September 2024
Compliance Implications of the Draft Anti-Monopoly Guidelines for the Pharmaceutical Industry (Mainland China)
September 2024
Yanting Pei and Teresa Huang
Preface
On August 9, 2024, the State Administration for Market Regulation issued the "Anti-Monopoly Guidelines for the Pharmaceutical Industry (Soliciting Opinions)". The draft (hereinafter referred to as the "Draft Opinion") is announced to publicly solicit opinions from society. Compared to the "Anti-Monopoly Guidelines for Active Pharmaceutical Ingredients" (hereinafter referred to as the "Active Pharmaceutical Ingredients Guidelines") formulated and released by the former State Council Anti-Monopoly Commission in 2021, the "Draft Opinion" is more comprehensive and systematic and will replace the "Active Pharmaceutical Ingredients Guidelines" after formal implementation, indicating that anti-monopoly compliance in the pharmaceutical industry may enter a new era. Therefore, although the guideline is still in the stage of soliciting opinions, it deserves certain attention. This article will provide a brief analysis of the main content of the Draft Opinion and the identification of major monopolistic behaviors for reference by relevant practitioners.
I. The main content and characteristics of the Draft Opinion
The Draft Opinion consists of 7 chapters and 55 articles, aiming to address the prominent monopoly issues in the pharmaceutical industry. It further elaborates on the behavioral manifestations, enforcement principles, and identification standards of monopoly behavior in the pharmaceutical industry, mainly including the general provisions, monopoly agreements, abuse of market dominance, concentration of undertakings, fair competition review and abuse of administrative power exclusion, restriction of competition, and application of legal responsibilities.
Specifically, the new guidelines aim to clarify the overall principles of anti-monopoly supervision and law enforcement in the pharmaceutical industry (Articles 1 to 6), refine the performance of monopoly agreements in the pharmaceutical industry (Articles 7 to 19), improve the rules for identifying abuse of market dominance in the pharmaceutical industry (Articles 20 to 29), deepen the consideration and analysis of factors in the review of drug operator concentration (Articles 30 to 36), and summarize the key points of fair competition review in the pharmaceutical industry and the characteristics of abuse of administrative power to exclude and restrict competition (Articles 37 to 44).
Compared to the previous "Active Pharmaceutical Ingredients Guidelines", the "Draft Opinion" has a wider scope of application, covering the production and operation of the entire pharmaceutical industry, including traditional Chinese medicine, chemical drugs, and biological products. At the same time, efforts are being made to establish a comprehensive regulatory system for the entire chain of pre-, mid-, and post-events, forming systematic institutional designs such as compliance guidelines for enterprise operations, anti-monopoly review and investigation, regulation of administrative agency monopolies, and transfer of illegal and disciplinary clues, in order to enhance the scientific, targeted, and effective nature of anti-monopoly supervision.
II. Identification of Monopoly Agreements
One of the biggest features of this Draft Opinion is that it clarifies the analytical framework under the provisions of each monopolistic behavior. That is, it first determines whether the relevant behavior belongs to the "horizontal monopoly" or "vertical monopoly" situations based on Chapter 2 of the Anti-Monopoly Law and the "Provisions on the Prohibition of Monopoly Agreements", and then analyzes whether the operator can prove that the above behavior meets the conditions for non-prohibition or exemption stipulated in the Anti-Monopoly Law. On this basis, the "Draft Opinion" has refined the criteria for identifying each specific monopolistic behavior.
In terms of horizontal monopoly, it refines the criteria for determining fixed or changed drug prices, restricts the production or sales quantity of drugs, segments sales markets or raw material procurement markets, restricts the purchase of new technologies and equipment, or restricts the development of new technologies and drugs, joint boycott transactions, and reverse payment agreements.
In terms of vertical monopoly, more detailed explanations have been provided regarding fixed resale prices and limited minimum resale prices.
In addition, provisions have been made for situations that do not constitute a monopoly agreement, other monopoly agreements, the organization and substantive assistance of undertakings, the organization of industry associations, and exemption systems.
