic Resources (2008); and
  • the export of human genetic resources must obtain approval from the China Human Genetic Resources Administration Office, according to the Interim Measures for Management of Human Genetic Resources.

China is a party to ASEAN, and has entered into Free Trade Agreements with Hong Kong, Macau, the Maldives, Australia, Switzerland, Costa Rica, Chile, Georgia, South Korea, Iceland, Peru, New Zealand and Pakistan.

China enforces UN decisions on economic sanctions, mainly restricting the import and export of industrial goods and natural resources. Pharmaceuticals are not usually included in the sanctioned products list.

The main sources of legislation that govern patent law in China are the Patent Law (2008), Rules for the Implementation of the Patent Law (2010), the Guidelines for Patent Examination (2017) and Administrative Measures for Prioritised Examination of Patent Applications (2017). 

The most common issues encountered are patents being rejected for lack of inventiveness, lack of support and insufficient disclosure. 

An invention or utility model must meet the following requirements in order to be patentable:

  • novelty – the invention or utility model is not existing technology or disclosed in another patent application filed in China before the date of filing, but published after the date of filing;
  • inventiveness – the invention has prominent and substantive features and represents notable progress, or the utility model possesses substantive features and represents progress; and
  • usefulness – the invention or utility model has practical applicability.

In regard to patentability requirements related to pharmaceuticals, the following are not patentable in China:

  • methods for the diagnosis or treatment of diseases (for example, X-ray diagnostic method);
  • scientific discoveries (eg, gene in a natural form);
  • inventions or creations that are contrary to Chinese laws or social morality (for example, both human embryonic stem cells and the preparation thereof); and
  • inventions or creations completed on the basis of genetic resources, where their acquisition or use breaches related laws and regulations.

Methods for the diagnosis or treatment of diseases are not patentable in China. However, second and subsequent medical uses – also known as "Swiss-style" claims – are patentable, as the Guidelines for Patent Examination expressly provide that the use of substance X in the manufacture of a medicament for the treatment of condition Y is not deemed as "methods for the diagnosis for treatment of diseases". 

Anyone who makes, uses, sells or otherwise exploits a patent on a second or subsequent use of a drug without permit is highly likely to be determined as infringing second and subsequent patents of pharmaceutical products.

China does not have a mechanism by which to extend the 20-year term for an invention patent. The Chinese Patent Law does not include any provisions on patent term extensions or supplementary protection certificates (SPCs), as found in many Western patent systems. 

Patent infringement of both pharmaceutical drugs and medical devices is perpetrated by anyone who makes, uses, sells (or offers to sell), imports or exploits an invention, utility model or design patent covering a product or process used to manufacture a product without the prior agreement of the patent-owner. 

Producing, using or importing patented drugs or medical devices for the purposes of providing information required for administration examination and approval, such as market authorisation, does not infringe a patent under the administrative approval exception of the Patent Law.

If a patent-holder has evidence proving that someone is infringing or will infringe a patent and that, if not stopped promptly, such infringement will likely give rise to irreparable harm to the right-holder’s lawful rights, then the patent right-holder may apply to the court for a pre-trial injunction and an order for the preservation of infringing evidence and assets even prior to the commencement of the court actions.

The first pre-trial injunction issued by the China IP court was in 2016, where six factors were taken into consideration, as follows:

  • whether the patents at issue were valid and stable; 
  • whether the ongoing activities of the respondents were infringing the patents;
  • whether the right-holder's interests would be irreparably damaged if no injunction were issued; 
  • whether the loss incurred by the respondents through the issuance of the injunction was smaller than or equivalent to the loss caused to the right-holder if no injunction were issued; 
  • whether the injunction would harm public interests; and 
  • whether the right-holder afforded an effective and proper bond. 

It was established that a court handling a request for an injunction will order a respondent to stop its infringing activities only when it considers that there is the possibility that such activities will be infringements, ie an imminent infringement exists. 

There are specific defences to patent infringement in relation to pharmaceuticals and medical devices in China. Firstly, there is the Administrative Approval Exemption, which applies in cases where the potential infringement only occurred for the purpose of providing necessary information that was essential for the obtaining of administrative approval. Secondly, there is the Experimental Use Exemption, which applies in cases where the alleged infringement is used for research and experimentation. The two exemptions can collectively be construed as equivalent to the Bolar exemption in the US. Further general defences include patent exhaustion, prior art defence and transit exception. 

