China is becoming an increasing focus for transactions in the pharmaceuticals sector with its growing investment into research and development, government support and a steady supply of highly skilled professionals. Following growth in this area over the past few years, China is reported to be the second-largest developer of new drugs1. This is naturally prompting interest from companies that are seeking to in-license or acquire novel drug treatments – particularly early stage assets in areas such as antibody-drug conjugates (ADCs) and multi-specific monoclonal antibodies (mAbs), with oncology being a key disease area of interest.
Deal activity across the past year shows the China-to-West licensing trend continues. But in looking to maximise these opportunities, what do overseas companies need to consider at the drafting stage to contract effectively and take into account some of the unique aspects of the Chinese market? In this article, our Life Sciences team outlines some of the key points to consider when drafting licensing and collaboration agreements where your partner company is based in China.
We provide a breakdown of some of the notable differences in these kinds of collaborations and share insight from our team's in-depth experience in optimising the contractual position for those operating in this dynamic sector. Key areas we explore include:
Splitting the territory
Collaborating with a company in China may involve the grant of worldwide rights, but it is not unusual for a Chinese company to be interested in retaining rights in China, even if its overseas partner takes the rights to the rest of the world. These are known as "split territory" deals.
A split territory arrangement introduces complexity and risk for the overseas partner. If development is controlled by different parties inside and outside China, then there is a risk of misalignment. A key issue unique to life sciences is the need for clinical trials and that once these are done, they cannot be undone. A trial that is out of step with other trials for a product and doesn't generate the required level of data or generates negative data can impact the product and its ability to gain approval outside of China.
This can also be true with manufacturing. A manufacturing issue in China that causes a product defect could subsequently tarnish the product in other potential markets. Similarly, in respect of commercialisation, an achievable price in China might create downward pressure on the achievable price outside of China. Thus, alignment between the parties is important.
The best way for the overseas partner to deal with these potential issues is to seek veto rights over development and commercialisation activities in China. This gives the overseas party the power to block a proposed action or decision if there is no agreement on the way forward over developments and commercialisation activities in the different markets. These are frequently used in agreements but are often subject to certain conditions with regard to the types of decision that the overseas partner can veto or time limits to ensure that the decision-making process does not get bogged down. While veto rights provide strong protection, they may be very hard for the party that is subject to the right to accept.
Another way to manage these risks at contract drafting stage can be to provide for high-level alignment between the two parties through the use of agreed global development and commercialisation plans that contain agreed worldwide standards and goals. Although, care needs to be taken in the detailed drafting of these plans, as it is easy to stray into areas such as pricing, which might prompt competition law concerns; hence, seeking specialist advice in this area is important to ensure you are well prepared. It would also be common to ensure that there is a governance structure to provide a forum for the parties to discuss developments and keep each other informed about changes in their respective markets.
A compromise position is to include a mechanism for dispute resolution by a third party expert, if the parties disagree on development and commercialisation activities and there is escalation of the dispute. Such a mechanism helps provide for resolving a dispute quickly to ensure operations – and relationships – are not adversely affected.
Risks to confidential information
Risk mitigation is important, as in any commercial agreement, and a well-drafted agreement with clear, robust confidentiality clauses will help both parties to ensure legal compliance, as well as provide all-important clarity and detail.
Prevention is better than cure when it comes to trade secrets. Chinese courts apply stringent interpretation rules regarding what constitutes trade secrets, placing the burden of proof on the plaintiff. Furthermore, the potential compensation awarded for breaches of confidential information, particularly when the violations are committed by individuals, is generally lower than what is typically expected in western jurisdictions.
With this in mind, there are practical mechanisms that can be built into the agreement to help manage this area of risk – such as restrictions on sublicensing, so that a party licensing IP to China can keep tighter control on what happens to that IP and who has access to it.
Non-disclosure agreements or NNNs
When collaborating with a Chinese company, it is also important to note that you may need something further than a traditional non-disclosure agreement (NDA) to cover the protection of confidential information. While NDAs are standard in many jurisdictions, their enforceability in China can be limited.
To ensure the enforceability of NDAs, foreign confidential information owners may want to consider choosing Chinese law and Chinese forums as the governing law and the competent dispute resolution forum. Further, the NDAs which may potentially be enforced in China would be more comprehensive than the traditional NDAs used in western countries. They will also build in provisions that are specific for the Chinese jurisdiction. For example, IP ownership clauses would need to be considered, especially when the NDAs were signed for the purpose of sharing trade secrets that Chinese counterparties may be able to make improvements on.
