2024外商投资中国医药行业法律热点概要

LifeSciences:SummaryofLegalHotTopicsforForeignInvestmentinPRCHealthcareand PharmaceuticalIndustryin2023-2024

SUMMARYOFLEGALHOT

TOPICSFORFOREIGN

INVESTMENTINPRC

HEALTHCAREAND

PHARMACEUTICALINDUSTRY

IN2023-2024

ThePeople’sRepublicofChina(“PRC”)istheworld’ssecondlargesthealthcareandpharmaceutical

market.AccordingtoFrost&Sullivan’sforecast,thePRChealthcareandpharmaceuticalmarketwill

increasetoUS$320billionby2025.TherehasbeenanupturninM&AactivityinthePRChealthcareandpharmaceuticalmarketsince20231.Attheendof2023,AstraZenecaannounceditsacquisitionof

GracellBiotechnologiesInc.,aleaderincelltherapyinthePRC,forUS$1.2billion,whichisthefirstM&AdealinwhichamultinationalpharmaceuticalcompanyfullyacquiredaPRCbiotechnologycompany.

BasedontheprojectexperienceandobservationsofKing&WoodMallesons’LifeSciences&HealthcareGroup,overthepastyear,foreign-investedpharmaceuticalenterprisesinthePRChaveremainedactiveinconductingM&A,technologylicensing,andotherrelateddeal-makingactivities.Weanticipatethis

trendwillpersistinto2024,despitetheuncertaintyoftheinternationalanddomesticmacroenvironmentandotherfactors.

LookingbackattheoveralllegalenvironmentforforeigninvestmentinthePRChealthcareandpharmaceuticalindustryin2023:

Firstly,thePRCgovernmentcontinuestointroducevariousfavorablepoliciesto:(i)encourageforeigninvestmentinthePRChealthcareandpharmaceuticalindustry.Thisisespeciallysointhefieldsrelatedtotheresearch,developmentandproductionofcelltherapydrugs,developmentandproductionof

drugsforrarediseasesandpediatrics,developmentandproductionofpharmaceuticalmanufacturing-relatedconsumables,research,developmentandmanufacturingofsmarthealthcareproductsfortheelderly,etc.2;(ii)supportforeigninvestorstoinvestinR&DcentersinthePRC,andtoconduct

technologyR&Dandindustrializedapplicationjointlywithdomesticenterprises;(iii)speedupthe

launchingofforeigninvestmentprojectsinbiopharmaceuticalfield;(iv)encourageforeign-invested

enterprisestocarryoutclinicaltrialsofcellandgenetherapydrugsthathavebeenmarketedoverseasinthePRCinaccordancewiththelaws;and(v)optimizethemarketingauthorizationapplication

proceduresfordrugsthataremarketedinthePRCandmanufacturedoverseastobemanufacturedin

thePRC.Furthermore,localgovernmentsarecontinuouslystrengtheningtheprotectionofforeign

investmentandimprovingthefacilitationofinvestmentandoperations3.Accordingtothestatistics

releasedbytheStateAdministrationforMarketRegulation(“SAMR”),bytheendofSeptember2023,

684,000foreign-investedenterpriseshadregisteredinthePRC,anincreaseof1.5%fromtheendoflastyear,indicatingasteadyriseinthenumberofnewlyestablishedforeign-investedenterprises.

Secondly,withrespecttolegislationandlawenforcementin2023,aseriesofsignificantlawsand

regulationscloselyassociatedwiththehealthcareandpharmaceuticalindustrywereeitherrevisedor

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enacted.Concurrently,aseriesoflawenforcementactivitiesinkeyfieldswerefrequentlycarriedout.Thesedevelopmentscouldpotentiallyexertasignificantinfluenceontheinvestment,M&A,licensing-in/out,anddailybusinessoperationsofforeign-investedpharmaceuticalenterprisesinthePRC.

ThisarticlereviewsandoutlinesthesubstantialchangesinthelegalenvironmentofthePRChealthcareandpharmaceuticalindustriesin2023-2024,aimingtoprovideguidanceandreferenceforforeign-

investedpharmaceuticalenterprisesconductingbusinessinthePRC.