The State Intellectual Property Office can issue compulsory licences for the exploitation of a patent in the following circumstances, upon the request of a third party:

  • if the patentee's act of exercising the patent right is determined to be monopolistic and a compulsory licence would remove or reduce the anti-competitive effects of such patent use;
  • if a patentee has failed to exploit a patent without legitimate grounds for more than three years since the date of granting the patent right and four years since the patent application date;
  • if it concerns public interest, an extraordinary state of affairs, or a national emergency; 
  • for the manufacture and export of patented drugs to certain countries for the purpose of public health; and
  • if major technical advancements with remarkable economic impact rely on earlier patents.

The civil judicial system and the administrative system can both be used to enforce patent rights. 

For civil cases, either the interested party or the patentee can bring a proceeding for infringement. Interested parties can be either an exclusive licensee (who brings proceedings individually, thus not together with the patentee), or a non-exclusive licensee (who must sue with the patentee or act as a specially empowered agent). A distributor can sue if specially empowered by the patentee. 

Multiple remedies are available. The first is a permanent injunction, which is one of the more common civil remedies as it stops the infringer from carrying out the infringing activities whilst the patent concerned is still valid. Monetary damages are also a common remedy, the amount of which is calculated on multiple factors, including the actual loss, profit made by the infringer, royalties and statutory damages. Also, in an attempt to minimise the loss suffered by the patent holder, a court may issue a preliminary injunction in the case of an imminent infringement. 

The remedies in an administrative action are more limited, as the State Intellectual Property Office (SIPO) cannot award monetary damages, but they can order the infringers to cease the infringement. Furthermore, the SIPO can order the infringer to provide evidence of the infringement, which could be useful for any potential civil case. In addition, should the patents be reordered with China Customs, they will have the authority to seize any products linked to the infringement from either entering or leaving China. 

The typical procedure for a patent infringement proceeding is as follows: the claimant submits a pleading to the court and files a copy of the pleading for each defendant;

  • the court will serve a copy of the pleading to each defendant within five days of accepting the case. The defendant must submit a statement of defence within 15 days of receiving this; 
  • the claimant and defendant submit evidence, and the court will arrange the exchange of evidence; 
  • the defendant may also choose to file a patent invalidation application with the Patent Re-examination Board; the court will conduct oral hearings and make its decision; and
  • an appeal to a higher court can be filed by either party within 15 days of receiving the judgment.

The typical procedure for an administrative enforcement is as follows: 

  • an administrative complaint is lodged with SIPO or a local intellectual property office; 
  • SIPO or the local intellectual property office conducts an investigation and takes action to obtain evidence of infringement; 
  • the defendant can submit a formal defence and rebuttal evidence;
  • oral hearings may take place;
  • SIPO or the local intellectual property office issues a decision; and
  • either party may choose to appeal the decision by filing an administrative lawsuit with the People’s Court.

In China, infringement claims are determined by the courts and invalidity claims are determined by the Patent Re-examination Board (PRB) of SIPO. In order to raise a defence of invalidity, a defendant to a patent infringement claim will often file an invalidation application with the PRB. The Court will stay the infringement proceedings until the invalidation claim is determined by the PRB. 

A potential generic entrant is able to conduct research and development, as well as clinical trials, in order to make an application to the CFDA for marketing approval under the experimental use and administrative approval exceptions to patent infringement. 

Clearing the way is not a requirement for generic market entry under the current practice. Only a simple non-infringement statement is required when making drug approval applications, and the applicant can hardly be held liable for the authenticity and accuracy of the statement. However, on 12 May 2017, the CFDA published a draft for comment, exploring a patent linkage system – Relevant Policies for Encouraging Innovations on Drugs and Medical Devices and Protecting Innovators' Rights and Interests (Circular No 55 of 2017). The proposed patent linkage system provides that, during the drug approval process, the patent-holder can start an action against the applicant for the alleged infringement, in which case the drug review board should stay the grant of approval for up to 24 months, during which time the assessment of the application will continue.

In early October 2017, the General Office of the State Council further issued a policy letter confirming that the patent linkage system shall be established. The details of the system, however, are yet to be confirmed following the official publication of the CFDA regulation.

Legislation also exists in the form of intellectual property law, whereby counterfeit pharmaceuticals or medical devices infringe trade marks or patents. The Trademark Law 2013 applies for trade-mark infringement, and the Patent Law (2008) will apply for patent infringement. 

