China Publishes Draft Pharma Sector Anti-Monopoly Guidelines

On August 9, 2024, China’s State Administration for Market Regulation (the “SAMR”) released for public consultation its draft anti-monopoly guidelines for the pharmaceutical sector (“Draft Pharma Guidelines”).¹

Once adopted, the Draft Pharma Guidelines will replace the Anti-monopoly Guidelines of the State Council’s Anti-Monopoly Committee on Active Pharmaceutical Ingredients—introduced in November 2021 to tackle monopolistic practices relating to APIs.² In contrast, the Draft Pharma Guidelines cover a much broader range of pharmaceutical product types, including traditional Chinese medicines, drugs, and biologics. They also apply to all key operational aspects of the sector, including R&D, production and distribution.

In particular, the Draft Pharma Guidelines explore reverse payment agreements, RPM and permissible resale pricing restrictions, patent-related abuses of dominance, exploitative pricing practices, collective dominance and merger control issues offering valuable insights into the practices and priorities of the SAMR in so far as these concern the pharma industry.

We summarize the essentials in our Client Alert below.

Reverse Payment Agreements

The Draft Pharma Guidelines reiterate the fundamental principles of monopoly agreements as outlined in Chapter 2 of the AML, reminding the market that typical monopolistic agreements, such as those aimed at fixing prices, controlling production or sales volumes, allocating markets, restricting the transfer of new technologies, or engaging in joint boycotts, are also prohibited when they concern the pharma sector.

In addition, the Draft Pharma Guidelines explain that reverse payment agreements may be monopolistic.  Such agreements, also known as “pay-for-delay” agreements, involve settlements resolving patent infringement disputes between patent holders and generic drug manufacturers, where patent holders compensate generic drug manufacturers for refraining from challenging the validity of a patent or delaying the launch of generic drugs. Article 13 of the Draft Pharma Guidelines set out factors that the SAMR may consider when assessing whether a reverse payment agreement is anti-competitive: 1) whether the settlement payment significantly exceeds, without justification, the cost of resolving the patent dispute, 2) the likelihood of the patent being invalidated should the generic manufacturer proceed with its challenge, and 3) whether the settlement effectively extends the patent holder’s monopoly or delays generic entry.

This provision follows the direction taken by the Supreme People’s Court (the “SPC”) in its judicial interpretation announced in June 2024 (the “SPC Interpretation”).³ And the approach taken in the Draft Pharma Guidelines and the SPC Interpretation can both be traced back to the SPC’s 2021 ruling in AstraZeneca v. Jiangsu Aosaikang Pharmaceutical.⁴ The China approach is largely consistent with enforcement efforts against reverse payment agreements in other jurisdictions, such as the U.S. and the EU.⁵

RPM

Consistent with the AML, the Draft Pharma Guidelines prohibit resale price maintenance (“RPM”). These are agreements between a pharmaceutical undertaking and its trading counterparty—distributor—that fix the resale price or control the minimum resale price of the drug. According to Article 14 of the Draft Pharma Guidelines, such agreements can be written or oral, they can come in various forms and formats, and can be achieved indirectly by fixing or limiting the trading counterparty’s margin, discount, rebate, commission or other elements of the fee/price.

RPM is presumed anti-competitive unless the pharmaceutical undertaking can prove there are no adverse effects on intra-brand or inter-brand competition, including price hikes, reduced supply, or higher barriers to entry.

The Draft Pharma Guidelines provide that certain restrictions common in the pharmaceutical sector do not amount to monopolistic RPM, as set out in Article 15:

1. Agency sales, where the pharmaceutical undertaking entrusts a sales agent with the sales of its products and sets prices and other commercial terms pursuant to the agency arrangement; 
2. Centralized Drug Procurement, where the price of the drug has been set through negotiation by the pharmaceutical undertaking in the context of a centralized procurement program, and the trading counterparty is required to follow the agreed price in its distribution to end-user medical institutions;
3. Ancillary service providers, who provide only import, delivery, payment, invoicing and technical support, can be required to follow the price set by the pharmaceutical undertaking responsible for selling and distribution of the product. 

Product Hopping

Complementing the core provisions of the AML, the Draft Guidelines elucidate the criteria for identifying whether a pharmaceutical company might hold a dominant market position and list out common forms of abuse, including refusal to deal, tying, discriminatory treatment and other trading restrictions. 