Compared to existing anti-monopoly regulations and laws, the provisions in the Draft Opinion better reflect the business characteristics of the pharmaceutical industry, especially the following points that need to be noted:
A. Reverse payment protocol may constitute a monopoly
The so-called reverse payment agreement refers to an agreement in which the patent holder of a generic drug provides or promises to provide direct or indirect benefits or compensation to the generic drug applicant, and the generic drug applicant makes noncompetitive commitments such as not challenging the validity of the patent rights related to the generic drug, delaying entry into the market related to the generic drug, or not selling generic drugs in specific regions. According to the Draft Opinion, such an agreement may constitute monopolistic behavior under the following conditions:
1. There is a competitive relationship between the two parties, including actual and potential competitive relationships;
2. The patentee provides or promises compensation for benefits without justifiable reasons;
3. The market share of both parties participating in the agreement reaches a certain standard.
The so-called competitive relationship was not further elaborated in the "Draft Opinion", but according to Article 8 of the "Provisions on the Prohibition of Monopoly Agreements" issued by the State Administration for Market Regulation[1], undertakings in the same relevant market may generally be recognized as having actual competitive relationships, while those who may enter the same relevant market may be recognized as having potential competitive relationships. Regarding the definition of the relevant market, the "Draft Opinion" provides a detailed explanation. In general, when defining the drug related commodity market, factors such as the use or efficacy of the drug (indications or functional indications), therapy (administration route, medication sequence, etc.), product characteristics, contraindications and adverse reactions, doctor-patient medication preferences, regulation, and medical insurance policies will be comprehensively considered for demand substitution analysis. When defining the relevant regional market, the relevant regional market for the production and operation of drugs is generally defined as the domestic market in China; however, depending on individual cases, when it comes to drug research and development innovation business, the relevant regional market may be defined as the global market. When it comes to drug retail, distribution and other aspects, the relevant regional market may be defined as a certain geographical area within China.
According to the Draft Opinion, when determining whether a reverse payment agreement constitutes monopolistic behavior, law enforcement agencies may consider factors such as:
1. Whether the compensation given to the generic drug applicant by the patent holder of the generic drug clearly exceeds the cost of resolving disputes related to the generic drug patent and cannot be reasonably explained;
2. If the applicant for generic drugs requests invalidation of the patent, is there a possibility that the patent right of the generic drug will be invalidated as a result;
3. Does the agreement substantially extend the market monopoly time of the generic drug patent holder or hinder or affect the entry of generic drugs into the relevant market;
4. Other factors that exclude or restrict market competition.
Of course, according to Article 17 of the Regulations on the Prohibition of Monopoly Agreements, if an operator reaches an agreement with a counterparty and can prove that the market share of the operator participating in the agreement is lower than the standard set by the State Administration for Market Regulation in the relevant market and meets other conditions set by the State Administration for Market Regulation[2], it shall not be prohibited.
Therefore, from a compliance perspective, drug patent holders also need to pay attention to whether the mediation scheme adopted in resolving patent disputes violates relevant antitrust regulations.
B. Under the centralized procurement rules for drugs, fixed prices and pure "agency" behavior may not be considered monopolistic behavior
According to Article 18 of the Anti-Monopoly Law, fixing a price for reselling goods to a third party or setting a minimum price for reselling goods to a third party is generally considered to constitute a monopoly agreement. However, in the case of centralized procurement of drugs, pharmaceutical companies often need to control distributor quotations to ensure that distributors do not exceed their centralized procurement online prices or winning bids, and that a distributor winning a bid at a low price in a certain province will not affect the bidding price of the drug in other regions of the country in the future. However, if the pricing of distributors is controlled, it will also lead to the risk of pharmaceutical companies being suspected of violating the Anti-Monopoly Law. Therefore, the "Draft Opinion" clarifies that according to the rules of centralized drug procurement, in drug procurement projects, bidding and bargaining are conducted by drug undertakings, and if the counterparty sells drugs to terminal medical institutions within the scope of centralized procurement at that price, it does not constitute a monopoly agreement.
In addition, the Draft Opinion also clarifies agency behavior. According to the Draft Opinion, if a drug operator sets sales prices or other transaction conditions related to agency business without transferring drug ownership and assuming sales risks on their own, or if a drug operator is responsible for drug sales, promotion, and other businesses and determines sales prices, and their counterparty only provides auxiliary services such as import, distribution, payment collection, invoicing, and technical support, it may not be considered as constituting a monopoly agreement. In the sales outsourcing model of pharmaceutical enterprises (so-called CSO), if the outsourcing enterprise only provides sales outsourcing services to pharmaceutical enterprises and does not involve the procurement of drugs (the ownership of drugs is transferred from the drug production enterprise to the outsourcing party), then the outsourcing enterprise can be recognized as the sales agent of the pharmaceutical enterprise, and the sales price set by the pharmaceutical enterprise to distributors does not constitute resale price maintenance. However, if an agency drug sales agreement is signed in the name of the outsourcing company, and the outsourcing party also participates in the procurement and resale of drugs, then the outsourcing arrangement cannot be recognized as an agency relationship but should be considered a distribution relationship. In such cases, the fixed resale price may constitute a monopoly agreement.