For civil or administrative cases, the rights-owner will normally conduct their own private investigation at the outset, during which time they will gather evidence of the infringement, after which they will file either a civil complaint at the People’s Court or an administrative complaint to the Chinese authorities. 

It is also sometimes possible to pursue a criminal case under the Criminal Law in situations where serious harm to human health or a serious infringement of IP rights arises as a result of counterfeit pharmaceuticals. In order to pursue a criminal case, the rights-owner will be expected to work with the CFDA and the CPS during the investigation period, after which the CPS will bring a formal criminal prosecution against the infringers. 

Currently, the use of unregistered trade marks or other drug names on labels of pharmaceuticals is prohibited without approval from the CFDA, per the Rules for Management of Labels and Direction of Use for Pharmaceuticals. Essentially, trade marks for drugs and medical devices need to be registered like any other trade mark. 

The CFDA also places restrictions on trade marks that can be used for pharmaceuticals and medical devices, namely that they cannot include generic words that could be taken as a description of the function, quantity or quality of the pharmaceutical product. 

The Trademark Law in China does not expressly place any restrictions on the import and distribution of non-counterfeit, genuine pharmaceuticals or medical devices from other markets. 

However, past cases have suggested that parallel imports could establish trade-mark infringement should the reputation of the trade mark-owner be damaged. Parallel imports involve the import into China for resale of genuine goods that have been lawfully manufactured and marketed abroad by the authority, or with the consent of the trade mark-owner, without the authorisation or agreement of the same trade mark-owner or its exclusive licensee in China.

IP protection is available for the trade dress or design of pharmaceuticals and medical devices, or their packaging, under the Anti-Unfair Competition Law (2017), Copyright Law, Trademark Law and Patent Law. The visual appearance is protected as trade dress under the Anti-Unfair Competition Law, as a design under Patent Law, as a copyrightable industrial design under the Copyright Law, and as a 2D/3D trade mark under the Trademark Law.

The CFDA recently published a draft law proposing a patent linkage mechanism and terms for data exclusivity for public comments – Relevant Policies for Encouraging Innovations on Drugs and Medical Devices and Protecting Innovators' Rights and Interests (No 55 of 2017). The proposed data exclusivity period is six years for an innovative drug; ten years for an innovative drug that is also an orphan drug or paediatric drug; three years for an improvement drug that is also an orphan drug or paediatric drug; ten years for an innovative therapeutic biologic; and 18 months if a generic applicant invalidates a linked patent or if the drug is the first domestic generic drug based on an originator that has been marketed abroad.

The Anti-Monopoly Law of China (AML) was promulgated in 2008 and focuses on prohibiting monopoly agreements that restrict competition, prohibiting abuse of dominant position, and prohibiting mergers, acquisitions or joint ventures that restrict competition. 

In regard to vertical distribution monopolies, the following agreements shall not be made between a business and a transaction counterparty: 

  • fixing the resale price of products to a third party;
  • restricting the minimum resale price of products to a third party; or
  • other monopoly agreements as determined by the State Council anti-monopoly enforcement authorities.

The AML also prohibits companies with dominant market positions abusing their position by doing the following:

  • selling commodities at unfairly high prices or buying commodities at unfairly low prices;
  • selling commodities at prices below cost, without justifiable reasons;
  • refusing to enter into transactions with their trading counterparts, without justifiable reasons;
  • allowing their trading counterparts to make transactions exclusively with themselves or with the undertakings designated by them, without justifiable reasons;
  • conducting tie-in sales of commodities or adding other unreasonable trading conditions to transactions, without justifiable reasons;
  • applying differential prices and other transaction terms among their trading counterparts who are on an equal footing, without justifiable reasons; or
  • other acts of abuse of dominant market positions confirmed as such by the authority for enforcement of the Anti-Monopoly Law under the State Council.

The AML also prohibits “Monopoly Agreements” that fix the resale price of products or restrict the minimum resale price of products (RPM). Such agreements are defined in AML as agreements decisions or other concerted actions that eliminate or restrict competition. 

The key elements of RPM are there is an agreement or understanding, by either an explicit contractual clause or informal communications (eg, emails, phone calls, conversations), between businesses operating at different levels of the market. As an example, this could be an agreement between a manufacturer and distributor to maintain resale price above a certain level using one of the following mechanisms:

  • fixed price or minimum resale price;
  • fixed discount or maximum discount;
  • minimum/maximum profit margins; or
  • other restrictions on the reseller’s freedom to set their own price.

