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Ramping up of antitrust enforcement in the Chinese pharmaceutical sector

NDRC fines three Chinese pharmaceutical companies for anti-competitive conduct.

China's National Development and Reform Commission (NDRC), one of China’s three agencies responsible for antitrust enforcement, recently published its decisions to fine three Chinese companies active in the manufacture of estazolam (a drug commonly used to treat insomnia) for refusing to supply estazolam active pharmaceutical ingredients (APIs) to other estazolam tablet manufacturers and raising estazolam tablet prices. The conduct was held to have infringed China’s Anti-Monopoly Law (AML) which prohibits, among other things, price-fixing and joint-boycotts. The NDRC imposed total fines of approximately RMB 2.6 million (approximately USD 418,057) on the three companies.
The decisions are the latest in a series of antitrust enforcement actions following drug price reforms in China in June 2015. The total fines imposed are considerably lower than recent multi-million RMB fines imposed by the NDRC in cartel and abuse of dominance cases in other sectors, but underline the NDRC’s continued focus on China’s healthcare sector.

The decision against the three Chinese estazolam producers

Huazhong Pharmaceutical (Huazhong), Shandong Xinyi Pharmaceutical (Xinyi) and Changzhou Siyao Pharmaceutical (Siyao), rival producers of estazolam tablets and three of only four companies with a license to produce (and at the time the only active producers of) estazolam APIs in China, agreed with each other to refuse to supply estazolam APIs to other estazolam tablet manufactures and agreed to raise their respective estazolam tablet prices. According to the NDRC, the agreement foreclosed estazolam tablet manufacturers by restricting access to an essential ingredient, drove up the price of estazolam tablets manufactured by the three companies, and harmed the consumer interest as well as competition. The weighted average price increase of estazolam tablets by the three companies ranged from 88% to 329%.
As the alleged ringleader of the cartel, Huazhong was fined 7% of its 2015 sales derived from the supply of estazolam tablets (RMB 1,571,829, or approximately USD 252,365). Xinyi was fined 2.5% of its 2015 estazolam tablet sales (RMB 547,563, or approximately USD 87,914), reflecting its active cooperation with the NDRC. Siyao was fined 3% of its 2015 estazolam tablet sales (RMB 484,431, or approximately USD 77,778), reflecting its non-lead role and willingness to rectify its conduct. The AML enables the antitrust authorities to impose fines of 1-10% of a company’s turnover in the preceding financial year.

Implications for the healthcare sector 

This case is the latest in a series of enforcement actions by the NDRC and the State Administration for Industry and Commerce (SAIC) – another antitrust enforcement agency – against companies active in the healthcare sector.

Cartels and other anti-competitive practices in the healthcare sector can attract high percentage fines

China’s draft guidelines on determining illegal gains derived from anti-competitive conduct and on setting fines, published by the NDRC in June this year for public comment, emphasise that China regards price-fixing cartels, market-sharing cartels and joint-boycotts, among other things, as serious infringements of antitrust law. The draft guidelines suggest that the starting tariff for fines for a cartel would be 3%, and for joint-boycotts 2%. In cases involving abuse of a dominant market position, the starting tariff for fines would be 3% or 2% depending on how the company acquired its dominant market position.  These tariffs can be adjusted based on the duration of the infringement, the existence of aggravating or mitigating circumstances, and the infringement's impact on competition and the consumer interest. A company may also benefit from a reduction in the percentage fines imposed if it is a leniency applicant or provides material evidence to the antitrust authorities to facilitate their investigation.
In the last year, both the NDRC and the SAIC have stepped up enforcement against anti-competitive practices in the pharmaceutical sector. In October 2015, the local Chongqing branch of the SAIC, the Chongqing Administration for Industry and Commerce, fined Chongqing Qingyang Pharmaceutical (Qingyang), a manufacturer of allopurinol (a drug commonly used to treat gout) and allopurinol APIs, for abusing its dominant position in the Chinese allopurinol APIs market. Qingyang, at the time the only manufacturer and supplier of allopurinol APIs in China since July 2012, refused to sell allopurinol APIs to other pharmaceutical companies that relied upon the supply of the APIs as an input to produce their own drugs. Qingyang was fined RMB 439,308 (approximately USD 67,829), equivalent to 3% of its 2013 sales as it actively cooperated with the agency and resumed supply.
In February 2016, the NDRC also fined five companies active in allopurinol for price-fixing and market sharing.  The companies included, at the time the only three active producers of allopurinol tablets in China, Qingyang, the Place Pharmaceutical Jiangsu, Shanghai SINE Pharmaceutical (SINE), as well as Qingyang's affiliate, Chongqing Datong Pharmaceutical, which on-sold Qingyang's products, and SINE's exclusive distributor Shangqiu Huajie Pharmaceutical. The NDRC imposed total fines of RMB 3,995,400 (approximately USD 607,300) on the five companies.  The fines imposed on Qingyang amounted to 8% of its allopurinol tablet sales in 2014.  This was based on the conduct's duration and significant impact on competition, Qingyang's lead role and its reported lack of cooperation and non-acknowledgement of relevant facts during the initial stages of the investigation.
In May 2016, the Jiangsu branch of the NDRC fined six companies a total of RMB 3.81 million (approximately USD 581,000) for price fixing. The companies fixed the price of chlorophenol, an ingredient also used to produce pharmaceuticals. The fines imposed were relatively low and represented 1% of the companies' annual sales due to the conduct's short duration and relative insignificant impact on competition as well as the companies' cooperation with the agency during the investigation and willingness to rectify their conduct.

