On November 14, the National Development and Reform Commission ("NDRC") announced its decision to fine two private pharmaceutical companies nearly RMB 7 million for violating the Anti-monopoly Law ("AML")1. The penalty decision was released right after the NDRC publicly confirmed its investigation over China Telecom and China Union for alleged abuse of dominance in the broadband market. It seemed that the NDRC could not wait to show its determination to enforce the AML with another striking case.
The penalized companies, Weifang Shuntong Pharmaceutical Co. Ltd. ("Shuntong") and Weifang Huaxin Pharmaceutical Trading Co. Ltd. ("Huaxin") are both pharmaceutical distribution companies in the business of selling promethazine hydrochloride, the key ingredient for "compound reserpine tablets", a popular hypertension medicine listed among China's national essential drugs.
According to the NDRC, Shuntong and Huaxin entered into exclusive sales agreements with the only two manufacturers of the ingredient in June 2011, thereby gained full control of the domestic supply of promethazine hydrochloride. Shuntong and Huaxin then raised the sales price of promethazine hydrochloride from less than RMB200/kg to RMB300-1350/kg and further required the downstream medicine manufacturers to raise the price of compound reserpine tablets from RMB1.3/bottle to RMB5-6/bottle.
As a result, the compound reserpine tablets manufacturers could not afford the excessively high ingredient cost and were forced to suspend production, causing shortage of supply in the market. Upon receipt of complaints from these medicine manufacturers, the NDRC initiated investigations over Shuntong and Huaxin. Shuntong was imposed a punitive fine of RMB6.5 million on top of confiscation of illegal income of RMB0.377 million (about USD1.06 million in total). Huaxin was imposed a fine of RMB100,000 on top of confiscation of illegal income of RMB 52,600 (about USD23,800 in total). The NDRC also ordered the companies to terminate their exclusive sales agreements with the promethazine hydrochloride producers.
The NDRC's news release did not clearly indicate which article(s) of the AML the two companies have violated. Based on publicly available information, we understand that Shuntong and Huaxin abused their dominant position in the promethazine hydrochloride market by charging excessively high price and by imposing unreasonable conditions without valid reasons.
Assuming there is no effective substitute for promethazine hydrochloride as a key ingredient of compound reserpine tablets, promethazine hydrochloride could be considered to constitute a separate relevant product market under the AML. The relevant geographic market could de defined as China-wide, given that the NDRC is only concerned with the domestic supply and demand of the product.
According to the NDRC, Shuntong and Huaxin controlled the entire supply of promethazine hydrochloride by entering into the exclusive sales agreements with the only two manufacturers of promethazine hydrochloride. The exclusive sales agreements effectively ruled out the possibility for other distributors to purchase and resell the relevant product. Moreover, it was reported that the two companies had cross shareholding relationships. Therefore, adequate competition between the two suppliers would not be expected to exist.
Pursuant to Article 19 of the AML, in case that two operators hold over 2/3 of market shares in the relevant market, the operators can be deemed to have a dominant position. In this case, it appears that the NDRC considered Shuntong and Huaxin to be dominant players in the relevant market.
There is no evidence showing that the aforesaid dramatic increase of promethazine hydrochloride price was resulted from a rise in its cost. According to Article 17(1) of the AML and Article 11 of the NDRC's Rules on Anti-price Monopoly ("Price Monopoly Rules"), where a dominant operator increases price beyond a reasonable range when the product cost remains stable, it could be deemed as charging an unfairly high price, which is a type of prohibited abusive conducts.
Additionally, we understand that by requiring the compound reserpine tablets manufacturers to raise the price of the medicine may also constitute a violation of Article 17(5) of the AML by imposing unreasonable trading terms on trading counterparts.
It appears that in its antitrust enforcement, the NDRC is targeting not only large SOEs but also smaller companies having control over supplies of important products. Its successive actions have also indicated that the NDRC is ready to take a stronger stance in its enforcement of price-related monopoly conducts.
1For the original news release on the NDRC's website (in Chinese), please refer to: http://jjs.ndrc.gov.cn/gzdt/t20111115_444599.htm.
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