The article outlines the background of the introduction of China’s new healthcare policies, highlighting the risks for foreign enterprises’ investment under these regulations and the impact of US legislation on biotechnology and data security. By strategically planning and allocating resources from the outset, foreign enterprises can expect significant returns in the medium to long term, thanks to progressive implementation of policies and sustained growth of market demands.

On September 7, 2024, the Ministry of Commerce, the National Health Commission, and the National Medical Products Administration jointly issued the “Notice on Carrying out Pilot Program to Expand Opening up in the Healthcare Field” (the “Notice”[1]) (see the attachments of this article for the complete bilingual versions of the Notice in Chinese and English), proposing to carry out two pilot projects to deepenopening up in the healthcare field. Starting from the date of issuance of the notice, 1) the free trade pilot zones in Beijing, Shanghai, and Guangdong, as well as the Hainan Free Trade Port, will allow foreign-invested enterprises to engage in the development and application of human stem cells, gene diagnosis (CGT), and therapeutic technologies for product registration, marketing, and production; 2) at the same time, wholly foreign-owned hospitals (excluding traditional Chinese medicine and the acquisition of public hospitals) are greenlighted in Beijing, Tianjin, Shanghai, Nanjing, Suzhou, Fuzhou, Guangzhou, Shenzhen, and the entire island of Hainan.

In today’s economic environment, it is challenging for Chinese companies to thrive without any cross-border ties, whereas many foreign enterprises face obstacles when seeking to develop in China. Given the high stakes involved, market players are encouraged to carefully consider their next moves. In light of the Notice, we aim to provide some insights for Chinese and foreign companies on achieving sound and sustainable development in China.

Policies and Markets: To Deepen China’s Market Opening-up

1、Support in View of 30 Years of China’s Reform and Opening-up Policies

Enterprises operate within a micro-level context, while national policies function on a macro scale, influencing the broader economic landscape and inevitably the survival and development of enterprises. Following the establishment of a market economy in 1992, “bringing in” has been a fundamental national policy for China’s economic development. This commitment has been further solidified when the country joined the WTO in 2001, which saw China’s consistent promotion of the policies of “going global” and “bringing in”. Subsequently, the third plenary session of the 20th Central Committee of the Communist Party of China reaffirmed the nation’s unwavering dedication to “upholding the fundamental national policy of opening up and propelling reform on the basis of openness”, which gave “steady expansion of institutional opening up” an unprecedented strategic priority.

“By reviewing the old, one can better understand the new”./ Over the past 30 years, China has adopted a measured approach to incrementally deepen its openness across different sectors, driving economic development. From this perspective, allowing foreign-invested enterprises to engage in the development and application of CGT, as well as to establish foreign-funded hospitals, marks an important step in China’s reform and opening up efforts within this vital sector, which holds immense implications for the well-being of the Chinese people.

2、Support from Steady Growth in China’s Healthcare Market

According to statistics from China’s National Health Commission, the number of hospitals in China and per capita medical expenditure are both growing steadily. The numbers of outpatient visits and outpatient costs as follows[2] are but two examples of such growth:

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3、Government Financial Support to Residents

According to the “Financial Statistics Report (2023) ” released by the People’s Bank of China, the total increase in CNY deposits for the year was CNY 25.74 trillion, of which household deposits increased by CNY 16.67 trillion. Further analysis shows that the total balance of Chinese residents’ deposits has more than doubled in the past eight years, growing from CNY 59.8 trillion in 2016 to CNY 137 trillion in 2023. The share of household deposits in total deposits also rose considerably, climbing from 39.7% in 2016 to 48.2% in 2023.[3] As disposable income grows and the population ages, combined with a heightened public awareness of health, a surge in expenditure on medicalcare and health is anticipated.

Key Issues for Foreign Enterprises to Consider

For foreign investors seeking to invest in these two sectors in China, the following issues need to be considered. Although in 2023, we counseled foreign pharmaceutical companies in their clinical trials for targeted drugs in China and engaged with competent Chinese authorities on behalf of them to parse specific regulatory requirements and formulate business strategies, a comprehensive exploration of these experiences is beyond the scope of this discussion due to space constraints. Here we lay out some key legal considerations, and further discussion on more specific issues is available if requested.