I.RevisionstoPRCCompanyLaw

ThenewlyrevisedPRCCompanyLaw(the“NewCompanyLaw”)wasformallypromulgatedon

December29,2023,andwillcomeintoforceonJuly1,2024.Comparedtotheversioncurrentlyinforce,theNewCompanyLawadoptscomprehensiveamendmentsrelatedtocapitalcontributionrules,

corporategovernancestructure,shareholders’rights,responsibilitiesofdirectors,supervisorsandseniormanagement,etc.Amongtheseamendments,foreign-investedpharmaceuticalcompaniesshouldpay

particularattentiontothefollowing:

Firstly,theNewCompanyLawrequirestheshareholdersofalimitedliabilitycompanytomakefull

capitalcontributionwithinfiveyearsaftertheestablishmentofthecompany.Thisprovisionreplacesthelong-standingsubscribedcapitalsystemunderthecurrentlaw.Therefore,ifaforeigninvestorintendstosetupanewcompanyinthePRCaftertheNewCompanyLawcomesintoforce,itshallcomplywiththecapitalcontributionperiodrequiredundertheNewCompanyLaw.Furthermore,theNewCompanyLawprovidesthatexistingcompanies(includingforeign-investedcompanies)whosecapitalcontribution

periodexceedstherequiredperiodundertheNewCompanyLaw,shallgraduallyadjusttheircapitalcontributionperiodtomeetthestatutoryrequirement4.

Secondly,theNewCompanyLawintroducesalternativecorporategovernancestructures,allowingtheestablishmentofanauditcommitteecomprisedofdirectorsinlieuofaboardofsupervisorsor

supervisors,toperformthefunctionsanddutiesofaboardofsupervisors.Inaddition,limitedliabilitycompaniesofasmallsizeorhavingasmallnumberofshareholdersmaychoosenottohaveany

supervisor.Weunderstandthatforeigninvestorsusuallysetupacompanyintheformofalimited

liabilitycompanyinthePRC,whichisusuallyawhollyforeignownedenterprise(WFOE)orajoint

venture(JV)havingasmallnumberofshareholders.Therefore,foreign-investedcompaniesmay

consideroptimizingtheircorporategovernancestructurebasedontheirownsituationtoreducecostsandincreaseefficiency.

ItisworthnotingthatthePRCForeignInvestmentLawpromulgatedin2019requiresforeign-investedenterprisespreviouslyestablishedundertheSino-ForeignEquityJointVentureLaw,theSino-ForeignCooperativeJointVentureLawandtheWhollyForeignOwnedEnterpriseLawtoadjusttheir

organizationalformandstructureaswellasoperatingrulesaccordingtothePRCCompanyLawwithinafive-yeartransitionalperiod(thisperiodwillendonDecember31,2024).Thepromulgationand

implementationoftheNewCompanyLawisatajuncturewhenthetransitionalperiodisabouttoexpire.

Therefore,regardlessofwhetheraforeign-investedpharmaceuticalenterprisehas

completedtheadjustmentfollowingtheCompanyLawornot,itneedstoreviewandupdateitscurrentarticlesofassociation,shareholders’agreement/jointventureagreementand

otherlegaldocumentsaccordingtotheprovisionsoftheNewCompanyLaw.

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II.PromulgationofHGRRegulationImplementationRules

Outofconsiderationofbiosafety,nationalsecurity,andsocialandpublicinterest,thePRCgovernmentsupervisesandregulatesthecollection,preservation,andutilizationofhumangeneticresources

(“HGR”)5aswellasprovisionofHGRtoforeign6partiesandotherHGR-relatedactivities.Since1998,the

PRCgovernmentandothercompetentauthoritieshavepromulgatedtheInterimMeasuresonthe

AdministrationofHumanGeneticResources,theRegulationsontheAdministrationofHumanGeneticResources,theBiosafetyLaw,andotherrelevantlawsandregulations,graduallyestablishingtheHGRregulatoryframeworkandsettingupapprovalorrecord-filingproceduresforHGR-relatedactivities

includingthecollection,preservationandutilizationofHGRandprovisionofHGRtoforeignparties.