C. The online drug trading platform may provide substantial assistance
According to Article 19 of the Anti-Monopoly Law, undertakings shall not organize other undertakings to reach monopoly agreements or provide substantial assistance to other undertakings in reaching monopoly agreements. The Draft Opinion provides further clarification on this, namely: The following behaviors of undertakings may constitute organizational or substantive assistance behaviors prohibited by Article 19 of the Anti-Monopoly Law:
1. Undertakings that provide online drug trading platform services or other third-party undertakings have a decisive or leading role in the scope, main content, and performance conditions of the monopoly agreement reached or implemented by drug undertakings;
2. Organize, coordinate, or facilitate drug undertakings with competitive relationships to obtain or exchange competitively sensitive information, establish contacts, and reach or implement monopoly agreements;
3. By providing price monitoring services, or utilizing platform rules, data, and algorithms to provide necessary support, create critical convenience conditions, or provide other important assistance for the achievement or implementation of monopoly agreements;
4. Organize through other means to reach monopoly agreements or provide substantial assistance.
Therefore, for drug sales platforms, providing price monitoring services, or utilizing platform rules, data, and algorithms to provide necessary support, create critical convenience conditions, or provide other important assistance for the achievement or implementation of monopoly agreements may constitute substantial help in reaching monopoly agreements. The legal responsibility for substantial assistance is the same as that of the undertakings who actually participate in the monopoly agreement, and of course, the leniency system and the system of reducing punishment are also applicable.
D. Joint research and development of new drugs can apply for exemption
According to Article 20 of the Anti-Monopoly Law, if the operator can prove that the agreement reached will not seriously restrict competition in the relevant market and can enable consumers to share the benefits arising from it, they can claim that it does not constitute a monopoly agreement, which is the so-called "exemption system". This is further elaborated in the Draft Opinion.
According to Article 19 of the Draft Opinion, if a drug operator enters into an agreement with others for joint research and development or payment for research and development of new drug varieties, dosage forms, uses, or new technologies, processes, or equipment for the production of drugs, which is suspected of constituting a monopoly agreement, they may claim exemption in accordance with Article 20, Paragraph 1, Item 1 of the Anti-Monopoly Law. The "Draft Opinion" further points out the factors that will be considered when determining whether "consumers can share the benefits arising from it":
1. Increase the variety of drugs;
2. Improve drug safety, efficacy, and accessibility;
3. Shorten the drug marketing cycle;
4. Reduce the burden of medication on consumers;
5. Ensure the effective supply of drugs during public health emergencies.
Therefore, in cases involving joint development, drug undertakings can also demonstrate the compliance of the proposed cooperation from the above perspectives.
III. Identification of Abuse of Market Dominance
In terms of abusing market dominance, the "Draft Opinion" also provides an analytical framework and analysis of specific monopolistic behaviors, which will not be further elaborated on here. In response to the characteristics of the pharmaceutical industry, the "Draft Opinion" specifically explains "Product Hopping" and "Division of Labor and Cooperation", which should be of concern to pharmaceutical undertakings.
A. Product hopping may constitute an abuse of market dominance
The so-called "Product Hopping" refers to the behavior of drug patent holders who obtain new drug patent rights by redesigning existing patented technology solutions and take measures such as stopping sales and repurchasing to achieve the conversion of original patented drugs to new patented drugs.
According to Article 28 of the Draft Opinion, if the patentee enjoys a dominant market position and their "Product Hopping" behavior hinders the effective competition of generic drug companies, it may constitute the abuse of market dominance prohibited by Article 22, Paragraph 1, Item 7 of the Anti-Monopoly Law. Specifically, the law enforcement agencies may consider the following factors when it comes to judging whether it has formed to an abuse of market dominance:
1. Whether the new patented drug is a non-substantial improvement, such as only converting the drug dosage form or combining two or more drugs into a new drug, without significantly improving the use or efficacy of the drug or significantly enhancing the safety of the drug;
2. Does the conversion of original patented drugs to new patented drugs hinder or affect the entry of generic drugs into relevant markets;
3. When implementing the conversion of original patented drugs to new patented drugs, consider whether the original patent is approaching its expiration date or whether generic drugs have been planned to enter the relevant market;
4. Will the range of choices for patients and physicians be substantially limited;
5. Is there a legitimate reason.
Therefore, when considering countermeasures for patent expiration, drug patent holders also need to pay attention to whether the new product development plan meets the requirements of antitrust laws and regulations.