The scrutiny of the healthcare sector is far-reaching

The NDRC has also increased scrutiny of local authorities that engage in discriminatory practices that favour local drug producers over non-local ones. In August 2015, the NDRC published its decision finding that the Bengbu Health and Family Planning Commission in Anhui Province (the Bengbu Health Commission) had abused its administrative power by adopting discriminatory measures that favoured local bidders over non-local bidders. The Bengbu Health Commission issued several notices setting out rules that privileged local drug producers in tendering procedures at local hospitals. It also set different revenue obligations for local and non-local bidders when participating in the bids. The regulator took remedial action following the Anhui government’s intervention.
Similarly, in November 2015, the NDRC disclosed that it had investigated the Sichuan Province Health and Family Planning Commission and the Zhejiang Province Health and Family Planning Commission, respectively for giving preferential treatment to local drug producers during drug procurement procedures in their respective provinces and hence discriminating against drug producers from other provinces. The two regulators adopted remedial measures following the local government’s intervention.
The AML does not empower NDRC or the SAIC to sanction local government agencies. However, the antitrust authorities may issue a “recommendation” inviting the local government that supervises the local government agency investigated to address the identified anti-competitive conduct.
The latest wave of antitrust enforcement follows the NDRC’s sector-wide inquiry in 2013/4 into, among other things, the ex-factory and retail prices of drugs, drug distribution, the pricing of drugs after patents expire; and the liberalisation of drug prices since June 2015 (the Drug Price Reform). Prior to the Drug Price Reform, the NDRC, in its capacity as price regulator, determined the maximum retail prices and the maximum profit margins in the distribution chain of most drugs in China, especially those covered by the national health insurance scheme. The Drug Price Reform liberalised the centralised pricing system by removing the maximum retail prices, allowing most drug prices to be determined by the market.
The reform did not, however, mean that pharmaceutical companies could determine drug prices arbitrarily. At the time of launching the reform, the NDRC indicated that it would use its antitrust enforcement powers to prevent price distortion in drug markets.
The NDRC’s Notice on Strengthening the Supervision of Pricing Activities in the Pharmaceutical Industry highlighted conduct that would likely be the focus of enforcement action in the months following the introduction of the Drug Price Reform. These included, among other things, price-fixing, collusion and abuse of dominance through excessive pricing – all of which are prohibited under the AML. Unsurprisingly, recent enforcement activities have focused on such practices as well as other practices. The recently launched sector-wide inquiry into pharmaceutical companies in 2016 and the investigation of medical device companies reportedly look into a number of these issues.
More recently, in July 2016, eight Chinese government ministries, including the NDRC and the SAIC, announced a joint inspection campaign into the healthcare sector, the key focus of which would be conduct by government agencies that lead to excessive drug pricing. The NDRC claimed in August 2016 that the pharmaceutical price reforms implemented in public hospitals have seen positive results. According to the NDRC, the reforms have reduced drug prices, thereby stabilizing patients’ medical payments.  Furthermore, in August 2016, the NDRC issued a notice announcing that it would take further actions as part of the healthcare sector price reforms.  Its intended steps include, among other things, removing mark-ups on drug prices and reducing the costs of medical checks and treatments using certain medical devices, with the aim of ultimately adjusting prices for medical services in China.

Concluding remarks

China’s healthcare sector is expected to continue to attract attention from China’s antitrust authorities, as evidenced by the recently launched sector-wide inquiry into pharmaceuticals and reported investigations of manufacturers of medical devices – involving both local and foreign-owned companies.
The continuing inspections and public statements made by the authorities suggest that the intense scrutiny and enforcement activity in China’s healthcare sector can be expected to continue. Companies active in the healthcare sector in China will need to (continue to) focus on developing a compliance culture, step up training of frontline personnel (particularly those with day-to-day sales, pricing, marketing and procurement functions), and ensure that they are prepared for eventual enforcement action and/or inquiries by the authorities.