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New Opportunities in China’s Healthcare and Pharmaceutical Industries

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

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

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

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

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

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

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

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

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

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

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

As one of China’s major policies to promote foreign investment, foreign investors investing in the industries listed in the Catalogue of Encouraged Foreign Investment Industries can mainly benefit from the following three policies[5]:

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

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

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

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

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

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

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

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

III. New Regulations on Online Drug Sales

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

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

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

1. Drug MAHs: Drug MAHs are only allowed to sell the drug for which they have obtained a drug marketing authorization. To sell drugs to individuals, an additional retail qualification needs to be obtained;
2. Drug distributors: Drug distributors shall carry out online drug sales in accordance with their approved business model (wholesale or retail) and within their approved business scope; and
3. Manufacturers of traditional Chinese medicine (“TCM”) decoction pieces: Manufacturers of TCM decoction pieces shall abide by the relevant obligations imposed on the drug MAH when selling their decoction pieces, including overseeing the whole manufacture and distribution process and establishing a tracing system for decoction pieces to ensure the safety, effectiveness, and traceability thereof[9].

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

In China, not all drugs can be sold online. According to the Provisions for Online Drug Sales, vaccines, blood products, narcotics, psychotropic substances, toxic drugs for medical use, radioactive drugs, pharmaceutical precursor chemicals and other drugs under special management by the country are prohibited from being sold online. The specific catalogue of such drugs is formulated by the NMPA. On November 30, 2022, the NMPA issued the List of Drugs Prohibited from Selling Online (the First Edition) (药品网络销售禁止清单（第一版）), implementing a “negative list” for the administration of drugs sold online. In addition, the Provisions for Online Drug Sales specify that online drug retailers are allowed to sell prescription drugs to individuals through the Internet, provided that such retailers sign an agreement with electronic prescription providers and ensure that the sources of prescriptions are authentic and reliable.

IV. Implementation of Internet hospital supervision policies

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

On July 17, 2018, the PRC National Health Commission, together with the National Administration of Traditional Chinese Medicine, formulated the Administrative Measures for Internet-Based Diagnosis (for Trial Implementation) (互联网诊疗管理办法（试行）), the Administrative Measures for Internet Hospitals (for Trial Implementation) (互联网医院管理办法（试行）) and the Good Practices for Telemedicine Services (for Trial Implementation) (远程医疗服务管理规范（试行）), establishing a basic legal framework for China’s Internet-based medical services sector. On February 8, 2022, the Detailed Regulatory Rules for Internet-Based Diagnosis (Trial) (互联网诊疗监管细则（试行）) was issued, further elaborating on the regulations on Internet-based medical services. With the introduction of these new policies, Internet hospitals, as one of the important sectors of Internet-based medical services, ushered in a new era of strong supervision.

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

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

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

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

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

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

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

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

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

China attaches great importance to the development of the healthcare and pharmaceutical industries, encourages foreign investment in the healthcare and pharmaceutical industries, and continuously improves the investment environment in many aspects, such as innovating regulatory methods, speeding up review and approval, expanding market opening, and promoting the transformation of international rules. With the continuous introduction of new regulations and new policies, China’s healthcare and pharmaceutical industries will also have new opportunities, but at the same time, China’s healthcare and pharmaceutical industries will be subject to more comprehensive, detailed and stricter supervision. The supervision policies are often tailored to suit the local market, so for the enterprise interested in investing in China’s healthcare and pharmaceutical industry, it is strongly advised to engage a PRC law firm with rich experience in the healthcare and pharmaceutical industry to ensure full compliance in the transaction, operation and other aspects in order to secure ideal investment returns.

Authors

Contributed by Jianwen Huang, Head of Pharma and Healthcare Practice at King & Wood Mallesons.

Footnotes

[1] From 2022 China Transaction Report released by Pharmcube.

[2] According to paragraph 4 of clause 32 of the Drug Administration Law of the People’s Republic of China, the entrusted manufacturing of blood products, narcotics, psychotropic substances, toxic drugs for medical use, and pharmaceutical precursor chemicals is prohibited, unless otherwise stipulated by the drug regulatory department under the State Council.

[3] Paragraph 2 of Clause 30 of the Drug Administration Law of the People’s Republic of China.

[4] Clause 40 of the Drug Administration Law of the People’s Republic of China.

[5] http://www.mofcom.gov.cn/article/xwfb/xwrcxw/202210/20221003363101.shtml.

[6] Announcement on Issues concerning the Implementation of the Catalogue of Encouraged Foreign Investment Industries (2022 Version) (Announcement No. 122, 2022 of the General Administration of Customs of the PRC) (海关总署关于执行《鼓励外商投资产业目录（2022年版）》有关事项的公告（海关总署公告2022年第122号）).

[7] Notice on Preferential Policies for Enterprise Income Tax in Hainan Free Trade Port (Cai Shui [2020] No.31) (关于海南自由贸易港企业所得税优惠政策的通知（财税〔2020〕31号）).

[8] Clause 7 of the Provisions for Supervision and Administration of Online Drug Sales.

[9] Clause 39 of the Drug Administration Law of the People’s Republic of China.

[10] Administrative Measures of Sichuan Province for the Sino-Foreign Equity/Co-operative Joint Venture Medical Institutions 2012 (四川省中外合资、合作医疗机构管理办法).

[11] Interim Administrative Measures for the Establishment of Wholly-owned Hospitals by Taiwan Service Providers in the Mainland (台湾服务提供者在大陆设立独资医院管理暂行办法) and Notice of Ministry of Health and the Ministry of Commerce Concerning Issues in Establishing Medical Institutions by Hong Kong/Macau Service Providers in the Mainland (卫生部、商务部关于香港和澳门服务提供者在内地设立医疗机构有关问题的通知).

[12] Provisional Measures on the Administration of Wholly Foreign-invested Medical Institutions in China (Shanghai) Pilot Free Trade Zone (中国（上海）自由贸易试验区外商独资医疗机构管理暂行办法).