The NDRC has launched high-profile cases against RPM and appears to be adopting an approach that presumes RPM restrictions are illegal (“per se” illegal). The NDRC has also launched high-profile cases against abuse of dominant position in recent years. 

The AML in China has a similar regime to Sections 1 and 2 of the US Sherman Act, aiming to prohibit monopolistic conduct that eliminates or restricts market competition by abusing intellectual property rights. However, there have not been any cases addressing pay-for-delay agreements, which are usually formed between originators and generic drug companies with the purpose of delaying the marketing schedule of generic drugs in exchange for the maintenance of the originator's dominant position in the market.

Life cycle strategies such as “product hopping”, whereby the brand-name companies try to preserve monopoly profits on a patented drug by making modest formulations to obstruct generic competitors, are commonly adopted in China. However, there have not yet been any cases addressing the antitrust issue in such strategies. 

The AML allows for any party that has been harmed by anti-competitive acts in violation of the AML to bring proceedings for breach of competition law in the People’s Court. Furthermore, anybody can report potential anti-competitive acts to the Administration for Industry and Commerce (AIC), which will review the report and make a public ruling following an administrative investigation. The NDRC regulates price-related rules regarding anti-competitive agreements, as well as abuse of dominance. The Ministry of Commerce regulates mergers that may have the effect of restricting or eliminating competition, and the SAIC governs non-price-related rules regarding anti-competitive agreements, as well as abuse of dominance.

The administrative process for bringing proceedings for breach of competition law is that the complaint will mean the relevant body (eg, AIC or NDRC) starts their investigation and evidence collection, after which there could be on-site inspections, an inquiry and depositions, and collection of evidence. This will enable a decision to be made and a potential punishment ordered; a hearing will allow for the parties’ statement and defence to be considered, after which the decision is upheld, implemented and filed. 

In recent years, the NDRC imposed administrative penalties on a pharmaceutical company for concluding vertical monopolistic agreements with its distributors to set a minimum resale price, restrict the distribution regions and restrict the distribution of products from its competitors. 

The NDRC is paying more attention to monopolistic behaviour regarding the pricing of drugs. Horizontal agreements between drug companies and vertical agreements between drug companies and distributors with a purpose of setting a price floor will be closely monitored by the authority. 

Agreements for different types of transactions or collaborations in China should contain certain important legal provisions, which will vary depending on the type of deal or agreement. Generally, it is essential to cover representations, warranties, covenants, indemnities, dispute resolution (arbitration, mediation, etc) and governing law in any type of deal. 

For share deals, key provisions should include the identification of the precise equity of the target company, warranties and representations, adjustment mechanisms and payment terms. The key provisions for assets are much the same as for share deals, and again the defining and describing of the exact asset to be purchased (or excluded) by the buyer is important. 

For joint-venture agreements, the key provisions are much the same as for share and asset agreements, as previously discussed. It is important to define the parties' contributions to the venture, as well as any ownership of IP rights; terms under which the venture would be terminated (bankruptcy, mutual agreement, etc) are also vital. 

Licensing agreements should contain definitions of key terms, define the scope of the licence (eg, territories), contain payment mechanisms (eg, royalty payments), define IP rights, define the terms of termination, and cover representations, warranties and indemnities. 

In commercial agreements such as manufacturing or development agreements, key provisions should include rights in regards to distribution, territory and exclusivity, payment terms, quality terms, IP rights/ownership and any termination agreements. 

There are a number of agreements that can be used to bridge the valuation gap between buyer and seller. Purchase price adjustment mechanisms can be used to modify the price in the event of changes in the financial condition of the seller between the date of the initial balance sheet and closing. Furthermore, post-closing adjustments that are contingent on the occurrence of future events – such as the performance of the business after closing – are also used. An agreement to obtain an appraisal report from a third party can be include in the agreement, in order to enable more informed decisions to be made. Also, milestone payments are common, which are adjustments contingent on the business’ performance after closing; milestones could be related to sales figures, or to obtaining a licence for a new drug from the CFDA.

Purchase price adjustments, as seen in many Western countries, are not as commonly adopted in China. The most common is a completion accounts agreement, which is used to confirm that the actual financial position of the target company at completion is what the parties expected when, on the basis of historic financial information, they entered into the deal.

