Spotlight on Greater China: internal investigations and enforcement trends in the life sciences sector

Kicking off the series, Lu Zhou, partner in the Hogan Lovells general corporate and M&A practice, noted that internal investigations in China provide a variety of challenges. These can include a difficulty in gathering evidence and the complicated interplay between Chinese and foreign laws, as well as how to grapple with whistleblowers, employment issues, and self-reporting issues. Ms. Zhou also noted that companies take a variety of approaches in conducting internal investigations, with some taking approaches that are mostly administered by internal personal personnel, administered by external counsel, or by some combination of these.

China’s unique legal landscape

Picking up on these themes, Calvin Ding, partner in the Hogan Lovells investigations, white collar, and fraud practice, emphasized that China is a unique marketplace in which to conduct investigations due to its local laws. Mr. Ding cautioned that Western lawyers soon learn that the legal instincts from their home country cannot always be relied upon in handling sensitive matters in China and could also run afoul of Chinese law. One key consideration is that legal privilege does not exist in China, meaning that even legal professionals may be required to divulge information to courts or regulatory authorities. For this reason, Mr. Ding advised that companies should conduct and structure investigations in such a way that maximizes protection of privilege outside of China. Also important to keep in mind is that the PRC Criminal Procedure law obligates self-reporting of suspected criminal activity.

Mr. Ding also noted that China’s data blocking and privacy statutes have an impact on internal investigations. Under the PRC State Secrets Law, certain data related to “state secrets” must be approved by local authorities before it can be exported abroad. Mr. Ding cautioned that life sciences companies should not assume that their work falls outside of the definition of “state secrets”. This also applies to review by forensic accountants; if not based in China, even the remote review by accountants or other vendors can have consequences if “state secrets” are transferred out of China without proper vetting. Companies should take care in selecting appropriate data collection vendors, for example, to choose suppliers having PRC-based servers. Moreover, “state secrets” are not the only area in which pre-approval by local authorities may apply. Both the Chinese Data Security Law (DSL) and the Personal Information Protection Law (PIPL), which each came into force in 2021, as well as the PRC Law on International Judicial Assistance in Criminal Matters (IJAC), have provisions requiring approval from local Chinese authorities before providing information to foreign law enforcement, which can create difficulties in proceeding with foreign investigations. China has also recently enacted a host of privacy laws requiring express consent for the processing of information, which may necessitate that companies take precautions such as anonymizing or redacting data before exporting this information from China. Additional challenges can also result where a Chinese-based employee maintains data on a personal device.

Developments in the life sciences sector

In the regulatory context, Mr. Ding noted that the State Administration for Market Regulation (SAMR), also enacted in 2021, issued regulations providing awards of up to 1 million RMB (approximately USD150,000) to whistleblowers who were able to: report a major violation of law, with specific facts suggesting a violation, of which the SAMR was not already aware, and which was subsequently substantiated following the government’s investigation. These regulations aim to protect whistleblowers by giving a reporting incentive. Mr. Ding cautioned that companies should review and strengthen their internal controls in view of these requirements.

The Chinese government has also continued its emphasis on anti-corruption enforcement. Mr. Ding noted that this emphasis has resulted in an anti-corruption mindset becoming more internalized as a way of doing business, which is a welcome development. Collectively, the two discipline inspection and supervision agencies Central Commission for Discipline Inspection (CCDI) and the National Supervisory Commission (NSC) have processed an astounding 1.8 million case clues in recent years and have imposed penalties on over 600,000 people. 

Antitrust and medical insurance fraud are key areas of enforcement

Mr. Ding highlighted that antitrust is a key area of enforcement in the life sciences sector, with recent guidelines targeting entities that manufacture and/or supply active pharmaceutical ingredients (APIs). To date, enforcement has mainly targeted domestic companies. However, life sciences companies should take note of two recent policy papers: the 14^th Five-Year Plan for Modernizing Market Regulation and the 14^th Five-Year Pharmaceutical Industry Plan signal China’s intent to strengthen antitrust enforcement in the pharmaceutical sector. Both Plans make note of practices in the pharmaceutical sector, including excessive pricing, exclusive dealing, limiting supply, tying or bundling, and imposing unreasonable terms and conditions, highlighting the government’s focus in this area. Mr. Ding noted that China’s “Common Prosperity” policy suggests that in the future there may be a prolonged emphasis on government enforcement as a way to support development pathways for overcoming China’s persistently wide income inequality.

