On August 9, 2024, the State Administration for Market Regulation (SAMR) released the Anti-Monopoly Guidelines for the Pharmaceutical Sector (Draft for Public Comment) (hereinafter referred to as the Pharmaceutical Anti-Monopoly Guidelines or the Guidelines) to solicit opinions from the public. The release of the Guidelines marks the second set of detailed regulations for the pharmaceutical sector's anti-monopoly issues following the publication of the Anti-Monopoly Guidelines for the Active Pharmaceutical Ingredients (APIs) Sector (hereinafter referred to as the API Guidelines) by the former Anti-Monopoly Committee of the State Council in 2021. The API Guidelines have played an important role in regulating monopolistic behaviors in the APIs sector. However, as anti-monopoly enforcement deepens, monopolistic behaviors in the pharmaceutical sector has become more covert and complex, especially considering that the pharmaceutical industry's supply chain is long, involves a wide range of entities, and operates under complex business models. Therefore, building upon the API Guidelines, the creation of anti-monopoly guidelines covering all types of pharmaceuticals can provide more specific guidance for anti-monopoly enforcement and compliance advice for operators in the pharmaceutical sector.
The Pharmaceutical Anti-Monopoly Guidelines consist of 7 chapters and 55 articles. The Guidelines address prominent monopoly issues in the pharmaceutical sector, further detailing the characteristics of monopolistic behavior, enforcement principles, and review standards within the sector. Articles 1 to 6 clarify the overall principles for anti-monopoly enforcement in the pharmaceutical sector. Articles 7 to 19 elaborate on the forms of monopolistic agreements in the sector. Articles 20 to 29 refine the rules for recognizing the abuse of market dominance in the pharmaceutical sector. Articles 30 to 36 delve deeper into the factors considered during the review of merger control filings in the pharmaceutical sector. Articles 37 to 44 summarize the key points of fair competition reviews in the pharmaceutical sector and the characteristics of the abuse of administrative power to exclude or restrict competition. Finally, Articles 45 to 53 clarify the legal liabilities applicable to monopolistic behavior in the pharmaceutical sector. In this article, the author will briefly highlight the key points of the Pharmaceutical Anti-Monopoly Guidelines.
1. The Scope of Application of thePharmaceutical Anti-Monopoly Guideliness Comprehensive
The Pharmaceutical Anti-Monopoly Guidelines cover all types of pharmaceuticals in the pharmaceutical industry chain, including traditional Chinese medicine (including Chinese medicinal materials, Chinese herbal decoctions, Chinese medicine extracts, Chinese medicine formula granules, and proprietary Chinese medicines), chemical drugs (including chemical raw materials and chemical drug preparations), and biological products (including preventive biological products, therapeutic biological products, and diagnostic reagents managed as biological products). Article 54 of the Pharmaceutical Anti-Monopoly Guidelines also clearly stipulates that these guidelines apply to all operators in the pharmaceutical sector and their production and business activities. Pharmaceutical excipients, pharmaceutical packaging materials, pharmaceutical intermediates, and related services in the pharmaceutical field are also subject to the guidelines. In addition to covering the three major areas of antitrust issues—monopoly agreements, abuse of market dominance, and concentration of undertakings—the guidelines further refine the analysis and recognition of monopolistic behavior and also analyze administrative monopolies with Chinese characteristics. A more exhaustive list of various forms of monopolistic behavior is provided.
Although the API Guidelines were issued in 2021 to address the high incidence of monopoly cases in the API sector, as pharmaceutical antitrust enforcement has deepened, the types of pharmaceuticals involved have expanded. Some cases involve pharmaceutical production and distribution, even covering the full industry chain. In this context, the introduction of anti-monopoly guidelines for the entire pharmaceutical chain has become urgent. Moreover, given the long and complex industry chain in the pharmaceutical field, the social harm caused by monopolistic behavior can be greater. Therefore, for the first time, the Pharmaceutical Anti-Monopoly Guidelines stipulate the need to improve full-chain antitrust supervision, strengthening the anti-monopoly supervision in pharmaceutical sector.
