Before Entering the Chinese Medical Device Market, Know the Regulatory Landscape and Ready Your Resources

I. INTRODUCTION

China has been identified as one of the “new frontiers” for the biotechnology, pharmaceutical, and medical device industries due, in part, to its large aging population. The size of the Chinese population that is aged 65 or older has been growing continuously since at least 1982.¹See China Factfile, http://www.gov.cn/english/links/brief20050923.htm (last visited Sept. 23, 2011). As of 2003, almost 97 million people in China were over 65.²See id. The overall size of the aging population is even more remarkable when one considers that 167 million people in China were aged 60 and older in 2009.³See “China’s pharmaceutical industry—Poised for the giant leap” at p. 15; KPMG Advisory (China) Limited 2011, http://www.kpmg.com/cn/en/IssuesAndInsights/ArticlesPublications/Documents/China-pharmaceutical-201106-2.pdf (last visited Sept. 23, 2011).

Because of this large and aging population, many life science companies have been targeting China as a market worthy of their attention. China’s recent bevy of drug and device regulation, along with its identification of the biotechnology sector as a Strategic Emerging Industry in its most recent Five Year Plan, suggests that China, too, may welcome increased development and investment in its medical device sector. One must keep in mind, however, that while China has a large population (and thus a large consumer base for life science companies), the manufacture and sale of medical devices in China may be fraught with potential pitfalls for the unwary.

China’s medical device industry is regulated primarily by the State Food and Drug Agency (“SFDA”). In some situations, the SFDA may share regulatory control with the Ministry of Health (“MOH”), and the SFDA often confers power to regulatory authorities of provinces, autonomous regions, and municipalities. The SFDA has published a multitude of regulations regarding the manufacture and sale of medical devices in China. In this article, we discuss some of the regulatory requirements governing the manufacture and sale of medical devices in China. We conclude with some observations about the regulatory scheme in China and issues about which medical device manufacturers seeking to conduct operations in China should be aware. When considering entering the Chinese market, it is essential to follow three important steps: (1) understand the current regulatory landscape; (2) assemble resources knowledgeable in Chinese language and device regulation; and (3) be prepared for rapid changes.

II. MANUFACTURING MEDICAL DEVICES IN CHINA

Overview of Requirements

Compared to some of the world’s regulatory regimes, China is in the early stages of regulating the manufacture and sale of medical devices. China’s Regulations for the Supervision and Administration of Medical Devices (“the Regulations”) became effective on April 1, 2000.⁴See Regulations for the Supervision and Administration of Medical Devices. Article 3 of the Regulations defines a “medical device” as follows:

[A]ny instrument, apparatus, appliance, material, or other article whether used alone or in combination, including the software necessary for its proper application. It does not achieve its principal action in or on the human body by means of pharmacology, immunology or metabolism, but which may be assisted in its function by such means; the use of which is to achieve the following intended objectives:

1) Diagnosis, prevention, monitoring, treatment or alleviation of a disease;

2) Diagnosis, monitoring, treatment, alleviation of or compensation for an injury or handicap conditions;

3) Investigation, replacement or modification for anatomy or a physiological process;

4) Control of conception.⁵Id. at Art. 3.

Similar to the regulation of medical devices in the United States, medical devices in China are categorized into three classes. Class I devices (those whose safety and effectiveness can be ensured through routine administration) are subject to the least burdensome controls. The devices are to be inspected, approved, and granted a registration certificate “by the drug regulatory authority of the government of the municipalities consisting of districts.”⁶Id. at Arts. 5, 8. Class II devices (for which further control is required to ensure safety and effectiveness) are subject to inspection and approval “by the drug regulatory authorities of provinces, autonomous regions and municipalities under the central government.”⁷Id. Finally, Class III medical devices (implantable devices, life sustaining devices, and devices that pose potential risk to the human body and require “strict control”) fall under the regulatory authority of the State Council.⁸Id.

Manufacturing requirements are found in Chapter III of the Regulations. A manufacturer must have the “professional technical personnel” required to manufacture the devices; must have adequate facilities and “environment” for manufacturing its medical devices; must possess the required equipment; and must possess “an establishment or personnel and equipment for quality testing required for the manufacture of its medical devices.”⁹Id. at Art. 19. Additionally, manufacturers of Class I devices must file a record with the appropriate drug regulatory authority. Manufacturers of Class II and Class III devices also must undergo inspection and approval by the governing drug regulatory authority and obtain a Medical Device Manufacturing Enterprise License.¹⁰See id. at Art. 20. The license is valid for 5 years, after which time the drug regulatory authority must re-inspect and renew the license. The limited timeframe for licensure increases the risks to which manufacturers in China are exposed because it may be hard to predict whether the license will be renewed after the five year period ends, particularly because the criteria for obtaining renewal are unclear.