Often, the use of non-disclosure, non-use, non-circumvention agreements (NNNs) are considered in order to provide for a more comprehensive safeguard of intellectual property and trade secrets. These will need to take account of the specific context of a collaboration, set out clear definitions and draw on the legal expertise of advisers who understand the market and Chinese law.
Clinical data
The quality of clinical data can be a concern to overseas parties when partnering with a Chinese company. Increasing numbers of clinical trials are conducted in China but there is a perception that, while there are some excellent clinical trial service providers in China, there are some less reputable ones too, and this can cause concerns about the quality of data. This can be mitigated by including reporting obligations and rights of approval or veto over the service providers used, together with comprehensive rights to audit the provider and its records.
A more difficult issue, and one for the relevant clinical teams to consider, is whether a trial conducted in China will yield data on a sufficiently genetically diverse population for the Food and Drug Administration to accept the data as a basis for a US marketing authorisation. This may depend on the disease the drug is being developed to address and the affected population, so there is no one-size-fits-all answer and it should be considered with the clinical team when deciding who will conduct clinical trials and where.
China has issued, and is also in the course of issuing, a series of laws and regulations on personal data and clinical trial data protection. Overseas parties should involve local advisers when instructing Chinese clinical trial service providers and the service contracts signed with them need to take these specific Chinese laws and regulations into account.
Intellectual property
Intellectual Property (IP) is a key element of your pre-deal due diligence. All existing IP involved in the collaboration should be identified and documented. Similarly, the ownership of any new IP as part of the arrangement will need to be clearly defined, alongside any rights that the other party may have to that IP. Where licensing is involved, then it will be important to ensure the terms are clear around the use, duration, transferability and any applicable financial terms.
We have seen particular difficulty in defining what IP is going to be the subject of the exclusive licence grant to the overseas partner, particularly where the Chinese company has a platform with broad application or a desire to retain as many rights as possible to develop additional products – such as novel combinations. What should be a relatively straightforward exercise can become difficult if there is not clear agreement on what IP is included in the licence grant and what is not.
In our experience, it is often the case that pre-existing China head-licences and contractual arrangements can also be vague and confusing (even to native Chinese speakers and experts), so it is important to obtain specific Chinese advice on these agreements; and, if necessary, request amendments to them before the collaboration agreement comes into effect.
From a China perspective, there are certain regulatory and local market factors to consider. One of which is the patent linkage system where generic drug approvals are tied to the status of related patents. International companies who partner with a Chinese entity will need to ensure compliance with patent linkage and data protection regulations in China. There are also specific provisions, for example, for patent term extensions, and for certain categories of drugs where data exclusivity has been introduced to protect innovator data from being used for generic drug approvals.
Another aspect of Chinese law to consider is that if public hospitals or public universities were involved in the IP creation, there may be a risk of the Chinese (People's Republic of China (PRC)) state having ownership rights over the IP. If involvement of public hospitals or public universities is discovered during due diligence, it may be prudent to take local law advice on whether there is a risk of state ownership.
Human Genetic Resources laws can also create complexities for IP ownership.
Human Genetic Resources
China has a piece of regulation originally issued in 2019 and recently amended in 2024 which covers human genetic resources (HGR). This regulation carves out the framework for foreign and Chinese institutions cooperating in areas related to human genetics resources, including the models of cooperation, the scope of the collaboration, and the sharing of cooperation outcomes. Therefore, when collaborating with a Chinese company, any desired transfer of HGR or related data outside of the country – for instance data produced from clinical trials performed in China – will likely require approval from specific Chinese authorities.
A particular issue for the overseas company to be aware of is that IP generated in co-operation between the overseas and Chinese parties arising from Chinese HGR is required to be co-owned. The parties can agree between themselves on other aspects of the ownership, such as how to share the profits derived from the exploitation of the relevant IPs, the right to licence, and so on. However, assigning the relevant IPs to a third party must be agreed by both parties and the assignment fees must be allocated fairly based on the actual contributions of each party.
Import/export law
Another reason why it is worth considering taking Chinese law advice, even if the contract itself will not be governed by Chinese law, is that China has a specific law on the import and export of technologies. Licensing of technologies by Chinese companies to foreign companies is regarded as exporting technologies, and therefore subject to this law. Based on the same law, the Chinese Ministry of Commerce and Ministry of Science and Technology has published and provided updated versions of catalogues of technologies that are forbidden or restricted to be transferred out of China, dividing these between:
- Technologies categorised as "forbidden" to be exported, cannot be exported.
