Overview of Localization Trend of Medical Devices

China

On 21 April 2022, the Department of Finance of Anhui Province, the Health Commission of Anhui Province and the Healthcare Security Bureau of Anhui Province jointly issued the Circular on Regulating Government Procurement of Imported Products by Public Medical Institutions (the “Circular”), which will take effect as of 1 June 2022.

The Circular emphasizes that procurement of imported products shall follow the statutory process and shall be subject to strict examination and approval. The Circular releases a signal that the Anhui provincial authority tends to regulate the government procurement of imported products by public medical institutions in a stricter way.

The Circular echoes with the trend of localization of medical devices in the People’s Republic of China (“PRC”) in recent years, while the government procurement of domestic medical devices instead of imported ones has been supported by a set of governmental policies.

We highlight below the localization trend of medical devices in recent years.

1. Imported Products in Government Procurement in China

Procurement of domestic products has been always the principle for government procurement1. Procurement of imported products can only apply to exceptional cases as listed in Article 10 of the Government Procurement Law, especially where the goods, construction or services needed are not available within the territory of the PRC, or, though available, cannot be acquired on reasonable commercial terms.

Examination and approval procedure shall be carried out for government procurement of imported products. For different kinds of products2, different documents need to be submitted for the above examination and approval.

Local government procurement practices may vary. Thus, procurement procedures may not always be well-organized. Section II of the Circular provides that examination and approval procedures shall be standardized for those public medical institutions using fiscal budget funds and “self-owned funds” and intending to procure imported products. Specifically, all procurement entities in Anhui Province shall apply for examination and approval through the online platform “Hui Cai Yun”3 and submit standard application forms and experts’ opinion. Procurement of imported products shall not be carried out until the online application has been approved by the competent authorities4.

The above Circular implies that sale of import medical devices is still possible in public procurement in Anhui Province. Public procurement shall be subject to a standardized procedure so that the Anhui provincial authority can supervise examination and approval process of imported medical devices more effectively. This apparently increases the difficulty in purchasing imported medical devices.

2. Policies Supporting Localization in Government Procurement of Medical Devices

a) National-level

In the past few years, localization of medical devices5 has been supported by a set of governmental policies, following the release of national policy “Made in China 2025” issued by the State Council on 8 May 2015 to support domestic manufacturing industries.

On the national level, the “Healthy China 2030” Planning Outline (issued on 25 October 2016) stipulates that by the year 2030, there should be a significant increase in the localization rate of high-end medical equipment market.

Also, the central government supports domestic scientific and technological innovation, by promulgating the Law of the People's Republic of China on Science and Technology Progress (latest revised and effective as of 1 January 2022) (the “Law on Science and Technology Progress”). Article 91 of the Law on Science and Technology Progress provides that with respect to technological innovation products or services created by natural persons, legal persons or non-legal-person organizations in China, government shall purchase them for procurement, provided that such products or services satisfy the requirements of government procurement in terms of their performance, quality and other indicators.

The Law on Science and Technology Progress increases financial incentives to encourage science and technology progress for domestic products by adopting multiple governmental measures, including through favorable government procurement policies (Article 85).

We noticed that Section IV of the Circular corresponds with the above-mentioned Article 91 of the Law on Science and Technology Progress word-by-word, which means the national-level policy has been incorporated into the local policy relating to government procurement of medical devices in Anhui Province.

b) Provincial-level

For examination and approval for procuring imported products, several provinces issued the Government Procurement Imported Products Lists (“Lists”), for example in Guangdong, Zhejiang, and Sichuan Provinces. Some provincial Lists include medical devices. For those products already included in the Lists, there is no need for procurement entities to separately prepare and provide experts’ opinion to prove the necessity of importing such products.

We noticed that in recent years, in those provinces that adopt the Lists, there has been a significant decrease of number of imported medical devices included in the Lists, such as Guangdong and Zhejiang. This demonstrates that, these provinces, under the guidance of state policies, have been encouraging domestic manufacturing and also purchase of domestic products in government procurement.

However, there is still no such List in Anhui Province. Section III of the Circular provides that examination and approval authority shall review the procurement of imported products in a strict way in accordance with the government procurement related laws and regulations, and focus on reviewing experts’ opinion supporting procurement needs of imported products in relevant projects. The Circular explicitly stipulates that the unspecific and unclear experts’ opinion shall not be used as the basis for examination and approval.

