It is not easy for companies engaging in life sciences in China to navigate around the legal frame work as there is a myriad of laws and regulations. This is compounded by the fact that this is a fast growing area, and the Chinese government has been issuing new regulations and measures to cope with the changes. Pharmaceutical companies intending to invest in China need to be careful and invest sufficient resources to ensure compliance with the regulations. This article covers a number of issues that are highly relevant to the pharmaceutical industry and investment generally, in the life sciences sector in China.
Regulation of pharmaceutical drugs in China
Pharmaceuticals are highly regulated in China and companies must obtain approvals and/or licenses and satisfy a range of requirements to manufacture, sell or import, or conduct research on pharmaceutical products.
The Drug Administration Law is the main piece of legislation governing the control of drug manufacturers and distributors, the control of pharmaceuticals in medical institutions and the regulation of drugs and drug packaging, pricing and advertising in China. The SFDA is the authority responsible for granting approval for the manufacture and sale of pharmaceutical products.
Clinical trials are also closely regulated under the Drug Administration Law and a number of separate measures and regulations. In the case of “new” drugs and imported drugs, the pharmaceutical company needs to submit clinical data based on trials conducted in China, to obtain marketing approval. To obtain approval to run clinical trials, the applicant needs to:
- Submit preclinical data. Provided certain criteria are met, preclinical data from trials run in another country can be used.
- Ensure the samples for clinical trials are tested and approved by a designated institute.
The clinical trials are subject to regulation by the provincial drug administration and SFDA, and must be conducted at designated or otherwise approved hospitals.
“New drugs” refers to drugs which have never been sold in China, drugs whose composition or administration method has changed or where the application of the drug has been amended to include additional indications.
In addition, pharmaceutical companies intending to conduct clinical trials need to pay close attention to a number of issues. The Protocol for the study should comply with the Good Clinical Practice (GCP) and the SFDA Regulations. The clinical trial may be jeopardizsed if it falls short of the legally required standard. For example, clinical trials involving human subjects must meet certain special requirements, such as approval from an independent ethics committee, and the informed consent of all participants.
Pharmaceutical companies should seek expert advice before commencing any particular study since not all relevant information can be gleaned from the network of complex laws and regulations. For example, Article 66 of the GCP requires that multiple centre trials being carried out in different countries around the world should be conducted simultaneously. It would be very difficult to comply with this provision in practice and in recognition of this the SFDA has indicated that Article 66 will not be interpreted rigidly.
The enormous amount of data that must be submitted to obtain marketing approval takes months or years to gather, at a considerable cost. The major concern for drug innovators is that generic manufacturers will be able to short cut their marketing approval application process by relying on this data. New regulations effective from September 2002 are of some assistance.
Article 35 of the Implementation Rules for the Drug Administration Law, requires the SFDA to protect the data submitted by a pharmaceutical company for obtaining production or marketing approval for drugs with new chemical entities. Other pharmaceutical manufacturers are also not permitted to use the same data to apply for approval for that drug for 6 years from the date of the granting of the approval (unless the originating pharmaceutical manufacturer consents, which is highly unlikely).
The fact that clinical data is subject to review by a committee of experts who may come from tertiary and research institutions may cause some concern as to the risk of leakage of data. There does not appear to have been any reported instances of this and in any case another company would not be permitted to use the data to seek SFDA approval.
Prior to the 1992 revision of the Patent Law, patents could not be granted for pharmaceutical products. Only process patents could be granted for pharmaceuticals, i.e. patents which cover a process for the manufacture of pharmaceuticals. However, the government set up a scheme where owners of exclusive rights in pharmaceutical products which had never been marketed in China could seek administrative protection for those products in China, provided the rights were acquired between 1986 and 1993. This prevents others from manufacturing or selling the same drug in China for up to seven and half years.
The administrative protection mechanism is becoming redundant since less and less products qualify for this protection as time goes on.
In 2002 an administrative measure relevant for new products was introduced: where approval is granted for the manufacture of a new product in China, no other entity will be granted manufacturing or marketing approval for up to 5 years during a “monitoring period”. “New drug” means that it has not previously been sold in China.
