Pharmaceutical Antitrust

Generally, foreign investment must conform to the national industrial policies. The Guideline Catalogue of Foreign Investment Industries (revised in 2017) (the Catalogue of Foreign Investment) provides the entry requirement for foreign investment in various industries. The Catalogue of Foreign Investment divides specific industries into ‘encouraged’, ‘restricted’ and ‘prohibited’ categories. Those that are not listed in the Catalogue of Foreign Investment generally are permitted industries. Before the Catalogue of Foreign Investment was revised in 2015, pharmaceutical manufacturing sectors fell into all three categories, but these have now been removed from the ‘restricted’ category. Nevertheless, the implementation of the processing measures of ready-for-use traditional Chinese medicines and the manufacturing of traditional Chinese patent medicine of secret prescriptions is still listed in the ‘prohibited’ category.

Meanwhile, the Drug Administration Law (amended in 2015) and the Measures for Administration of Drug Registration (the Registration Measures), together with other specific regulations, such as the Regulations for Implementation of the Drug Administration Law of the People’s Republic of China, set out rules on the authorisation, registration and pricing of pharmaceutical products.

On 24 April 2015, the 14th session of the Standing Committee of the 12th National People’s Congress adopted the decision to amend the Drug Administration Law. The amendment not only simplified the procedures for the registration, modification and cancellation of the drug manufacturing licence and drug distribution licence at the administration for industry and commerce, but also removed price restrictions for most drugs to pave the way for the marketisation of drug prices. Article 7 of the current Drug Administration Law requires pharmaceutical producers to obtain production permits from the local food and drug administration (FDA) where the producers are located. The permit is valid for five years and can be renewed provided that the application for renewal is approved. According to articles 11 and 12 of the Drug Administration Law, wholesale and retail pharmaceutical distributors need to obtain the drug distribution licence issued by a local FDA before operating the relevant business. The drug distribution licence is also valid for five years and can be renewed upon application.

On 23 October 2017, the China Food and Drug Administration (CFDA) launched a consultation on draft amendments to the Drug Administration Law. Article 5 of the draft amendment stipulates the drug marketing authorisation holder mechanism, which holds the drug marketing authorisation holder liable for the safety, effectiveness and quality of the drugs. Moreover, the most recent draft amendment simplifies the administrative procedure by cancelling the good manufacturing practice and good supply practice certification. Instead, it requires full compliance with the Best Practice for Drug Manufacturing and Quality Management Practice for Drug Operation (also known as the Pharmaceutical Good Supply Practice (GSP)), which means much stricter compliance requirements on pharmaceutical manufacturers and distributors.

In addition, pursuant to the Registration Measures, registration is required for clinical trials, production and importation of pharmaceutical products in China. The CFDA issues registration codes, imported pharmaceutical products’ registration certificates or medical and pharmaceutical products’ registration certificates. Certificates are valid for five years and can be re-registered, provided that the application for re-registration is approved.

As for the pricing of drugs, article 55 of the Drug Administration Law states that business operators shall observe the regulations stipulated by the responsible department of price control of the State Council (ie, the National Development and Reform Commission (NDRC)). On 4 May 2015, the NDRC published an announcement on issuing the Opinions on Promoting Drug Pricing Reform (2015, No. 904), which requires the removal of government pricing controls for most drugs (with the exception of narcotics and type I psychotropic drugs) from 1 June 2015. The government no longer administers drugs by fixing maximum retail prices. Instead, the prices of drugs will be formulated by the market through different means according to the principle of administration by classification. On the same day, the NDRC published the Notice regarding Strengthening the Supervision and Administration on Pricing of Drugs (2015, No. 930), which also contains specific regulations on pricing of drugs.

On 23 November 2017, the NDRC published the Price Behaviour Guidelines on Operators of Active Pharmaceutical Ingredients and Drugs Prone to Shortages (API Guidelines). Operators of active pharmaceutical ingredients (APIs) and drugs prone to shortages are prohibited from reaching monopoly agreements, abusing market dominance or engaging in any acts that are in violation of the Price Law.

As regards generic drugs, the Opinions on Deepening the Reform of Examination and Approval Systems to Encourage Innovation in Drugs and Medical Devices (the Opinions), distributed by the General Offices of the Central Committee of the Communist Party of China and the General Office of State Council of China, clearly promotes production of generic drugs. In order to guide the production of generic drugs, authorities will regularly issue a list of drugs that have lost their patent rights upon expiry, termination or invalidity, but have not been imitated. The Opinions also propose to explore and establish a drug patent linkage system, under which the applicants for drug registration should elaborately mention the related patents and their ownership status as well as notify patent owners within a prescribed period of time. Where there are patent disputes, parties may file a suit, but the legal action will not hold up the technical review. The CFDA can approve or disapprove the launch of drugs passing technical reviews in accordance with effective rulings or mediation decisions. Drugs that fail to obtain final decisions of lawsuits after a certain period of time may be cleared by the CFDA to be marketed.

In 2017, China’s State Council issued a set of guidelines to further regulate drug manufacturing and distribution. In the guidance, entitled ‘State Council’s Several Opinions on Further Reforming and Improving Pharmaceutical Manufacture and Distribution’, calls for tightening the scrutiny of new drugs and the promotion of the quality and efficacy conformance assessment of generic drugs. The guidance also calls for actively promoting the use of online platforms for drug distribution.