Locked box agreements, where the equity price is calculated based on a defined historical balance sheet date agreed by the parties, are seen much less often in China. 

Deal protection agreements are used in China. Material Adverse Change agreements are utilised to allow parties to refuse completion of a merger or acquisition if the target suffers a detrimental change in condition. Deferred consideration agreements are also regularly included, which allow a party to defer certain costs until after a pre-defined time period. Break fees are customary, to ensure that the bidder is paid a fee if the deal fails before completion. Escrow agreements are also commonplace, whereby one party deposits an asset with a third party, who will make delivery to the other party if conditions are met. Mergers and Acquisition Insurance is used in limited cases to transfer certain potential risks of the transaction (whether already provided or that may surface at a later date) to an insurance policy.

The Ministry of Commerce of China must provide approval for transactions (mergers or acquisitions, where a party acquires control of another) if the worldwide collective turnover of all parties involved in the transaction exceeded RMB10 billion in the previous financial year, and if at least two of the companies involved in the transaction have exceeded RMB400 million in the previous financial year in China. Approval must also be acquired in transactions where the collective turnover in China of all the parties in the transaction exceeded RMB2 billion in the previous financial year, and at least two of the companies have exceeded RMB400 million in the previous financial year. 

Tax treatment in asset deals depends on the type of asset involved but can include Value Added Tax, Stamp Duty, Deed Tax, and Land Appreciation Tax. Share deals can incur Company Income Tax, Withholding Tax and Individual Income Tax and Stamp Duty. 

In China, intellectual property rights are regarded as general assets for the purposes of liquidation. The effect of a licence agreement in case of insolvency is not specified in Chinese law. Therefore, there is no special statutory protection for a licensee in insolvency procedures. Parties are recommended expressly to specify the relevant remedies in licence agreements in case of insolvency. 

Investigations into white-collar offences are regulated by the State Administration for Industry and Commerce (SAIC) and the Public Security Bureau (PBS).

The healthcare industry is one of the authority’s primary focuses, with commercial bribery being one of the main investigations taking place at the moment. Almost a third of the companies in the Life Sciences industry  that were subjected to an investigation in 2017 were being investigated for commercial bribery. 

The main reason for a company or employee being investigated for commercial bribery is the transfer of a benefit to a third party (eg, HCPs) to carry out illegal behaviour. 

In recent years, misconduct has become more complex as authorities have determined to look further into potential bribery payments that are now being transferred in the form of promotion fees, rebates or speaker fee payments. 

Furthermore, the updated Anti-Unfair Competition Law 2017 states that, in cases of commercial bribery violations, administrative authorities can “confiscate illegal gains resulting from illegal conduct, and impose a fine of between RMB100,000 and RMB3 million,” as well as revoke a business operator’s business licence in cases of severe misconduct. This is a significant increase from the 1993 AUCL, which had fines ranging from RMB10,000 to RMB200,000. 

There may be investigations by various authorities in the pharmaceutical and medical sector. 

At the Initial contact: DO ask the Investigation Officials to show their identifications, whilst accompanying the Investigation Official to a separate meeting room. Furthermore, inquire as to their investigation plan and requirements in detail, including requests for documents, computers, and interviews of employees. 

DO NOT allow the Investigation Official to enter the office working area without confirming the authenticity of their identification. 

At the Interview stage: DO contact legal counsel for instructions and demonstrate a co-operative attitude towards the interviewer. 

DO NOT sign any document without checking the accuracy, and DO NOT provide inaccurate information or information beyond the scope of the question.

In 2016, the National Development and Reform Commission fined a leading medical device company RMB118.5 million as a punishment for price-fixing. This was the first time that the commission had fined a medical-device maker. 

The biggest fine remains that received by a leading pharmaceutical company in 2014, of more than RMB3 billion, for being found guilty of commercial bribery by, amongst other activities, bribing doctors to prescribe its drugs. Furthermore, five senior employees received prison sentences, which demonstrates that the authorities will also seek to pursue individuals on a criminal basis in addition to imposing monetary fines to punish corruption.

As shown by the large fines handed out to pharmaceutical and medical-device companies in recent years, this industry is facing increasing scrutiny from authorities seeking to identify corruption. Given that the healthcare industry is directly related to the public sector, the Chinese authorities will naturally take a close look at any potentially illegal activities that involve the state being deceived. 

