Medical Device Manufacturers and Traders under Stricter Regulatory Supervision

By David Tang, Min Zhu and Michael Xu1

The China Food and Drug Administration (" CFDA") on July 30, 2014 issued the Supervision Measures for the Manufacturing of Medical Devices (Order No.7, the " New Manufacturing Measures") and the Supervision Measures for the Trading of Medical Devices (Order No. 8, the " New Trading Measures") which came into effect beginning October 1, 2014 as the supporting rules for the Regulation on Supervision and Administration of Medical Devices (the " New Regulation")

After previously discussing the registration (filing) of medical devices, in this article we will briefly discuss the regulatory changes concerning manufacturing and trading of medical devices and the influence it may have on the medical device industry and its market participants.

New Changes to Medical Device Manufacturing and Trading Rules

Increased Emphasis on Quality Management Systems to Heighten Quality Control Requirements for Medical Device Manufacturers

In order to clearly define the quality control responsibilities of medical device manufacturers, the New Regulation introduces new provisions regarding good manufacturing practice (" GMP") and quality management systems for the manufacturing of medical devices.

The New Regulation sets quality management as a prerequisite for setting up new manufacturing operations by providing that medical device manufacturers shall have a "management system that ensures the quality of medical devices." 2 In addition, the New Regulation also requires that medical device manufacturers undertake particular obligations with respect to their quality management system. These obligations include: (1) establishing and perfecting a quality management system with respect to the medical devices within the manufacturer's business scope and ensuring the system's effective operation by following the GMP guidelines; (2) conducting periodic self-inspections of the operating status of the quality management system and submitting self-inspection reports to the local administrative authority; (3) under circumstances where manufacturing conditions have changed and no longer satisfy the quality management system requirements, immediately adopting remedial measures, and, to the extent that the safety and effectiveness of the medical devices would be impaired, suspending manufacturing activities and reporting to the local administrative authority. 3

The New Regulation also sets forth new requirements for administrative authorities by specifying that the administrative authorities shall, as a part of regularly supervising medical device manufacturers' quality management systems, conduct key inspections of quality management system operating effectiveness as well as whether the manufacturing and operating conditions are in continuous conformity with statutory requirements. 4

Currently, CFDA has not imposed the GMP requirements on all medical device manufacturers. For the purpose of achieving uniform administrative standards and imposing strict quality control requirements on manufacturers, CFDA has set a definite timetable for progressively implementing the GMP requirements. 5Furthermore, to support the implementation of the New Regulation, CFDA is now seeking opinions on a new Good Manufacturing Practice for Medical Devices.

Minor Changes to Contract Manufacturing Requirements may lead to more OEM Activity

According to the original manufacturing measures, in the case of medical device contract manufacturing, the principal and the agent shall both have the same qualifications, i.e. either having obtained a manufacturing license for Class II or Class III medical devices or having registered to manufacture Class I medical devices. 6This requirement can, to some extent, impede the work of small and medium-sized enterprises or scientific research institutions. Under the former "Production License before Product Registration" process, before the principal obtains a product registration certificate and becomes qualified to contract with other companies for manufacturing, it first has to make a considerable investment in order to obtain a production license. This process, however, is not a pragmatic option for small and medium-sized enterprises, scientific research institutions, or entities preferring an asset-light business model.

The New Regulation and the New Manufacturing Measures have made certain changes to remove these regulatory obstacles. According to the New Manufacturing Measures, in the case of domestic innovative medical devices subject to special approval procedures, the principal is only required to complete the registration or filing for domestic medical devices to be contract manufactured, though the agent is still required to "acquire a production license or complete production filing according to the business scope covering the medical devices to be contract manufactured." 7Given that the three conditions required for special approval of innovative medical devices as stipulated in Article 2 of the Special Approval Process for Innovative Medical Devices (Trial) are designed to encourage technological innovation and product improvement, we have enough reason to expect that this regulatory change will stimulate more innovation in medical devices and may lead to more OEM activity in medical device manufacturing. Nevertheless, it is known that the administrative authorities strictly review applications for special approval of innovative medical devices and thus approvals are not common. Therefore, it remains uncertain to what extent these measures will affect the medical device industry.

In order to exert reasonable risk control upon contract manufacturers, the New Manufacturing Measures set certain limits on application scope, providing that within a given time period one principal can only contract for one type of medical device with a single medical device manufacturer, unless the manufacturing is done at the same time by two or more of the principal's majority-owned subsidiaries. 8 The New Manufacturing Measures also specify that high-risk implantable medical devices are not allowed to be contract manufactured. 9

Illegal Manufacturing and Trading Activities to Receive Harsher Punishment

The New Regulation's chapter on legal liabilities for the manufacturing and trading of medical devices details specific punishments on an article by article basis for violations of other chapters. This means that each obligation of manufacturers and traders in the New Regulation has its own corresponding legal liability.

In addition, the range of punishments for violations has been enhanced which should serve as strong deterrent to would-be violators. First, the base amount used to calculate the fine is changed from "illegal gains" to "value of the product." This change removes the need to determine cost of goods sold and thus will expand the calculation base in calculating the fine amount as well as assist administrative authorities in enforcing the regulations. For manufacturing or trading in Class II or Class III medical devices without registration certificates, or for engaging in manufacturing or trading of Class II and Class III medical devices without approval, the fine has been increased from 3 to 5 times the illegal gains under the original regulation to 10 to 20 times the value of the product. The fine range is increased from 2 to 5 times the illegal gains to 5 to 10 times the value of the product for manufacturing, trading or using medical devices not in compliance with compulsory standards, trading in medical devices without a qualification certificate, or which are otherwise expired, ineffective, or obsolete.