In addition, the Medical Reform Office of the State Council and the other eight departments under the State Council released the Opinions on the Implementation of the Two-Invoice System in Drug Procurement by Public Medical Institutions (for Trial Implementation), in January 2017, to streamline distribution through a ‘two-invoice system’, which would limit the number of invoices arising from the pharmaceutical procurement to a maximum of two (ie, one from a drug supplier to a drug distributor and the other from the drug distributor to a public health institute).

For the bodies that are entrusted with enforcing these rules, the CFDA and local FDAs are the primary agencies responsible for drug supervision. These are the agencies that issue drug registration certificates, distribution licences and manufacturing licences and that conduct inspections to ensure that drugs meet quality standards. The CFDA is in charge of managing and supervising issues related to drugs at the national level while the local FDAs are in charge of the supervision and management of drugs in their respective geographic areas.

The State Council and provincial-level governmental departments also play a role in the overall supervision and promulgation of policy regarding drug distribution. The State Council is responsible for the overall supervision and management of drug-related work at the national level. Provincial-level governmental departments are responsible for the overall supervision and management of drug-related work in their respective geographic areas.

The State Administration of Industry and Commerce (SAIC) and its local bureaus, which supervise market operations in China, may also regulate drug distribution at various levels, because drugs are considered commercial products.

In addition, the NDRC and local Development and Reform Commissions (DRCs) are in charge of supervising the enforcement of regulations on the pricing of drugs as well as other goods.

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As mentioned in question 1, China has removed government pricing controls for most drugs (with the exception of narcotics and type I psychotropic drugs) from 1 June 2015. The government no longer administers drugs by fixing maximum retail prices. However, the pricing of drugs is still subject to the regulation of the Anti-Monopoly Law (AML), where business operators are prohibited from entering into monopolistic agreements and from abusing their dominant market position if any, and the Price Law. Moreover, in the API Guidelines, the NDRC emphasises that operators of API and drugs prone to shortage shall not engage in anticompetitive behaviour, market price manipulating behaviour and market price disturbing behaviour, etc.

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Yes. In China, there are two main pieces of legislation on drugs distribution, which are the Provisions for Supervision of Drug Distribution (PSDD) and the GSP. The PSDD and GSP are formulated under the Drug Administration Law and Registration Measures and apply to drug wholesale, retail, storage and transportation. Besides the above, the Measures for the Classified Administration of Prescription Drugs and Over-the-Counter Drugs also provide some guidelines on distribution of pharmaceutical products. For medical devices, the Measures for the Supervision and Management of Medical Device Operation is the main piece of legislation regulating the distribution, and this applies to the wholesale, retail, storage and transportation of medical devices.

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The most directly relevant legislation are the API Guidelines. There is no other legislation directly relevant to the application of competition law to the pharmaceutical sector.

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The AML took effect on 1 August 2008. The AML was enacted for the purpose of preventing and restraining monopolistic practices, protecting fair competition in the market, enhancing economic efficiencies, safeguarding the interests of consumers and of the public at large, and promoting the robust development of the socialist market economy. It mainly regulates the following three monopolistic practices:

• monopoly agreements entered into by business operators;
• abuse of dominant market positions by business operators; and
• concentrations of business operators that exclude or limit competition or might exclude or limit competition.

The AML also regulates administrative monopoly. Before the enactment of the AML, the Anti-Unfair Competition Law and the Price Law provided the regulations on anti-unfair competition practices and price-related monopolistic practices.

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The Ministry of Commerce (MOFCOM) is responsible for reviewing notification of concentrations of undertakings that have triggered certain turnover thresholds. The NDRC is responsible for price-related monopoly agreements, abuse of dominance and administrative monopolies, whereas the SAIC is responsible for non-price-related monopoly conduct.

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Normally, remedies can be imposed in merger controls as well as for abuse of dominance and monopoly agreements prohibited by the AML.

In the context of merger controls, as of 16 January 2018, out of 35 conditionally cleared transactions and two forbidden transactions, six relate to the pharmaceutical and medical device industry:

• the acquisition of Wyeth by Pfizer;
• the acquisition of Alcon by Novartis;
• the acquisition of Gambro by Baxter;
• the acquisition of Life Technology by Thermo Fisher Scientific;
• the acquisition of St Jude by Abbott; and
• the merger of Bard and Becton Dickinson.

Structural remedies were used in the Pfizer/Wyeth case, where Pfizer was required to divest from the swine MH vaccine business under the brands of Respisure and Respisure One in China. Behavioural remedies were applied in the Novartis/Alcon case, such as the commitment of the termination of sales regarding certain pharmaceutical products and the termination of the distribution agreement regarding certain lens-care products. Both structural and behavioural remedies were imposed in the Baxter/Gambro case, where Baxter was required to divest its global continual renal replacement therapy business, including all tangible and intangible assets necessary for the viability and competitiveness of the divested assets, and completely terminate its original equipment manufacturing (OEM) production agreement with Nipro regarding haemodialysis within the territory of China by 31 March 2016.

Similarly, both structural and behavioural remedies were applied in the Thermo Fisher/Life Technology case where Thermo Fisher was required to:

• divest its global cell-culture businesses, including the tangible and intangible assets necessary for the divested business’s viability, marketability and competitiveness;
• sell its 51 per cent stake in Lanzhou National HyClone Bio-engineering in China;
• divest its gene-modulation business, including the tangible and intangible assets necessary for the divested business’s viability, marketability and competitiveness;
• offer a 1 per cent reduction in the catalogue prices of SDS-PAGE protein standard products and SSP reagent kits, in the Chinese market, every year for the next 10 years, and pledge to not reduce the discounts offered to Chinese distributors; and
• in the following 10 years, provide SSP reagent kits and SDS-PAGE protein standard products to third parties by way of OEM agreement, or grant third-party perpetual and non-exclusive technology licences as relating to those two products, whichever is chosen by the third party.