B. The division of labor and cooperation may also constitute abuse of market dominance
According to Article 29 of the Draft Opinion, if two or more drug undertakings engage in drug production and operation activities through division of labor and cooperation, and abuse their market dominant position in a mutually cooperative manner, anti-monopoly law enforcement agencies may, based on the specific circumstances of each case, determine that the above-mentioned undertakings are common subjects who have committed acts of abuse of market dominant position.
The Draft Opinion points out that when analyzing whether two or more drug undertakings are common entities engaged in the abuse of market dominance, the following factors can be considered:
1. Participate in or control the same or different parts of the pharmaceutical industry chain;
2. Jointly negotiate the procurement, production, or sales of drugs and implement a division of labor;
3. The behavior of different drug undertakings is indispensable for the implementation of monopolistic behavior;
4. Jointly acquire and distribute monopoly profits.
According to the above regulations, even if the undertakings are not in the same relevant market, if their vertical behavior constitutes a monopoly, it can still be considered abuse of market dominance.
IV. Regarding the Concentration of Business Undertakings
In terms of the concentration of business undertakings, the "Draft Opinion" once again emphasizes that those who meet the declaration standards stipulated in the "Regulations of the State Council on the Declaration Standards for Concentration of Business Undertakings" should declare to the Anti-Monopoly Law Enforcement Agency of the State Council in advance. Concentration shall not be implemented without declaration or approval after declaration. In addition, for those who do not reach the declaration threshold, if there is evidence to prove that the concentration of undertakings has or may have the effect of excluding or restricting competition, the Anti-Monopoly Law Enforcement Agency of the State Council may also require undertakings to declare and notify them in writing.
It is worth noting that the "Draft Opinion" also points out the common types of concentration of undertakings in the pharmaceutical industry, including horizontal concentration, vertical concentration, and mixed concentration. Especially for mixed concentration, anti-monopoly law enforcement agencies will focus on the concentration between undertakings with adjacent or complementary relationships. Therefore, even if there is no competitive or upstream-downstream relationship in the concentration of undertakings, consideration should be given to whether an anti-monopoly declaration is necessary during the concentration.
Furthermore, the Draft Opinion also points out that the pharmaceutical industry belongs to an intellectual property-intensive industry, and undertakings that obtain control over other undertakings or can exert decisive influence on other undertakings through transactions involving pharmaceutical intellectual property may constitute a concentration of undertakings.
V. Regarding Legal Liability
In terms of legal responsibility, the Draft Opinion clearly states that anti-monopoly law enforcement agencies may consider the construction and implementation of anti-monopoly compliance management systems for undertakings when investigating and handling violations of the Anti-Monopoly Law in the pharmaceutical industry. It can be seen that anti-monopoly law enforcement agencies hope that pharmaceutical companies can establish a normalized anti-monopoly compliance system to fundamentally reduce the risk of violating the law.
In addition, it should be noted that, in addition to following Article 63 of the Anti-Monopoly Law to clarify that punitive fines are also applicable in the pharmaceutical industry, the Draft Opinion also points out the situation of heavier punishment. That is, if drug undertakings violate the Anti-Monopoly Law by repeatedly implementing monopolistic behaviors, artificially causing drug supply shortages, causing significant losses to medical insurance funds, and endangering public health, anti-monopoly law enforcement agencies may impose heavier punishments in accordance with the law.
Overall, the Draft Opinion has further refined the standards for anti-monopoly law enforcement in the pharmaceutical industry and provided direction for the construction of compliance systems for enterprises. It can be seen that the fields of generic drugs, drug sales agents, platform sales, and concentration of undertakings in pharmaceutical companies are still key areas of anti-monopoly law enforcement, and law enforcement agencies are also pleased to see more companies establish more normalized compliance systems to reduce illegal behavior from the source. Although compliance work for pharmaceutical companies has always been a key focus, the release of the "Draft Opinion" indicates that companies may need to consider their compliance work from a more comprehensive perspective.
[1] The operators with competitive relationships referred to in these regulations include actual operators competing in the same relevant market and potential operators who may enter the relevant market for competition.
[2] The specific standards are not yet clear in the Draft Opinion, please refer to Article 13 of the "Anti-Monopoly Guidelines of the State Council Anti-Monopoly Commission in the field of intellectual property". There are the following possibilities: (1) Operators with competitive relationships have a total market share of no more than 20% in the relevant market; (2) The market share of the operator and the counterparty in any relevant market affected by agreements involving intellectual property rights shall not exceed 30%; (3) If the operator finds it difficult to obtain market share in the relevant market, or if the market share cannot accurately reflect the operator's market position, but there are four or more substitute technologies independently controlled by other operators that can be obtained at a reasonable cost in the relevant market, in addition to the technologies controlled by the parties to the agreement.
