Legal Updates: Investing and Operating in China
Pharmaceutical Industry
North Carolina
March 9, 2010
David K. Y. Tang
Copyright © 2010 by K&L Gates LLP. All rights reserved.
Agenda
Chinese market overview
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2009 PRC Economy
Chinese Pharmaceutical Industry
Legal Developments in China
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Foreign Investment in China
Non-Competition and Confidentiality Issues
Tax Regulations
Intellectual Property Rights
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Chinese Market Overview
2009 Chinese Economy
GDP increased 8.7% in
2009, has overtaken Japan
and become the world’s
second largest economy
Foreign direct investment
dropped 12.6% in the first
10 months of 2009 due to the
Global recession
2
Chinese Market Overview
Chinese Pharmaceutical industry
Fast increasing market
1998 (Billion)
2007 (Billion)
Increase Rate
Turnover of medicine products (drug,
medical device, etc.)
RMB137.1
RMB667.9
387%
Import amount
US$1.5
US$14
833%
Export amount
US$3.4
US$24.6
624%
Domestic pharmaceutical companies
 More than 3500 domestic drug companies, accounting for 70%
of the market
 Most are generic drug manufactures—95% of Chinese
pharmaceutical products are generic, which only take 2-4 years
to launch into the market
 Chinese government encourages R&D of new drugs. However
it will take 8-10 years to launch into the market
3
Chinese Market Overview
Chinese Pharmaceutical industry
Foreign Participants
 Among top 50 drug best-sellers in China, 40 are foreign brands
 Top 20 global drug companies have set up subsidiary and R&D
centers in China (Pfizer, Merck, Roche, GSK, Novartis, Bayer)
 International CROs like Covance, Quintile, PPD have presence
in China
Investment in pharmaceutical industry in China
 Venue: Beijing / Shanghai
 Near regulatory agencies
 More talent available
 Pharmaceutical industrial development zone: Beijing
Changping, Shanghai Zhangjiang
4
Chinese Market Overview
Chinese Pharmaceutical industry
Investment in pharmaceutical industry in China
 Cooperation with CROs in China
 International CROs: Quintile, PPD, Covance, and MDS Pharma
Services have subs in Beijing and Shanghai
 Local CROs fast growing
 Some Chinese universities and research institutions have
cooperative research projects with foreign companies
 Preferential Policies
 Preferential income tax for high-tech companies
 Exemption of import duties for research equipments and related
technology and parts
 Increasing IP protection
 Local preferential policies
5
Foreign Investment in China – Introduction
Four foreign investment industrial catalogues
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Encouraged
Permitted
Restricted
Prohibited
Four types of foreign invested enterprises
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Wholly Foreign Owned Enterprise
Equity Joint Venture
Contractual Joint Venture
Representative Office
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Foreign Investment in China--Pharma Industry
2007 Foreign Investment Catalogue
 Manufacture -- Classified as encouraged (16 types of
products and 10 types of equipments), restricted (i.e. immunity
vaccines, psychotropic, blood products) or prohibited (i.e. stem
cells, gene therapy) categories, depending on the nature of the
drugs to be manufactured in China
 Distribution – Classified in restricted category (Chinese
party shall have a controlling interest for a chain, which has 30
or more branch stores and distributes different varieties and
brands of products from two or more suppliers )
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Foreign Investment in China--Pharma Industry
2007 Foreign Investment Catalogue
 Drug Research and Development
 Encouraged -- Biomedical Engineering Technology is
classified in encouraged catalogue
 Restricted – Generally no restrictions.
 Clinical trial: the sponsors (foreign pharma R&D centers or
CROs) cooperate with investigators (qualified medical
institutions) to implement clinical trial. The medical institutions
are in restricted catalogue, wholly foreign invested medical
institutions are not permitted.
 Prohibited -- R&D and application regarding stem cell and
gene diagnosis and treatment are prohibited for foreign
investment
 Private Hospitals – Limited to Joint Venture only
8
Foreign Investment in China- Legal Updates
New Requirements on Rep Offices
Notice on Strengthening Administration for Registrations of
Foreign Enterprises Resident Representative Institutions
(effective on Jan 4, 2010)
 New application documents required for establishment or
name alternation
 No more than four representatives
 One year validity term of registration certificate
9
Four limitations on non-competition under
Chinese Labor Contract Law
 Non-competition term shall not exceed 2 years;
 Geographic scope shall be reasonably agreed by
employer and employee;
 Upon termination of the employment, the employer
shall pay employee economic compensation on a
monthly basis during the agreed non-competition
period;
 The persons subject to non-competition shall be
limited to senior mangers, senior technicians, and
other employees, who have the obligation to keep
secrets of employer.
