Spotlight on Greater China: antitrust and regulatory risks in life sciences distribution channels

Kicking off the webinar, Lu Zhou, partner in the Hogan Lovells General Corporate and M&A practice, noted that many life sciences and health care companies lack significant experience with antitrust and regulatory issues in their distribution channels in China. The complexity of laws, regulations, and cultural differences can each bring challenges to practicing in this market.

Antitrust in Mainland China and Hong Kong: risk mitigation for the life sciences sector

Qing Lyu, senior associate at Hogan Lovells Fidelity¹ and PJ Kaur, senior associate in the Hogan Lovells Hong Kong office each gave overviews of, respectively, the Mainland China and Hong Kong antitrust regimes. In Mainland China, anti-competitive conduct is governed under the amended Anti-Monopoly Law of China (AML) with four AML implementing regulation amendments now in force from 15 April 2023, as we have also described here. In Hong Kong, the primary source of competition law is the Hong Kong Competition Ordinance, which has been in force since 2015. 

Enforcement trends in the life sciences sector

Ms. Lyu highlighted how the life sciences sector remains an antitrust enforcement priority, with the pharmaceutical sector accounting for almost 10% of total behavioral cases. There are specific guidelines regarding active pharmaceutical ingredients (API), while the recent enforcement focus also extends into other drug and medical device areas. A key trend to watch is that enforcement focuses on sectors concerning people’s livelihoods, with high drug prices and/or price increases under scrutiny.

Turning to Hong Kong, Ms. Kaur noted that while there has been only one complaint regarding pharmaceutical, therapeutic, and other sciences in the prior one-year period, the Hong Kong Competition Commission (HKCC) has also indicated that enforcement in 2023 will prioritize conduct that negatively impacts people’s livelihoods, which may imply that the life sciences sector is on the radar of the authorities. Ms. Kaur also noted that the HKCC will not hesitate to pursue a foreign parent company based on the activities of its Hong Kong subsidiary.

Key risk areas and how to mitigate

Turning to major risk areas for the life sciences sector, Ms. Lyu first discussed potential issues around excessive pricing in Mainland China, noting that the AML prohibits a dominant company from setting unfairly high prices. Considerations include 1) comparison with the prices of competitors’ same or similar products; 2) comparison with the prices of same or similar products by the dominant company in other regions; 3) abnormal price increase vs stable costs; and 4) price increase clearly higher than cost increase. Recent Supreme People’s Court (SPC) draft interpretations also introduce new factors for assessing the “reasonableness” of high prices. Recent enforcement cases have focused on products having multiple price increases, and the authorities considered whether costs remained stable and/or whether price increases were proportionate to cost increases. Ms. Lyu also noted that there can be a risk even for non-dominant companies, as laid out in a guiding opinion by the State Administration for Market Regulation (SAMR) in June 2022 regarding price gouging in view of pandemic-related supply shortages, and proposed some measures to mitigate risk.

Turning to resale price maintenance (RPM), Ms. Lyu noted that RPM is, in practice, approached  almost like a per se illegal violation by SAMR, despite the recent AML amendment which suggested the contrary. While a prior draft had included a specific numerical market share safe harbor, this language was deleted from the official rules as enacted, indicating that SAMR decided to forego the opportunity to set a formal market share threshold, at least for the time being. Ms. Lyu highlighted that the Chinese authorities look closely at whether there are disincentives when a company provides for resale price recommendations, such as threats of suspending supply or revoking distributorship, or incentives to comply with the recommendations. Again, Ms. Lyu shared her thoughts on risk mitigation.

Similarly, noted Ms. Kaur, in Hong Kong, RPM is also generally considered illegal, and fixed or minimum resale prices can come under scrutiny. In addition, Ms. Kaur noted, the HKCC can bring RPM cases directly to the Competition Tribunal without warning to the business. To mitigate the RPM risk, she noted that, similar to the situation in Mainland China, the starting point is to audit distribution agreements, especially those entered into before the Competition Ordinance came into effect, pay special attention to any terminology regarding fixed prices and/or margins. If potentially problematic language is identified, this can be handled on a case-by-case basis, considering, for example, whether the agreement constitutes a genuine agency agreement, and possibly considerations of overall economic efficiency. 

Ms. Kaur also highlighted recent cases regarding exclusive dealing and refusal to deal and their relevance to the life sciences sector. She gave an overview of certain scenarios in which these allegations may be more likely to arise, such as where a customer is also a competitor in the downstream market, and put forward ideas on how to mitigate risk.

Drawing to a close, the team advised that risks for the life sciences sector are growing in these important areas. Moderator Adrian Emch, antitrust partner in the Hogan Lovells Beijing office, again underscored the importance of the focus by authorities in both Mainland China and Hong Kong on industries impacting people’s livelihoods, which likely include the life sciences sector at large.