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Yanting Pei and Teresa Huang
Preface
On August 9, 2024, the State Administration for Market Regulation issued the "Anti-Monopoly Guidelines for the Pharmaceutical Industry (Soliciting Opinions)". The draft (hereinafter referred to as the "Draft Opinion") is announced to publicly solicit opinions from society. Compared to the "Anti-Monopoly Guidelines for Active Pharmaceutical Ingredients" (hereinafter referred to as the "Active Pharmaceutical Ingredients Guidelines") formulated and released by the former State Council Anti-Monopoly Commission in 2021, the "Draft Opinion" is more comprehensive and systematic and will replace the "Active Pharmaceutical Ingredients Guidelines" after formal implementation, indicating that anti-monopoly compliance in the pharmaceutical industry may enter a new era. Therefore, although the guideline is still in the stage of soliciting opinions, it deserves certain attention. This article will provide a brief analysis of the main content of the Draft Opinion and the identification of major monopolistic behaviors for reference by relevant practitioners.
I. The main content and characteristics of the Draft Opinion
The Draft Opinion consists of 7 chapters and 55 articles, aiming to address the prominent monopoly issues in the pharmaceutical industry. It further elaborates on the behavioral manifestations, enforcement principles, and identification standards of monopoly behavior in the pharmaceutical industry, mainly including the general provisions, monopoly agreements, abuse of market dominance, concentration of undertakings, fair competition review and abuse of administrative power exclusion, restriction of competition, and application of legal responsibilities.
Specifically, the new guidelines aim to clarify the overall principles of anti-monopoly supervision and law enforcement in the pharmaceutical industry (Articles 1 to 6), refine the performance of monopoly agreements in the pharmaceutical industry (Articles 7 to 19), improve the rules for identifying abuse of market dominance in the pharmaceutical industry (Articles 20 to 29), deepen the consideration and analysis of factors in the review of drug operator concentration (Articles 30 to 36), and summarize the key points of fair competition review in the pharmaceutical industry and the characteristics of abuse of administrative power to exclude and restrict competition (Articles 37 to 44).
Compared to the previous "Active Pharmaceutical Ingredients Guidelines", the "Draft Opinion" has a wider scope of application, covering the production and operation of the entire pharmaceutical industry, including traditional Chinese medicine, chemical drugs, and biological products. At the same time, efforts are being made to establish a comprehensive regulatory system for the entire chain of pre-, mid-, and post-events, forming systematic institutional designs such as compliance guidelines for enterprise operations, anti-monopoly review and investigation, regulation of administrative agency monopolies, and transfer of illegal and disciplinary clues, in order to enhance the scientific, targeted, and effective nature of anti-monopoly supervision.
II. Identification of Monopoly Agreements
One of the biggest features of this Draft Opinion is that it clarifies the analytical framework under the provisions of each monopolistic behavior. That is, it first determines whether the relevant behavior belongs to the "horizontal monopoly" or "vertical monopoly" situations based on Chapter 2 of the Anti-Monopoly Law and the "Provisions on the Prohibition of Monopoly Agreements", and then analyzes whether the operator can prove that the above behavior meets the conditions for non-prohibition or exemption stipulated in the Anti-Monopoly Law. On this basis, the "Draft Opinion" has refined the criteria for identifying each specific monopolistic behavior.
In terms of horizontal monopoly, it refines the criteria for determining fixed or changed drug prices, restricts the production or sales quantity of drugs, segments sales markets or raw material procurement markets, restricts the purchase of new technologies and equipment, or restricts the development of new technologies and drugs, joint boycott transactions, and reverse payment agreements.
In terms of vertical monopoly, more detailed explanations have been provided regarding fixed resale prices and limited minimum resale prices.
In addition, provisions have been made for situations that do not constitute a monopoly agreement, other monopoly agreements, the organization and substantive assistance of undertakings, the organization of industry associations, and exemption systems.