In practice, experts’ opinion in favor of procuring imported medical devices would usually hold that “similar domestic products cannot meet the performance requirements”. Whether this would suffice for the approval of imported medical devices under the Circular is not clear and remains to be seen, because the Circular does not give a specific standard for “specific and clear experts’ opinion”. Notwithstanding the foregoing, it is apparent that the criterion for public procurement of imported medical devices will become stricter.

3. Legality of Localization

The policies supporting localization of medical devices show differentiated attitude towards domestic products and imported products. Such differentiated attitude does not violate the generally accepted rule of indiscrimination.

Currently, PRC has not accessed to the plurilateral Agreement on Government Procurement (“GPA”) under WTO. Legally, the PRC is not bound by the rules under the GPA. (The GPA provides that during government procurement, for those committed goods, services and construction services, the parties to the GPA shall not protect domestic products or suppliers and discriminate against foreign products or suppliers).

Also, Article 16 of the Foreign Investment Law provides that foreign-funded enterprises can participate in government procurement activities through fair competition. Such provision does not include foreign entities.

4. Solutions to Face Localization in Government Procurement

For foreign registrants or filing entities of imported medical devices, there are mainly following solutions to deal with the localization trend in government procurement of the PRC.

a) MAH Holder

One option is to set up a domestic entity and apply for a domestic medical devices registration certificate. Such certificate can be applied under the Market Authorization Holder (“MAH”) regime under the PRC law. MAH regime allows the separation between the entity holding the medical devices license and the entity actually manufactures medical devices6. Therefore, a domestic entity to be set up by a foreign company and apply for the domestic medical devices registration certificate does not need to be a manufacturing company. It can entrust third-party manufacturing entities to carry out manufacturing of medical devices.

b) Domestic Manufacturing of Imported Medical Devices

The Announcement on Matters Concerning the Production of Imported Medical Device Products by Enterprises within the PRC (effective as of 18 September 2020) applies to a foreign entity holding imported medical devices license for Class II or Class III medical devices and intending to have the products localized.

The foreign party can set up a subsidiary in China, and apply for its domestic medical devices registration certificate. The subsidiary can submit less documents comparing with the normal process for application of medical devices registration certificate, if it is ensured that the production quality management, the main manufacturing processes and main materials are equivalent and consistent with the original imported products. Theoretically, this would save some time for the process of applying for registration certificate. However, it should be emphasized that under this option the foreign entity can only set up the subsidiary in China which actually manufactures medical devices by itself and cannot subcontract the manufacturing to any third parties.

c) Domestic Manufacturing of Medical Devices by a Chinese partner

A foreign registrant may also conclude a licence agreement with its Chinese partner in order to license the technology of manufacturing imported medical devices to the latter, and get remunerated through royalties and export of components for manufacturing of domestic medical devices. The Chinese partner can also adopt the MAH method for the manufacturing of such domestic medical devices. In this scenario (c), there will be less control on domestic medical devices manufactured by its Chinese partner.

Localization of imported medical devices will give rise to significant impact on the business of foreign medical devices companies in China and may also give rise to significant changes on the relevant commercial arrangements concluded with their Chinese partners or even trigger high risk of violating such commercial agreements. Although the localization policy has not yet been completely put into place on a national level, foreign registrants or filing entities of imported medical devices are advised to pay more attention to the localization trend in the PRC on a regular basis and formulate strategies and plans in response to the localization trend.

 

1Government Procurement Law of the People’s Republic of China (effective as of 1 January 2003, latest revised and effective as of 31 August 2014) (“Government Procurement Law”).
2Classified as encouraged products, restricted products and products other than encouraged products or restricted products.
3Accessible through the website https://login.anhui.zcygov.cn/user-login/#/login.
4Competent budget entity and the financial department above municipal (municipality in charge of districts) level.
5Referring to government procurement of domestic products instead of imported ones.
6According to the Regulations on Supervision and Administration of Medical Devices (effective as of 1 June 2021), those implantable medical devices with high risk cannot be manufactured by third parties other than the medical devices registrants. The list of such medical devices was issued by the NMPA in the Catalogue of Medical Devices For Which Entrusted Manufacturing is Prohibited (effective as of 11 May 2022).