The monitoring period is intended to allow for observation of adverse effects of the new drug and the duration may range from 3 to 5 years from the date of approval to manufacture the new drug. During this period, SFDA will not grant approval to another company to manufacture or import the same drug.
Patent infringement action
As pharmaceutical product patents were not permitted prior to 1992, innovators were forced to rely on process patents to protect their inventions. Process patents are usually much harder to litigate and take longer than product patents. There was a flurry of patent applications in 1993 and the number has been increasing each year.
There is good justification for the opinion that patent infringement actions are difficult for patentees in China. This is slowly changing in China and the courts are becoming more experienced. Most provinces now have specialist intellectual property courts and the Beijing and Shanghai courts are developing the best reputation in this area. It is possible for a plaintiff to “forum shop” – they can initiate the action in a Beijing or Shanghai court provided they are able to collect evidence of infringing activity within the respective jurisdiction.
The plaintiff needs to note a few procedural issues. There is no formal discovery process in litigation in China which would normally allow a plaintiff to obtain information on a defendant’s manufacture of its products. For process patents, this difficulty is somewhat alleviated by Article 57 of the Patent Law which reverses the onus of proof to the defendant to show that it is using a non-infringing process to manufacture the product. To invoke this, the plaintiff must show:
(1) The product in question is a “new” product, that is, it was not available in China before the filing date of the plaintiff’s patent application.
(2) The infringer’s product is identical to their own product. This may be established by testing samples of the infringer’s product or examining the product inserts and leaflets.
Plaintiffs may also seek the court’s assistance in obtaining evidence to support their case through an evidence collection or evidence preservation order. This can be effective as the respondent is not given prior notice and is often required to produce the documents or evidence immediately.
As with other jurisdictions, a common tactic for the defendant is to file for invalidation of the patent. This is a particular risk if there are a number of defendants, (such as generic drug manufacturers) as they may gather resources to do so.
The PRC has a split system: the patent validity is considered by the Patent Re-examination Board (PRB) of the State Intellectual Property Office, whereas the infringement is determined by the Chinese courts.
As it is not uncommon for an infringement trial to be completed before the PRB has decided on the validity of the patent, it is possible for a court to find infringement with the patent later being found invalid. In such a situation, the earlier judgment is not “void” and the plaintiff will not be ordered to return any damages paid to it prior to the invalidity declaration.
It is perhaps for this reason that in practice, the courts will often either exercise its limited discretion under the Patent Law to stay the infringement proceedings, or defer handing down the judgment until the PRB gives its decision on validity.
It is possible for a patentee to apply for a preliminary injunction to restrain the defendant from selling an infringing pharmaceutical product before legal proceedings are instituted. The court will need to be satisfied that there is a high likelihood of finding patent infringement (most important factor), risk of irreparable damage to the patentee, provision of adequate security by the patentee and that it is in the interests of the public.
A successful plaintiff may ultimately be awarded a permanent injunction and/or damages against the infringer. Under the Patent Law, damages are calculated according to the loss suffered by the patentee or the profits earned by the infringer. If this is difficult to ascertain, then the court will assess the damages by reference to royalties which may be payable. Compared to other jurisdictions, the damages awarded in China for patent infringement cases are not substantial.
In addition, a recent amendment to the Measures for Administration of Drug Registration now gives a right to a patentee who has obtained a judgment in its favour to request the SFDA to cancel the approval given to a pharmaceutical company in respect of an infringing drug.
Commercial deals in life science
Multinational pharmaceutical companies have been investing heavily in research and development in China. Other than the benefit of lower costs, a pharmaceutical company who aligns itself with a prestigious research institute in China may help in building important relationships and consolidate its position in developing the market. This seems like a wise choice for companies considering China’s support for high tech R&D in the form of tax concessions and other incentives, and the fact that there is no shortage of talent.
A foreign pharmaceutical company will often enter into a collaboration or commissioning contract with a Chinese research institute. The foreign entity usually provides the background intellectual property and resources to the Chinese research institute who carries out the research with local staff. Such contracts are subject to regulation under the Contract Law, particularly the technology contract provisions. If there is a license of intellectual property to the research institute to conduct the research and a transfer back of intellectual property resulting from the research, it is also necessary to ensure that the provisions dealing with import and export of technology are complied with. Depending on the nature of the technology, it may be necessary to register and/or seek approval for the contract from relevant government authorities.