OnJuly1,2023,thenewlyreleasedImplementationRulesfortheRegulationsontheAdministrationofHumanGeneticResources(“ImplementationRules”)cameintoeffect.TheImplementationRules

furtherclarifythedefinitionofHGR7andthescopeof“foreignparties”8.TheImplementationRulesalsofurthersimplifytheinternationalcooperationadministrativeapprovalandrecord-filingproceduresthatforeign-investedpharmaceuticalenterprisesmaybeinvolvedin.Forexample,theImplementationRulesprovidecertainexemptionsforforeignpartiesfromethicsreview,andsimplifytherecord-filing

procedurefortheprovisionoftheHGRinformationto,oropenutilizationofHGRinformationby,foreignpartiesto“priorreporting”procedure,etc.

Inpractice,whenaforeign-investedpharmaceuticalenterprisecarriesoutclinicaltrialsin

thePRCtoobtainmarketingauthorizationfortherelevantproductsorengagesin

technologylicensing,cooperativedevelopment,commissioneddevelopmentandotherrelevantactivitieswithPRCinstitutions,HGRcomplianceissuesmayariseandspecialattentionshouldbepaidtotheseissues.

III.FurtherClarificationofMAH’sQualityManagementResponsibilities

ThePRCDrugAdministrationLawrevisedandimplementedin2019formallyestablishedthedrug

marketingauthorizationholder(“MAH”)system.Accordingtorelevantlawsandregulations,MAHsshallberesponsibleforthequalityandsafetyofdrugsduringtheirfulllifecycle.

On1March2023,theProvisionsontheSupervisionandAdministrationofDrugMarketingAuthorizationHoldersImplementationoftheMainResponsibilitiesofDrugQualityandSafetyissuedbythePRC

NationalMedicalProductsAdministration(“NMPA”)cameintoforce,requiringMAHstosetupquality

managementdepartmentsstaffedwithqualitymanagementpersonnel,andfurtherclarifyingthespecificrequirementsforMAHsincarryingoutqualitymanagementwork.Drugadministrationauthoritieswill

superviseandinspectthequalitymanagementworkperformedbytheMAHs.InOctober2023,with

regardtocontractmanufacturingofdrugsbyMAHs,NMPAissuedtheAnnouncementonStrengtheningtheSupervisionandAdministrationofContractManufacturingbyDrugMarketingAuthorizationHolders,puttingforwardaseriesofspecificrequirementsonqualitymanagementbyMAHsinrelationtocontractmanufacturing.

Aforeign-investedpharmaceuticalenterprisewhoistheMAHofacertaindrugneedstotakefullresponsibilityforthequalityandsafetyofitsdrug(ifaforeignentityistheMAH,such

foreignMAHshalldesignateaPRCentityasitslocalagenttoperformtheobligationsoftheforeignMAHandbearjointandseveralliabilitywiththeforeignMAH).IftheMAHholdinga

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classBdrugproductionlicenseentrustsathirdpartytomanufacturethedrugs,itshould

payparticularattentiontothequalitymanagementissuesduringtheentrustedmanufacturing.

IV.PromulgationofNewRegulationsonDrugDistribution

FollowingtherevisionofthePRCDrugAdministrationLawin2019,theProvisionsforDrugRegistration

andtheProvisionsfortheSupervisionandAdministrationofDrugManufacturing,havebeensuccessivelyrevisedandpromulgatedastheimplementingregulations.However,theregulationsinthefieldofdrugdistribution(ProvisionsforDrugDistributionLicenseandProvisionsforSupervisionofDrugDistribution),whichwerepromulgatedearlier,arenolongerinlinewithcurrentregulatorythinkingandrequirements.

InSeptember2023,theSAMRissuedtheProvisionsforSupervisionandAdministrationoftheDrugQualityinDistributionandUsage(“Provisions”),updatingtheregulatoryrulesinthefieldofdrugdistribution.TheProvisionswereimplementedon1January2024.