2. Encouraging Pharmaceutical Operators to Establish and Improve Antitrust Compliance Management Systems,Which Can Be Considered in Antitrust Enforcement
Currently, China's antitrust enforcement increasingly emphasizes a combination of strict enforcement and flexible regulation, actively promoting the establishment of antitrust compliance systems within companies. Antitrust compliance will become a key focus of the enforcement agencies. On April 25, 2024, the State Council's Anti-Monopoly and Anti-Unfair Competition Committee issued the Anti-monopoly Compliance Guidelines for Operators (2024 Edition of the Compliance Guidelines), providing more detailed and clearer recommendations on how operators can establish antitrust compliance management systems. The biggest highlight of the 2024 Edition of the Compliance Guidelines is the addition of a special chapter on compliance incentives. Articles 32 to 38 in Chapter 5 specifically set out provisions on compliance incentives, explicitly proposing to "strengthen compliance incentives," meaning that when antitrust enforcement agencies investigate the violations of the "Anti-Monopoly Law," they may take into consideration the operator's efforts in establishing and implementing an antitrust compliance management system. Article 45, Paragraph 2 of the Pharmaceutical Anti-Monopoly Guidelines echoes this, clearly stating that when antitrust enforcement agencies investigate monopolist behaviors in the pharmaceutical sector, they may consider the construction and implementation of the operator's antitrust compliance management system. For specific guidance on how to apply compliance incentives, pharmaceutical companies can refer to the 2024 Edition of the Compliance Guidelines.
3. Clarifying the Factors for Reverse Payment Agreements Potentially Constituting Horizontal Monopoly Agreements
Paragraph 2 of Article 13 of the Pharmaceutical Anti-Monopoly Guidelines stipulates the factors that can be considered when determining whether a reverse payment agreement constitutes a horizontal monopoly. A reverse payment agreement (also known as a pay-for-delay agreement) refers to an agreement between a patent drug company and a generic drug company, which have an actual or potential competitive relationship. In this agreement, the patent drug company provides certain compensation to the generic drug company, and in return, the generic drug company agrees not to challenge the validity of the patent or to delay the market entry of its generic drug, or to refrain from selling the generic drug in a specific region.
Reverse payment agreements originated from the U.S. patent linkage system, which encourages generic drug companies to challenge the patents of brand-name drug companies and provides favorable conditions for both parties to reach a settlement. Although the original intention of this system was based on public interest, in practice, it may delay the market entry of generic drugs, hinder competition between generic drugs and brand-name drugs, prevent consumers from accessing cheaper generic drugs in a timely manner, and therefore harm consumer interests. As such, it could potentially constitute a horizontal monopoly agreement through market separation.
The Chinese Supreme Court first conducted the antitrust review of reverse payment agreements in a case involving patent infringement related to saxagliptin tablets. The court ruling clarified the necessity of antitrust review of agreements that have the appearance of a "pharmaceutical patent reverse payment agreement" in court proceedings, and identified the following factors for consideration in such reviews:
1. The likelihood that the relevant pharmaceutical patent may be invalidated due to a request for patent invalidation. If the possibility of the patent being invalidated is high, the competition harm caused by the agreement should be further examined.
2. The core is the competition harm the agreement may cause. If the execution and implementation of the agreement effectively extend the market exclusivity of the patent holder or substantially delay or exclude actual and potential market entry of generic drug applicants without legitimate reasons, it is generally considered that the agreement is likely to exclude or restrict competition in the relevant market, thus increasing the risk of constituting a monopoly agreement regulated by the Anti-Monopoly Law.
In the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Disputes over Monopolistic Conduct (the Anti-monopoly Judicial Interpretation), released on June 24 this year, specific provisions were also made regarding the determination of whether a reverse payment agreement constitutes a monopoly agreement.
The Pharmaceutical Anti-Monopoly Guidelines refine the antitrust review of reverse payment agreements from the perspective of administrative regulation, aligning with the review approach in the Anti-monopoly Judicial Interpretation. The consistency between administrative enforcement and judicial practice provides pharmaceutical companies with unified guidance for antitrust compliance evaluations, facilitating pharmaceutical companies in reviewing the reverse payment agreements from antitrust compliance perspective.
4. Refining Antitrust Regulations on Resale Price Maintenance in Line with Industry Characteristics
Article 18 of the Anti-Monopoly Lawand Article 14 of the Provisions on Prohibition of Monopoly Agreements both stipulate the legal analysis of resale price maintenance (RPM) behavior. According to these provisions, for monopoly agreements that fix the resale price of goods or set a minimum resale price to third parties, if the operator can prove that the agreement does not have the effect of eliminating or restricting competition, it will not be prohibited. Article 21 of the Anti-monopoly Judicial Interpretation further allocates the burden of proof regarding whether the agreement has the effect of eliminating or restricting competition. In other words, RPM is presumed to have the effect of eliminating or restricting competition, thus constituting a vertical monopoly agreement under the Anti-Monopoly Law. However, the operator can rebut this presumption by proving that the agreement does not cause competitive harm. According to the Pharmaceutical Anti-Monopoly Guidelines, operators can provide evidence such as that the agreement does not restrict intra-brand or inter-brand competition, does not have an adverse cumulative effect on competition, and does not result in consequences such as raising drug prices, reducing the supply of drugs, or increasing the difficulty of market entry for drugs. Compared to the Pharmaceutical Anti-Monopoly Guidelines, which focus solely on proving adverse competitive effects, Article 22 of the Anti-monopoly Judicial Interpretation suggests that the court should balance both the pro-competitive effects and anti-competitive effects to determine whether the agreement has the effect of eliminating or restricting competition.
