Issues to consider when exploiting commercial opportunities in People’s Republic of China

In a recent webinar, James Fry and Mark Davison of Mills & Reeve were joined by Josh Shin and Yongjin Zhu of Fangda Partners. This was a fascinating discussion of the issues non-Chinese licensors should consider when collaborating with local Chinese partners to exploit commercial opportunities in the Chinese market.  

As the Chinese life sciences market continues to grow and develop, the Chinese government continues to de-regulate or streamline its regulatory pathways (such as its drug approval regimes). And as Chinese parties seek to exploit foreign technologies, there are increasing opportunities for overseas life sciences and biotechnology licensors to exploit market opportunities in PRC.  However, PRC is a complex market.  Its regulatory framework is different to that which many non-Chinese parties will be used to. 

The panel sought to debunk some of the myths around commercialising opportunities in PRC. Six top key themes emerged that overseas licensors should consider before embarking in partnering with local Chinese parties:

1. The need to perform due diligence: When partnering with or licensing technology to a local Chinese partner, it is important to undertake due diligence not only as to the local partner but also on the regulatory framework relating to your technology and existing patents that may be registered or applied for in PRC. Local Chinese lawyers can assist foreign clients with that process so that they can fully evaluate the risks involved.

2. How to structure the transaction: Holding companies for Chinese corporate groups may be based in non-Chinese jurisdictions in order to seek foreign investment. Partnering with a non-Chinese group company could make enforcing your rights more straight-forward. It may also limit issues that may arise in trying to transfer royalty or milestone payments outside of PRC. However, thought needs to be given to how terms can be enforced against group companies who are not party to the licence agreement. If you are partnering with a local-Chinese partner, consider risks that may arise if your licensing transaction is “exporting” technology into PRC.  Local Chinese regulations give local authorities the power to review your commercial transaction and place conditions on the use of technologies.

3. The clinical development and regulatory landscape in PRC: The local PRC regulatory landscape is continuing to evolve at pace. The PRC National Medical Products Authority has published over 1,000 new regulations in the past five years.  The timeline for obtaining regulatory approval for new drugs is getting quicker.  Overseas licensors will want to ensure that they are aware of the regulatory pathway to ensure that the commercial exploitation of technologies is not hindered by a failure to obtain the requisite approvals.

4. IP ownership rights: Prior to 2019, Chinese regulations provided that if technology was imported into China, the IP of any developments/improvements to that technology would have to be owned by the party who made the improvements. However, that regulation no longer exists and there is flexibility for improvements linked to the base technology to be owned by the licensor. However, overseas licensors need to take care to spell out the nature of the licence and the ownership of any IP to protect their rights going forward.  Using recognised terminology is key.

5. Other key protections overseas licensors should ask for: The panellists considered key protections overseas licensors should request. Whilst licensees normally provide indemnities for any losses suffered in IP partnering transactions, if the agreement is governed by PRC law, Chinese courts do not recognise the concept of indemnities.  A party will need to establish what damages it has suffered. 

6. Governing law and enforcement: Enforcing foreign judgments against Chinese parties in PRC can be problematic. By way of example, there is no reciprocal enforcement regime between PRC and the UK and therefore there is uncertainty as to whether a PRC court would enforce a UK judgment.  Parties should therefore select a governing law and dispute resolution regime which best protects their rights.  PRC is a member of the New York Convention 1958 and so arbitration may provide parties with the protections they require.

You can access the webinar here using password: Life_sciences_March _2021.

For more information and to discuss any of the issues discussed, please get in touch.