ThenewlyissuedProvisionsreplacetheProvisionsforDrugLicenseandProvisionsforSupervisionof

DrugDistribution,becomingthecoreregulatorydocumentinthefieldofdrugdistribution.TheProvisionssimplifytheadministrationofdrugdistributionapproval,clarifythecross-regionalsupervision

responsibilities,andprovideclearprovisionsontherequirementsforself-ownedwarehousesofdrug

wholesalers,commissionedstorageandtransportation,andself-salesaswellascommissionedsalesbyMAHs.

Foreign-investedpharmaceuticalenterprisesconductingbusinessinthePRCshouldcomplywiththerelevantrequirementsoftheProvisions.Specifically,foronlinedrugsales,onlinetradingplatformsandotheremergingonlinebusinessmodes,theSAMRissuedthe

ProvisionsforSupervisionandAdministrationofOnlineDrugSales,effectiveasofDecember1,2022.Foreign-investedpharmaceuticalenterprisesinvolvedinrelatedbusinessesshouldtakenoteoftheseprovisions.

V.ComplianceRequirementsforAdvertisingContinuetobeDetailed

Duetotheuniquecharacteristicsofpharmaceuticalproductsandmedicalserviceswhichdifferfromothergeneralgoodsorservices,advertisingandpromotionalactivitiesinthehealthcareand

pharmaceuticalindustryshallstrictlycomplywiththerequirementsofthelaw.Inrecentyears,

accompaniedbytheemergenceofawidevarietyofnewadvertisingcampaignsresultingfromthedevelopmentofe-commerceanddigitalmarketingactivities,thePRCgovernmenthascontinuedtorefinetheregulatorysysteminthefieldofadvertisingthroughtheintroductionofrelevantlawsandregulations.

InMarch2023,theSAMRissuedtheMeasuresontheAdministrationofInternetAdvertising,which

comprehensivelyoptimizeandsupplementtheInterimMeasuresontheAdministrationofInternet

Advertisingpromulgatedin2016,expresslyprohibitinganypublicationofadvertisementsformedical

treatments,drugs,medicaldevices,healthfoodandformulafoodsforspecialmedicalpurposesin

disguisedformssuchasintroducinghealthandwellnessknowledge.Furthermore,newlyemerged

popularmarketingmethods,suchaslivestreaming,arealsosubjecttoadvertisingregulationandmustcomplywithrelevantrequirements.

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InMay2023,theSAMRissuedtheMeasuresforExaminationandAdministrationofAdvertisementsofDrugs,MedicalDevices,HealthFoodandFormulaFoodsforSpecialMedicalPurposes(Draftfor

Comments),whichfurthersupplementthecompliancerequirementsfortheadvertisementsofdrugs,

medicaldevices,healthfoodandformulafoodsforspecialmedicalpurposes.Forinstance,itisforbiddentoconcealthepromotionoftheaforementionedproductsasimpartinghealthandwellnessinformationduringlivestreaming;itisalsoprohibitedforspokespersonsinadvertisementstoendorseorcertifytheaforementionedadvertisedproductsduringlivestreaming.Additionally,itoptimizestheexistingrulesofadvertisingreviewandapprovalfortheaforementionedproductsbyadvertisingcensorshipauthorities.Forexample,itclarifiesthatadvertisingreviewisnotrequiredforintroductionanddisplayofproduct

information,specifiedtheexceptionsforanewadvertisingreviewandadjustedthevalidityperiodofadvertisingapprovalnumbers,etc.

WhenconductingpromotionalmarketingactivitiesinthePRC,foreign-investedpharmaceuticalenterprisesshouldpaygreatattentiontowhethercertainpromotionalbehaviorsareconsideredadvertisementswhichthereforemustcomplywithrelevantlawsandregulations.

