Focus on monopoly risk of APIs

Active pharmaceutical ingredients (APIs) refer to the raw materials used in the production of various preparations, which cannot be taken directly by patients and can only be used for clinical application after being processed into drug products. At present, there are serious problems of oligopoly and frequent chaos in China’s API market, which have become more serious in recent years. The reasons for monopoly in this industry are as follows:

The concentration of API enterprises is high. The high entry threshold, complex application procedure and long application periods of API enterprises result in fewer competitors and insufficient competition.

API manufacturers have strong dominance. There are 1,500 kinds of APIs in China’s finished drugs. However, only one enterprise is qualified to produce 50 of them, only two enterprises to produce 44 of them, and only three enterprises to produce 40 of them. Ten percent of APIs can only be produced by several enterprises, and their production is in the hands of a very small number of production enterprises.

Pharmaceutical enterprises have strong dependence on API enterprises. In practice, due to the long period and complicated procedures of downstream pharmaceutical enterprises to replace API suppliers, pharmaceutical enterprises often choose to co-operate with an API enterprise for a long time, thus forming a high degree of dependence on it. When API enterprises increase prices significantly, stop supplying, or restrict supply, pharmaceutical enterprises can only passively accept the situation.

Monopoly behaviour includes two aspects: monopoly agreements reached by operators, and abuse of market dominance. Monopoly agreements reached by operators can be divided into horizontal monopoly agreements and vertical monopoly agreements.

The case of glacial acetic acid in July 2018 is a typical case of a horizontal monopoly agreement. The three manufacturers in the glacial acetic acid market exchanged market quotations and information on production and sales, and discussed joint price increases many times, thus reaching a monopoly agreement to jointly raise the sale price of APIs for glacial acetic acid. They were confiscated of this illegal income and fines were imposed totalling RMB12.8 million (US$1.8 million). This case was the biggest ticket issued by China for an anti-monopoly case in the field of APIs in the past 10 years, since the implementation of the Anti-Monopoly Law (AML).

The promethazine hydrochloride case, in 2011, is a typical case of a vertical monopoly agreement. In 2011, Shandong Shuntong and Shandong Huaxin signed a sales agency agreement with two promethazine hydrochloride manufacturers, respectively, which monopolized the domestic sales of the product. As a result, many compound reserpine manufacturers could not afford it and were forced to stop production by July 2011.

A typical case of abusing market dominance is the monopoly of the API chlorpheniramine. Henan Jiushi Pharmaceutical is the largest manufacturer of chlorpheniramine in China. Hunan Erkang Pharmaceutical Management has had the sole import agent qualification of chlorpheniramine since 2018.

Under the guidance of Hunan Erkang, the two enterprises involved in the case were in frequent contact with each other, co-operated with each other, and carried out abuses of their market dominance including: selling chlorpheniramine to downstream operators at unfair high prices; and tying related pharmaceutical excipients to downstream operators when selling chlorpheniramine. In the end, the penalty ratio (the proportion of fines to sales) imposed by the State Administration for Market Regulation on the two enterprises reached 8%, by far the highest penalty ratio in published law enforcement cases in China.

Enterprises investigated need to take active measures to prevent and control anti-monopoly risks, including:

(1) Conduct an anti-monopoly internal audit, employ anti-monopoly professionals to assist in conducting a comprehensive anti-monopoly risk investigation and assessment when necessary, conduct anti-monopoly law training for executives and employees, and strengthen the enterprise’s awareness of anti-monopoly compliance and law-abiding awareness;

(2) For enterprises that are suspected of illegal activities, on the basis of consulting professional opinions, it is suggested that they report the situation to the anti-monopoly law enforcement agency as soon as possible and take corrective measures in due course;

(3) If encountering the dawn raids of the anti-monopoly law enforcement agencies, relevant enterprises should calmly respond, safeguard their own rights and interests according to law, and actively defend their rights and interests in the light of the specific circumstances of the enterprise involved in the case;

(4) When communicating with anti-monopoly law enforcement officials, operators should not only abide by the law, but also safeguard the interests of the enterprise;

(5) The enterprises investigated should be very cautious in dealing with the media.

Against the background of increasing costs of violating the law and stricter law enforcement, the authors recommend that relevant enterprises conduct self-assessment in accordance with the provisions of the Guidelines on Price Behaviour of Operators of Drug and APIs in Shortage, and make timely adjustments.

API manufacturers need to be very cautious when they engage in the following actions: (1) price increases beyond a reasonable range; (2) exclusive distribution or exclusive agency agreements with distributors; (3) attending any meeting where competitors exchange sensitive information on price, volume, etc., and reaching arrangements with competitors for joint price increases, market segmentation or refusal to supply to third parties.

Finally, lawyers can provide customers with the following assistance in anti-monopoly investigations: (1) legitimacy analysis of relevant acts; (2) propose coping strategies according to specific cases; (3) provide AML compliance assessment for commercial contracts, competition strategies, distribution channels and sales patterns; (4) obtain an exemption from a monopoly agreement; (5) strive for suspension of investigation, including modification of business strategy; (6) strive for leniency; (7) draft common documents to deal with anti-monopoly investigations; (8) conduct hearings, administrative reconsideration, administrative litigation, civil litigation, etc., on behalf of clients.

Susan Guo is a partner and James Tian is a counsel at AllBright Law Offices