Stricter policy sees hefty fines for domestic drug firms fixing prices

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The National Development and Reform Commission (NDRC) announced in November 2011 that it was imposing large fines on two domestic drug companies for monopoly pricing of raw materials for compound reserpine tablets, a high blood pressure treatment on China’s National Essential Drug List.

The fines were RMB6,877,000 (US$1.08 million) for Shandong Weifang Shuntong Pharmaceutical and RMB152,600 for Shandong Weifang Huaxin Medicine Trade. Their illegal gains will also be confiscated, as provided by the PRC Anti-monopoly Law.

This is the first heavy anti-monopoly penalty in China, and analysts say the case signals government plans to standardise the price-setting system for drugs and crack down on monopolies.

drug_and_rmbPharmaceutical companies that believe they might hold a dominant position in their market in China should be aware that they are more vulnerable to scrutiny by PRC antitrust agencies, with the risk of possible enforcement action. Companies should consider reviewing their supply and distribution agreements with this in mind.

The NDRC found that although the two companies, Shuntong and Huaxin, do not manufacture compound reserpine tablets, they are controlling its raw material supply by acting as monopolistic distributors. On June 6, Shuntong and Huaxin signed sole-agent agreements with the two national providers of promethazine hydrochloride (a raw material for compound reserpine tablets), and stipulated that the two suppliers could not sell the substance to anyone else without their consent.

They then forced manufacturers to buy high-cost raw materials (the price went from RMB200 to RMB1,350 per kilogram) and told them what retail price to charge patients for the tablets.

Four large domestic companies supply about 75% of the market for these tablets. When they could not get the necessary raw materials, they had to turn to Shuntong and Huaxin. The two companies would only supply the drug makers if they agreed to increase the price of a 100-pill bottle from RMB1.3 to RMB5 or RMB6.

Rising costs for promethazine hydrochloride forced dozens of manufacturers, including Changzhou Pharmaceutical Factory, Yabao Pharmaceutical Group, CSPC Pharmaceutical and Shandong Xinhua Pharmaceutical to either halt production, or deplete stocks of raw materials to maintain normal supply.

More than 10 million mostly low- and middle-income Chinese patients use the compound reserpine medication. More than nine billion pills are taken annually.

Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. Readers can contact Zhang Danian at Baker & McKenzie in Shanghai at danian.zhang@bakermckenzie.com