In particular, the Draft Pharma Guidelines address the practice of “product hopping,” where a pharmaceutical patent holder with a dominant market position makes minor modifications to an existing drug to extend its patent life while withdrawing the original version of the drug from the market.  This conduct effectively prolongs its dominance and blocks entry by generic drug manufacturers.

Factors relevant to assessing the anti-competitive effects of product hopping are provided in Article 28 of the Draft Pharma Guidelines.  These include 1) whether the new patented drug constitutes a substantial improvement, 2) the effects on generic entry, 3) the timing of the conversion (e.g., whether the original patent is nearing expiry and whether any generic drugs are about to launch), and 4) the range of choices available to patients and physicians. 

Although we are not aware of any product hopping case in China, the inclusion of this conduct in the Draft Pharma Guidelines suggests that this potential form of abuse has likely already appeared on the enforcement authority’s radar. Overseas jurisprudence in this area will provide a helpful reference for future product hopping cases under the AML.⁶

Unfairly High Prices

In recent years there have been several cases involving unfairly high prices in the pharmaceutical sector in China. According to the SAMR’s 2023 Annual Report on Anti-Monopoly Enforcement, 5 of the 11 abuse cases concluded in 2023 concern the pharmaceutical sector, and 4 of these were excessive pricing cases.⁷ 

Recalling the Provisions on Prohibiting Abuses of Dominant Market Positions, Article 22 of the Draft Pharma Guidelines provides a framework for evaluating whether a price is unfairly high:

1. Comparable competitor pricing: by comparing whether the pharmaceutical undertaking’s pricing is significantly higher than that of its competitors assuming the same or similar market conditions
2. Comparable cross-region pricing: by comparing the pharmaceutical undertaking’s prices across regions assuming the same or similar market conditions 
3. Comparable historical pricing: by comparing the pharmaceutical undertaking’s pricing during different periods assuming the same or similar market conditions as the present 
4. Normal margin approach: by examining whether a price increase results in a “normal” margin taking any increases in cost into account
5. Whether the price increase results from “layering up” the price.

Some of the methods or approaches outlined above can already be seen in recent enforcement cases. For example, in accordance with the “comparable competitor pricing” method, in November 2023, the Shanghai Administration for Market Regulation (the “Shanghai AMR”) fined Jiangxi Xiangyu Medicine RMB 1.6 million (USD220,000) for selling iodized oil at prices that were more than three times those of competitors.⁸ Utilizing an analytical approach akin to the “comparable cross-region pricing” method, the Shanghai AMR fined SPH No. 1 Biochemical & Pharmaceutical RMB 462 million (USD 65 million) in December 2023 for selling injectable polymyxin b sulfate at a listing price that was 35-44 times that charged in other regions.⁹ And in March 2023, Tianjin Jinyao Pharmaceuticals (“Tianjin Jinyao”) was fined RMB 27.7 million (RMB 4 million) by Tianjin Administration for Market Regulation, which found that Tianjin Jinyao abused its dominance in carmustine injections by selling a chemotherapy drug at 7.5 times the historical 2016 price (i.e., while costs remained stable).¹⁰

Collective Dominance

Article 29 of the Draft Pharma Guidelines provides that an abuse of collective dominance can occur when two or more pharmaceutical undertakings collaborate on the production of pharmaceuticals. The following factors are to be considered when assessing whether there has been an abuse such that two or more parties can be found liable: (1) whether the corporations participated in or exercised control over the same or different stages of the relevant pharmaceutical supply chain, (2) whether there is joint procurement, production, or sale of pharmaceuticals or some other division of labor between the parties, (3) the parties respective contributions to the monopolistic conduct and (4) whether there is a joint acquisition and distribution of monopoly profits.

The Chinese enforcement authorities have found collective dominance in previous cases in the pharmaceutical sector.  For example, in the SPH No.1 case mentioned above, Wuhan Healthcare Pharmaceuticals and two affiliated companies (collectively “Wuhan Huihai”) were found to have engaged in abuse of collective dominance together with SPH No. 1. Wuhan Huihai controlled the supply of the API for injectable polymyxin b sulfate manufactured by SPH No. 1. During their collaborative efforts to manufacture and launch the injectable polymyxin b sulfate product, the parties communicated and agreed on matters relating to pricing and delivery of the drug and shared monopoly profits derived from the sale of injectable polymyxin b sulfate in the China market. Wuhan Huihai was ordered to disgorge its illegal gains and pay fines totaling RMB 757 million (USD 107 million).  