Compared to existing anti-monopoly regulations and laws, the provisions in the Draft Opinion better reflect the business characteristics of the pharmaceutical industry, especially the following points that need to be noted:
A. Reverse payment protocol may constitute a monopoly
The so-called reverse payment agreement refers to an agreement in which the patent holder of a generic drug provides or promises to provide direct or indirect benefits or compensation to the generic drug applicant, and the generic drug applicant makes noncompetitive commitments such as not challenging the validity of the patent rights related to the generic drug, delaying entry into the market related to the generic drug, or not selling generic drugs in specific regions. According to the Draft Opinion, such an agreement may constitute monopolistic behavior under the following conditions:
1. There is a competitive relationship between the two parties, including actual and potential competitive relationships;
2. The patentee provides or promises compensation for benefits without justifiable reasons;
3. The market share of both parties participating in the agreement reaches a certain standard.
The so-called competitive relationship was not further elaborated in the "Draft Opinion", but according to Article 8 of the "Provisions on the Prohibition of Monopoly Agreements" issued by the State Administration for Market Regulation[1], undertakings in the same relevant market may generally be recognized as having actual competitive relationships, while those who may enter the same relevant market may be recognized as having potential competitive relationships. Regarding the definition of the relevant market, the "Draft Opinion" provides a detailed explanation. In general, when defining the drug related commodity market, factors such as the use or efficacy of the drug (indications or functional indications), therapy (administration route, medication sequence, etc.), product characteristics, contraindications and adverse reactions, doctor-patient medication preferences, regulation, and medical insurance policies will be comprehensively considered for demand substitution analysis. When defining the relevant regional market, the relevant regional market for the production and operation of drugs is generally defined as the domestic market in China; however, depending on individual cases, when it comes to drug research and development innovation business, the relevant regional market may be defined as the global market. When it comes to drug retail, distribution and other aspects, the relevant regional market may be defined as a certain geographical area within China.
According to the Draft Opinion, when determining whether a reverse payment agreement constitutes monopolistic behavior, law enforcement agencies may consider factors such as:
1. Whether the compensation given to the generic drug applicant by the patent holder of the generic drug clearly exceeds the cost of resolving disputes related to the generic drug patent and cannot be reasonably explained;
2. If the applicant for generic drugs requests invalidation of the patent, is there a possibility that the patent right of the generic drug will be invalidated as a result;
3. Does the agreement substantially extend the market monopoly time of the generic drug patent holder or hinder or affect the entry of generic drugs into the relevant market;
4. Other factors that exclude or restrict market competition.
Of course, according to Article 17 of the Regulations on the Prohibition of Monopoly Agreements, if an operator reaches an agreement with a counterparty and can prove that the market share of the operator participating in the agreement is lower than the standard set by the State Administration for Market Regulation in the relevant market and meets other conditions set by the State Administration for Market Regulation[2], it shall not be prohibited.
Therefore, from a compliance perspective, drug patent holders also need to pay attention to whether the mediation scheme adopted in resolving patent disputes violates relevant antitrust regulations.
B. Under the centralized procurement rules for drugs, fixed prices and pure "agency" behavior may not be considered monopolistic behavior
According to Article 18 of the Anti-Monopoly Law, fixing a price for reselling goods to a third party or setting a minimum price for reselling goods to a third party is generally considered to constitute a monopoly agreement. However, in the case of centralized procurement of drugs, pharmaceutical companies often need to control distributor quotations to ensure that distributors do not exceed their centralized procurement online prices or winning bids, and that a distributor winning a bid at a low price in a certain province will not affect the bidding price of the drug in other regions of the country in the future. However, if the pricing of distributors is controlled, it will also lead to the risk of pharmaceutical companies being suspected of violating the Anti-Monopoly Law. Therefore, the "Draft Opinion" clarifies that according to the rules of centralized drug procurement, in drug procurement projects, bidding and bargaining are conducted by drug undertakings, and if the counterparty sells drugs to terminal medical institutions within the scope of centralized procurement at that price, it does not constitute a monopoly agreement.
In addition, the Draft Opinion also clarifies agency behavior. According to the Draft Opinion, if a drug operator sets sales prices or other transaction conditions related to agency business without transferring drug ownership and assuming sales risks on their own, or if a drug operator is responsible for drug sales, promotion, and other businesses and determines sales prices, and their counterparty only provides auxiliary services such as import, distribution, payment collection, invoicing, and technical support, it may not be considered as constituting a monopoly agreement. In the sales outsourcing model of pharmaceutical enterprises (so-called CSO), if the outsourcing enterprise only provides sales outsourcing services to pharmaceutical enterprises and does not involve the procurement of drugs (the ownership of drugs is transferred from the drug production enterprise to the outsourcing party), then the outsourcing enterprise can be recognized as the sales agent of the pharmaceutical enterprise, and the sales price set by the pharmaceutical enterprise to distributors does not constitute resale price maintenance. However, if an agency drug sales agreement is signed in the name of the outsourcing company, and the outsourcing party also participates in the procurement and resale of drugs, then the outsourcing arrangement cannot be recognized as an agency relationship but should be considered a distribution relationship. In such cases, the fixed resale price may constitute a monopoly agreement.