As mentioned, the updated AUCL 2017 has already increased the maximum fines limit, and companies will have to assess their business model to ensure that they are compliant with its various new regulations. 

Furthermore, there is a level of distrust in place, as pharmaceutical companies have already been subject to investigations and found to be carrying out illegal activities, and now that the market authorisation-holder can even be held liable for the illegal actions of third parties, the level of awareness for potential investigation in this sector is higher than most – if not all – industries. 

The relevant product liabilities are scattered in relevant laws and regulations, such as the Tort Liability Law, the Product Quality Law, the Drug Administration Law, the Consumer Protection Law and the Criminal Law of China.

There is no significant difference between liability for medical products and other products; liability for medical products is also subject to the Product Liability Section of the Tort Liability Law.

One specific provision in the Tort Liability Law that only applies to medical products is that a patient may seek compensation from the manufacturer as well as from the medical institution for damage from medical practice, if said damage is due to defective drugs, disinfectants or medical devices that do not meet the requisite standards. The medical institution may seek reimbursement of the compensation from the manufacturer responsible for the damage. 

The parties potentially liable for product liability are manufacturers, distributors, and third parties like transporters and warehouse-keepers. 

Strict liability applies for manufacturers, meaning that a manufacturer can be liable for medical product defect if the claimant can establish that the medical product is defective, or that they suffered physical injury or property damage due to the defective medical product. 

For distributors, transporters and warehouse-keepers, the liability is fault-based, meaning that the claimant must establish the fault of the parties in addition to the three elements above – the existence of defect, physical injury/property damage and causation. 

There is no presumption of causation on product liability in China. The claimant must prove the existence of defect, the damage and the causal link between the damage and the defect. 

The standard for proof of causation in medical product liabilities is that the claimant can show that the defendant wrongly exposed the claimant to an increased risk of a type of injury known to be associated with the product. 

There are no specific defences available regarding medical product liability. However, medical product manufacturers can invoke general defences available for a product manufacturer, including: 

  • that the products have not been put into circulation;
  • that the defects were non-existent when the products were put into circulation; and
  • that the defects cannot be found due to scientific and technological constraints at the time of circulation.

In the context of product liability in China, “defective” means failing to comply with national or industry standards for ensuring personal safety and the safety of property, if such standards exist. If a medical product complies with national and industry standards such as GSP and GMP, it should not be deemed defective, and such compliance can be a defence for product-liability claims. 

Article 10 of the Tort Liability Law applies when there are acts from multiple actors and some of them cause damage to the claimant. If the claimant cannot establish which act caused the damage, the law assumes that all potential actors shall be jointly and severally liable to the claimant. 

There is no doctrine of market share liability in China. Instead, the amount of compensation to be incurred by the jointly and severally liable parties shall be determined according to their respective liabilities. If the degree of their respective liabilities cannot be determined, the liability for compensation shall be borne equally.

According to the Product Liability Law, the statute of limitation period for product liability is two years, starting from the date on which the party concerned knows of – or should have known of – the infringement of his or her rights and interests. The court will look at the actual or constructive knowledge of the party raising the statute of limitation argument. 

Also, the right to claim compensation for the damage done by the defective product shall be forfeited upon the expiry of a period of ten years from the date on which the defective product causing the damage is delivered to the first consumer, except where the clearly stated period of safe use has not expired.

According to Article 81 of the Civil Procedure Law, in urgent circumstances where evidence could be lost, or where it may be hard to obtain the evidence in future, a party may apply to the court at the location of the evidence or the other parties’ address, or to the people’s court that has jurisdiction for the case, for preservation of evidence prior to filing the lawsuit or application for arbitration. Preservation of evidence is limited to urgent requests, and the applicant can be asked to provide a guarantee. 

In regard to obtaining information from a public body, Article 13 of the Regulations of China on the Disclosure of Government information allows that “citizens, legal persons or other organisations may, according to their own production, daily life, scientific research or other special needs", file applications in writing with the relevant department of the State Council, local people's government at any level, or the department under the local people's government at or above county level to obtain relevant government information. The government will not provide information that contains any state secrets, nor will it provide any trade secrets or personal privacy if the publicising of such is likely to harm the rights of a third party. The government can, however, contact the third party to obtain their permission to provide the information.

The types of damages that are available include compensation for medical costs, death or disabilities, as well as damage to other property.

