China’s Ministry of Science and Technology (MOST) officially announced on June 1, 2023 the release of the “Detailed Implementation Rules for the Management Regulations of Human Genetic Resources” (the Detailed HGR Rules). These rules, set to take effect on July 1, 2023, represent a significant milestone in the regulation of human genetic resources (HGR) in China.
The Detailed HGR Rules, which build upon the earlier draft version issued by MOST on March 21, 2022, provide comprehensive guidance and operational details for the management of HGR. They address various concerns and issues that have emerged since the implementation of the Regulations on the Management of Human Genetic Resources (HGR Regulations) in 2019.
EXISTING LEGAL RESTRICTIONS ON ‘FOREIGN PARTIES’
According to the HGR Regulations, the PRC Biosecurity Law (2020), and various other implementing regulations, Foreign Parties (as defined below) are subject to the following restrictions and requirements when conducting activities involving Chinese HGR materials or information:
- Foreign Parties must cooperate with a Chinese partner in collecting or preserving Chinese HGR materials within China and execute cooperation agreements in accordance with law and reach clear and specific agreements on related matters, such as ownership of intellectual property (IP) rights, benefit sharing, confidentiality, etc.
- Foreign Parties must obtain prior approval from MOST for using Chinese HGR materials or information for international scientific research collaboration or transferring Chinese HGR materials or information abroad.
- Foreign Parties must co-own and jointly file patents resulting from an international collaboration using Chinese HGR materials with the Chinese partner.
- Foreign Parties may not use Chinese HGR materials or information for purposes that endanger public health, national security, or social public interests of China or violate ethical principles, and should not use Chinese HGR materials or information for purposes other than those approved by MOST or agreed to by the resource providers.
- Foreign Parties may not sell or purchase Chinese HGR materials.
REFINED SCOPE OF ‘FOREIGN PARTIES’
The HGR Regulations adopt a broad definition of Foreign Parties that includes not only the foreign organizations and institutions, but also entities established or under “actual control” by foreign entities or individuals (Foreign Parties).
The Detailed HGR Rules provide specific guidelines for determining “actual control.” In particular, under Article 12, organizations and institutions established or actually controlled by overseas organizations or individuals include the following circumstances:
- Foreign entities and individuals hold or indirectly hold more than 50% of the shares, equity, voting rights, property shares, or other similar rights and interests of the institution.
- Foreign entities and individuals hold or indirectly hold less than 50% of the shares, equity, voting rights, property shares, or other similar rights and interests of the institution, but the voting rights or other rights and interests they enjoy are sufficient to dominate or exert a major influence on the institution’s decision-making, management, or other conduct.
- Foreign entities and individuals, through investment relationships, agreements, or other arrangements, are sufficient to exert significant influence or control over the decision-making and management of the institution.
- Other circumstances provided for by laws, administrative regulations, and rules.
These guidelines align with the definition under Article 216(2) of the PRC Company Law and clarify scenarios where foreign entities and individuals would be considered to have “actual control” over an entity. These provisions seem to suggest that entities with less than 50% foreign investment and that will not be subject to the significant influence of foreign minority shareholders through decision-making authority or internal management will no longer be classified as Foreign Parties. This change will facilitate the utilization of HGR by institutions with foreign minority shareholders, though the practical implementation by the regulators remains to be tested.
Article 12, Clause 3 of the Detailed HGR Rules explicitly states that “if foreign entities and individuals, through investment relationships, agreements, or other arrangements, . . . are sufficient to exert significant influence or control over the decision-making and management of an institution,” such an institution is considered under “actual control” by foreign entities and individuals and thus constitutes a Foreign Party.
This definition explicitly includes Variable Interest Entity (VIE) structures that constitute “actual control.” Therefore, entities registered as domestic companies but having a VIE structure must comply with the HGR regulatory requirements as Foreign Parties when conducting business activities. However, in practice, the Detailed HGR Rules do not further specify how regulatory authorities will determine what constitutes “significant influence” on internal decision-making and management.
Additionally, under Article 11 of the Detailed HGR Rules, domestic controlling entities set up in Hong Kong and Macau are regarded as domestic entities. While additional clarification is required for the precise definition of “domestic controlling entities,” our initial interpretation is that subsidiaries established in Hong Kong and Macau that are effectively controlled by Chinese companies will be classified as domestic entities (rather than Foreign Parties).