In the Abbott/St Jude case, structural remedies were applied, such as the divesture of the small hole vessel closure device business to Terumo, provision of transitional service and finishing the divesture within 20 days of closing the Abbott/St Jude transaction.

In the Becton Dickinson/Bard case, structural remedies were applied (ie, the divesture of the global product line and the R&D product line of the core needle biopsy devices business of Becton) within three months of the date of the announcement to buyers.

Besides the above, Shanghai Fosun Pharmaceutical and Dade Holding Co, Ltd were fined 200,000 yuan and 150,000 yuan, respectively, for their failure to submit a merger filing prior to Fosun’s acquisition of a 35 per cent stake in Suzhou Erye Pharmaceutical and Dade’s acquisition of a 50 per cent stake in Jilin Sichang Pharmaceutical Company. In 2017, Meinian Onehealth was fined 300,000 yuan for the failure to submit a merger filing prior to Meinian Onehealth and its affiliates’ acquisition of Ciming Health Checkup; and Canon was fined 300,000 yuan for the failure to submit a merger filing prior to its acquisition of Toshiba Medical Systems.

In addition, the NDRC and SAIC have conducted several investigations on pharmaceutical companies for abuse of dominance and engaging in monopoly agreements. Remedies were imposed in some of the penalty decisions. For example, in November 2011, the NDRC announced its decision to fine two private pharmaceutical companies nearly 7 million yuan for violating the AML by abuse of dominant position. The penalised companies are both pharmaceutical distribution companies that sell a key ingredient for a drug that cures hypertension. According to the NDRC, the pharmaceutical distribution companies entered into exclusive sales agreements with the only two manufacturers of the ingredient in June 2011 and thereby gained full control of the domestic supply of the key ingredient. Both of them then raised the sales price of the ingredient significantly and required the downstream medicine manufacturers to raise their prices as well. As a result, the downstream medicine manufacturers could not afford the excessively high cost of raw material and were forced to suspend production, causing a shortage of supply of the downstream pharmaceutical product in the market. Upon receipt of complaints from these medicine manufacturers, the NDRC initiated investigations and imposed fines on the companies. In addition, the NDRC also ordered the companies to terminate their exclusive sales agreements with the ingredient producers.

On 15 August 2017, the NDRC announced its decision to fine two drug makers 443,900 yuan for abuse of dominance in relation to isoniazid APIs. The NDRC found that the two companies, Zhejiang Second Pharma and Tianjin Handewei Pharmaceutical, held a dominant market position in the relevant market of Chinese domestic medical-use isoniazid APIs as their combined share exceeded two-thirds in 2013 and neither has fallen below one-tenth since 2016. The two companies abused their dominant position to sell isoniazid APIs at excessive prices. They also engaged in unjustifiable refusal to trade by individually entering into an exclusive general distribution contract with Weifang Longshunhe and supplying isoniazid APIs to Longshunhe and companies designated by it only. Therefore, the NDRC imposed fines on the two companies and ordered them to discontinue the anticompetitive practices.

On 22 December 2015, the Chongqing municipal branch of the SAIC fined Chongqing Qingyang Pharmaceuticals 439,300 yuan, or 3 per cent of its 2013 revenue, for abuse of market dominance. The investigation found that Qingyang Pharmaceuticals had stopped supplying allopurinol ingredients to its distributors and other manufacturers of allopurinol for half a year in order to raise the prices of the ingredients and increase its share of the allopurinol market.

On 28 January 2016, the NDRC stated that it had fined five domestic pharmaceutical companies almost 4 million yuan for reaching and implementing monopoly agreements on the sales of allopurinol ingredients. The five companies, Chongqing Qingyang Pharmaceutical and its distributor Chongqing Datong, the Place Pharmaceutical Jiangsu, and Shanghai SINE Pharmaceutical and its distributor Shangqiu Huajie, held four meetings on the distribution of allopurinol in the period between April 2014 and September 2015 and reached monopoly agreements on:

• fixing and raising the price of allopurinol;
• dividing markets for sales of allopurinol; and
• reaching an agreement on bidding in different areas.

The NDRC requested that the companies terminate their illegal behaviour immediately.

On 22 July 2016, the NDRC published its decisions to fine three domestic pharmaceutical companies 2,603,823 yuan in total for reaching and implementing monopoly agreements on the sales of estazolam APIs and tablets. The three companies, Huazhong Pharmaceutical, Shandong Xinyi Pharmaceutical and Changzhou Siyao Pharmacy, reached monopoly agreements on:

• entering into and implementing monopoly agreements to jointly boycott transactions of estazolam APIs; and
• entering into and implementing monopoly agreements to fix or change prices of estazolam tablets.

The NDRC requested that the companies terminate their illegal behaviour immediately.

On 7 December 2016, the NDRC announced its decision to fine Medtronic (Shanghai) Management 118.5 million yuan for engaging in and implementing a resale price maintenance (RPM) arrangement for medical equipment supplies. Medtronic restricted the minimum RPM, minimum bid prices of distributors and minimum RPM for hospitals.

