The pharmaceutical sector, like China’s digital markets (see our previous briefing), is attracting attention from China’s State Administration for Market Regulation (SAMR). Fine levels in the pharmaceutical sector pale into insignificance compared to the multi-million-dollar antitrust fines imposed on companies active in China’s digital markets. That said, the rising number of investigations and the steadily increasing level of antitrust fines in the sector in the past few years, together with recent antitrust guidelines targeting the manufacture and supply of active pharmaceutical ingredients (or APIs) illustrate the level of scrutiny over the pharmaceutical sector in China. For now, SAMR has mainly targeted domestic companies – especially API manufacturers and suppliers. It may only be a matter of time before it renews interest in multinationals active in China as the latest decision involving the pharmaceutical sector suggests. Last month, SAMR imposed a fine of US$1.45m (c. €1.23m) on the local unit of a Swiss company for engaging in RPM. Companies active in China’s dynamic healthcare and life sciences sector will need to adapt to heightened antitrust scrutiny.
Antitrust investigations and fine levels are increasing in pharmaceutical sector
Since 2018, SAMR and its local branches have completed 14 investigations and fined nearly 20 pharmaceutical companies a total amount of around US$203m (c. €172m). This is about 8 times more than total fines imposed in the pharmaceutical sector during the first 10 years of enforcement of China’s Anti-Monopoly Law (AML).
In April 2021, SAMR imposed its highest fine yet in the pharmaceutical sector. Yangtze River Pharmaceutical group, a large domestic pharmaceutical company, was fined about US$118m (c. €100m) for resale price maintenance (RPM). In the same month, three API manufacturers of fluocinolone acetonide were fined roughly US$7.9m (c. €6.7m) for price fixing. Other API manufacturers have also been fined since 2018 – with aggregate fines ranging from US$380,000 (c. €330,000) to over US$50m (c. €33m) – for engaging in abusive practices such as excessive pricing, exclusive dealing, imposing unreasonable terms and conditions, or refusal to supply, reflecting some of the supply issues which have characterized certain API markets. In one case, SAMR imposed the maximum fine possible under the AML (10 per cent of group turnover) taking into account obstruction of investigation as an aggravating factor and confiscated the company’s illegal gains derived from the anticompetitive practice totalling about US$39m (c. €33m).
Policy and legislative developments highlight enforcement focus on pharmaceutical sector
Two policy papers – the Fourteenth Five-Year Modernisation of Market Regulation Plan and the Fourteenth Five-Year Pharmaceutical Industry Plan – published in January 2022 signal China’s intent to strengthen antitrust enforcement in the pharmaceutical sector. The policy papers were adopted at central government level and form part of the Chinese government’s strategic blueprint for the next half decade and signal the importance of antitrust enforcement in the pharmaceutical sector. They highlight certain commercial practices in the pharmaceutical sector that are likely to be an enforcement focus. Targeted practices include excessive pricing, exclusive dealing, limiting supply, tying/bundling and imposing unreasonable terms and conditions (such as requiring customers to sell back finished products to a dominant company). The policy papers were published after the API Antitrust Guidelines adopted by the Anti-Monopoly Commission of the State Council in November 2021 to tackle anticompetitive commercial practices in API-related markets in China. These guidelines are China’s latest sector-specific antitrust guidelines (since the September 2020 Auto Guidelines and February 2021 Platform Guidelines (see our previous briefing)), and were introduced in response to the number of investigations involving API markets (including those noted above). They provide guidance on market definition (e.g., noting that an API is generally a separate market which, in some cases, can be further segmented) as well as examples of commercial practices that raise antitrust risks. For example, the guidelines indicate that:
- joint production, joint procurement, joint sales, and joint bidding arrangements between competitors will typically raise antitrust concerns as will compensating competitors for ceasing API production or sales;
- RPM will remain an enforcement priority, and other vertical restraints, such as customer and territorial restrictions resulting in anticompetitive effects will also be scrutinised; and
- SAMR will not hesitate to pursue abuse of collective dominance claims. The emphasis on collective dominance is of particular relevance in the China context where API markets are generally highly concentrated and characterised by other features that SAMR may consider to establish collective dominance, including market transparency, products homogeneity, and the existence of parallel conduct.
The current wave of investigations in the healthcare sector has mainly targeted domestic companies active in APIs, intermediate products or end products. The focus of investigations is, for the most part, on price-related conduct such as RPM, price-fixing and excessive pricing leading to inflated prices for consumers. A key step will be to introduce periodic internal antitrust compliance reviews of business operations, if these are not yet in place, to ensure compliance with China’s AML.
Looking beyond China
Healthcare and life sciences companies also face heightened scrutiny in other major jurisdictions, such as the US, EU and UK. Regulators globally are looking closely at commercial behaviours that sit at the intersection of competition, consumer, data privacy and IP/patent laws. Pricing and non-pricing practices, including territorial restrictions aimed at preventing parallel trade, continue to attract regulatory scrutiny in the EU and UK. The US agencies continue to investigate a string of generic drug price-fixing allegations, which may have resulted in inflated prices for federal healthcare programmes and end customers. These cases highlight that the protection of national health care programmes is high on the enforcement agenda globally.
Please contact us or your usual contact in our Antitrust, Competition and Trade team if you would like to discuss this update further. To read more about these and other antitrust developments, please see our Global antitrust in 2022: 10 key themes report.