Pharmaceutical companies intending to conduct clinical trials China should ensure they fully protect their rights. It is important to have a comprehensive clinical trials agreement setting out all of the obligations of the respective parties since there are often a number of different parties involved. These parties include the Sponsor, the Institution, the Principal Investigator (often employed by the Institution and has overall responsibility for the conduct of the trial), an independent Ethics Committee and Review Board, and a Monitor. The actual clinical trials agreement will usually be between the Sponsor and the Institution and there should be appropriate warranties and indemnities in the agreement to cover the potential liabilities of the other parties involved.
It is also essential to specifically address the ownership of intellectual property rights developed during the course of a clinical trials study since there are so many parties involved who could potentially lay claim to any inventions or discoveries arising from the study. It is usual for the Sponsor to own most of the intellectual property rights developed from the study and this should be stated in the agreement to avoid the risk of future disputes between the parties.
Vibrant foreign investment activity in the life sciences sector
With the further liberalisation of the life sciences sector in the context of China’s entry into the WTO, recent years have also seen increasing foreign investment in the sector. Foreign-related M&A activity, in addition to traditional “green-site” investments in the life sciences sector, has been growing strongly as a result of the liberalisation of laws and regulations in China.
For example, Royal DSM N.V. recently made a US$164 million strategic investment into North China Pharmaceutical (Group) Co Ltd. ("NCPC") and an NCPC-listed company in Shanghai. It also acquired a 49% interest in two other DSM-NCPC joint-ventures in North China.
Investment vehicle available to foreign investors
Foreign investors are only permitted to set up or acquire companies in China which carry on certain categories of business. The Catalogue for Guiding Foreign Investment Industry in the PRC, categorises businesses as being “encouraged”, “restricted” or “prohibited”. As a general rule, if a business is not expressly encouraged, restricted or prohibited, it is permitted under PRC law.
In the life sciences sector, a large majority of pharmaceutical manufacturing and research, biotechnology, healthcare equipment and facilities manufacturing activities fall either within the “encouraged” or “permitted” category. The establishment of a medical institute or the manufacture of certain healthcare products or equipment is a “restricted” category of business, while the manufacture of certain types of traditional Chinese medicine is “prohibited”. Distribution of pharmaceuticals has been partly liberalised but certain restrictions still remain. Accordingly, it is important to establish whether the foreign investor’s proposed activities are permitted in China.
Generally, there are 3 principal types of foreign invested enterprise that may be available to a foreign investor for the purpose of establishing a presence in China. These are:
- an equity joint venture ("EJV");
- a contractual (or cooperative) joint venture ("CJV"); and
- a wholly foreign-owned enterprise ("WFOE").
An EJV is a Chinese legal entity with limited liability. It is established on the basis of a joint venture agreement between Chinese and foreign parties.
A CJV may take one of two forms:
(1) No creation of a separate legal entity; the parties make their contributions to the project and directly acquire the benefit of profit or the burden of loss.
(2) Creation and registration of a separate legal entity where the parties' respective liabilities are generally limited to their capital contributions to the entity.
A WFOE is a separate legal entity with a limited liability status where one or more non-PRC parties hold 100% of the equity.
A foreign investor may consider establishing a presence in China in the life sciences sector by:
(a) making a so-called "”green site” investment under which a new FIE is created; (“Green Site Investment”); or
(b) acquiring an existing business ("M&A Transaction") which may be restructured.
An M&A Transaction may include the acquisition of shares or the purchase of assets in an existing foreign-owned or domestic business. Both Green Site Investments and M&A Transactions require the approval of relevant authorities in China. Indeed, an understanding of the approvals required and regulatory hurdles is a key to successful market entry in the life sciences sector in China.
At the pharmaceutical intellectual property rights summit in Beijing last July, the SFDA firmly emphasiszed the importance of protecting IPR in the pharmaceutical industry. “More effort must be put into protecting IPR in [this] sector”, said Zhang Jingsi, the deputy director of the State Food and Drug Administration (SFDA).
The constant development of China’s regulatory frame work and the courts’ increasing exposure to patent infringement cases is producing a more sophisticated legal system. This can only make it easier for companies to do business and enforce their rights in the PRC.