On the other hand, whether domestic subsidiaries established by Hong Kong and Macau companies would be considered Foreign Parties shall be assessed based on the criteria outlined in Article 12 of the Detailed HGR Rules.
NARROWER DEFINITION OF ‘HGR INFORMATION’
One key aspect emphasized in the Detailed HGR Rules is the narrower definition of HGR information. While the HGR Regulations broadly define HGR information as “data and other information generated from the utilization of materials of HGR,” the Detailed HGR Rules specify that HGR information refers specifically to “human genes, genome data and other information generated by using HGR materials,” and specifically excludes clinical data, imaging data, protein data, and metabolic data.
This scope is in line with the Q&A notifications issued by MOST in March and April 2022, which clarified that imaging data, such as ultrasound (B-mode) and CT scans, are not categorized as HGR information. However, it is worth noting that the Detailed HGR Rules do not explicitly address whether “biomarker” data and data analysis conclusions derived from the utilization of HGR are subject to regulation.
Based on the definition provided in the Detailed HGR Rules, the applicability of the HGR Regulations and the Detailed HGR Rules may depend on whether they contain specific genetic or genomic data information.
CHANGES IN HGR COLLECTION AND STORAGE REQUIREMENTS
The Detailed HGR Rules introduce significant changes to the approval scope for the collection and storage of HGR in China. Previously, the HGR Regulations required approval for the collection of important genetic lineages, specific regional genetic resources, and specified types and quantities of genetic resources. The Detailed HGR Rules have narrowed the scope of collection activities that require approval while also providing exemptions in certain cases.
In terms of collection approval, the Detailed HGR Rules have narrowed the scope by excluding common diseases such as hypertension, diabetes, color blindness, and hemophilia from the regulation of important genetic lineages.
The rules have also removed specific collection requirements for rare diseases and increased the minimum collection threshold that necessitates approval. Only collection activities involving more than 3,000 cases for large-scale population studies require approval.
Furthermore, the rules provide exemptions for international collaborative clinical trials conducted for obtaining drug or medical device marketing approval even if the number of individuals from whom genetic resources are collected exceeds 3,000 cases.
In terms of storage, the rules provide a refined definition of “storage activities,” differentiating them from temporary storage and simplifying the approval process. Additionally, the rules outline the procedures for managing changes in collection and storage approval, offering clear and comprehensive compliance guidelines. These updates aim to facilitate the utilization of HGR while promoting resource conservation and streamlining regulatory oversight.
CHANGES IN OVERSIGHT OF INTERNATIONAL COLLABORATIONS
While the earlier draft of the rules issued on March 21, 2022 allowed Chinese and Foreign Parties in international collaboration projects to contractually determine the ownership and profit sharing of IP related to research work, data, standards, and processes, this provision has been removed from the Detailed HGR Rules.
Instead, the rules specify that resulting patents must be co-owned by a PRC entity without explicitly addressing the ownership and profit sharing of other IP. This autonomy regarding nonpatent IP could be crucial for submitting supporting materials to regulatory authorities for drug approval and play an important role in subsequent licensing, collaborative research, and other projects. It is hoped that the regulatory agencies will clarify this issue in their future regulatory practices.
The Detailed HGR Rules outline requirements and procedures for international collaboration in clinical studies aimed at obtaining marketing authorization for drugs and medical devices in the PRC. While such collaborations may not require MOST approval if they do not involve the export of HGR, prior filing with the Ministry is still necessary.
The rules also introduce streamlined approval procedures for international scientific research collaborations to facilitate smoother cooperation. For example, the Detailed HGR Rules address the process of making non-substantial changes in international collaborations. In cases where non-substantial changes occur, the parties involved are required to submit relevant materials to MOST for explanation and filing, without the need for approval for the changes.
The Detailed HGR Rules define “non-substantial changes” as situations where (1) the research content or research plan remains unchanged, and only the cumulative total of changes does not exceed 10% of the approved quantity; (2) changes occur in participating units other than the applicant, leading unit, contracted research organization, or third-party laboratories; (3) changes occur in the legal entity name of the collaborating party; or (4) changes occur in the research content or research plan that do not involve changes in the type, quantity, or purpose of HGR or exceed the approved scope.