Adverse Event Reporting

Like the United States, China has implemented certain requirements regarding the reporting of adverse events. In January 2009, the SFDA released a regulation developed in conjunction with the MOH that requires both the public and manufacturers to report adverse outcomes from the use of medical devices. Reports are required when severe injuries or deaths result from the use of approved devices that function properly.¹¹See Administration Measures for Medical Device Adverse Event Monitoring and Re-evaluation (Interim), Art. 11. China has a two-tiered reporting timeframe: (1) deaths must be reported within five weekdays, and (2) events that may cause severe injuries or death must be reported within fifteen weekdays.¹²See id. at Art. 12. Reports may be filed with provincial device monitoring centers (or the equivalent for directly controlled municipalities or autonomous regions).¹³ See id.

On September 16, 2011, the SFDA released its Guidance for Medical Device Adverse Event Monitoring (Interim), which provides new details about the regulatory scheme governing adverse event reporting for medical devices. The guidance includes draft adverse event reporting forms and addresses the responsibilities and duties of entities involved in the adverse event reporting system (e.g., manufacturers, businesses, users, and governmental institutions monitoring adverse event reports). The guidance additionally sets forth systems and process standards for each entity, provides human resource allocation requirements, and lists other related measures.

This new guidance serves as an example of the Chinese government’s increasing efforts to solidify its regulatory landscape governing medical devices. Similar efforts also are likely in other areas of the medical device regulatory structure.

III. SALES OF MEDICAL DEVICES IN CHINA

The Chinese government has regulations in place to restrict the sale and promotion of new and imported medical devices. Policies that centralize the tendering and purchasing of devices by state-owned entities further complicate efforts to sell such products.

Registration

Under Article 7 of the Regulations, “new medical devices” include novel product varieties, “which have not been available in the domestic market, or for which the safety, effectiveness and product mechanism have not been recognized domestically.”¹⁴Regulations for the Supervision and Administration of Medical Devices, Art. 7. New medical devices must be inspected, approved, and granted a registration certificate by the drug regulatory authority that is responsible for the class of medical device at issue (e.g., municipal/district government, provincial government, SFDA).¹⁵See id. at Art. 8. Registrations are valid for four years unless manufacturing of the device stops continuously for more than two years, at which time the registration is automatically invalidated.¹⁶See id. at Art. 14. Importers of medical devices additionally are required to submit for inspection and approval by the SFDA the instructions for use, quality standards, testing methods, “other relevant information,” product samples, and marketing authorization certifications issued by the manufacturing countries.¹⁷Id. at Art. 11. The importer also must receive an import product registration.¹⁸See id. Despite the existence of timelines in the regulations, the exact process and criteria for approval of registration applications is somewhat ambiguous, making it hard to predict whether and when a device will be approved for importation. Moreover, registration certificates for imported devices only may be obtained by a China-based designee of a foreign manufacturer that has a manufacturing license issued by the regulatory authority of the origin country.¹⁹See id.

Registration requirements under Article 7 should not be confused with, and are in addition to, the requirement that a medical device also acquire the “CCC Mark.” The “CCC Mark” designates certain types of products as having received the China Compulsory Certification.²⁰See Administration of Quality Supervision, Inspection and Quarantine Order No. 5, Regulations for Compulsory Product Certification (2001). The CCC Mark was implemented in August 2001 and combines two independent inspection systems into a single procedure. Medical devices are one of the types of products that must acquire the CCC Mark prior to importation in order to avoid having the product held at the border by Chinese Customs and subjecting the manufacturer to penalties.²¹See id. at Arts. 2, 25; see also Catalogue of Products Subject to Compulsory Product Certification.