For serious violations regarding the manufacturing or trading of uncertified Class II and Class III medical devices, or engaging in the unapproved manufacturing or trading of Class II and Class III medical devices, the New Regulation additionally stipulates that the person directly responsible or the company involved shall also be disqualified from applying for medical device approvals for a period of five years (qualification deprivation).

Simplified Administration and Reduced Administrative Approvals

In addition to having fewer approval items, another major change found in the New Regulation for the manufacturing and trading of medical devices is simplified and decentralized administrative oversight, which mainly includes:

(1) the registration authority for manufacturing and contract manufacturing of Class I medical devices has been changed from the provincial level to the municipal level food and drug administration, 10(2) filing with the provincial food and drug administration is no longer required for trading Class I medical devices; (3) approval by the provincial food and drug administration to trade Class II medical devices has been changed to filing with the municipal food and drug administration; (4) the approval authority for trading Class III medical devices has been changed from the provincial level to the municipal level food and drug administration.

In terms of the reduced administrative approvals, apart from the above-mentioned change from approval to filing in order to trade Class II medical devices, the New Regulation also cancels the compulsory safety certification requirement for Class III medical devices, which was imposed by Article 22 of the original regulation for certain Class III medical devices.

Commentary on Impact

Medical device manufacturers and sellers are primarily responsible for securing the safety and effectiveness of their medical devices, and these parties' quality control has a direct bearing on issues concerning post-sale use and supervision of medical devices. Furthermore, prior to the promulgation of the New Regulation, there had been constant criticism that too much emphasis was put on product approvals rather than on post-approval supervision due to inadequate supervisory measures and low supervision efficiency. Therefore, the New Regulation not only raises manufacturers' quality control requirements through implementing GMP, but also enhances punishment against illegal manufacturing and trading activities to deter would-be violators. Only with these measures can medical device manufacturing and trading enterprises be expected to enforce strict quality control, thus ensuring the safety and effectiveness of medical devices on the market.

With CFDA's setting a clear timetable for thoroughly implementing GMP requirements upon all medical device manufacturers, as well as enhancing punishment for illegal activities, operating costs are expected to substantially increase for small manufacturing or trading companies which fail to satisfy the regulatory requirements. This presents an increased likelihood for large publicly-listed companies to take the lead in mergers and acquisitions activity in the medical device industry in the coming years.

1.David Tang is a partner, Min Zhu is of counsel and Michael Xu is an associate at AllBright in Shanghai. 

2.See Article 20 of the New Regulation. While the original regulation differentiates the establishment conditions for Class I, Class II and Class III medical device manufacturers and sets forth relatively low requirement for Class I medical device manufacturers, the New Regulation no longer makes any distinction and unifies the establishment conditions for all medical device manufacturers. As such, under the framework of the New Regulation the establishment requirements for Class I medical device manufacturers have actually been enhanced to a degree. 

3.See Article 23 and 24 of the New Regulation and Article 38, 41 and 42 of the New Manufacturing Measures. 

4.See Article 53 of the New Regulation and Article 52 of the New Manufacturing Measures. 

5.According to the Circular on Relevant Issues of Implementing GMP for Medical Device Manufacturers (No. 15 of 2014), starting October 1, 2014 all the newly established medical device manufacturers as well as the existing medical device manufacturers expanding business scope to cover Class III medical devices, relocating or expanding their manufacturing site shall comply with the GMP requirements for medical device manufacturing. Starting January 1, 2016, all of the Class III medical device manufacturers shall comply with the GMP requirements for medical device manufacturing. Starting January 1, 2018, all of the medical device manufacturers shall comply with the GMP requirements for medical device manufacturing. 

6.See Article 26 and Article 27 of the original manufacturing measures. 

7.This change is consistent with the new "Product Registration Prior to Production License" process. Innovative enterprises and institutions can, after obtaining product registration certificate, either consider OEM or apply for a production license to self-manufacture. 

8.See Article 36 of the New Manufacturing Measures. 

9.See Article 37 of the New Manufacturing Measures. The original catalogue of medical devices prohibited from being contract manufactured includes only certain general principles and a certain product groups. See the Notice of China Food and Drug Administration on Releasing the Catalogue of First Group Medical Devices Prohibited from Being Contract Manufactured (Notice [2005] No. 166). The New Regulation and the New Manufacturing Measures, however, clearly define the scope of such medical devices into "high-risk implantable medical devices" and promulgated detailed catalogues of four major medical device categories. See the Notice on Releasing the Catalogue of Medical Devices Prohibited from Being Contract Manufactured (No. 18 of 2014). 

10.The New Regulation has also changed the filing authority for domestic Class I medical devices to the municipal food and drug administration. With this change, the supervisory authority of Class I medical devices, including both the product filing and the manufacturing filing, are now the municipal food and drug administration, enabling clearer oversight and divisions of responsibility among the authorities. Nevertheless, this does not necessarily mean that Class I medical device manufacturing fillings can be done at the same time as the product filing for the same medical device. According to Article 11 of the New Manufacturing Measures, manufacturing filings shall not be processed until the product filling has been completed.