The Product Quality Law specifically excludes product liability from covering the damage of the product itself, while the wording used in the Tort Law generally refers to “injury or damage of others”. In practice, different courts may have differing opinions regarding whether a product can be included in a product liability claim because of the ambiguity in the law. 

Punitive damages are available on the condition that the manufacturer or distributor knowingly produces or sells defective products that cause serious damage to the health of others, or death. 

There is no maximum limit of damages available for one claimant, or from one manufacturer.

China does not have a binding case law system. However, the interpretations issued by the Supreme Court of China have binding value and are often a significate indication of how the courts will decide on the relevant issue. One of the most important recent interpretations on product liability is the Interpretation of the Supreme People’s Court on Several Issues Concerning Application of Laws in the Hearing of Consumer-related Civil Public Interest Litigation (2016), which confirms a consumer association’s right to file public interest litigation if a business operator’s practices harm the lawful rights of numerous non-specific consumers, or endanger consumers’ personal or property safety, or impair the public interest.

This interpretation applies to public litigation actions against drug defects. Pharmaceutical companies face the risk of higher damages for a single drug-defect incident, as the interpretation also allows the consumers a free ride – the claimant for a drug liability case can request that the determination of facts in the public interest litigation shall apply to the claim from the same defect.

Trials will be held by a judge. There is currently no jury system in China as found in other countries, although there are people’s jurors in civil procedures, who will sit on a panel with the Judge.

According to the Civil Procedure Law, all evidence must be submitted and disclosed to all parties at the court, and also be subject to cross-examination by the parties, except confidential information that involves state secrets, business secrets or personal privacy, which will be kept from public disclosure. 

In regard to potential changes in the legal regime for liability for pharmaceuticals, the recent implementation of the two-invoice system for manufacturers and sales has reduced any intermediary business in getting products to patients. As such, the work of transporting drugs is now performed directly by the manufacturing entity, or the distributors. Therefore, liability for product defects in the transportation process lies with the manufacturer or distributors. 

Also, the MAH system that may come into force in 2018 will hold the market authorisation-holder liable for the quality and safety of the drugs throughout the drug’s lifecycle. Such a mechanism will impose more risks and liabilities for the manufacturers and importers, and will require more stringent due diligence and compliance methods from pharmaceutical companies. 

The general legislation and regulations that govern privacy and data protection include the Cybersecurity Law (2017), the General Rules of the PRC Civil Law (2017), the PRC Tort Law (2010) and Amendment (IX) to the PRC Criminal Law 2015.

Furthermore, the regulations of the National Health and Family Planning Commission of China (NHFPC) are specific to the healthcare sector, and include Regulations for Medical Institutions on Medical Records Management (2014), Measures for the Management of Population Health Information (for Trial Implementation, 2014) and the EMR Administrative Measures (for Trial Implementation, 2017).

The Central Leading Group for Cyberspace Affair (“CAC”) was established specifically for the development of overall strategies and policies on general cybersecurity in China, with President Xi Jinping being the head officer. As previously mentioned, as well as the general regime, the healthcare sector is also regulated by the NHFPC. 

The National Cyber Safety Strategy issued by the CAC on 27 December 2016 lists several key concerns, including the data safety of critical information infrastructure (“CII”), and the healthcare industry is one of the CIIs with which the CAC is concerned.

In the healthcare industry, the following health-related information is commonly used: 

  • basic information of both physicians and patients (name, gender, age, ID number, birthday, contact information and address, behaviour pattern, etc);
  • information in relation to medical records, such as personal and family medical history, outpatient/inpatient/discharge records;
  • medical prescription or consumption record; and
  • other operation information of medical institutions. 

The above-mentioned information may fall into one or several categories of data, as follows:

  • Personal information: refers to all kinds of information that can be used independently to identify a natural person's personal information, or can be combined with other information to do so.

The basic information detailed above is deemed personal information, and information relating to medical records may also constitute personal information if it is sufficiently specific and detailed.

  • CII data: if medical institutions are classified as CII, personal information and important data collected and generated during its operation might be deemed CII data – namely all categories listed above. 
  • Population health data: the NHFPC interprets this as basic demographic information, medical and healthcare services information and other health information generated during the operation of all types of medical institutions in China, including e-health files, e-medical records and health statistics information.

With the above broad interpretation, all information of specific patients and their aggregate data generated from medical institutions (ie, not basic information) may come under the concept of population health data. 