In the author's opinion, the term "eliminating or restricting competition" here pertains to the illegality of the agreement. Even if the agreement meets the formal requirements for RPM, if the operator can prove that it does not have anti-competitive effect, it should not be deemed as monopoly agreement and would fall outside the scope of the Anti-Monopoly Law. The difference between the Pharmaceutical Anti-Monopoly Guidelines and the Anti-Monopoly Judicial Interpretation on the interpretations of competitive harm relates to the different enforcement approaches of the antitrust authorities and the judicial authorities. In administrative enforcement practice, once the authorities determine that an agreement meets the formal requirements of a monopoly conduct, they may make a preliminary finding of illegality or demonstrate the competitive harm caused. Few cases involve parties arguing for the pro-competitive effects of the agreement, and only in rare cases do parties invoke the exemption defense under Article 20. The exemption defense is not a necessary step for determining the illegality of the agreement but an exceptional claim to be made by the party. In judicial practice, the courts analyze both the positive and negative effects of an agreement when determining the illegality of RPM. The Pharmaceutical Anti-Monopoly Guidelines draw from the practical experience of antitrust enforcement, while the Anti-Monopoly Judicial Interpretation summarizes judicial practice, hereby resulting in different approaches.
Additionally, Article 15 of the Pharmaceutical Anti-Monopoly Guidelines provides exemptions for RPM, taking into account the specific conditions of the pharmaceutical industry. For example, Paragraph 2 explains the exemption conditions for centralized procurement, a unique business model in the pharmaceutical industry. In centralized procurement, the pharmaceutical operator sets the price, and the distributor sells to downstream medical institutions based on that price. Although this business model superficially aligns with the formal requirements of RPM, considering that it is a product of the "two-invoice system" in the pharmaceutical industry and serves public interest and consumer welfare, the Anti-Monopoly Guidelines recognize that centralized procurement under certain conditions does not constitute a monopoly agreement, thus providing clear compliance guidelines for pharmaceutical companies.
Another common scenario in the pharmaceutical industry involves drug manufacturers promoting drugs themselves or outsourcing promotion to third parties, while setting the price at which the drugs are sold to medical institutions. In this case, the distributor only handles logistics, invoicing, and payment collection, functioning merely as an "intermediary." Similar provisions can be found in the Anti-Monopoly Guidelines for Automobile Industry, and the underlying logic regarding intermediaries is consistent in both Guidelines.
Furthermore, Paragraph 1 of Article 15 clarifies situations where "agency agreement" does not constitute a monopoly agreement, and Paragraph 2 elaborates on the definition of "agency," specifying two main criteria: whether ownership is transferred and whether sales risk is assumed. This aligns with Paragraph 1 of Article 23 in the Anti-Monopoly Judicial Interpretation. However, it is regrettable to mention that the Pharmaceutical Anti-Monopoly Guidelines do not, like the Anti-Monopoly Judicial Interpretation, mention the "safe harbor" rule under Article 18 of the Anti-Monopoly Law. In the author's view, even if the final version of the Pharmaceutical Anti-Monopoly Guidelines does not introduce a "safe harbor" provision, this does not mean that RPM in the pharmaceutical sector cannot be exempt under safe harbor rules. However, given that the market share standards and rules for safe harbor have not yet been introduced, it is advisable for pharmaceutical companies to exercise caution when engaging in RPM behavior.
