Health in Focus
China has become the world's second largest biopharmaceutical market and is on the way to becoming the next superpower in the pharmaceutical R&D field. Innovation is key to the development of the pharmaceutical industry, and China is creating a more conducive environment for such innovation at the legal and regulatory level. We look at the role that lawyers and in-house counsels are playing in this.
The COVID-19 outbreak in 2020 has brought the Chinese medical and pharmaceutical sector into the spotlight again. In the context of the recession facing the broader economy, the medical and pharmaceutical industry still maintains vitality in terms of research and development and capital operation. It is even called the "sector of counter-cycle investment,” meaning, the worse the macro economy, the more people become aware that health is the top priority, and therefore are more willing to invest in this sector.
During the past decade, the medical and pharmaceutical sector in China has seen a growth momentum that cannot be ignored. According to a report in Nature magazine in November 2019, titled “The Next Biotech Superpower,” China is the world's second-largest biopharmaceutical market with $137 billion in sales in 2018.
“The Law of the People's Republic of China on Promotion of Basic Medical and Health Care is the top-level legislation design in the field. For example, paragraph 2 of Article 3 stipulates that 'medical and health care services shall adhere to the principle of public welfare,’ setting forth the principle for the dozen or so prevailing laws in the medical and health care sectors."
Wang Bo, Commerce & Finance Law Offices
In October 2016, the China's CPC Central Committee and the State Council issued the Healthy China 2030 Planning Outline, which proposed five strategic tasks, with one of them being to develop the healthcare industry.
"The Chinese medical and pharmaceutical market has experienced an explosive growth in the past decade. This growth is manifested in the capital market – the relevant listing, investment and financing activities have been extremely active," says Wang Bo, partner at Commerce & Finance Law Offices. "According to a third-party's statistical data, although the overall capital market investment tended to be cautious in 2019, investments in the medical industry remained at 60 billion yuan [$8.6 billion]."
In the view of He Li, Asian co-head of Davis Polk & Wardwell, the Chinese medical and pharmaceutical sector has long been a particularly important market segment that has not been fully activated.
He Li points to the rapid development of the medical and pharmaceutical sector in the past decade, which has brought about the development of legal business in three aspects. "One is compliance services in China and abroad; the second is pharmaceutical products related transaction services, such as mergers and acquisitions, and investment; and the third is capital market services, such as listing," he says.
The medical and pharmaceutical industry is closely related to people's health and wellbeing, and as a result has always been a highly regulated industry globally. But in China, the medical and pharmaceutical regulatory systems have not always kept up with the rapid development of the industry.
According to Wang, China has been stepping up efforts to strengthen the top-level legislation in the medical and pharmaceutical sector, among which, the most important legislation is the Law of the People's Republic of China on Promotion of Basic Medical and Health Care, which came into force on June 1 this year.
"This law is the top-level legislation design in the field. For example, paragraph 2 of Article 3 stipulates that 'medical and health care services shall adhere to the principle of public welfare,’ setting forth the principle for the dozen or so prevailing laws in the medical and health care sectors," Wang says.
In the field of biotech, 2019 was also known as "the year of policy innovation.” In August 2019, the first major revision was done to the Drug Administration Law since its promulgation 18 years ago. The revised law implements a new market authorization holder (MAH) system. In the past, drug registration is bundled together with drug production license; as a result, scientific research institutions have to sell newly developed drugs to pharmaceutical production companies in order to obtain drug registration approvals.
Under the new system, scientific research institutions can apply to become drug marketing license holders and entrust pharmaceutical production companies with the production of these new drugs, which is a great incentive to scientific research institutions for innovation.
According to Amy Liu, head of legal & compliance division at Roche Pharmaceuticals China, the MAH system, as well as the concept of full-process management of the drug life cycle, allow drug marketing license holders to adopt a more flexible business model and meanwhile undertake more and stricter management responsibilities.
She also points out that the new Drug Administration Law and the newly revised Measures for the Administration of Drug Registrations greatly simplified and accelerated the review and approval of biopharmaceuticals, especially innovative drugs. At the same time, the National Medical Products Administration (NMPA) has released a number of guidelines for biopharmaceutical technology review, making its R&D and marketing standards clearer and more mature, and thus promoting the internationalization process in this field.
But "there are still many detailed implementing rules need to be clarified. We look forward to the promulgation of more standards, detailed rules and guidelines in the future to give companies clearer guidance," she says.
Meanwhile, Liu points out that the frequent changes to China's pharmaceutical regulations have posed new requirements for lawyers. The first is the higher compliance requirements for companies.
Secondly, in-house counsel need to have a keen sense of business opportunities in a dynamic environment, so as to provide effective support for the business. "China's regulatory environment keeps evolving; therefore, it is one of the important competitiveness of a company if it is able to discover opportunities in time and act according to circumstances," she says.
Recently, Roche China's legal team worked together with law firms to conduct feasibility studies on the cooperation with local companies under the new MAH system, to carry out R&D cooperation, outsourced production and more.
In addition to regulatory changes, China also started the dynamic adjustment of the medical insurance catalogue in August 2019 and launched the national program of "buying with quantity.” In China, people still choose medical care services and drugs within the scope of medical insurance reimbursement, therefore the new adjustment will have a significant impact on pharmaceutical companies.
INNOVATION AND COLLABORATION
According to the report in Nature, China's pharmaceutical R&D landscape is also undergoing rapid development. The first wave of independent research and development of new drugs has been launched in China. According to the data released by the China Pharmaceutical Innovation and Research Development Association, the number of Chinese local pharmaceutical companies has reached 4,441.