Pharmacovigilance in Mainland China and Hong Kong

Recent changes in Mainland China

Turning to other regulatory risks to life sciences distribution channels, Jessie Xie, counsel in the Hogan Lovells Strategic Operations, Agreements & Regulation (SOAR) practice area, first provided an overview of pharmacovigilance (PV) in the context of Chinese regulations. She noted that China joined the International Council for Harmonization of Technical Requirements for Human Use (ICH) in 2017, followed by the establishment in December 2019 of a pharmacovigilance system to monitor, identify, evaluate, and control adverse drug reactions, which was established in the China Drug Administration Law. The China Good Pharmacovigilance Project (China GVP) was released in December 2021, followed by the National Medical Products Administration (NMPA) Pharmacovigilance Inspection Guidelines in April 2022. Local guidance in Jiangsu Province has also followed, as we have described in more detail here.

The China GVP generally follows international standards, and covers activities during clinical trials as well as the drug post-marketing period. The China GVP extends to sponsors and marketing authorization holders (MAH), whether domestic or foreign. The MAH must register with the National Adverse Drug Reaction Monitoring System within 30 days after obtaining MA of the first drug product, and must establish a drug safety committee, a PV department and a PV “in-charge person”. While the MAH is ultimately responsible, MAH are allowed to entrust qualified third parties, such as a local domestic entity, to take certain of these responsibilities.

While PV focuses on adverse drug reactions (ADR), information regarding other unintended or harmful events, such as drug abuse, drug misuse, or taking the wrong dosage, must also be collected, monitored, and reported. The China GVP distinguishes between “serious” and “non-serious” risks, with different reporting requirements for each. When assessing risk, Ms. Xie noted, companies must also account for off label uses. She also highlighted some specific practical control points for stakeholders to consider.

Regulatory approvals in Hong Kong

Turning to Hong Kong, Andrew Cobden, counsel in the Hogan Lovells Intellectual Property, Media, and Technology practice, noted that Hong Kong has a fairly well developed system for PV, which has been in place for at least 10 years. Mr. Cobden noted that Hong Kong administers a drug surveillance program where the Hong Kong Drug Office collects samples on a random and/or risk related basis. In addition, the Hong Kong Drug Office carefully monitors the websites and information given by overseas drug regulators such as FDA in the U.S. and the European Medicines Agency (EMA). These PV requirements apply not only to the MAH but really to anyone involved in distribution of the drug and also those in the medical profession, he noted.

Hong Kong’s ADR reporting system distinguishes between “serious” and “unexpected” events, each with different reporting requirements. In addition, special rules apply to ADRs occurring in clinical trials, as well as to any ADR concerning Advanced Therapy Products (ATPs – referred to in other jurisdictions as Advanced Therapy Medicinal Products or cell, tissue, and gene therapy products).

Finally, Mr. Cobden highlighted that obtaining regulatory approval in Hong Kong is somewhat unusual in that there are special requirements if the approval relates to a new chemical entity (NCE) or a new biological entity. In particular, the Hong Kong Drug Office requires that marketing approval has also been submitted in two or more of a number of countries, which, from 23 February 2023 also includes the ability to rely on the MA submitted in Mainland China.

To conclude the program, Mr. Emch highlighted how a variety of regulatory aspects, including the antitrust and pharmacovigilance considerations described above, can impact life sciences companies and their distribution channels in greater China. With increased scrutiny in the life sciences sector, stakeholders with interests in the region should pay careful attention to recent developments.

Why Hogan Lovells?

The Asia-Pacific region presents an immense, but also immensely challenging, commercial opportunity for future-ready pharmaceutical, biotech, medical device and health care companies.

We have been supporting clients in Asia-Pacific for over three decades and we are backed by a global dedicated life sciences practice comprising over 500 lawyers around the world. Leveraging the full-service capabilities of our offices within the region, we can offer a dedicated team of culturally-attuned, multi-jurisdictional and multi-practice lawyers with substantial experience and background in the life sciences and health care sector and the ability to advise on the full scope of issues in this sector.

We hope that the above summary has highlighted some key considerations in order to prepare for and navigate evolving issues, risks, and opportunities relevant for your commercial interests in the APAC region.

The full webinar is available here and you can view the slides here.

You can access:

• A summary of Session no. 1: “Internal investigations and enforcement trends in the Life Sciences sector in China” here, or view the full session here.
• A summary of Session no. 2: “China’s data protection regime and risk management for handling of human genetic resources under relevant regulations in China” is available here, or view the full session here.
• A summary of Session no. 3: “Out-licensing to Chinese counterparties, including related necessary IP protections” is available here, or view the full session here.

A summary of Session no. 4: “Life Sciences companies navigating the shifting patent landscape in China” is available here, or view the full session here.