On 29 December 2016, the Shanghai Price Bureau fined Smith & Nephew (a British medical equipment company) 742,148 yuan for engaging in RPM. Smith & Nephew and its distributors entered into and implemented an RPM agreement for over-the-counter CICA-CARE silicone gel sheets for scar treatment in the Chinese market between 2014 and 2015, and had been asking online pharmacies to sell its products at or above certain price floors since 2014.

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In accordance with article 50 of the AML, business operators who practise monopoly conduct, causing others to suffer losses therefrom, shall bear civil liability pursuant to the law.

To provide more guidance on AML civil actions, China’s Supreme People’s Court issued the Rules of the Supreme People’s Court on Several Issues Concerning the Application of Law in Hearing Civil Cases Caused by Monopolistic Conduct (the Rules) on 3 May 2012. The Rules contain 16 articles covering the standing of plaintiffs, jurisdiction, burden of proof, evidentiary rules, expert witness, the judicial process, form of civil liabilities and the statute of limitations. The Rules entered into force on 1 June 2012.

According to the Rules, where a defendant’s monopolistic conduct has caused any losses to the plaintiff, the people’s court may, in light of the plaintiff’s claims and the finding of facts, order the defendant to cease infringement, compensate for losses and otherwise assume civil liability in accordance with the law. The people’s court may also, upon the petition of the plaintiff, include the plaintiff’s reasonable expenses for investigation and prevention of the monopolistic conduct in the scope of compensation for losses.

In May 2012, the Shanghai First Intermediate People’s Court rendered judgment on the vertical monopoly agreement action filed by Beijing Rainbow (a pharmaceutical equipment company in Beijing) against Johnson & Johnson (J&J). Beijing Rainbow alleged that J&J engaged in RPM that led to the elimination or restriction of competition in the relevant market and claimed damages of 14.4 million yuan. The court found that the distribution agreement did fix prices, but that that alone was not sufficient for the plaintiff to prove that competition had been restricted. On this basis, the court rendered its judgment in favour of J&J. Beijing Rainbow appealed to the Shanghai Higher People’s Court on 28 May 2012. On 1 August 2013, after three court hearings, the Shanghai High Court reversed the lower court decision and ruled that J&J had violated the AML by having RPM agreements with Beijing Rainbow, and that J&J should compensate Beijing Rainbow 530,000 yuan for the economic loss that resulted from the RPM agreement.

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In merger filing cases, it is a routine process for MOFCOM to conduct inquiries into certain stakeholders, such as the industry association, before it makes the final decision on the filing. For pharmaceutical filings, MOFCOM will conduct the sector-wide inquiries via the industry association or other competent authorities in charge of the industry. The feedback from these inquiries may influence the outcome of the merger filing to some extent.

Meanwhile, according to news reports, from the middle of 2013 to the end of 2015, the NDRC launched several rounds of inquiry focusing on the pricing of pharmaceutical products and medical devices in the form of a survey or questionnaire. In 2016, the NDRC further distributed two rounds of questionnaires to pharmaceutical companies, both of which focus on price monopoly. The first round was sent to thousands of pharmaceutical companies in May 2016, issued through the NDRC’s local branches, local price bureaus and local price associations. The second round was started in August 2016 and was aimed at the companies that caught the agency’s attention during the first round. Moreover, in June 2016, having noticed that there was some price-related illegal behaviour in the drug and API markets, which affected fair competition, increased the patients’ burden and aroused objections from consumers and enterprises, the NDRC decided to initiate another round of national special inspection into drug prices. In particular, behaviour to be investigated and punished include:

• whether enterprises manufacturing and operating APIs or drugs reach and implement monopoly agreements, and whether industry associations organise relevant enterprises to reach and implement monopoly agreements; and
• whether enterprises manufacturing and operating APIs or drugs abuse dominant market position to sell APIs or drugs at an unfairly high price.

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The Rules of the Supreme People’s Court on Several Issues Concerning the Application of Law in Hearing Civil Cases Caused by Monopolistic Conduct is silent on whether NGOs, trade associations or consumer groups could bring private antitrust litigation on behalf of the plaintiff.

In the meantime, in accordance with article 55 of the Civil Procedure Law of the People’s Republic of China (2012 Amendment), for conduct that pollutes the environment, infringes the lawful rights and interests of large numbers of consumers or otherwise damages the public interest, an authority or relevant organisation as prescribed by law may institute an action in a people’s court. Therefore, NGOs or other non-government background organisations (which are not organised as prescribed by law) may not be able to launch a private action against infringers of the competition rules.

However, as mentioned in question 9, the opinions of the trade associations and consumer groups may influence the antitrust investigation conducted by the antitrust enforcement agencies.

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As mentioned in question 3, national regulatory restrictions apply on the production, importation, registration, pricing and distribution and supply of pharmaceutical products. So, in the merger review, MOFCOM will take into consideration the influence of these sector-specific features.

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In the pharmaceutical sector, there are many ways to classify and categorise pharmaceutical products. Anatomical therapeutic classification (ATC), which is developed and used by the European Pharmaceutical Marketing Research Association, and also by the World Health Organization, is normally recognised as the standard classification for the purpose of defining the relevant product market in the merger filing in China. Further, the third level of ATC classification (ATC-3) allows medicines to be grouped in terms of their therapeutic indications (ie, their intended use) and can therefore be used as an operational market definition. While there is no particular principle regarding market definition of medical device, substitution test is still applied.

In the public decision issued by MOFCOM on the conditional approval of the acquisition of Wyeth by Pfizer, MOFCOM acknowledged the market classification of ATC-3 in the human pharmaceutical sector.

