CHINA (PRC FIRMS): An Introduction to Healthcare

Development in Investment Activities 

In light of the COVID-19 pandemic, the pharmaceutical industry has continued its hot streak as one of the top VC/PE investment destinations and the most active sectors for M&A activities. The proportion of onshore transactions with built-in JV structures has increased in recent years, based on data we collected from over 500 transactions in 2020 and over 2,000 transactions we advised on in the past four years. Transactions with non-VIE structures have become significantly more popular than before among offshore transactions where the investee company was an offshore entity while its principal business remained in China. This is directly attributable to China’s gradual liberalisation of foreign investment control and exceptional progress in developing new technologies in the industry.

Certain key legal provisions are more commonly found in investments in the pharmaceutical industry. For example, in share purchase agreements, language for principal business, use of proceeds, and representations and warranties are usually detailed to specify the developmental stages or milestones for the relevant type of product. In the shareholders’ agreements, as life science founders and investors from across the world share a similar background, redemption obligations in most transactions fall solely upon the investee company. Where founders are required to bear redemption obligations, the obligations are often contingent upon the occurrence of certain events. The founders only serve as a backstop to the company’s obligations and the founders usually cap their obligations to the extent of their shares in the company or the value of such shares to shield their other personal and family assets from such obligations.

Among pharmaceutical sub-industries, vaccine technologies have drawn investor interest, including the research and development of siRNA, mRNA, and DNA drugs. For example, we have observed that a certain company engaged in the clinical development of potential COVID-19 vaccines has raised more than CNY600 million in its series B financing and USD700 million four months later. By contrast, investor enthusiasm for aesthetic medicine projects has decreased due to strict regulatory supervision. The National Health Commission and related authorities announced they intend to conduct a special campaign to combat illegal aesthetic medicine services across the country from June to December 2021, according to the Work Plan for the Special Rectification Campaign to Combat Illegal Aesthetic Medicine Services. The increase in regulatory supervision has caused concern in the capital markets about the aesthetic medicine industry in China.

Development of License-in/out Transactions 

In recent years, driven by favourable government policies and market incentives, China’s pharmaceutical industry, especially in the field of biomedicine and innovative drugs, has shown a trend of rapid and high-quality development. National pharmaceutical policies in China have put forward higher requirements for innovation capabilities and core technologies of pharmaceutical companies. On 2 July 2020, the Center for Drug Evaluation (CDE) issued the Guiding Principles for Clinical Value-Oriented Research and Development of Anti-tumor Drugs (Draft for Public Comments), which require clinical data submitted by innovative pharmaceutical companies to use the most innovative cancer drugs on the market as reference standards. On 16 April 2021, the China Securities Regulatory Commission (CSRC) revised the Guidelines for the Evaluation of Science and Technology Innovation Attributes (for Trial Implementation), adding a new requirement that research and development personnel must account for more than 10% of the company’s total workforce, which has been interpreted as requiring companies to have substantive scientific and technological innovation capabilities.

Under the guidance of such pro-innovation policies, Chinese innovative pharmaceutical companies have focused more on the research and development of first-in-class and best-in-class products. The development of license-out transactions has exceeded market expectations and Chinese pharmaceutical companies have gradually stepped into the pharmaceutical innovation acceleration track. Before 2020, there were fewer than 10 innovative drug license-out deals per year in China, while the number of license-out deals in 2020 reached 40, with 22 disclosed transactions having an aggregate transaction amount of CNY10.97 billion. In the first half of 2021 alone, there have been 12 license-out transactions disclosed by PRC pharmaceutical companies and the aggregate transaction amount of the 7 disclosed transactions reached CNY5.95 billion.

License-in transactions are also experiencing a significant transformation. Compared with traditional product-based license-in arrangements that introduce innovative drugs or generic drugs, the market has shown a preference for technology-based license-in arrangements, such as introducing a technology platform from a business partner for front-end drug development or introducing technology for drug research and development on the licensee’s own platform. Among all license-in transactions, the number of technology license-in transactions increased from 2 in 2018 to 18 in 2020; and the number of technology platform license-in transactions in the first eight months of 2021 has reached 13. We expect to see a similar trend in the next few years, and the market will continue to pay more attention to the innovation capabilities of pharmaceutical companies and promote further acceleration and enhancing innovation of Chinese pharmaceutical companies.

Health Data Security and Personal Information Protection

China has over the past few years gradually established and improved its personal information protection system through the promulgation of legislation, judicial interpretations, rules and voluntary national standards, including the Cybersecurity Law, the PRC Civil Code and the Data Security Law. The formal promulgation of the Personal Information Protection Law, which came into force on 1 November 2021, provides a detailed legal framework for personal information protection and lays down the foundation for future legislation in this field.

Meanwhile, significant developments have been seen in the healthcare sector with respect to personal information protection. In accordance with the Regulations on Administration of Human Genetic Resources, effective as of 1 July 2019, if the relevant personal information is classified as human genetic resources information, any collection, preservation, utilisation and disclosure thereof must comply with certain requirements, including ethical reviews, prohibition on purchase and sale, prohibition on collection or preservation by foreign or foreign-controlled organisations, individuals or institutions, and prohibition of cross-border transfers. All these mandatory rules are echoed in the Biosecurity Law, a higher level piece of legislation, which took effect on 15 April 2021. Additionally, national voluntary standards list personal medical treatment records as personal sensitive information, and recommend additional measures be taken for the transfer, storage, access control, processing, sharing and transfer of personal sensitive information. These standards include the Information Security Technology – Personal Information Security Specification, revised in October 2020, and the Information Security Technology – Guide for Health Data Security, effective as of 1 July 2021.

These latest legislative and regulatory developments have imposed a noticeable impact upon pharmaceutical, medical device and medical services companies, particularly foreign invested entities in these industries. Utilisation of human genetic resources is inevitable in almost all clinical trials conducted by pharmaceutical and medical device companies, which are required to be filed with competent authorities. These filing formalities, however, have proven to be lengthy and thus cumbersome for the entire clinical trial process. Mandatory localisation and prohibition on cross-border transfers of healthcare data represent another point of consternation for multinationals because global sharing and management of clinical, commercial and patient treatment data have long been a common practice.