1、Entry Procedures: Market Access and Strategy in China

To access China’s market and operate in the biopharmaceutical industry within China, it is necessary to obtain the corresponding drug qualifications approved by the Ministry of Commerce, the National Health Commission, and the National Medical Products Administration, depending on the specific types of business. Drug manufacturers and sellers must obtain qualifications, including the Drug Manufacturing License and the Drug Business License, and be eligible for the Good Manufacturing Practice (GMP)/Good Supply Practice (GSP) certification for drug production/operation quality management; during the drug development process, compliance with the “Regulations on the Management of Drug Clinical Trials” (GCP) is required; after the completion of drug development, the Drug Registration Certificate is a must; if import and export of drugs are involved, the registration procedures related to business, taxation, customs, commodity inspection, foreign exchange, etc. must be completed in advance. The essential procedures from drug development to market launch include but are not limited to research and development screening, pre-clinical research, clinical research, new drug application and approval, new drug testing, and bioequivalence tests. Each step must comply with China’s strict regulatory provisions. (We will not delve into the intricacies of subsequent operational matters such as labor, taxation, and business management in this article, as they fall outside its purview.)

Due to the high specialization and strong innovative nature of GCT, as well as the potential involvement of a large amount of sensitive data and ethical issues, foreign pharmaceutical companies should remain vigilant and stay abreast of regulatory requirements concerning data protection, cross-border data flow, management of human genetic resources, intellectual property rights, and technology import and export, among others, when investing in this field. If there is a VIE (variable interest entity) structure in place, it is also necessary to consider whether to dismantle the structure and find a better alternative.

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Advice for Practice: Given differences in legal frameworks and specific regulations between China and foreign markets, foreign enterprises need to carefully consider the distinctive characteristics and discrepancies between their home countries and China and to develop tailored investment plans before entering the Chinese market. For instance, it is advisable to consider the differences in pharmaceutical patent protection mechanisms to create an effective patent portfolio for their existing innovations to better suit each jurisdiction’s regulatory environment. Many foreign investors adopt a “small steps, quick progress” model to gradually expand into the Chinese market. As foreign enterprises expand their presence in China, it is essential to cultivate a robust and effective communication framework with competent Chinese regulatory authorities, so as to lay a foundation for future business advancement and innovation.

2、Challenges for Foreign Pharmaceutical Enterprises: Impact of US Biotechnology and Data Security Legislation 

In addition to considering the challenges of market access in China, foreign healthcare companies investing in China also should consider the potential impact of US executive orders and legislative drafts on the biotechnology and data security sectors.

Since 2018, the United States has formulated policies in response to China’s growing biotechnology sector. On September 9, 2024, the US “BIOSECURE Act” (H.R.8333) was passed by the House of Representatives and will be deliberated by the Senate in the coming months. This bill aims to restrict contracts between the US government and companies under its control with certain biotechnology firms, while also imposing limitations on the acquisition and transmission of sensitive data. In conjunction with the previously effective Executive Order No. 14117, “Executive Order on Preventing Access to Americans’ Bulk Sensitive Personal Data and United States Government-Related Data by Countries of Concern and the Protecting American’s Data from Foreign Adversaries Act of 2024”, the United States has imposed restrictions on the acquisition of sensitive data. As a result, entities from China (including Hong Kong and Macao) will face restrictions or outright prohibitions on accessing sensitive personal data of US citizens, including but not limited to specific types of personally identifiable information, biometric identification information, genomic data, and personal health data. In light of the potential implications, foreign enterprises need to proactively stay on top of the potential impact of US executive orders and legislative drafts, thereby making informed strategic decisions to optimize their production, research and development, and business arrangements.

(With regard to the latest regulatory developments and requirements of the US biotechnology and data security legislation, please refer to our articles: US Legislative Movements: Blacklisting “Biotech Companies” and Multiple Risk Factors for the Biotechnology Industry under the BIOSECURE Act.)

Advice for Practice: It is essential for foreign enterprises to consider the sources of their technology and applicable regulatory constraints when investing in China, especially regarding their business partners, R&D arrangements, and technology introduction, so as to inform their business development in both China and the US, as well as their investment and shareholding. In order to optimize outcomes, consider devise proactive strategies that foster consistent revenue streams while avoiding compliance issues.

Conclusion

China’s ongoing commitment to opening up makes available to businesses a vast market with untapped opportunities. However, the healthcare industry is characterized by high technology, significant investment requirements, elevated risks, substantial returns, and protracted development cycles, making it less susceptible to the typical business cycle. The benefits of foreign enterprises in China’s medical market will not be apparent in the short term. We hope that these preliminary tips can assist foreign enterprises in their strategic planning and market positioning. By helping them to address medium and long-term risks, we hope to contribute to their sustainable growth and enduring success in China.

[注] 

[1] https://www.gov.cn/zhengce/zhengceku/202409/content_6973072.htm

[2]  http://www.nhc.gov.cn/guihuaxxs/s3585u/202408/6c037610b3a54f6c8535c515844fae96.shtml

[3] https://news.hexun.com/2024-05-17/212876718.html