Response to IPO Consideration for Distribution of Medical Devices

A The recent Chinese television drama The Youth Memories tells the inspirational story of a group of young Beijing people in the 1970s who found each other the strength to overcome a variety of challenges during the 1970s while progressing through gaokao state exams, military service and finally the common start into the economy grew up. Their business activities started with the authorized sale of imported medical equipment and gradually developed into developing domestic equipment for export.

Baker Chen
partner
Llinks Law Firms

Interestingly, the drama reveals several problems that have plagued China’s medical device industry as it has grown: expensive equipment, limited hospital budgets and a staggering number of patients in dire need of advanced treatment.

To solve these problems, medical institutions and medical device manufacturers gradually developed a cooperative mode of device sales, which raised suspicions and doubts about commercial bribery and unfair competition.

Having combed through relevant Star Market IPO cases, this article summarizes the key concerns of securities regulators when reviewing compliance in medical device distribution and what can be learned from them.

direct sales

When reviewing medical device distribution for compliance, securities regulators typically focus on whether the act constitutes commercial bribery or unfair competition, which involves the bundling of supplies and ancillary equipment under the guise of leasing , gift or sale.

Based on IPO applicant responses to verification requests, companies that need to establish the legitimacy of their operations may consider the following considerations:

• While the sale of reagents/consumables occurred concurrently with the distribution of the medical device/equipment, the issuer and customer entered into separate agreements for both activities. Sales and distribution were independent of each other, with the former serving neither as a precondition nor as a postcondition for the latter.

In addition, the transaction took place on the basis of standard market negotiations. There was no clause requiring the purchase of reagents/consumables under the instrument/equipment distribution agreement, nor was there a clause specifying a minimum purchase quantity or volume of reagents or consumables for use of the instrument/equipment.

Fiona Zhu
contractor
Llinks Law Firms

• The publisher may have made the device/equipment available to the customer free of charge in order to promote the sale of the reagents/consumables, however, the ownership of the device/equipment remained with the publisher while the customer only received the right to use the device/equipment. to use the equipment within a certain period of time. Therefore, the act did not constitute a sale by bribe or otherwise.
• Leasing or providing equipment/equipment for free is both industry practice and business logic. The Issuer adopted this method to promote sales of the reagents/consumables and maximize the profitability of its portfolio. By renting or providing the device/equipment to the customer free of charge, the company’s overall sales and consolidated gross margin can increase positively due to the stimulated sales of reagents/consumables, which have higher gross profit margins.

In addition, a unit of medical devices/equipment can be quite expensive. Lease or free provision would benefit customers by relieving their financial pressure, thereby maintaining good cooperative relationships.

trust in dealers

When verifying the compliance of distribution of medical devices through intermediary dealers, securities regulators look to see whether the dealer has been penalized for gifting or distributing the device/equipment and whether the issuer’s normal operations would be significantly and adversely affected.

According to the responses to valuation requests, issuers are often required to demonstrate that:

1. The sales partner carries out his activity as an independent legal entity and bears the resulting legal consequences himself;
2. Whether the retailer was penalized by market regulators during the reporting period for suspected crimes such as bribery or unfair competition related to the donation or distribution of medical devices; And
3. The transaction amount between the issuer and the distributor during the reporting period represents a relatively small percentage of the issuer’s operating income, which means that even if the cooperation ceases and the distributor is excluded from the medical device, the impact on the issuer’s operating results would be limited.

Therefore, the donation or free distribution of medical devices would not have a material or adverse impact on the issuer’s normal business operations.

key to take away

Based on this study of Star Market IPOs and the current understanding of the Unfair Competition Act, when potential issuers are asked whether their distribution of medical devices constitutes unfair competition, they should focus their argument on whether the market order has been harmed Competition.

For this focus, the specific demonstration direction includes, but is not limited to: verifying that the act is consistent with the practice of the medical device segment; if there is a clause that restricts fair competition from other parties (e.g. minimum purchases of reagents/consumables, purchase amounts, unreasonable claims for damages or exclusion clauses); and where commercial bribery or other improper means of gaining commercial opportunity or competitive advantage have been involved.

When medical devices are distributed through intermediary distributors, potential issuers should draw the regulators’ attention not only to whether there is unfair competition, but also to the amount of the transaction with the distributor, its share of the operating revenue and, if the cooperation is terminated, any its normal operation would be significantly and negatively impacted.

Baker Chen is a Partner at Llink’s Law Offices. He can be contacted on +86 21 3135 8759 and by email at [email protected]
Fiona Zhu is a contractor at Llinks Law Offices. She can be contacted on +86 21 3135 8790 and by email at [email protected]