Non-Notifiable Pharma Mergers and Killer Acquisitions

In the area of merger control, the Draft Pharma Guidelines place particular emphasis on potential competitors (including for drugs still under R&D) and the investigation of below threshold (non-notifiable) concentrations.  Noting that the term “killer acquisition” was first coined in the pharmaceutical sector to describe an incumbent acquiring, with a view to shutting it down, a competitor that threatened to undermine its products, ¹¹ it is perhaps unsurprising that the limited instances to date of SAMR calling-in for review non-notifiable (below-threshold) mergers have involved the pharmaceutical sector. 

As disclosed in its 2019 Annual Report on Anti-Monopoly Enforcement, the SAMR intervened in a below-threshold merger, where Henan Jiushi Pharmaceutical was to be acquired by its sole distributor Hunan Er-Kang Pharmaceutical.¹²  The transacting parties had been under SAMR’s scrutiny and were previously fined in 2018 for abuse of dominance in the supply of chlorphenamine maleate. Following the SAMR’s intervention in respect of the proposed merger, the parties eventually abandoned the transaction after repeated reminders from the SAMR that they should not proceed with a transaction that would violate the AML. More recently, Simcere Pharmaceutical Co., Ltd.’s (“Simcere”) proposed acquisition of Beijing Tobishi Pharmaceutical Co., Ltd. (“Tobishi”) was notified to the SAMR voluntarily.¹³ In this case, SAMR’s competition concerns related to Simcere having a 100% share in the supply of Batroxobin Injection API in China with Tobishi being the sole downstream manufacturer of Batroxobin Injection. Simcere ran clinical trials for its own Batroxobin Injection product and had positioned itself as a potential new entrant according to the SAMR. After a review lasting about 15 months, the SAMR ultimately cleared the transaction subject to a mix of structural and behavioral commitments.

The ongoing consultation by SAMR on the Draft Pharma Guidelines indicates that pharmaceutical transactions—and the sector generally—will remain an enforcement focus for SAMR going forward.

¹ See here.

² See here.

³ According to Article 20 of the Supreme People's Court's Interpretation of Certain Issues Relating to the Application of the Law in the Trial of Monopoly-Related Civil Disputes (SPC Interpretation), courts may find an agreement anti-competitive if 1) the patent right holder gives or promises to give the generic drug manufacturer unreasonable monetary or interest compensation, or 2) the generic drug manufacturer agrees not to question the validity of the patent holder’s patent or agrees to delay its entry into the relevant market. The SPC Interpretation is available here. See also our alert entitled “China Issues Judicial Interpretation on Civil Antitrust Cases,” available here.

⁴ The ruling is available here.

⁵ E.g., in FTC v. Actavis Inc., the U.S. Supreme Court ruled that reverse payment agreements are to be analyzed under the “Rule of Reason” framework. And in Lundbeck v. Commission (Case C-591/16 P), the European Court of Justice held that settlement agreements between Lundbeck and generic drug manufacturers were anti-competitive, as the agreements under which Lundbeck would compensate the generic drug manufacturers in exchange for the latter refraining from selling their products for a specific period serve “no purpose other than impeding competition.”

⁶ E.g., in State of New York v Actavis, the court distinguished between a “hard” switch, where the original drug is discontinued, and a “soft” switch that preserves the original drug with the new drug. A “soft” switch is less likely to be deemed anti-competitive because it preserves greater choice for patients and physicians.

⁷ SAMR 2023 Annual Report on Anti-Monopoly Enforcement, p. 18, available here.

⁸ See here.

⁹ See here.

¹⁰ See here.

¹¹ See CPI, Antitrust Chronicle – Killer Acquisitions, May 2020, available here.

¹² See here.

¹³ See here.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Philip Monaghan, an O’Melveny partner licensed to practice law in Hong Kong, England and Wales, and Ireland; Lining Shan, an O’Melveny senior legal consultant in the firm’s Beijing office; Vivian Wang, an O’Melveny associate licensed to practice law in New York and the District of Columbia; and Norman Luk, an O’Melveny trainee solicitor in the firm’s Hong Kong office, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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