For different types of data, current legislation imposes different implications on network operators for collection, storage and utilisation. Network operators are the owner, manager or internet service-provider of the network. For example, a medical institution is the network operator of its system (such as EMR, HIS), and pharmaceutical companies could be the network operator of their owned/managed internal system, software, website, etc.

Under the PRC Cybersecurity Law, all network operators are obliged to ensure the security of their network, including forming a protective system dependent on the corresponding grade, taking necessary technical measures (such as data classification, and backup and encryption of important data, etc), developing an emergency plan for cybersecurity events, and providing technical support and assistance for authorities’ investigations.

Due to the additional regulations imposed by the NHFPC on population health data, health-related information is subject to stricter regulations.

In China, the methods of assuming civil liability include stopping the infringement, compensating for actual and direct losses, paying liquidated damages, eliminating the impact, and apologising.

As there is no support of punitive damages under the PRC civil law system, civil claims raised by individuals (normally patients) are limited. 

In terms of administrative liabilities, the following sanctions can apply:

  • Where there has been a failure to establish a protection system or to perform an emergency plan in a timely manner, the company shall correct as per the requirement. If the correction is refused, then authorities can impose fines of between RMB10,000 and RMB100,000. 
  • Where there has been a failure to comply with the principle of being “lawful, justifiable and necessary” for the collection and use of personal information, or a failure to delete or correct relevant information as per the request of the data subject, the authorities could require rectification, issue a warning, confiscate illegal gains, and/or impose a fine of one to ten times the illegal gains; where there is no illegal gain, a maximum fine of RMB1 million might be imposed on the operators. 

Where the circumstances are more serious, the relevant authorities could suspend the operator’s business, close down the website, or revoke any relevant business permits or the business licence.

  • For unlawfully obtaining, selling or providing personal information to others, the competent branch of MPS could confiscate the illegal gains, and impose a fine of one to ten times the illegal gains; where there is no illegal gain, a maximum fine of RMB1 million might be imposed on the operators.

If CII is unlawfully transferred overseas, competent authorities could require rectification, issue a warning, confiscate illegal gains, impose a fine of RMB50,000-500,000,order the operator to suspend any relevant business, close down the website, or revoke the relevant business permits or their business licences; a fine of RMB10,000-100,000 may be imposed on the persons in charge.

In terms of criminal law, risks can be triggered where companies are found to have sold or provided others with more than 5,000 pieces of personal information concerning health. The criminal liabilities are three to seven years imprisonment for the responsible person, and a concurrent fine for the operators (one to five times the illegal gains). 

In regard to cloud platforms, the new Cybersecurity Law means that companies must use licensed hosts and cloud service-providers approved by the Chinese government to operate in China.

The Internet Data Centre Value-Added Telecom Service (“IDC VATS”) licence approves entities to sell nfrastructure as a Service (IaaS) or Platform as a Service (PaaS), so providers will need to have this licence.

Whilst there is no specific legislation regarding the storing of sensitive data of patients in cloud platforms, such storage and transfer must be on government-approved hosting sites, as generally required for all cloud platforms.

Global Law Offices

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Huangpu District
Shanghai 200021
China

(86 21) 2310 8200

(86 21) 2310 8299

alanzhou@glo.com.cn http://www.glo.com.cn/
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Global Law Office is the first Chinese law firm. Its history dates back to 1979, when it became the first law firm in the PRC. Global Law Office is one of the largest Chinese law firms. It has more than 350 lawyers practising in Beijing, Shanghai and Shenzhen offices, most of whom have gained qualifications and hands-on experience in law schools and firms throughout Asia, North America, Europe and Australia. Global Pharmaceutical and Healthcare (P&H) practice group is one of the leading advisers in China as this group has not only premium knowledge but also thorough understanding of the practice of P&H industry. We have provided ‘one-stop’ legal services for every area of the P&H industry, including drug R&D, clinical research organisations (CRO), pharmaceuticals, life sciences, biotechnology, medical devices, supply producers and distributors, hospitals and other healthcare-providers, as well as various investment funds in the P&H sector. Global advises clients on challenging P&H legal issues such as regulatory compliance, structuring transactions and contractual arrangements, realisation of pipeline and geographic expansions, capital-raising and project-financing, mergers and acquisitions, reorganisations, IP protection, licensing and distribution arrangements, settlement of disputes involving adverse effects in clinical trials and medical treatment, etc.

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