New regulations in China designed to encourage innovation in clinical trials have made it easier to test human samples in a lab setting.

Lab tests on human samples – including blood and saliva to determine the presence of a disease or the risks of obtaining it – played a critical role during the Covid-19 global pandemic. Known as in vitro diagnostics (IVD) reagents, when they are designed, manufactured and used within a single laboratory, they are classified as laboratory-developed tests (LDT).

Under the Chinese medical device regulatory regime, filing/registration[1] is compulsory prior to marketisation. This has long made the legality of using unregistered IVDs in LDT[2] a grey area.

However, a new rule has shed some light on Chinese authorities’ relaxing attitude towards the LDT model.

Article 53 of the revised Regulation for Supervision and Administration of Medical Devices (“Revised Regulation”), effective on June 1, 2021, prescribes that a qualified medical institution may, according to its clinical needs, develop by itself and use unregistered IVDs within its own entity under the guidance of licensed physicians if no same type IVDs are available in the Chinese market.

This is expected to enhance competition and open access to the capital market for LDT companies, encouraging innovation and registration.

However, despite positive developments signaled by the new rule, some uncertainty remains with a series of detailed rules and standards still unclear. Further clarification from the authorities and industry is needed.

This article highlights the key unaddressed issues and potential implications of the new rule which may concern med-tech companies interested in the Chinese market.

Key risks based on unaddressed issues

1. Whether the restriction against multiple products will hurt supplies

Once an IVD product for an intended use is registered with the National Medical Products Administration (NMPA), LDT products for the same intended use are forbidden.

The rationale is crystal clear: to incentivise companies to constantly develop and register their IVD products driven by the enhanced protection of registered products.

Yet the limitation is also clear: the restriction only focuses on the existence of registered IVD products without considering their supply or function. If the limited supply or function of a registered IVD product fails to satisfy clinical needs, it remains to be seen whether these factors will substantially influence the determination of “same type” or not. This means that there is a risk that a product needed by the market could remain unregistered because the same product is already registered – even if there isn’t enough of it to meet demand.

2. Whether separate labs breach the need to keep tests in the same entity

The exclusive use of unregistered IVDs by the medical institution “in its own entity” may pose a challenge to the prevailing LDT model.

It is a common practice that two entities affiliated to one group company, namely, a ‘dry lab’ (research and development (R&D) organisations) and a ‘wet lab’ (medical testing laboratories), independently perform different functions of an LDT business.

The dry lab is solely responsible for developing IVDs, while the wet lab performs tests for patients with such IVDs provided by the former. A separate structure may violate the Article 53 requirement of “self-developed” and “in its own entity”.

We have seen few investigations by the authorities in this regard since the implementation of the Revised Regulation, but specific impacts of Article 53 on this business model remain to be seen.

3. Whether outsourcing testing breaches the ‘same entity’ rule

Most Chinese medical testing laboratories providing LDT services are usually equipped with few licensed physicians, as one is sufficient for their establishment in accordance with relevant laws.

In practice, a significant number of LDT companies choose to cooperate with hospitals whose licensed physicians will recommend or prescribe the tests to patients. The hospitals will then outsource the testing work to the LDT companies who provide feedback to the hospitals and/or patients.

uch a model, the licensed physicians of the hospitals recommending or prescribing the tests are technically not in the “same entity” of the LDT companies conducting the tests. Whether this would challenge the requirement of “under the guidance of licensed physicians” is yet to be seen.

Potential Implications

1. Mainstream IVD model unchanged: filing / registration remains generally compulsory

A typical positive idea concerning Article 53 is that it may boost the development of companion diagnostic (CDx) reagents which help to provide essential information for the safe and effective use of a corresponding drug or biological product.

CDx products generally must go through a long process of registration, which may tempt some companies to pursue a less time-consuming process through the LDT model. However, it should be noted that Article 53 only exempts registration for a very limited scope of LDT products. It does not substantially alter the principle rooted in the Chinese medical device regulatory regime that filing / registration is compulsory prior to marketisation.

2. Boost to the registration & rapidity of LDT products

Some companies did not register their LTD products, believing registration was not compulsory. The authorities showed tacit consent.

This may change following the implementation of the new rule. To win a leading edge over competitors, LDT companies will develop their LDT products with new strategies; specifically, assessing whether their products are of the same type as IVD products available in the market, enhancing registration capabilities, and accelerating registration process.

3. Better access to capital markets

Chinese LDT companies constantly face obstacles in accessing the capital market due to the ambiguity over the legality of their LDT business. In practice, some local regulatory authorities may give the green light by adding specific test items to an inter-laboratory quality assessment or Laboratory Acceptance Certificates, but such efforts may fall short.

The implementation of the new rule may serve as a persuasive factor to further justify the legality of LDT business when dealing with the authorities.

Conclusion

As the new rule relaxes restrictions on the LDT model in China, it will also entrench increasing polarisation among LDT competitors. Companies, backed by outstanding capabilities in research, development, and registration as well as product portfolios targeting urgent clinical needs, are likely to override those which are weaker in these aspects.

Comprehensive capability in both innovation and registration will be the new focus favored by all stakeholders in the long run, including investors and the capital market.