On August 9, 2024, the State Administration for Market Regulation (SAMR) released the "Guidelines on Anti-Monopoly in the Pharmaceutical Sector (Draft for Comments)." The draft guidelines, which mark a critical step in China’s ongoing efforts to regulate the pharmaceutical industry, are open for public comment. Notably, new concepts such as product hopping are incorporated. The authority vows to impose a “full chain” regulatory framework. How this affects the enforcement landscape is worth everyone’s watch.
A. Background and Context
As indicated by SAMR in the introduction, China's pharmaceutical market is one of the largest and fastest-growing globally, making it a critical arena for both domestic and multinational companies. However, the market has been fraught with challenges related to monopolistic practices, which have prompted increased regulatory scrutiny. SAMR's draft guidelines are a continuation of efforts to refine China's competition law framework, specifically targeting anti-competitive behaviors that have been observed in the pharmaceutical sector.
Building on previous regulatory measures, including the 2021 "Guidelines on Anti-Monopoly in the Active Pharmaceutical Ingredients (API) Sector," SAMR has been vigilant, initiating over 20 enforcement actions against companies for engaging in monopolistic agreements and market dominance abuse. Notable cases include penalties against Grand Pharmaceutical, Yangtze River Pharmaceutical, Shanghai Pharma, and Northeast Pharmaceutical.
B. Expanded Provisions and Regulatory Enhancements
In this draft guidelines, we observe the efforts to refine the recognition of market dominance abuse, deepen considerations for merger reviews, and clarify legal responsibilities for monopolistic behavior in the pharmaceutical sector.
C. Necessity of Comprehensive Anti-Monopoly Regulation in the Pharmaceutical Sector
The draft guidelines affirm the necessity of comprehensive anti-monopoly regulation across all aspects of the pharmaceutical sector, including traditional Chinese medicines, chemical drugs, and biological products. The guidelines cover all stages of the pharmaceutical lifecycle, from research and development to production and distribution, aiming to address various types of monopolistic behaviors.
• Case Types: The prevalence of anti-monopoly cases in the pharmaceutical sector has necessitated a broader regulatory approach. Initially, the 2021 Anti-Monopoly Guidelines focused on active pharmaceutical ingredients (APIs), but the scope has now expanded to include chemical formulations and traditional Chinese medicines.
• Case Characteristics: Control over APIs often extends to the entire formulation industry, complicating the distinction between API and formulation monopolies. The guidelines aim to address practices where companies use exclusive distribution to control both API and formulation markets.
• Case Nature: The high public interest in pharmaceutical anti-monopoly cases, due to their impact on drug prices and public health, underscores the need for comprehensive regulation.
D. New Features of the Comprehensive Anti-Monopoly Regulation
The draft guidelines introduce several notable features to enhance regulatory effectiveness:
• General and Specific Provisions: The guidelines incorporate general anti-monopoly rules applicable to all types of pharmaceuticals, while also addressing specific issues such as API-related refusals to deal and unreasonable trade conditions.
• Forward-Looking System Design: Recognizing the evolving nature of the pharmaceutical industry, the guidelines anticipate future developments, including the rise of proprietary medicines and associated IP-related monopolistic practices.
• Predictability of Legal Responsibilities: The guidelines outline the potential legal responsibilities of companies engaging in monopolistic practices, providing clearer regulatory expectations.
E. New Requirements for Comprehensive Anti-Monopoly Regulation
The draft guidelines set forth new requirements to enhance regulatory mechanisms and analytical approaches:
• Emphasis on Full-Chain Regulation: The guidelines advocate for a comprehensive regulatory approach encompassing pre-emptive, concurrent, and retrospective oversight.
• Promotion of Anti-Monopoly Compliance: Companies are encouraged to establish robust anti-monopoly compliance programs, aligning with recent amendments to the “Business Operator Anti-Monopoly Compliance Guidelines.”
• Innovation-Focused Enforcement: The guidelines emphasize the importance of fostering innovation within the pharmaceutical industry, underscoring the role of anti-monopoly regulation in supporting a dynamic and competitive market.
F. Key Provisions and Regulatory Focus
The draft guidelines are structured into seven chapters, comprising 55 articles, each addressing different aspects of anti-competitive practices within the pharmaceutical sector. Below are some of the most critical provisions:
1. Monopolistic Agreements
• Reverse Payment Agreements (Article 13): These agreements, often referred to as “pay-for-delay” deals, involve a patent holder compensating a generic drug applicant to delay the market entry of the generic version or to refrain from challenging the patent's validity. The draft guidelines suggest that such agreements may constitute a monopolistic practice if they unreasonably delay competition. SAMR will evaluate factors such as the size of the payment relative to potential litigation costs and the probability that the patent would have been invalidated in court.
• The guidelines also address various forms of monopolistic agreements beyond reverse payments in Chapter 2, including horizontal and vertical agreements that restrict market competition. These could involve price-fixing, market division, or agreements that impose restrictive conditions on third parties.
2. Abuse of Market Dominance
• Product Hopping (Article 28): The draft guidelines target the practice known as "product hopping," where a pharmaceutical company with a dominant market position makes slight modifications to an existing drug to extend its patent protection, then withdraws the original version from the market. This tactic is often used to block generic drugs from effective competition. The guidelines propose that if such behavior prevents or delays the entry of generic drugs into the market, it may be deemed an abuse of market dominance.
• Beyond product hopping, the guidelines delineate other forms of market dominance abuse in Chapter 3, such as predatory pricing, refusal to deal, and tying or bundling practices that could unfairly exclude competitors from the market.
3. Price Limit or Discrimination
• The guideline discusses the prohibition of unjustified price limits or discrimination against distributors, which could distort market competition, particularly where there is no reasonable basis for differential pricing, fixed/lowest selling pricing, or excessive pricing.
G. Strategic Implications for the Industry
The release of these draft guidelines indicates a robust regulatory trajectory in China, one that aligns more closely with international norms regarding competition law, particularly as it relates to the pharmaceutical sector. For pharmaceutical industry, this development presents both challenges and opportunities:
1. Patent Strategies: Companies will need to reassess their patent strategies, especially concerning reverse payment agreements, product hopping and product lifecycle management practices. The draft guidelines could necessitate more cautious and transparent approaches to patent settlements and product modifications.
2. Market Practices: The heightened scrutiny on monopolistic practices may require companies to review their market strategies, ensuring compliance with the new regulatory environment. This could involve changes in pricing strategies, supply chain management, and contractual agreements with distributors and retailers.
3. Regulatory Compliance: With SAMR’s increasing enforcement actions, pharmaceutical companies should bolster their compliance programs, particularly in areas related to competition law. This may involve additional training, internal audits, and legal reviews to avoid potential penalties.