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 Non-competition and confidentiality agreements
with employees
 Payment of economic compensation
 No national standard of calculation of consideration-pursuant to Labor Contract Law: “agreed by both
parties”
 Some local rules provide minimum statutory
consideration–usually a percentage of employee’s total
annual income before the termination date of
employment
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 Non-competition and confidentiality agreements
with employees
 Enforcement problem of non-competition
agreement
In case violation of non-competition agreement
happens, since there are no pre-judgment
injunctions under PRC civil procedure laws, it can
take one year or more to complete the arbitration
or litigation process
12
Tax Regulations -- Enterprise Income Tax
New Enterprise Income Tax Law
 Effective January 1, 2008
Flat rate of 25%
 Tax preferential treatment
 High-tech enterprises: 15%
 The incomes incurred from the certain technology
transfer: exempted or reduced
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Thresholds for recognition of High-Tech
enterprises:
Registered in China (excluding Hong Kong, Macao and Taiwan) and
has independent intellectual property in core technologies in its key
products/services;
The products/services are within the Nation Supported High-Tech
Category, including electronic information technology,
biopharmaceutical technology, aerospace engineering, new material
technology, new energy and environment technology and high-tech
services;
Scientific and technical personnel with an undergraduate degree or
higher account for at least 30 % of the total employees, of whom R&D
personnel account for at least 10 % of the total employees;
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Tax Regulations
Thresholds for recognition of high-tech enterprises:
R&D expenditure during the recent 3 accounting years shall be no
less than certain percentage of the total revenue:
Sales Revenue
R&D expenditure proportion
< 50 million RMB
≥ 6%
≤ 50 million RMB < 200 million RMB
≥ 4%
≥ 200 million RMB
≥3%
Revenue generated in high-tech products/services accounts for at
least 60% of its total revenue; and
Certain requirements regarding R&D management, capacity to
commercialize scientific and technological achievements, number of
independent IP rights, growth in sales and total assets
15
Tax regulation – Transfer pricing
Measures of Special Taxation Adjustments (Provisional)
(issued on January 2, 2009)
Notice of the State Administration of Taxation on
Intensifying the Transfer Pricing Follow-up Administration
(issued on 16 April 2009)
 Background – in connection with multinational
company’s arrangements without reasonable commercial
purpose
 Highlights of the new regulations
 Contemporaneous documentation and related-party
annual filing
 Transfer pricing investigations and adjustments
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Intellectual Property Rights-- Introduction
Protecting IP in China: a cynic’s perspective
 Why bother?
 What’s the point?
 Is it really possible?
 Is there any Chinese interest in protecting IP?
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Intellectual Property Rights-- Introduction
IP Legal Framework
Patent law
- April 1, 1985, amended in 1992, 2000 and 2008
Trademark law
- March 1, 1983, amended in 1993 and 2001
Copyright law
- 1990, amended in 2001
Trade Secret
Protected by Unfair Competition Law - 1993 and
amendment under consideration
WTO / TRIPS (2001)
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Intellectual Property Rights-- Introduction
Scope of protection
Duration
Formalities
Inventions, Industrial designs,
Utility models
Fairly limited
(20 years or
10 years)
Application
required
Does not cover “ideas” within
a work
Fairly long
(Lifetime of
the author
plus 50 years)
Subsists at
creation (but
registration is
beneficial)
Trademark
Words, symbols, designs…
No protection on trade dress
10 years
(renewable)
Application
required
Trade secret
Covers a very broad range of
ideas, expression, plans, etc.
but must remain secret
Can be
infinite
Must maintain
secrecy of trade
secret material
Patent
Copyright
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Intellectual Property Rights-- Introduction
IP Enforcement Authority
Judicial Action
 Civil Action -- Civil (IP) division of the local People’s Court
 Criminal Action -- Criminal division of the local People’s Court
(only local procuratorate office can file a criminal case)
Administrative Action
 Copyright infringement - National Copyright Administration of
China
 Trademark infringement - State Administration of Industry and
Commerce and its local offices
 Patent infringement - State Intellectual Property Office
 Customs - Investigation and detainment of exporting/importing
infringed goods
20
Intellectual Property Rights– Legal Updates
Patent Protection
New SIPO Statistics:
 976,000 patent applications in 2009, 90% are domestic
applications, foreign applications went down 10.9%
New Legislation
 3rd Amendment of Patent Law (eff. October 2009)
 Implementing Rules of Patent Law (issued January 2010)
 Interpretation on Several Issues Concerning the Application
of the Law on Trials of Patent Infringement Disputes (eff.
January 2010)
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Intellectual Property Rights– Legal Updates
Trademark
 3rd Amendment to Trademark Law is being drafted
 Bad-faith registration problem
Enforcement of IP
 First IPR Court (rather than IP division in People’s Court)
established in Zhuhai National Hi-tech Industrial Development Zone on
an experimental basis
 Experiment to uniformly handle criminal, civil and administrative
lawsuits regarding IPR, which are responsibilities of criminal, civil and
administrative divisions in other traditional People’s Courts
22
Intellectual Property Rights –
Strategies/Summary
 Have a comprehensive IP strategy before entering
the market.
 File/register your IP as early as possible.
 Internally:
 Employees should be aware of importance of IP
protection.
 Core IP design/info should be housed in home
country.
 Build relationships with officials in IP specific bodies
and in the company’s industry.
23
High Tech/ Internet Business
 Restrictions for foreign investor
 Value-added telecom services--foreign capital shall not exceed
50%;
 Mobile voice and data services in basic telecom services--foreign
capital shall not exceed 49%;
 Domestic and international business in basic telecom services-foreign capital shall not exceed 35%;
 News websites, internet audio and video programs, business
places for surfing internet (i.e. internet cafe), and operation of
internet culture are prohibited in 2007 in Foreign Investment
Catalogue
 In practice:
 Some multinational companies, i.e. Yahoo, Google have entered
into Chinese market through special contractual arrangements.
24
Google - IP Theft and Censorship
Google considered leaving the China market after IP
theft in January 2010 and limitations of censorship,
but remains in China. Factors?
 Politics
 Business
 Necessity/Survival
 Publicity
 New Business Model/Competition
25
Practical Operations
Office/Science Parks
Dispute Resolution
Business/Social Etiquette
26
Business/Social Etiquette - Broadly
 Gifts/ Guanxi and FCPA
 Nonverbal cues - Attitude/Respect
 Authority/Saving Face
27
Questions?
David K.Y. Tang
Managing Partner, Asia
Beijing +86.10.8518.8528
david.tang@klgates.com
Thank You
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