Cross-Border CMO Structure Still in Doubt under China MAH Rules

Since the introduction of a nationwide Marketing Authorization Holder (MAH) system in 2019, licenses have linked directly to therapeutic products rather than manufacturers. This has cleared way for a new era where biotech companies (focused on R&D without manufacturing capability) can hold the market authorization while outsourcing the manufacture to contract manufacturing organizations (CMOs). 

The MAH system has boosted the development of local biotech companies. Yet it is still unclear whether it is possible to have cross-border contract manufacture for both domestic and foreign players. 

As outlined in this insight, based on our experience neither PRC MAHs engaging foreign CMOs nor foreign MAHs engaging PRC CMOs (both for the purpose of distribution in China) is likely to work in practice yet.

We expect this may change in time, given the innovation-oriented and efficiency-focused regulatory philosophy in China.

Background: How a Successful 4-year Regional Pilot Scheme Led to the MAH

The MAH was introduced at a national level by the revised Drug Administration Law (DAL) in 2019[1].  Yet China already had a system partially in place for years. A three-year MAH pilot plan for drugs was implemented in ten provinces in China ("Pilot Plan") from 2015 with an extension of one year into 2019. 

The pilot plan gave domestic drug research and development institutions and individuals in the pilot regions eligibility to hold drug licenses as an MAH, without needing qualification as drug manufacturers. They could instead entrust contract manufacturers that were licensed, Good Manufacturing Practice (GMP) certified, and were located within the pilot regions. 

The tentative efforts were a success. More than 3000 drug licenses were issued to MAHs during the pilot period, leading to the national system. 

Legal Feasibility of Cross-Border Contract Manufacture

The DAL has no explicit limitations on contract manufacture. 

In theory, cross-border contract manufacture is legally feasible. Features of the DAL support this:

• Specifically, Article 32 permits MAHs to entrust a "qualified" contract manufacturer by concluding entrustment agreements and quality agreements, without further limitations. 

• Unlike the Pilot Plan, it has no limit requiring contract manufacturers to be located within a pilot region. 

• The DAL does not confine contract manufacturers within the territory of the PRC. 

• Overseas contract manufacturers are not explicitly required to obtain a Drug Manufacturing Permit (药品生产许可证 in Chinese), which is only compulsory for domestic drug manufacturers. 

Given that, it is theoretically feasible that Chinese MAHs may entrust a foreign contract manufacturer (and vice versa).

As to foreign MAHs, it should be noted that under the old regime, they shall first apply for Imported Drug Registration Certificate (进口药品注册证 in Chinese), and meanwhile, the manufacture of imported drugs shall in principle be conducted abroad. 

With the implementation of the MAH, parallel procedures and requirements for domestic and foreign applicants are harmonized as one. Both must apply for a Drug Registration Certificate (药品注册证 in Chinese) alone under the DAL[2].  Considering the absence of explicit limitations on contract manufacture outlined above, foreign MAHs, by holding the same certificate as the domestic MAHs, should also be able to entrust a Chinese contract manufacturer.

However, the current supervision and administration practice from the National Medical Products Administration (NMPA) tells differently. Based on our anonymous consultations with the authorities and our experience in some cases, it is still pragmatically infeasible for the time being mainly because it is too early for the relevant implemented rules and procedures to come into shape yet[3]. 

Potential Implications on Major License-in Transactions

If the legal feasibility of cross-border contract manufacture becomes reality, the commercial structure of license-in transactions for imported drug might substantially change. In the past, the foreign licensor had to first obtain an Imported Drug Registration Certificate for the licensed drug and hold the certificate until the transfer of technology to the domestic licensee was complete. Such a time-consuming process pains the domestic licensee because it cannot hold the certificate even after the payment is made.  In many cases, the foreign licensor did not welcome the fact that it had to be the MAH for an uncertain period of time first due to the liabilities entailed by the MAH status.

The new system enables foreign licensors to largely skip the above steps and address the relevant concerns under the cross-border contract manufacture of MAH. The domestic licensee, can directly apply for and hold the Drug Registration Certificate for the licensed drug. Meanwhile, a foreign manufacturer can become the domestic licensee’s cross-border contract manufacturer until the manufacture technology transfer is completed, when the domestic licensee can change its foreign contract manufacturer to a domestic one.

Conclusion: A Long View Towards Foreign Participation

All stakeholders in the license-in transactions might benefit from a more efficient MAH mechanism (similar effects on the license-out transactions for offshore MAHs and PRC manufacturers), once cross-border contract manufacture rules are put into practice.  

In light of the progressive development of the Chinese medical regulatory regime, which has an underlying innovation-oriented and efficiency-focused regulatory philosophy, we expect this will happen. In the long run we anticipate a wholly feasible and workable cross-border contract manufacture capability.

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Footnotes：

[1] It was promulgated by the National People’s Congress Standing Committee and came into effect on December 1, 2019.

[2] The DAL has replaced different types of drug-related licenses (i.e. Imported Drug Registration Certificate, Drug Approval Number (“药品批准文号”) and New Drug Certificate (“新药证书”)) with Drug Registration Certificate.

[3] Noticeably, NMPA, along with the other seven national departments, issued Notice on Promulgation of the Work Plan for Innovative Development of Regulation over Drugs and Medical Devices in the Guangdong-Hong Kong-Macao Greater Bay Area (粤港澳大湾区药品医疗器械监管创新发展工作方案 in Chinese), effective on September 29, 2020, which permits Hong Kong/Macao drug MAHs to entrust qualified contract manufacturers located in the nine Mainland cities of the Greater Bay Area. 

Contact Us

Mark Zhang

Partner

Corporate & Commercial Group

mark.zhang@cn.kwm.com

Areas of Practice: foreign investment, cross-border M&A, PE&VC, as well as general corporate matters

Mr. Zhang has in-depth study and extensive experience in healthcare and life science practice. He provides day-to-day advice for a wide range of pharmaceutical, medical device, gene and cell product company, medical institution, food, cosmetic and other healthcare companies on M&A, license-in/out, clinic trial, product registration and MAH pathway, regulatory, importation, labelling, distribution management, e-healthcare, medical data, innovative business models, compliance (anti-commercial bribery and issues regarding competition law) and daily corporate matters.

Yang Fan

Partner

Corporate & Commercial Group

yangfan3@cn.kwm.com

Areas of Practice: foreign investment, cross-border M&A, PE&VC, as well as general corporate matters

Mr. Yang is experienced in healthcare and pharmaceutical industry and has provided professional legal services to M&A transactions of medical institutions, pharmaceutical companies, medical device companies and food manufacturers. He advised the biotech companies on the transactions and innovated business model, including license-in/out transactions, exclusive distribution or promotion, online healthcare and cross-border healthcare. He also advised on legal, compliance and dispute resolution matters related to clinical trials, data security, distribution and promotion, product liability, etc.

Li Lingbi

Counsel

Corporate & Commercial Group

lilingbi@cn.kwm.com

Areas of Practice: M&A, foreign investment, outbound investment, PE/VC investment, as well as corporate and compliance matters

Ms. Li provides legal services for a wide range of multinational and domestic pharmaceutical companies, medical device companies, CROs/CSOs, medical institutions and other healthcare and life science companies on clinical trials, technology license-in and license-out, compliance matters, MAH system, e-commerce and other legal issues regarding R&D, manufacture, distribution of pharmaceuticals/medical device.

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