Labeling and Advertising

The instructions for use, label, and packaging for medical devices sold in China must comply with requirements that are laid out in the Regulations on the Instructions for Use, Label, and Packaging of Medical Devices (“SFDA Order No. 10”), including prohibitions on the use of certain claims and expressions relating to product efficacy, superiority, and endorsements.²²See Regulations on the Instructions for Use, Label, and Packaging of Medical Devices (SFDA Order No. 10), Arts. 9, 13. All medical devices sold in China must be marked with the device’s registration number on both the external packaging and the device itself.²³See Regulations for the Supervision and Administration of Medical Devices at Art. 17. Under SFDA Order No. 10, the instructions for use, label, and packaging of medical devices must be in Chinese, although another language may be appended.²⁴See id. at Art. 16; Regulations on the Instructions for Use, Label, and Packaging of Medical Devices at Art. 6. Instructions for use must be submitted for review by the SFDA with the device’s registration application and may not be modified or changed without SFDA’s approval.²⁵See Regulations on the Instructions for Use, Label, and Packaging of Medical Devices at Arts. 15, 17.

Advertisements for devices are subject to two main laws, the Measures for the Examination of Medical Device Advertisements (“SFDA Order No. 65”) and the Standards for the Examination and Release of Medical Device Advertisements (“SFDA Order No. 40”), both of which were revised in April 2009. Both orders reference China’s Advertising Law, which defines “advertisement” as advertisements that are commercially funded to introduce products or services to the public.²⁶See Advertising Law of the People’s Republic of China (2004), Art. 2. The definition is broad and includes commercially funded advertisements transmitted through media and other forms that directly or indirectly introduce the funding source’s own products or services.²⁷Id.

Under SFDA Order No. 65, local Food and Drug Administrations (“FDAs”) at the provincial, autonomous region, and municipal level directly under the central government are responsible for examining medical device advertisements and granting advertising approvals.²⁸See Measures for the Examination of Medical Device Advertisements (SFDA Order No. 65), Arts. 4, 12. Such approvals are valid for one year.²⁹Id. The local Administrations for Industry and Commerce are responsible for monitoring public medical device advertising.³⁰See id. at Art. 4. The content of advertisements must be based on the instructions for use approved by the governing drug regulatory authorities, and the advertisements themselves “shall be approved by the drug regulatory authority of governments at provincial level and above.”³¹Regulations for the Supervision and Administration of Medical Devices, Art. 34. Thus, advertising requirements and prohibitions may differ from region to region within China based on local interpretations of the SFDA orders.

Advertisements are not permitted for medical devices whose production, sale, and use are subject to legal prohibition by SFDA or for devices that are developed for internal use in medical institutions.³²See Standards for the Examination and Release of Medical Device Advertisements (SFDA Order No. 40), Art. 3. For all other medical devices, permitted advertisements must contain the name of the approved device, its manufacturer, the device registration number, and the approval number of the advertisement.³³See id. at Art. 6. Medical device advertisers also are prohibited from making certain specific claims, including: (1) descriptions of efficacy or recovery rates and (2) comparisons to the safety or effectiveness of other medical devices, drugs, or therapies. Medical device advertisers also may not use absolute or exclusive words such as “only,” “exact,” and “newest technology.”³⁴Id. at Art. 10. Advertisements may not contain names or images of medical research entities, academic organizations, medical organizations, experts, doctors, or patients as testimonials regarding efficacy of the device.³⁵See id. at Art. 12.

Purchasing

The purchasing of medical devices is highly regulated by the Chinese government. In 2007, the MOH introduced a series of policies designed to strengthen control over medical device sourcing for state-owned hospitals both to keep the cost of medical devices in check and to minimize the opportunity for corruption.³⁶See Henry (Litong) Chen, China Cracks Down on Bribery, MDDI (July 2010), http://www.mddionline.com/article/china-cracks-down-bribery. The reforms strengthened Chinese governmental control over the prices of medical devices in the distribution chain by limiting price increases by distributors.³⁷See Monica Hogan, Nearly 10,000 Facilities To Be Built in China Under Final Health Plan, The Pink Sheet Daily (Apr. 13, 2009). China’s National Development & Reform Commission (“NDRC”) and the Guangdong provincial government recently proposed a fixed mark-up rate for medical devices to encourage sales of devices directly to purchasers and consumers instead of through distributors.³⁸See American Chamber of Commerce in China, Healthcare, Medical Equipment and Devices, American Business in China White Paper 262, 270 (2011). The mark-up would be applied to the Cost, Insurance, and Freight (“CIF”) port price of imported devices reported by importers to China Customs and the ex-factory price of domestically produced prices.³⁹See id. Businesses have voiced concern that the proposed mark-up system creates an uneven playing field because the domestic ex-factory price would include certain costs of doing business in China (e.g., obtaining regulatory approval) that foreign businesses typically would not recoup when their base-line price is the CIF price.⁴⁰See id.

