Shortly after the government of China launched its anti-monopoly bureau, an active pharmaceutical ingredient (API) manufacturer from Nanjing was fined RMB6.58 million ($1 million) for abusing its dominant market position and inflating prices. The swift action has sent a chill down API manufacturers’ spines.

Source: Beijing News

Nanjing Ningwei was one of the first API manufacturers targeted by China’s anti-monopoly bureau.

On Nov. 18, after the bureau was established under the State Administration of Market Supervision (SAMR), Shanghai SAMR authorities said they imposed administrative penalties with a RMB6.58 million fine on Nanjing Ningwei on the grounds of abusing its dominant position in the market. The company was accused of selling pralidoxime chloride active ingredients at unfairly high prices and imposing unreasonable trading conditions.

In January this year, the SAMR also issued an administrative penalty against Hong Kong-listed Simcere Pharmaceutical for abusing its dominant position in the market with a fine of more than RMB 100 million. Simcere was accused of refusing to supply bacitracin active ingredients to downstream companies.

There were more similar cases this year as well. On April 6, Tianjin Tianyao Pharmaceuticals, the largest steroid hormones manufacturer in Asia, was fined around RMB 44 million for an alleged monopoly on fluocinolone acetonide active ingredients.

Just recently, Shangqiu New Pioneer Pharmaceutical, the national distributor for the only phenol manufacturer in China, was fined more than RMB 11 million for selling phenol active ingredients at high prices. During the period when Shangqiu New Pioneer monopolized the market, the average sales price of phenol soared by 9.2 times its highest historical price.

Chinese anti-monopoly regulators have been targeting drug manuafcturers since 2016. The authorities have punished more than 10 companies for monopolisitc pricing on scarce drugs and APIs, including those related to the APIs of acetic acid, chlorpheniramine and calcium gluconate.

Among 1,500 kinds of chemical APIs in China, 50 are manufacture by only one qualified company, 44 by only two companies, and 40 by only three companies, a government offical told the state-run publication Legal Dail.

The conditions enable API manufacturers to control the market, while pharmaceutical preparation companies have passively accept price increases, supply stoppages, or shortages. However, the Chinese government intends strengthen its supervision on the API field with penalties and new guidelines.

Antitrust Guidelines on APIs

To address the issue, the anti-monopoly bureau issued antitrust guidelines for APIs on the same day it was launched. The guideline defines monopoly agreements on APIs as the agreements, decisions, or other concerted acts to exclude or restrict competition. Those agreements or decisions can be in written or oral form.

The guidelines stipulated that to determine whether the API has the dominant position should be based on the relevant provisions of Antimonopoly Law, to analyze the related factors and circumstances.

The following factors were deemed relevant to the field of APIs:

1. the operator's market share;

2. the relevant competition;

3. the manufacturing capacities and the operator's actual outputs;

4. the operator's ability to control the sales or procurement markets;

5. the operator's financial and technical conditions;

6. the extent to which trading counterparties are dependent on the operator;

7. the number of real and potential trading counterparties, and their ability to constrain the operators;

8. barrier of entry to the market for other operators.

The guidelines also say that the APIs industry chain covers manufacturing, transportation, distribution, and other aspects involving various types of businesses. Therefore, the definition of relevant products and geographical markets should consider the industry characteristics and judge on a case by case basis.

Effects remain to be seen

From penalty cases to guidelines, China's anti-monopoly regulations on APIs are strengthening.

The State Council's Anti-Monopoly Committee said, that the guidelines further improve the predictability and transparency of enforcement. At the same time, they also help operators to strengthen their compliance practices and help them self-regulate.

The committee also pointed out that, “the issue of drugs is related to the people's livelihood. In recent years, the monopolistic behavior in the field of APIs is frequent, affecting the pricing and stable supply of drugs. On the other hand, the API’s business model is complex and diverse, it is necessary to provide clear guideline for operators, to promote the development of the field.

However, one insider told the Legal Daily that, it cannot fundamentally curb API providers' monopolistic behavior even if punished by the government.

The API industry has high entry barriers, complex application procedures, and long application times, which severely limits market participation. The process is also long and complex for downstream preparation companies to change API suppliers, thus they often choose to cooperate with one API company for a long time.

One government insider said, Although the government's crackdown has curbed their behavior of raising drug prices, it can't control the supply. If a preparation manufacturer needs 10 kilograms of active ingredients, and the API providers deliberately supply only 1 kilogram, resulting in a serious shortage in maufacturing, there will be a big shortage of drugs on the market.

MedCloud, a training and consulting company that follows market access in the pharmaceutical industry, contributed to this report.