VI.IntensifyingEnforcementinAnti-Bribery

Inrecentyears,withtheaimofimprovingtheindustryenvironmentandmaintainingfaircompetition,

thePRCgovernmenthascontinuedtofocusoncrackingdownonvarioustypesofbriberyandcorruptionactivities.The“anti-corruptionstorm”in2023hashadamajorandfar-reachingimpactonthewhole

healthcareandpharmaceuticalindustry.OnMay8lastyear,theNationalHealthCommissionofPRC

(“NHC”)andtheNMPA,togetherwithother12ministries,jointlyissuedtheKeyPointsforRectifyingMisconductsinFieldoftheMedicinalPurchaseandDistributionandMedicalServicesin2023;lateronJuly21,theNHC,inconjunctionwiththeNMPAandother8ministries,convenedavideoconferencetodeployaone-yearnationwideconcentratedrectificationagainstcorruptioninthehealthcareand

pharmaceuticalindustry;onJuly28,theCentralCommissionforDisciplineInspectionandtheNational

SupervisoryCommissionconvenedakickoffmeetingwithprefectural-levelauthoritiesofdiscipline

inspectionandsupervision,reiteratingtherequirementsoffocusingonthecadresandkeypersonnel,

insistingonthesupervisionofbothcommittingandacceptingbribes,aswellasconcentratingondealingwithanumberofcorruptioncasesinthehealthcareandpharmaceuticalindustry.Sofar,thisspecial

anti-briberyactionhasmadecertainachievements.

Thisanti-briberyenforcementactionissweeping,coveringthewholeprocessofpharmaceutical

manufacture,supply,distribution,useandreimbursement,withthejointactionofmultipleministriessuchasNMPAandNHC,formingacoordinatedregulatoryandenforcementmechanism.Sincethen,hundredsofleadersandcadresofmedicalinstitutionshavebeeninvestigatedorhavevoluntarily

surrendered,andvariousacademicconferenceshavebeensuspendedorpostponed.Onceagain,theissueofcommercialbriberyinthepharmaceuticalmarketingsectorhasbecomeahottopicinthe

industry.

Thisanti-corruptionactionisanalarmbellaswellasagoodopportunityforpharmaceuticalenterprises

tocarryoutcompliancemanagement.Ontheonehand,foreign-investedpharmaceuticalenterprisesshouldbemorecautiousinconveningacademicconferences,providingcommercialsponsorshipsandothermarketingactivitiestomeetthecompliance

requirements.Atthesametime,ininvestmentandM&Aactivitiesorbusinesscooperation,

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theyshouldalsopayattentiontothecompliancestatusoftargetcompaniesorsuppliers,

andstrengthenexternalcompliancemanagementtoavoidattractingjointliabilityand

compliancerisks.Ontheotherhand,enterprisescouldalsomakeuseofthisopportunitytoconductself-evaluationoftheircompliancemanagementsystem,furtherenhancingtheir

compliancemanagement.

VII.ImprovingLegislationandTighteningofEnforcementintheAnti-monopolyField

2023istheyearwhenthewholeanti-monopolylawsysteminPRCwascomprehensivelyperfected.Tillthebeginningof2024,theSAMRhassuccessivelyrevisedaseriesofanti-monopolyregulations,whichincludesiximplementingrulesandregulationsrelevanttotheAnti-monopolyLaw(2022revision),i.e.ProvisionsonProhibitionofMonopolyAgreements,ProvisionsonProhibitionoftheAbuseofMarket

Dominance,ProvisionsontheReviewofConcentrationofUndertakings,ProvisionsontheAbuseof

AdministrativePowerontheeliminationandrestrictionofcompetitions,ProvisionsontheAbuseofIntellectualPropertyRightsontheeliminationandrestrictionofcompetitions,andRegulationsontheMergerControlFilingThresholds.

Thehealthcareandpharmaceuticalindustryhasalwaysbeenakeyfocusofanti-monopolyenforcement.Theanti-monopolyenforcementinPRCisdevelopingtowardsamoretransparentandhigh-leveltrend,

whichalsoincreasestheriskstoenterprises,especiallyinthehealthcareandpharmaceuticalindustry,

whichiscloselyrelatedtopeople’slivelihood.Accordingtorelevantresearchreports9,sincethe

implementationoftheAnti-monopolyLaw,casesinthepharmaceuticalandhealthcareindustryaccountfor10%ofalladministrativeenforcementcases,makingitoneoftheindustrieswiththehighestamountofanti-monopolyenforcementactivities.Inrecentyears,anti-monopolylawenforcementactivitiesinthePRCpharmaceuticalindustryhavemainlyfocusedontheAPIsfield,whileotherfieldssuchasdrugsandmedicaldeviceshavealsoreceivedincreasingattention,particularlyinthemarketingsector.Theanti-