MOFCOM has not published any market definition based on APIs. However, according to Chongqing Administration of Industry and Commerce’s (AIC) decision on Chongqing Qingyang Pharmaceuticals in 2016, a separate market of APIs (ie, a market of allopurinol ingredients) was defined and assessed. It is likely that MOFCOM may also refer to this approach in the future.

Geographic markets are typically defined in the pharmaceutical sector as nationwide, owing to the national regulatory restrictions on production, importation, registration, pricing and distribution and supply. This was borne out by the public decision issued by MOFCOM on the conditional approval of Pfizer’s acquisition of Wyeth. In the Baxter/Gambro case, it seems that MOFCOM has left the geographic market definition open as it analysed the market situation in both China and the global market. In the Thermo Fisher/Life Technology case, MOFCOM defined the geographic market as China, while taking influence on the global market into consideration as well. In the Abbott/St Jude case, MOFCOM defined the geographic market as China.

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In the regime of merger filing, it is possible for the concentration parties to argue that the concentration can strengthen the local or regional research and development activities, or to bring efficiency-based arguments. Though it depends on MOFCOM’s discretion whether this kind of argument could address the identified antitrust concerns, if the parties provide specific or quantifiable data regarding how the concentration would enhance efficiency, it would help MOFCOM assess and consider this kind of argument.

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MOFCOM has clearly stated that in merger review they will pay great attention to the combined market shares of the merging parties. Besides, before MOFCOM reaches a conclusion as to whether the transaction may have the effect of eliminating or restricting competition in the relevant market, MOFCOM will also comprehensively assess other factors, such as the general market situation, the difficulty of market entry and the demand and supply-side bargaining power. Among other things, severe competition concerns may arise when the merging parties account for a substantial combined market share in the highly concentrated relevant markets.

In addition, to achieve a comprehensive assessment of the competition status of the relevant market, MOFCOM always takes into consideration the potential competition from the new entries. For example, in the public decision issued by MOFCOM on the conditional approval of acquisition by Western Digital Corporation of Hitachi Global Storage Technologies Holdings Ltd, MOFCOM clearly stated the following:

[T]o reach a viable scale requires huge investments in production, R&D and market development, and thus poses huge potential risks. In the past decade, no new competitor has entered the market. Therefore, MOFCOM has found that entry into the HDD [hard disk drive] market is very difficult.

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In some previous filing cases, MOFCOM has taken account of the potential overlap of the parties’ pipeline products when the overlap will account for a substantial combined market share and competition in the current market is fragile. However, there is currently no precedent for MOFCOM to impose their conditions owing to competition concerns relating to products that are being developed.

As mentioned in question 14, potential competition is also taken into account when MOFCOM conducts merger reviews on transactions.

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As mentioned in question 7, MOFCOM has imposed structural remedies, behavioural remedies or mixed remedies in previous conditional clearance decisions (see examples in question 7).

Licensing arrangements have been accepted as a remedy in several different cases. For instance, in the ARM/Giesecke & Devrient/Gemalto case, MOFCOM required ARM to abide by the non-discrimination rule. It also required that in the future, ARM will release the security monitoring code as well as other information of its TrustZone technology that is necessary to develop trusted execution environment solutions, including relevant licences, licensing standards and conditions. In the Google/Motorola case, MOFCOM requested that Google license the Android platform on a free and open basis, consistent with current business practice, in order to alleviate its concerns.

In addition, MOFCOM promulgated a new rule on the restrictive conditions of notifications of concentrations in December 2014, entitled ‘Interim Provisions for Imposing Restrictive Conditions on Business Concentrations’, which takes into account the experiences of implementation of conditional remedies and provides the framework in relation to the determination, implementation, supervision, amendment, termination and legal liabilities of restrictive conditions. In the Abbott/St Jude case, MOFCOM referred to article 20 of the Interim Provisions for Imposing Restrictive Conditions on Business Concentrations and required Abbott and St Jude to preserve the viability, competitiveness and marketability of the divested business.

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We have not come across any precedents in relation to the notification of the sole acquisition of patents or licences. However, according to the Antitrust Guidelines on Abuse of IP Rights (Consultation Draft) (the Draft IP Antitrust Guidelines) published by the Anti-Monopoly Committee (AMC) under the State Council, it is recognised that business operations can obtain control or can exercise decisive influence over other business operators through IP transfer and exclusive licensing; when conducting detailed analysis, the following factors can be considered:

• if the IP right constitutes an independent business;
• if a market turnover in the previous year can be calculated and independently attributed to the IP right; and
• the term and duration of the exclusive licensing arrangement of the IP right.

It should be noted that the Draft IP Antitrust Guidelines are still in draft version and certain details need to be further clarified by the AMC.

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According to the AML, the term ‘monopoly agreements’ refers to the agreements, decisions or other concerted behaviour that may eliminate or restrict competition.

Article 13 of the AML prohibits horizontal agreements such as:

• fixing or changing the price of commodities;
• restricting the production quantity or sales volume of commodities;
• dividing the sales market or the raw material supply market;
• restricting the purchase of new technology or new facilities or the development of new technology or new products;
• jointly boycotting transactions; and
• other monopoly agreements as determined by the Antimonopoly Law Enforcement Agency under the State Council.

Article 14 of the AML prohibits vertical agreements such as:

• fixing the price of commodities for resale to a third party;
• restricting the minimum price of commodities for resale to a third party; and
• other monopoly agreements as determined by the Antimonopoly Law Enforcement Agency under the State Council.