5. Making a List of Typical Non-Price Vertical Agreements
Non-price control over distributors is a common method used by pharmaceutical manufacturers to manage their distributors, including restrictions on territories/customers/channels, exclusive sales restrictions, and exclusive purchasing restrictions. The Anti-Monopoly Law and the Provisions on Prohibiting Monopoly Agreements do not specify the types of vertical non-price restrictions. However, industry guidelines such as Article 6 of the Anti-Monopoly Guidelines for Automobile Industry provide provisions on territorial and customer restrictions, while Article 7 of the API Guidelines also addresses territorial restrictions and customer restrictions. The latter notes that, due to the concentrated market structure in the API industry, territorial or customer restrictions are more likely to limit both intra-brand and inter-brand competition, thus presenting a higher compliance risk in the API sector compared to similar arrangements in other industries. Additionally, various local compliance guidelines for business operators also regulate vertical non-price restrictions. For instance, the Anti-Monopoly Compliance Guidelines for Business Operators in Shanghai identify territorial and customer restrictions that limit passive sales and cross-supply by distributors, as well as exclusive sales and exclusive purchasing, as non-price vertical restrictions carrying anti-monopoly law risks. Similarly, the Competition Compliance Guidelines for Business Operators in Shenzhen also recognize exclusive distribution, exclusive procurement, and non-price vertical restrictions that limit passive sales and cross-supply by distributors, through territorial or customer restrictions as having anti-monopoly law risks.
Although the Pharmaceutical Anti-Monopoly Guidelines have added two types of non-price vertical restrictions with potential anti-monopoly risks, building on the existing API Anti-Monopoly Guidelines, they do not, as the aforementioned guidelines do, provide detailed standards for assessing these types of non-price vertical restrictions. As a result, they still fall short in offering practical guidance to pharmaceutical companies. Moreover, among all the administrative penalty cases currently published by anti-monopoly enforcement agencies, there are no cases that exclusively involve non-price vertical restrictions. In cases like the Bull Socket Case and the Yangtze River Pharmaceutical Case, the anti-monopoly enforcement agencies treated non-price vertical restrictions as an aggravating factor in resale price maintenance. Therefore, it is recommended that SAMR in the final version of the Pharmaceutical Anti-Monopoly Guidelines provide a basic framework and considerations for evaluating such behaviors, thus offering enforcement agencies a consistent approach and pharmaceutical companies a clearer compliance guideline.
6. Collaborating Conduct May Constitute Abuse of Market Dominance
Article 29 of the Pharmaceutical Anti-Monopoly Guidelines clarifies the enforcement approach and criteria for identifying abuse of market dominance through collaborating conduct. According to this provision, two or more operators at different phases of the pharmaceutical supply chain can be considered as having good standing in engaging in abuse of market dominance through collaborating conduct. This addition clearly responds to the enforcement experience in the recent case involving colistin sulfate for injection. This case was the first one in China to cover multiple phases of the pharmaceutical supply chain involving abuse of market dominance. The enforcement agency found that Wuhan Huihai, Wuhan Kede, and Minkang Pharmaceuticals (collectively referred to as "Huihai Group") made unified decisions, collaborated, and jointly engaged in the behavior in question. Additionally, SPH No.1 Biochemical & Pharmaceutical Co., Ltd. (SBPC) and the Huikai Group collectively held a dominant position in the Chinese market of colistin sulfate for injection and jointly engaged in the abusive behavior of unfairly high pricing.
Before this case, administrative cases related to joint abuse of market dominance only involved operators in the same relevant market, meaning competitors. According to current laws, regulations, and enforcement practices, joint abuse of market dominance only applies to operators in the same relevant market. This new provision on "collaborating conduct" offers a legal basis for antitrust enforcement. When operators at different stages of the supply chain jointly engage in relevant behaviors, antitrust enforcement agencies can analyze their actions based on the factors outlined in Article 29 to determine whether the behavior falls under the regulation of abuse of market dominance through collaborating conduct.
7. Application of the "Single Economic Entity" Doctrine
Article 50 of the Pharmaceutical Anti-Monopoly Guidelines addresses the legal liability for abuse of market dominance by operators having control relationships. According to this article, a control relationship means that a specific operator has control or can exert decisive influence over another operator, or both are controlled by or subject to decisive influence from the same third party. This provision reflects the concept of the "Single Economic Entity Doctrine" derived from EU law. Under EU competition law, multiple companies constituting the "same operator" are not regarded as competitors and will not be considered as engaging in horizontal monopoly agreements, as such agreements only apply to independent operators.