monopolyenforcementactivitiesmainlytargetatmonopolisticbehaviorswhichdirectlyaffectprices,suchasunfairlyhighpricesandfixedprices,andmanipulatingpricebyrefusingdealsorattaching

unreasonableconditions.SinceFebruary2023,theSAMRandotherprovincialandmunicipalmarket

regulatoryauthoritieshavelaunchedseveralspecialanti-monopolyenforcementactivities,focusingonmonopolisticbehaviorinhealthcareandpharmaceuticalindustryandotherkeyindustries.In2023,

SAMRdisclosedthreebatchesoftypicalanti-monopolyenforcementcasesinthefieldofpeople’slivelihood,ofwhich8wererelatedtothehealthcareandpharmaceuticalindustryandinvolved13pharmaceuticalenterprises.

Inthefuture,anti-monopolyenforcementactivitiesinthePRChealthcareandpharmaceuticalindustry

wouldcontinuetobestrictandrigorous.Becauseoftheheavypenaltiesinasingleanti-monopolycaseandthehighcostofviolatinglaws,foreign-investedpharmaceuticalenterprisesneedtopayextraattentiontothemonopolisticbehaviorssuchasconcentrationofundertakings,

abuseofmarketdominance,ormaintenanceofresalepriceintheirinvestmentandM&A

activitiesaswellasdailyoperationsinPRC,andcarryoutnecessaryanti-monopolyreviewstocertainbusinesspractices.

BasedontheexperienceandobservationsofKing&WoodMallesonsLifeSciences&HealthcareGroup,itisanticipatedthatthePRCgovernmentwillcontinuetofocusonthedevelopmentofthehealthcare

andpharmaceuticalindustryandencourageforeigninvestmentinthePRC.Inthefuture,PRC’s

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healthcareandpharmaceuticalindustrywilldeveloptowardsamorelaw-basedandstandardizedtrend.WheninvestinginthePRC,ontheonehand,foreign-investedenterprisesshouldpaycloseattentiontolegalandregulatorydevelopments,whichwouldhelpensuresuccessfulimplementationofinvestments,M&A,andlicensingtransactions,aswellasmaintainsmoothoperations.Ontheotherhand,experiencedPRClawyersinthehealthcareandpharmaceuticalindustrycouldalsoassistforeign-investedenterprisesinmanaginglegalrisksrelatedtoinvestment,M&A,operation,andexit.Duetospaceconstraints,this

articleonlyprovidesageneraloverviewofthePRC’shealthcareandpharmaceuticalindustry’slegalenvironmentfromlastyeartothepresent.Pleasefeelfreetocontactusifyouhaveanyqueries.

Footnotes:

1

ReferringtoChinaM&A2023Mid-YearReviewandOutlookpublishedbyPWC.

2ReferringtotheCatalogueofEncouragedForeignInvestmentIndustries(2022)issuedbythePRCNationalDevelopmentandReformCommissionandthePRCMinistryofCommercewhichcameintoforceonJanuary1,2023.

3

ReferringtotheGuidelinesregardingFurtherOptimizingtheForeignInvestmentEnvironmentandIntensifyingEffortsto

AttractForeignInvestmentsissuedbytheStateCouncilandcameintoforceonJuly25,2023.

4

AccordingtotheProvisionsoftheStateCouncilontheImplementationoftheRegistrationandAdministrationSystemof

RegisteredCapitalunderthePRCCompanyLaw(DraftforComments)releasedbytheSAMRonFebruary6,2024,existing

companyshall,duringathree-yeartransitionperiod(fromJuly1,2024toJune30,2027),adjusttheremainingcapital

contributionperiodtowithin5years,andtheremainingcapitalcontributionperiodfollowingtheadjustmentshallnotexceedfiveyearsfrom1July2027.IftheremainingcapitalcontributionperiodislessthanfiveyearsbyJuly1,2027,