Article 15 provides for the following exemptions for monopoly agreements:

• for improving technology, researching and developing new products;
• for upgrading the quality of products, reducing costs, improving efficiency, unifying the models and standards of the products, or implementing professional labour distribution;
• for improving the operational efficiency and enhancing the competitiveness of small and medium-sized business operators;
• for realising public interests of the society such as conservation of energy, protection of the environment, provision of disaster relief, etc;
• for mitigating a serious decrease in sales volume or excessive overstock from production during periods of recession;
• for protecting the legitimate interests during the process of conducting foreign trade and cooperation; and
• for other purposes as prescribed by the laws and the State Council.

To apply these exemptions from the bullet points relating to article 13, business operators shall also prove that the agreements reached will not seriously restrict competition in the relevant market and consumers will be able to share in these benefits.

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A technology licensing agreement is not considered an anticompetitive agreement by itself. When analysing whether the technology licensing agreement would restrict or eliminate market competition, Chapter 2 (concerning monopoly agreements) and Chapter 3 (concerning abuse of dominant market position) of the AML shall apply.

The SAIC has promulgated the Provisions on the Prohibition of Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (the SAIC IP Rules), which came into effect on 1 August 2015. Both the SAIC IP Rules and the Draft IP Antitrust Guidelines have listed licensing arrangements that may be regarded as anticompetitive and analytical factors in more detail. Moreover, MOFCOM also considers whether technology licensing agreements are anticompetitive in merger reviews. For example, according to the conditional clearance decision made by MOFCOM with regard to the proposed establishment of a joint venture between General Electric and China Shenhua in November 2011, the technology licensing agreements (for coal-water slurry gasification technology) were taken into consideration as one of the important factors for the competitive assessment and the definition of product market to the merger control review.

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Co-promotion and co-marketing agreements are not regarded as anticompetitive agreements by themselves. However, if the co-promotion and co-marketing are combined with price fixing, market division, RPM or other anticompetitive conduct set in articles 13 and 14 of the AML, the co-promotion and co-marketing agreements might be deemed anticompetitive. Moreover, if such activities facilitate information exchange between competitors, this information exchange may also be problematic.

According to news released by the SAIC, several investigations of monopoly agreement involving price-related or segmentation-related co-promotion or co-marketing agreements were closed by provincial AICs under the authorisation of the SAIC. In the new car insurance case in Hunan province, local insurance companies were found to reach into a co-promotion and co-marketing agreement by assigning one company to sell the insurance as their agent and to segment the market and agree on the unified discount. This conduct was found to be in violation of the AML for entering into a horizontal monopoly agreement. In 2017, Henan AIC penalised five local distributors of fireworks and crackers for reaching a co-marketing agreement to unify prices or price hikes and supply channel. Such behaviour was determined as monopoly agreement to allocate the sales market.

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As mentioned above, article 13 of the AML lists prohibited horizontal agreements, such as price fixing, production or sales restriction, and market segmentation. There is a catch-all provision under article 13 giving the authorities the power to deem other horizontal agreements anticompetitive.

On 20 August 2014, the NDRC announced its decisions regarding investigations on a cartel between eight Japanese auto parts suppliers (Hitachi Ltd, Denso Corp, Asian Electric Co Ltd, Mitsubishi Electric Corp, Mitsuba Corp, Yazaki Corp, Furukawa Electric Co Ltd and Sumitomo Corp) and decisions regarding cartel investigations among four Japanese bearing suppliers (Nachi-Fujikoshi Corp, Seiko Holdings Corp, JTEKT Corp and NTN Corp). The NDRC found that, from January 2000 to February 2010, the eight Japanese auto parts suppliers had held bilateral and multilateral meetings in order to establish multiple horizontal-pricing agreements that best served their own interests while eliminating competition. The NDRC also found that, from 2000 to June 2011, the four Japanese bearing suppliers organised an Asian studies conference in Japan, as well as an export market meeting in Shanghai to discuss Asia and China market price policy, timing and magnitude of price appreciation, and implementation of price appreciation. In addition, the parties concerned implemented price appreciation in the sales of bearings in China based on the agreed price or the exchange of information regarding price appreciation during the Asian studies conference and the export market meeting. According to the NDRC’s announcement, the eight Japanese auto parts suppliers were fined 831.96 million yuan in total and the four Japanese bearing suppliers were fined 403.44 million yuan in total for their AML-violating behaviour.

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As provided in article 14 of the AML, business operators are prohibited from reaching an agreement with their trading parties that fixes the resale price or restricts the minimum resale price. There is also a catch-all provision under article 14 giving the authorities the power to find other vertical agreements that they consider to be anticompetitive.

On 22 February 2013, Guizhou Pricing Administration issued an official statement, imposing a fine of 247 million yuan on Moutai for fixing the minimum resale price of distributor, and Sichuan Provincial Development and Reform Commission also issued an official statement, imposing a fine of 202 million yuan on Wuliangye for similar RPM. This was the first case on vertical monopoly agreements, testing the NDRC’s standard towards the identification of RPM conduct (ie, the assessment of anticompetitive effects of RPM and the damage to consumers’ interests).

