On September 8, 2024, the Ministry of Commerce, the National Health Commission and the National Medical Products Administration jointly issued the Notice on Expanding the Pilot Program for Opening Up in the Medical Field, announcing that, effective immediately, foreign-invested enterprises may engage in the development and application of human stem cell, gene diagnosis and therapy technologies (the “Stem Cell and Gene Area”) in the Beijing Pilot Free Trade Zone, the Shanghai Pilot Free Trade Zone, the Guangdong Pilot Free Trade Zone, and the Hainan Free Trade Port.
From 2007, the Stem Cell and Gene Area has always been listed as one of the areas that foreign investment is prohibited. However, from 2019, the PRC government and the local governments of Shanghai, Beijing and Shenzhen began to promulgate different measures to gradually open up foreign investment in the Stem Cell and Gene Area. For example, on July 11, 2024, the Shanghai Commerce Commission and a few other Shanghai government authorities jointly released the Implementing Measures for Optimizing the Foreign Investment Environment, which announced that “as pilot cases, to choose eligible foreign-invested enterprises in the Shanghai Pilot Free Trade Zone to carry out business in the Stem Cell and Gene Area”. On July 3, 2024, the Beijing Commerce Commission released the Implementation Plan for Deepening the Opening Up of the Service Sector to Promote Foreign Investment, which announced that “as pilot cases, to select eligible foreign-invested enterprises in the Beijing Pilot Free Trade Zone to explore expanded opening-up in fields such as the Stem Cell and Gene Area”.
There are no detailed guidelines as yet regarding how the new rules will work in the relevant free trade zones, such as the qualifications, requirements, and application procedures. According to our recent communications with a consulting agency that works closely with the government of the Shanghai Pilot Free Trade Zone, the government is working on the guidelines and rules, but we do not know when these will be released.
In recent years, we have seen enterprises engaged in the Stem Cell and Gene Area use the VIE structure (contractual control structure) in connection with qualified IPOs in Hong Kong and the U.S. However, the VIE structure remains a grey area with inherent risks of circumventing PRC foreign investment restrictions. From December 2023, enterprises with a VIE structure that contemplate overseas IPOs are required to complete record-filing with the China Securities Regulatory Commission (CSRC), which increases the uncertainty of the legality of the VIE structure.
Foreign companies/individuals that are interested in conducting business in the Stem Cell and Gene Area in China may consider setting up a wholly foreign owned enterprise (“WFOE”) or joint venture (“JV”) in one of the four free trade zones in China, and companies with an existing VIE structure may consider terminating the VIE structure and making adjustment to the WFOE/JV structure. The new rules may also attract more foreign investment funds to invest in the Stem Cell and Gene Area.
Companies doing business in the Stem Cell and Gene Area shall pay particular attention to regulatory requirements for the protection of human genetic resources. Please refer to our recent article at [Compliance by Pharmaceutical Enterprises of Human Genetic Resources Supervision— Observations of Some Common Issues] for this topic.