- Technologies categorised as "restricted" can only be exported after approval.
- Technologies not within either of these two categories – these can be exported but the export of such technologies has to be registered at the Ministry of Commerce before export.
According to the latest catalogues, published in 2023, the technologies being banned from export relevant to life science companies are human cell cloning and gene editing technologies.
It is prudent to consider these specific Chinese laws and regulations when devising a deal as there may be practical issues to deal with, such as required approvals to be obtained. A well drafted contract should deal with who will seek approvals and how that process will be handled.
The BIOSECURE Act
It would be remiss to discuss considerations in relation to life sciences collaborations in China without mentioning the BIOSECURE Act. At the time of writing, the BIOSECURE Act has not yet made it into US law but may yet do so. Under the provisions it sets out, certain Chinese contract development and manufacturing organisations (CDMOs) are designated as "companies of concern" and restrictions are placed on the ability of any products that were developed using these companies to be used in the US.
The exact impact of the BIOSECURE Act is far from certain, as is the timeline, but for organisations considering entering into a life sciences IP deal with a Chinese company it is wise to check the list of "companies of concern". This will allow for discussion over whether any of these entities might be used in China and what will happen if this proposed legislation comes into force.
Dispute resolution
At contract drafting stage, parties to a collaboration should clearly determine which jurisdiction's laws will govern the agreement. An important issue to be aware of is that even if the governing law is not Chinese, Chinese law may override the contract in some respects and circumstances. Foreign law clauses may be unenforceable if the contract is not deemed 'foreign related' under local law. In some cases, Chinese laws mandatorily apply to certain commercial contracts, even if they are "foreign related".
As with any good commercial contract, having an agreed dispute resolution clause will help to address conflicts that can arise in the course of day-to-day business and interactions. In life sciences collaborations and IP licensing agreements, arbitration is generally the favoured dispute resolution mechanism. China is party to the New York Convention, which means that arbitral awards rendered outside of China in a New York Convention member state are prima facie enforceable against Chinese companies in China. The rare exception to this might be if there is a procedural defect in the arbitration, or the award violates Chinese (PRC) public policy.
Nevertheless, although foreign arbitration awards can be enforced in China, the possibility of using injunctions by overseas parties against Chinese counterparties during foreign arbitration process is limited. Only arbitration processes administered by a handful of non-Chinese arbitration commissions, i.e. Hong Kong International Arbitration Centre (HKIAC) and some maritime arbitration centres, would allow parties of the arbitral process to obtain injunction orders from Chinese courts. In China, only courts are able to issue injunctions, or "preservation orders", the term more frequently used in China.
Based on this, if an overseas company is partnering with a Chinese company that has its main assets in China, and there is a risk that the western company may apply for injunction in China against their Chinese partner, the overseas company should consider either choosing a Chinese arbitration commission or Chinese courts as the competent forum.
Language and cultural considerations
Finally, cultural differences in negotiation and communication styles, as well as business practices should be considered and bridged through seeking expert legal advice and local counsel. Time invested in doing so at the outset will help provide clarity between parties and support productive negotiations, addressing any areas that might lead to challenges later on.
At a practical level, another point worth factoring into your drafting is the language to be used going forward in the exchange of reports and data. This is true to all international collaboration but with a Chinese counterparty the issue may be more apparent because the non-roman script can make translation less intuitive and more complex.
Focusing on clarity, detail and legal compliance are important themes in developing any collaboration agreement but when working with partners in different territories, cultural sensitivity can be important for the relationship between the parties too. When you are drafting a contract in which you are referring to China, for example, you should define what you mean. For example, you might refer to the People's Republic of China but, for clarity, should also address whether Hong Kong, Macau, and Taiwan are included.
How will you adapt your approach when contracting in China?
These key points to consider when drafting licensing and collaboration agreements to partner with a Chinese entity are a starting point to help you navigate your approach. With increasing deal activity between international companies and China-based innovators, there is growing experience to draw on and increased support available.
Footnote
1. Pharma R&D Review 2024 (Citeline White Paper); GBI analysis – Pharma R&D - Annual Review 2024; and Kong L, Li Q, Kaitin KI, et al. Innovation in the Chinese pharmaceutical industry.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