After the Moutai case, more and more investigations and decisions on vertical agreements have been made by the antitrust authorities. For example, the Guangdong DRC started an investigation in August 2014 into Dongfeng-Nissan and found that, between April 2012 and July 2014, Dongfeng-Nissan imposed vertical controls on its dealers by issuing business policies, price control methods and assessment measures to strictly control all prices. On 10 September 2015, Guangdong DRC announced the result of the investigation and held that Dongfeng-Nissan violated article 14 of the AML by imposing RPM agreements and restricting market competition. In 2016, the NDRC investigated and punished the companies for vertical agreements of RPM in the Medtronic case and the Smith & Nephew case. See question 7.

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To date, we have not noticed any precedents with regard to potential antitrust violation in the settlement of a patent dispute in China. That said, as mentioned in question 19, business operators shall not make use of exercise of IP rights, including by means of reaching settlements of patent disputes, to establish monopoly agreements that are prohibited by articles 13 and 14 of the AML.

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If the joint communications or lobbying actions are used to assist with price fixing, market division, RPM or other anticompetitive conduct set in articles 13 and 14 of the AML, the joint communications or lobbying actions might be deemed anticompetitive. Moreover, joint communications or lobbying actions may likely facilitate sensitive information exchange among competitors, which may lead to concerted actions as prohibited by article 13 of the AML.

In the context of trade associations, the NDRC issued Guidelines on Trade Associations’ Pricing Behaviour, on 20 July 2017. It is clearly pointed out that trade associations’ publishing of price-related information may affect the expectation and pricing behaviour of its members, the whole industry and the public, thereby impacting the market pricing order. Compared to the historic gathering of general or publicly available information, the publication of current or future price information, product-specific price information and publicly difficult-to-obtain information, may lead to a higher risk of business operators reaching monopolistic agreements.

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Under the Price Law, article 14(3) prohibits business operators from fabricating or circulating price rise information to push prices to excessively high levels. Therefore, if public communications (eg, via press statements) appear to have done this, the company involved may bear the risk of violating the Price Law. One example is the NDRC’s decision to fine Unilever for briefing the media on upcoming price rises of its consumer products in 2011.

Moreover, depending on the content of the communication and the specific market condition, such public communication could be regarded as sensitive information exchange between competitors. Currently, there is no precedent case in China in this regard.

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We are not aware of any precedents in China where anticompetitive exchanges of information occur in the pharmaceutical sector because of increased transparency. However, it would be problematic if business operators exchanged sensitive competition information to engage in monopoly agreements or concerted conduct prohibited by the AML. Typically, sensitive information includes information on price, capacity, cost structure, future plans for pricing and capacity, and target customers.

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According to article 17 of the AML, business operators holding a dominant market position are prohibited from committing any of the following acts:

• selling products at unfairly high prices or buying products at unfairly low prices;
• selling products at prices below cost without any justifiable cause;
• refusing to trade with a trading party without any justifiable cause;
• restricting their trading party so that it may conduct deals exclusively with themselves or with designated business operators without any justifiable cause;
• implementing tie-in sales or imposing other unreasonable trading conditions at the time of trading without any justifiable cause;
• applying discriminatory treatments on trading prices or other trading conditions to their trading parties with equal standing without any justifiable cause; or
• other forms of abusing the dominant market position as determined by the Antimonopoly Law Enforcement Agency under the State Council.

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Under the AML, there is no de minimis threshold for a conduct to be found abusive. However, factors, including the size of market or number of customers or tenders concerned, would affect the determination of whether, and to what extent, the behaviour would eliminate or restrict market competition. In addition, the duration of the conduct would affect the amount of fines to be imposed, according to the Guidelines on Calculation of Illegal Gains and Determination of Fines (Consultation Draft).

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According to the AML, the term ‘dominant market position’ refers to a market position held by business operators that have the ability to control the price or quantity of commodities or other trading conditions in the relevant market, or block or affect the entry of other business operators into the relevant market. The AML provides several factors for evaluating monopoly power:

• the market share of the business operator in the relevant market and the competition status in the relevant market;
• the ability of the business operator to control the sale market or the procurement market for raw materials;
• the financial strength and technological capabilities of the business operator;
• the extent of reliance by other business operators on transactions with the business operator;
• the level of ease or difficulty for entry by other business operators into the relevant market; and
• any other factors relating to the determination of dominant market position of the business operator.

According to article 19 of the AML, a business operator may be presumed to have a dominant market position under any of the following circumstances:

• the market share of one business operator accounts for half or more of the relevant market;
• the joint market share of two business operators accounts for two-thirds or more of the relevant market; or
• the joint market share of three business operators accounts for three-quarters or more of the relevant market.

Nevertheless, the above presumptions are rebuttable. In addition, when establishing joint dominance, if any of the business operators has a market share of less than 10 per cent, that business operator shall not be considered to have a dominant market position.

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A patent holder will not be deemed a dominant business operator simply on account of the patent that it holds. According to article 6 of the SAIC IP Rules, a business operator holding IP rights may constitute one of the factors for ascertainment of its market dominance, but the presumption of the business operator’s market dominance in the relevant markets shall not be merely based on the IP rights held by the business operator. Similarly, the Draft IP Antitrust Guidelines also recognise that IP holders should not be presumed to have a dominant market position solely owing to their possession of IP rights; instead, factors and circumstances, as prescribed in articles 18 and 19 of the AML, should be considered when determining whether a business operator holds a dominant market position.

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Article 55 of the AML provides as follows:

[T]his law shall not apply to the conduct of operators exercising their intellectual property rights in accordance with the laws and relevant administrative regulations on intellectual property rights; however, this law shall apply to the conduct of operators seeking to eliminate or restrict market competition by abusing their intellectual property rights.