ETHICS REVIEW
Ethics reviews remain an integral part of the Detailed HGR Rules for activities involving the collection, preservation, use, or provision of HGR outside the PRC. It is important to note that MOST issued the “Draft Measures for Technology Ethics Review (Trial) (Consultation Draft)” in April 2023, which, if formally implemented, will provide more detailed guidance for the technology ethics review mentioned in the Detailed HGR Rules.
SECURITY REVIEW BEFORE PROVIDING HGR INFORMATION TO FOREIGN PARTIES
Under the rules, a security review must be conducted prior to providing HGR information to Foreign Parties and foreign individuals in certain circumstances. These include cases involving important genetic families, specific areas, exome sequencing, genome sequencing of more than 500 individuals, and other information that may impact PRC public health, national security, and social public interests.
However, the rules do not provide detailed guidance on the materials and procedures for the security review other than that the review will be organized by MOST in coordination with other agencies and supported by an expert panel. This leaves MOST and its local branches with discretion when conducting such reviews.
ENFORCEMENT AND DUE PROCESS RIGHTS
The Detailed HGR Rules reflect China’s increased focus on strengthening the regulation of HGR. The rules emphasize a trend toward stricter enforcement and meticulous supervision. Of particular significance is Article 56(2), which introduces new supervision and inspection measures concerning the provision, export, use, and post-export utilization of approved HGR projects. This underscores the regulatory authorities’ heightened attention to overseeing the provision of HGR information to Foreign Parties and foreign individuals.
Compliance and reporting obligations for activities involving HGR will be of the utmost importance. The rules also stress the importance of fair and proportionate administrative penalties, with the establishment of specific penalty guidelines anticipated in the future.
The Detailed HGR Rules authorize MOST and its local branches to conduct regular inspections and supervision of entities previously penalized for HGR violations or with unresolved risks. Additionally, random inspections are carried out for other entities, while special inspections are deployed for severe violations or urgent cases.
Timely recordkeeping and information compilation from routine inspections are prioritized, highlighting MOST’s commitment to ensuring HGR compliance and safeguarding national biosecurity.
To gather evidence and enforce regulations, MOST is authorized under the Detailed HGR Rules to employ various investigative measures against non-compliance activities, including recording, copying, photographing, and video recording, as well as administrative measures such as sealing and confiscation, inspections, tests, quarantine, and forensic examination of relevant items.
Regarding the calculation of illegal gains, Article 72 of the Detailed HGR Rules states that the illegal gains should be calculated based on the total income derived from the illegal activities minus reasonable expenses. If it is not feasible to calculate the amount, the value of HGR involved in the illegal activities or the amount of funds invested in HGR should be used to determine the illegal gains.
The Detailed HGR Rules also seek to safeguard the due process rights of parties subject to penalty decisions regarding violations of the HGR Regulations. For example, MOST and its local branches are required to inform the parties in writing about the proposed penalty, including its content, facts, reasons, and legal basis.
They must also inform the parties of their right to make statements, present defenses, and request a hearing. Parties have five working days from the date of receipt to exercise these rights, and failure to do so within the specified time frame is considered a waiver.
Hearings are mandatory when (1) fines exceeding 1 million yuan (approximately $141,145) for legal entities or other organizations, or exceeding 100,000 yuan (approximately $ 14,114) for individuals, are imposed; (2) illegal gains exceeding 3 million yuan (approximately $423,435) for legal entities or other organizations, or exceeding 30,000 yuan (approximately $4,234) for individuals, are confiscated; (3) the banning of certain activities related to HGR for one year or more takes place; (4) administrative permit applications are rejected related to HGR for more than two years; (5) previously obtained administrative permits are revoked; or (6) other circumstances stipulated by laws and regulations require a hearing.
CONCLUSION
With the release of the Detailed HGR Rules, it is crucial for multinational companies operating in the healthcare and life sciences industry to carefully review the provisions and assess their impact on cross-border research initiatives and the handling of HGR in China.
Proactive measures should be taken to ensure compliance, including a thorough review of existing cooperation agreements and license agreements with PRC institutions and the development of compliance policies for international cooperation projects involving HGR information.
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