The 2007 reforms also created a system of centralized bidding and purchasing of medical devices by device type for all nonprofit medical institutions under government jurisdiction at or above the county level or owned by a state-owned enterprise.⁴¹See Chen, supra note 33. Under this system, the MOH is responsible for procurement of “category A” major medical equipment and high-priced medical consumables that include pacemakers, implantable defibrillators, stents, and interventional catheters.⁴²See id. (“Category A and category B major medical equipment refer to equipment with a price above RMB 5 million (approximately U.S. $720,000). However, category A major medical equipment is more capital intensive in investment and operation, more complicated in technology, and has a higher increase in medical expenses compared with category B.”); see also Ingrid Mezo, Chinese Health Care Reform: Market Opportunities and Challenges, The Gray Sheet (Oct. 6, 2008). Provincial governments are responsible for purchasing “Category B” major medical equipment and high-priced consumables (except for certain cardiac devices purchased by the MOH). Provincial and city governments are responsible for the purchase of other medical devices listed in a catalog of medical consumables created by the provincial governments.

IV. POTENTIAL PITFALLS FOR THE UNWARY

In addition to understanding the existing regulatory landscape in China, life science companies that intend to manufacture and/or import medical devices must also consider other business and regulatory issues.

Natural Evolution of Chinese Regulations

Due to the relative youth of Chinese medical device regulations, it is difficult to predict the potential changes to the regulatory landscape. Manufacturers hoping to sell their devices in China face a changing landscape of regulations that reflect the Chinese government’s efforts to update and revise the manner by which it controls medical devices in China. Chinese officials previously have stated their commitment to participate in global forums such as the Global Harmonization Task Force and their commitment to modify China’s regulatory system based on international practice. As the Chinese regulatory system matures, we may well see changes to the regulations that make them more specific, informative, and transparent. We also may see the centralization of regulatory authority under one regulatory body, rather than fragmented between provincial centralized bodies. Furthermore, companies doing business in China must understand that the regulatory structure under which they operate today is likely to be more robust (and potentially complex) in the future. This will require companies entering the Chinese market to keep abreast of developments and changes and be ready to react quickly.

Intellectual Property Protection

Concerns over intellectual property rights are not new for those doing business in China. In fact, the United States Embassy in Beijing has stated that even after implementing stronger statutory protection for intellectual property rights, enforcement measures largely have failed, in part, due to “China’s reliance on administrative instead of criminal measures to combat IPR infringements, corruption and local protectionism, limited resources and training available to enforcement officials, and lack of public education regarding the economic and social impact of counterfeiting and piracy.”⁴³See Embassy of the United States Beijing, China, http://beijing.usembassy-china.org.cn/protecting_ipr.html (last visited Sept. 12, 2011).

Companies wishing to do business in China ought to first understand the scope of intellectual property rights in China, including the protections they afford. They also will want to appreciate the practical restrictions they may encounter in seeking to protect their intellectual property rights, how to avail themselves of the protections that are available, and then develop a strategy for protecting their rights well before initiating business operations. For example, because medical devices often involve sophisticated technological advances, companies considering manufacturing for the Chinese market through the development of a new manufacturing channel should have procedures in place to protect their proprietary manufacturing processes. Ultimately, some companies may determine that the additional regulatory and compliance costs, when joined with new infrastructure expenses and the risks related to controls, make it more economical and practical to continue manufacturing in existing locations for export to China.

Finally, life science companies operating in China may need to closely monitor the sales of their products to limit the likelihood that merchandise licensed and/or sold in China pursuant to an existing agreement could be sold outside the country by a third party as “Grey Market” goods. Such sales, when made without the knowledge of the manufacturer or the licensed sales representative, have the potential to result in unforeseen uses of the product (without proper controls) that could have safety and marketing implications.

Transparency Concerns and Market Access

One large hurdle to understanding China’s changing regulatory landscape is the fact that China’s newer regulations may not immediately be available in English. This reality makes it difficult for non-Chinese based manufacturers without extensive compliance resources to understand the exact requirements that will apply upon the effective date of the regulations. Companies intending to import and/or establish a manufacturing base in China to serve that market need to account for the costs related to maintaining personnel with compliance expertise specific to the Chinese market, including appropriate Chinese and English language resources.