C. The online drug trading platform may provide substantial assistance
According to Article 19 of the Anti-Monopoly Law, undertakings shall not organize other undertakings to reach monopoly agreements or provide substantial assistance to other undertakings in reaching monopoly agreements. The Draft Opinion provides further clarification on this, namely: The following behaviors of undertakings may constitute organizational or substantive assistance behaviors prohibited by Article 19 of the Anti-Monopoly Law:
1. Undertakings that provide online drug trading platform services or other third-party undertakings have a decisive or leading role in the scope, main content, and performance conditions of the monopoly agreement reached or implemented by drug undertakings;
2. Organize, coordinate, or facilitate drug undertakings with competitive relationships to obtain or exchange competitively sensitive information, establish contacts, and reach or implement monopoly agreements;
3. By providing price monitoring services, or utilizing platform rules, data, and algorithms to provide necessary support, create critical convenience conditions, or provide other important assistance for the achievement or implementation of monopoly agreements;
4. Organize through other means to reach monopoly agreements or provide substantial assistance.
Therefore, for drug sales platforms, providing price monitoring services, or utilizing platform rules, data, and algorithms to provide necessary support, create critical convenience conditions, or provide other important assistance for the achievement or implementation of monopoly agreements may constitute substantial help in reaching monopoly agreements. The legal responsibility for substantial assistance is the same as that of the undertakings who actually participate in the monopoly agreement, and of course, the leniency system and the system of reducing punishment are also applicable.
D. Joint research and development of new drugs can apply for exemption
According to Article 20 of the Anti-Monopoly Law, if the operator can prove that the agreement reached will not seriously restrict competition in the relevant market and can enable consumers to share the benefits arising from it, they can claim that it does not constitute a monopoly agreement, which is the so-called "exemption system". This is further elaborated in the Draft Opinion.
According to Article 19 of the Draft Opinion, if a drug operator enters into an agreement with others for joint research and development or payment for research and development of new drug varieties, dosage forms, uses, or new technologies, processes, or equipment for the production of drugs, which is suspected of constituting a monopoly agreement, they may claim exemption in accordance with Article 20, Paragraph 1, Item 1 of the Anti-Monopoly Law. The "Draft Opinion" further points out the factors that will be considered when determining whether "consumers can share the benefits arising from it":
1. Increase the variety of drugs;
2. Improve drug safety, efficacy, and accessibility;
3. Shorten the drug marketing cycle;
4. Reduce the burden of medication on consumers;
5. Ensure the effective supply of drugs during public health emergencies.
Therefore, in cases involving joint development, drug undertakings can also demonstrate the compliance of the proposed cooperation from the above perspectives.
III. Identification of Abuse of Market Dominance
In terms of abusing market dominance, the "Draft Opinion" also provides an analytical framework and analysis of specific monopolistic behaviors, which will not be further elaborated on here. In response to the characteristics of the pharmaceutical industry, the "Draft Opinion" specifically explains "Product Hopping" and "Division of Labor and Cooperation", which should be of concern to pharmaceutical undertakings.
A. Product hopping may constitute an abuse of market dominance
The so-called "Product Hopping" refers to the behavior of drug patent holders who obtain new drug patent rights by redesigning existing patented technology solutions and take measures such as stopping sales and repurchasing to achieve the conversion of original patented drugs to new patented drugs.
According to Article 28 of the Draft Opinion, if the patentee enjoys a dominant market position and their "Product Hopping" behavior hinders the effective competition of generic drug companies, it may constitute the abuse of market dominance prohibited by Article 22, Paragraph 1, Item 7 of the Anti-Monopoly Law. Specifically, the law enforcement agencies may consider the following factors when it comes to judging whether it has formed to an abuse of market dominance:
1. Whether the new patented drug is a non-substantial improvement, such as only converting the drug dosage form or combining two or more drugs into a new drug, without significantly improving the use or efficacy of the drug or significantly enhancing the safety of the drug;
2. Does the conversion of original patented drugs to new patented drugs hinder or affect the entry of generic drugs into relevant markets;
3. When implementing the conversion of original patented drugs to new patented drugs, consider whether the original patent is approaching its expiration date or whether generic drugs have been planned to enter the relevant market;
4. Will the range of choices for patients and physicians be substantially limited;
5. Is there a legitimate reason.
Therefore, when considering countermeasures for patent expiration, drug patent holders also need to pay attention to whether the new product development plan meets the requirements of antitrust laws and regulations.