This is also reflected in recent enforcements against medical insurance fraud. Facing strain as its population ages, China’s National Healthcare Security Administration (NHSA) has been active in enforcement against individual health care providers (HCPs), hospitals, and pharmaceutical companies.

New Measures impacting the industry

Effective from 2020, Mr. Ding noted, the National Medical Products Administration (NMPA) released a set of measures called the Administration Measures for the Registration of Medical Representatives (for Trial Implementation) (the “Measures”). These Measures prohibit employees and other representatives of market authorization holders from collecting individual health care provider (HCP) prescription data and also prohibit pharmaceutical companies from sponsoring individual HCPs directly. Mr. Ding cautioned that the measures may also provide a basis for future government enforcement activity.

New standards in the form of the Pharmaceutical Industry Compliance Management Practices (PICMP) were also implemented in 2021. Mr. Ding noted that the PICMP includes anti-bribery and anti-corruption standards and generally aligns with codes of conduct issued by industry associations. In addition, Mr. Ding noted that the standard reaches into other topical areas as antitrust, tax, adverse reporting, data compliance and cybersecurity issues.

Frequent allegations in internal investigations

Turning to investigations, Mr. Ding highlighted several key factual scenarios that come up time and time again. First and most widely encountered are allegations regarding improper incentives to health care providers. These allegations can be especially onerous to U.S. companies because under the U.S. Foreign Corrupt Practices Act (FCPA), most hospitals in China are state-owned – making doctors and other HCPs employed by these entities “government officials” for purposes of the FCPA. In addition, Chinese enforcement of anti-corruption laws has increased in recent years, including in certain sectors, such as military/paramilitary hospital settings, which make up a significant portion of the Chinese hospital system. Mr. Ding also noted that there are certain ways in which improper incentives, such as false or inflated reimbursements, can be detected. These can include a review of expenses compared to fair market value of services, as well as a review of internal summaries of weekly plans, home visits, and night visits prepared by company sales representatives.

A second frequently encountered allegation is channel stuffing, where revenue is allegedly improperly recognized before a sale was made. This can be especially problematic for a U.S. Securities and Exchange Commission (SEC) listed company as it could impact revenue or earnings. Mr. Ding highlighted certain types of schemes that have been subject to scrutiny. These include payments to distributors to induce the distributor to hold excess inventory, repurchasing products already sold through a third party, or offering distributors significant discounts for not returning product.

Third are fraud allegations arising from patient assistance programs (PAPs). Again, Mr. Ding noted, there are often certain trends underlying these schemes, such as HCPs charging patients to certify for eligibility under a PAP, altering patient diagnoses to qualify under a PAP, or sales representatives directly interacting with or submitting applications on a patient’s behalf. Such behaviors can suggest an underlying problem that needs to be scrutinized to avoid fraud allegations.

Finally, Mr. Ding noted that off-label promotion of pharmaceuticals is another area in which allegations are frequently seen. While HCPs in China are allowed to prescribe a drug for off-label use, there are specific laws and regulations prohibiting companies from marketing of drugs in this capacity. Key watch-outs that may trigger scrutiny for allegations of off-label promotion include incentives to sales representatives, kickbacks or payments to physicians, misleading promotional materials, as well as presentations in which sales representatives publicize clinical trials in countries outside of China showing efficacy of off-label uses.

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 Session no. 2: “China’s data protection regime and risk management for the handling of human genetic resources under relevant regulations in China” here. Stay tuned for information on registering for Session no. 3: “Corporate and IP (out-licensing to Chinese counterparties, including related necessary IP protections)” and Session no. 4: “IP (the newly-introduced systems in China for patent term extension and patent linkage; and Chinese anti-monopoly issues when settling patent infringement actions).”

Authored by Dr Frederick Ch’en, Lu Zhou, and Calvin Ding.