This is the only provision under the AML that directly addresses the tension between the exercise of IP rights and the protection of competition.

To make article 55 more practical, the SAIC IP Rules and the Draft IP Antitrust Guidelines prohibit operators engaging in conducts described under article 17 of the AML (see question 27) and provide more detailed factors to be considered when conducting analysis regarding specific conducts.

In addition, article 10 of the SAIC IP Rules and article 17 of the Draft IP Antitrust Guidelines specify that business operators with market dominance will be deemed to be adding unreasonable terms to a transaction if they add the following restrictions or conditions, in the course of implementing intellectual property rights, without reasonable justification:

• the requirement of exclusive grant-back of techniques improved by the transaction counterparties;
• the prohibition of transaction counterparties from questioning the validity of their intellectual property rights or instituting IP infringement litigation;
• the restriction of the transaction counterparties from making use of competing commodities or techniques;
• the continuation to exercise intellectual property rights for which the protection period has expired or been declared void;
• the prohibition of transaction counterparties from or coercion of entering into transactions with third parties, or limiting the transaction conditions between the counterparties and third parties;
• the requirement of the transaction counterparties to cross-license the IPs without providing reasonable consideration; or
• the imposition of any other unreasonable restrictive conditions on the transaction counterparties.

Besides the above, the Draft IP Antitrust Guidelines also list several arrangements with respect to the grant or enforcement of IP rights that may eliminate or restrict the market competition subject to a case-by-case analysis, which would be prohibited by articles 13 and 14 of the AML. The said arrangements include joint development, cross-licensing, exclusive grant-back, non-challenge clause, standardisation and other limitations on, for example, applied areas of the IP rights, sales channel of products using the IP rights, usage of competing technologies or provision of competing products, etc.

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We are unaware of any precedent in the pharmaceutical sector in China. However, as mentioned above, business operators shall not exercise IP rights to establish monopoly agreements that are prohibited by articles 13 and 14 of the AML. Business operators with market dominance are also prohibited from abusing market dominance in exercising intellectual property rights to eliminate or restrict competition.

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We are unaware of any precedent in this regard in China. However, communications aimed at HCPs concerning the retail price of drugs may violate article 14 of the AML, which prohibits business operators from fixing the resale price or limiting the minimum resale price to a third party.

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To the best of our knowledge, we are not aware of any prohibitions against a patent holder’s right to market or license its drug as an authorised generic, or allow a third party to do so, before the expiry of the patent protection on the drug concerned.

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We are unaware of any precedent concerning the patent holder’s limitation on off-label use in China. However, as mentioned above, business operators shall not exercise IP rights to establish monopoly agreements that are prohibited by articles 13 and 14 of the AML. Business operators with market dominance are also prohibited from abusing market dominance in exercising intellectual property rights to eliminate or restrict competition.

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According to the AML, the following pricing conduct would raise antitrust risks:

• competitors agreeing on fixing or changing commodities’ prices;
• a business operator agreeing with its transaction counterparty to fix the resale price or limit the minimum resale price to a third party;
• selling products at unfairly high prices or buying products at unfairly low prices if the business operator holds a dominant market position; and
• selling products at prices below cost without justifiable cause if the business operator holds a dominant market position.

High prices of a dominant market player could be abusive. The NDRC further stipulated more detailed rules on regulating price-related monopolistic conduct in 2010 (the NDRC Anti-Price Monopoly Rules). According to the NDRC Anti-Price Monopoly Rules, when determining whether the price is excessively high, the following factors should be considered:

• whether the selling price is obviously higher than the price at which other business operators sell the same products;
• whether the selling price is increased beyond the normal range when cost is basically stable;
• whether the mark-up rate of the sold products is obviously higher than the growth rate of costs; and
• other relevant factors that need to be considered.

Further, article 8 of the NDRC’s API Guidelines emphasises and elaborates the above-mentioned factors, where the NDRC would also consider whether there exists an excessively high price difference in the same regional market during a different time period or in a different regional market during the same time period.

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Owing to the lack of rules and precedents, it is not clear whether the specific features of the pharmaceutical sector provides an objective justification for conduct that may otherwise infringe antitrust rules.

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Not applicable.

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As regards antitrust regulation in the pharmaceutical sector, the NDRC published the API Guidelines in 2017. The Draft IP Antitrust Guidelines may be published in the near future.

Additionally, the implementation of the ‘two-invoice system’, which is one of the big moves in medical reform, has been a hot topic in 2017. The new invoicing system may lead to the streamlining of distribution by drug manufacturers, which may in turn entail antitrust risks, such as RPM.

The pharmaceutical sector has been one of the priorities of antitrust enforcement agencies in recent years. Apart from the cases mentioned above, the NDRC also focused on cracking down on administrative monopolies. The NDRC published its statement relating to administrative monopoly by Shenzhen Health and Family Planning Commission (Shenzhen HFPC) in April 2017. In the course of promoting group purchasing, Shenzhen HFPC abused its administrative power in permitting only one group purchasing organisation (ie, Shenzhen Quanyaowang Pharmaceutical) to provide services, requesting Shenzhen’s public hospitals and pharmaceutical manufacturers to only use Shenzhen Quanyaowang Pharmaceutical’s services and restricting the use of pharmaceutical distribution service providers to only those designated by Shenzhen Quanyaowang Pharmaceutical. The NDRC concluded that Shenzhen HFPC abused its administrative power to restrict or eliminate competition. Shenzhen HFPC realised that the foregoing practices were anticompetitive and committed to rectifying its conduct.

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