B. The division of labor and cooperation may also constitute abuse of market dominance
According to Article 29 of the Draft Opinion, if two or more drug undertakings engage in drug production and operation activities through division of labor and cooperation, and abuse their market dominant position in a mutually cooperative manner, anti-monopoly law enforcement agencies may, based on the specific circumstances of each case, determine that the above-mentioned undertakings are common subjects who have committed acts of abuse of market dominant position.
The Draft Opinion points out that when analyzing whether two or more drug undertakings are common entities engaged in the abuse of market dominance, the following factors can be considered:
1. Participate in or control the same or different parts of the pharmaceutical industry chain;
2. Jointly negotiate the procurement, production, or sales of drugs and implement a division of labor;
3. The behavior of different drug undertakings is indispensable for the implementation of monopolistic behavior;
4. Jointly acquire and distribute monopoly profits.
According to the above regulations, even if the undertakings are not in the same relevant market, if their vertical behavior constitutes a monopoly, it can still be considered abuse of market dominance.
IV. Regarding the Concentration of Business Undertakings
In terms of the concentration of business undertakings, the "Draft Opinion" once again emphasizes that those who meet the declaration standards stipulated in the "Regulations of the State Council on the Declaration Standards for Concentration of Business Undertakings" should declare to the Anti-Monopoly Law Enforcement Agency of the State Council in advance. Concentration shall not be implemented without declaration or approval after declaration. In addition, for those who do not reach the declaration threshold, if there is evidence to prove that the concentration of undertakings has or may have the effect of excluding or restricting competition, the Anti-Monopoly Law Enforcement Agency of the State Council may also require undertakings to declare and notify them in writing.
It is worth noting that the "Draft Opinion" also points out the common types of concentration of undertakings in the pharmaceutical industry, including horizontal concentration, vertical concentration, and mixed concentration. Especially for mixed concentration, anti-monopoly law enforcement agencies will focus on the concentration between undertakings with adjacent or complementary relationships. Therefore, even if there is no competitive or upstream-downstream relationship in the concentration of undertakings, consideration should be given to whether an anti-monopoly declaration is necessary during the concentration.
Furthermore, the Draft Opinion also points out that the pharmaceutical industry belongs to an intellectual property-intensive industry, and undertakings that obtain control over other undertakings or can exert decisive influence on other undertakings through transactions involving pharmaceutical intellectual property may constitute a concentration of undertakings.
V. Regarding Legal Liability
In terms of legal responsibility, the Draft Opinion clearly states that anti-monopoly law enforcement agencies may consider the construction and implementation of anti-monopoly compliance management systems for undertakings when investigating and handling violations of the Anti-Monopoly Law in the pharmaceutical industry. It can be seen that anti-monopoly law enforcement agencies hope that pharmaceutical companies can establish a normalized anti-monopoly compliance system to fundamentally reduce the risk of violating the law.
In addition, it should be noted that, in addition to following Article 63 of the Anti-Monopoly Law to clarify that punitive fines are also applicable in the pharmaceutical industry, the Draft Opinion also points out the situation of heavier punishment. That is, if drug undertakings violate the Anti-Monopoly Law by repeatedly implementing monopolistic behaviors, artificially causing drug supply shortages, causing significant losses to medical insurance funds, and endangering public health, anti-monopoly law enforcement agencies may impose heavier punishments in accordance with the law.
Overall, the Draft Opinion has further refined the standards for anti-monopoly law enforcement in the pharmaceutical industry and provided direction for the construction of compliance systems for enterprises. It can be seen that the fields of generic drugs, drug sales agents, platform sales, and concentration of undertakings in pharmaceutical companies are still key areas of anti-monopoly law enforcement, and law enforcement agencies are also pleased to see more companies establish more normalized compliance systems to reduce illegal behavior from the source. Although compliance work for pharmaceutical companies has always been a key focus, the release of the "Draft Opinion" indicates that companies may need to consider their compliance work from a more comprehensive perspective.
[1] The operators with competitive relationships referred to in these regulations include actual operators competing in the same relevant market and potential operators who may enter the relevant market for competition.
[2] The specific standards are not yet clear in the Draft Opinion, please refer to Article 13 of the "Anti-Monopoly Guidelines of the State Council Anti-Monopoly Commission in the field of intellectual property". There are the following possibilities: (1) Operators with competitive relationships have a total market share of no more than 20% in the relevant market; (2) The market share of the operator and the counterparty in any relevant market affected by agreements involving intellectual property rights shall not exceed 30%; (3) If the operator finds it difficult to obtain market share in the relevant market, or if the market share cannot accurately reflect the operator's market position, but there are four or more substitute technologies independently controlled by other operators that can be obtained at a reasonable cost in the relevant market, in addition to the technologies controlled by the parties to the agreement.
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