In recent years, Chinese biotech companies have increased investment in research and development. But according to data released by the World Health Organization, there are not many pharmaceutical companies with R&D capabilities in China and their R&D budget accounts for less than 5 percent of their sales revenue. In contrast, biotech companies in the U.S. and Europe invest nearly half of their sales revenue on R&D. This means that research and development in China's pharmaceutical sector is still in its infancy.
He Li has participated in the IPOs of dozens of Chinese pharmaceutical companies in the United States and Hong Kong. In the process of preparing the prospectus of such a company, he finds that "a considerable number of biopharmaceutical companies intended to be listed are still targeting drug targets that have been proven by foreign advanced pharmaceutical companies, or adopt a 'me-better' R&D approach, which is not pure local innovation."
In addition to independent research and development, the cross-border licensing transaction is another form of research and development, the volume of which is also increasing in recent years. An in-house counsel from a local pharmaceutical company, who wants to stay anonymous, tells ALB that not only do cross-border drug licensing transactions occur more frequently in recent years, but also the proportion and investment in drugs for clinical researches among multiple international clinical centers are increasing year by year.
All these benefit from the increasingly open attitude of the Chinese government towards foreign investment in China, which is manifested in the promulgation of the new Foreign Investment Law. Local governments are also opening doors to overseas players in this field.
Chu Yang, partner at Davis Polk & Wardwell, tells ALB that from the perspective of a law firm, it had already seen an increase in such cooperation-oriented transactions or consultation requests. "One of the tendencies is that biotech companies seek to continue to expand drug research pipelines, while law firms represent these companies in seeking cooperation with foreign pharmaceutical companies to obtain the right to develop certain drugs in China and increase the varieties of the companies' pharmaceutical products pipelines,” he notes.
Of course, cooperation is always a two-way road. "Another trend that we have noticed is that foreign pharmaceutical companies are looking for partners in China to set up joint ventures, so as to authorize these joint ventures to develop pharmaceutical products in Greater China. Then these joint ventures may seek to list in Hong Kong," Chu says.
As one of the first pharmaceutical companies entering the Chinese market, Roche established a joint venture in Shanghai as early as 1994. In October 2019, Roche's new innovation center in Shanghai was inaugurated, which hired about 150 scientific researchers engaged in drug discovery and early clinical development.
Liu observes that competition in the Chinese pharmaceutical market has indeed become more intense in recent years. In her opinion, the benefits of this change outweigh the disadvantages. "With the participation of many local investors and R&D institutions, it will promote the technological progress and talent exchange ... And it should not be a zero-sum game between multinational companies and Chinese local companies, especially in the pharmaceutical field," she says.
CHALLENGES AND FUTURE TRENDS
Speaking of the challenges faced by pharmaceutical companies in China in the future, Liu firstly mentions that, in terms of intellectual property rights, China has not yet established a link system between drug registration and patent status. "It might easily cause a large number of IP infringement disputes among manufacturers after the products are marketed," she feels.
"At present, there are not unified regulations and regulatory authorities for the management of medical care data in China, and relevant laws are updated quite frequently. Therefore, it is very important for biopharmaceutical companies to effectively use medical and health data to promote R&D to benefit patients, and meanwhile to keep abreast of the changes in the relevant laws and regulations to ensure compliance in their operations."
Amy Liu, Roche Pharmaceuticals China
Another challenge lies in the field of medical care data, which is critical for pharmaceutical companies.
"At present, there are not unified regulations and regulatory authorities for the management of medical care data in China, and relevant laws are updated quite frequently. Therefore, it is very important for biopharmaceutical companies to effectively use medical and health data to promote R&D to benefit patients, and meanwhile to keep abreast of the changes in the relevant laws and regulations to ensure compliance in their operations," Liu says.
Another new change facing pharmaceutical companies is the Internet plus business model. At present, the Roche's legal team is working with law firms on issues related to the strategic cooperation with online medical institutions after the uptake of services such as remote medical consultation, and online sales of prescription drugs.
Lawyers say that although the "Internet-based health care" is not a brand-new idea, the COVID-19 pandemic has triggered a boom in the field. According to data released by the National Health Commission, in March, virtual consultations conducted by hospitals under its administration increased 17 times over the same period last year, while virtual consultations conducted through some third-party online service platforms saw an increase of more than 20 times compared with the same period last year, Wang shares with ALB.
The development of the Internet-based business model in the medical and pharmaceutical industry also pose challenges to lawyers. According to Wang, "lawyers need to have a deeper understanding of the industry, have a faster learning ability, and also have a strong ability to appropriately classify the services and products."
He gives an example. When talking about the Internet, the first thing comes into the minds of many lawyers is that the Permit for Operation of Value-Added Telecom Services must be obtained. But when it comes to online medical appointments, online consultations, and online hospitals, whether they fall within the category "B21 – online data processing and transaction processing business" or the category "B25 – information service business", or neither? It requires lawyers to have a deeper understanding of the related business and make relevant analysis and judgment after putting the services or products into different categories appropriately.
Regarding the overall development of the medical and pharmaceutical sector in the future, He Li says that the sector is pretty much a hot spot at present, but the market maturity and market penetration in terms of medicines, medical devices or medical care services in China still need to be improved. "This sector is still at the stage of dawn."
To contact the editorial team, please email ALBEditor@thomsonreuters.com.