In addition to the regulatory hurdles discussed above, obtaining market access to what many perceive to be a potentially lucrative domestic Chinese market is not readily assured. New entrants into the Chinese market should not assume that the internationally negotiated norms established under the World Trade Organization agreements (e.g., national treatment, most-favored nation provisions for duties, and presumptions against trade barriers) will ease access in all instances. Instead, there may be times when market access will be wrongfully denied, requiring consultation with U.S. Embassy officials and/or legal counsel for assistance. Pre-planning and coordination before entering the market may limit delays, but difficulties (like drawn-out regulatory approval timelines) are real possibilities.

Corruption and Bribery Safeguards

Of particular concern for enterprises that sell medical devices is the potential for misdeeds by agents or representatives in their dealings with customers that may be deemed government officials. The exposure of companies and persons to liability pursuant to the Foreign Corrupt Practices Act of the United States or to laws enacted pursuant to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions can be significant when not properly managed. The OECD, for example, has been critical in the past of China’s public and corporate governance policies,⁴⁴See, e.g., China Needs Far-Reaching Reforms In Public And Corporate Governance, OECD Says, http://www.oecd.org/document/53/0,2340,en_2649_37447_35316789_1_1_1_37447,00.html (July 9, 2005). highlighting that there is additional risk to be managed by companies doing business in China.

Simply stated, because “foreign officials” often could be deemed to be engaged in transactions involving the purchase of medical devices in China, companies are well advised to have strong anti-bribery programs in place to avoid liability they may incur outside of China for actions that take place within China. The domestic anti-corruption and anti-bribery laws enacted in China also should be provided for in a company’s compliance procedures.

Other U.S. Considerations

Life science companies looking to the Chinese market also must ensure that they comply with their U.S. exporting obligations, which extend beyond the mere shipment of goods. Multiple U.S. government agencies have independent standards and regulations concerning the export of merchandise and materials, the transfer of technology and software to non-U.S. persons, and the proper reporting of export data.

For example, many items are subject to the Export Administration Regulations (”EAR”) of the U.S. Department of Commerce, Bureau of Industry and Security, including: U.S.-origin items; foreign products made with certain U.S.-origin technology, with certain U.S.-origin software, or at certain U.S. facilities; and even non-U.S. products that incorporate certain levels of controlled U.S. content. ⁴⁵See 15 C.F.R. §§730-774. Similarly, defense articles and technical data listed on the United States Munitions List is separately regulated under the International Traffic in Arms Regulations, which are administered by the Department of State, Directorate of Defense Trade Controls. See 22 C.F.R. §§120-130. The export or re-export of such materials ultimately may be controlled for export based on how those items are classified under the EAR. The release of U.S. technology or software source code to non-U.S. persons also may be controlled under the EAR. Thus, companies should ensure they understand whether a license must be obtained from the U.S. government before the company transfers products, materials, equipment, or technology overseas or to non-U.S. persons. While certain items specifically designed for medical end-use are excluded for controls under the EAR, this exclusion may not apply in all cases, particularly in situations where manufacturing technology or equipment is being exported.

Likewise, the U.S. Department of the Treasury, Office of Foreign Assets Control, restricts transactions by U.S. persons that otherwise would involve the target of a sanctions program implemented by the United States. Of particular note, with regard to potential transactions in China, are the list-based sanctions concerning entities and individuals for which U.S. persons are prohibited from engaging in business transactions.⁴⁶See, e.g., http://www.treas.gov/offices/enforcement/ofac/sdn/.

Finally, companies in the United States that ship to China also should have procedures in place to ensure that proper information is reported to U.S. Customs and Border Protection and to the U.S. Census Bureau at the time of export.⁴⁷See Foreign Trade Regulations, 15 C.F.R. pt. 30. The substance of such information, in turn, also will need to be used for classification and duty purposes upon importation into China.

V. CONCLUSION

While it may be true that the Chinese medical device market presents a promising opportunity for market expansion, companies hoping to enter the market should educate themselves about the nuances of Chinese government and regulation before proceeding. The Chinese medical device regulatory regime is in its infancy and is likely to increase in specificity and complexity as the regulations and guidance mature. Medical device companies seeking to expand into the Chinese market will need to amass considerable resources to provide strong Chinese language capability and expertise in the Chinese regulatory system. Furthermore, companies should well understand challenges relating to intellectual property, the Foreign Corrupt Practices Act, and U.S. trade regulations when developing a business plan for entering the Chinese market. Success may well depend on a well thought-out plan backed by considerable resources and expertise.