Although the concept of a "single economic entity" is not explicitly illustrated in China's current antitrust system, similar principles or rules have been applied in the country's antitrust enforcement practices. For example, in the Calcium Gluconate API case, the enforcement agency concluded that, although there was no cross-shareholding or correlation between the companies involved, the agency still concluded that the three companies were not independent of each other but acted together as the joint subject of the monopolistic behavior, coordinating and collaborating to implement the monopolistic behavior, based on the analysis of personnel appointments, business relations, financial connections, business decisions, and profit sharing. In the SBPC case, the enforcement agency found that Wuhan Huihai, Wuhan Kede, and Minkang Pharmaceuticals made unified decisions, collaborated, and jointly implemented the behavior in question, based on the fact that all three companies have the same actual controlling shareholder, and they shared monopolistic profits. The difference between these two cases is that in the Calcium Gluconate API case, there was no equity relationship between the companies, while in the SBPC case, the three entities had the same actual controlling shareholder. This demonstrates that, although equity relationships are important in determining the independence of operators, factors such as personnel appointments, business decisions, and financial connections are also critical factors. Article 50, Paragraph 2 of the Pharmaceutical Anti-Monopoly Guidelines responds to and synthesizes the enforcement experiences mentioned above.
The author's understanding is that the main purpose of this article is to regulate the allocation of legal responsibility for abusive behavior by entities identified as a "single entity" due to control relationships. However, based on the structure of the guidelines and the wording of this article, it would be more appropriate to place it after Article 29, "Abuse of Market Dominance through Collaborating Conduct." The reason is that, like collaborating conduct, the abuse of market dominance by a single economic entity is a special category of abusive behavior by market dominance and this would be more logically consistent if regulated in Chapter 3. Furthermore, from a legislative perspective, the analytical approach to the legal responsibility of a "single economic entity" is consistent with the approach for analyzing the legal responsibility of a single party, so there is no need to create a separate provision.
8. Transactions Involving Intellectual Property May Constitute Concentration of Undertakings
The pharmaceutical industry is an IP-intensive sector. The main types of IP-related transactions in the industry are IP transfers and IP licenses (License-in/out). The core of the License-in model is essentially the introduction of a product or project based on an IP licensing transaction, with the product or project being introduced domestically, and the licensor being a foreign entity. Conversely, in a License-out situation, the licensor is a domestic entity that authorizes foreign entities. The License-out model has become an important choice for Chinese innovative pharmaceutical companies to expand internationally in recent years.
The Pharmaceutical Anti-Monopoly Guidelines further clarify that transactions involving intellectual property in the pharmaceutical industry may constitute the acquisition of control or the ability to exert decisive influence over other operators, thus can be regarded as a concentration of undertakings. The License-in/out model is likely to fall within this scope. The Pharmaceutical Anti-Monopoly Guidelines do not specify the factors to consider in determining whether an IP transfer or license constitutes concentration of undertakings, but pharmaceutical companies can refer to Article 20, Paragraph 2 of the Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights by the State Council Anti-Monopoly Commission. This provision suggests taking into consideration of whether the IP constitutes an independent business, whether it generated independent and measurable revenue in the previous fiscal year, and the terms and duration of the IP license. We understand that this provision not only regulates the active License-in/out models from an antitrust perspective but also aligns with international practices. For example, the U.S. HSR Act explicitly states that exclusive licensing in the pharmaceutical sector may be considered an asset transaction. If the value of the patent or exclusive license meets the filing threshold and is not exempt from notification, the transaction must be filed to the relevant authorities. The filing threshold is primarily based on the transaction size and the size of the parties involved, and the entity obligated to file for concentration of undertakings is the licensee.
Under the HSR Act, a condition for requiring merger control filing for an IP license is that the license must be exclusive to the licensee. However, the Pharmaceutical Anti-Monopoly Guidelines do not restrict it to "exclusive licenses." The author believes that from the legal logic of regulating concentration of undertakings, non-exclusive licenses may not grant the licensee the "control over or decisive influence on other operators," so only exclusive licenses may meet the filing threshold of concentration. Of course, to better guide pharmaceutical operators in practice, it is recommended that the final version of the guidelines either provide detailed descriptive or illustrative explanations regarding "acquisition of control or the ability to exert decisive influence" under IP licenses or directly limit the scope to "exclusive licenses."
Under the current trend of "going global," many Chinese innovative pharmaceutical companies use the License-out model to reach IP licensing agreements with foreign companies, especially U.S. companies. We recommend that Chinese licensors analyze and assess whether the proposed transaction will trigger a merger control filing in the licensee's country before signing the agreement, adjust the transaction timeline accordingly (if notification is required), allocate responsibility and costs for such notification between the parties, and prepare contingency plans in case the transaction is not cleared or is cleared with conditions.
Conclusion
The Pharmaceutical Anti-Monopoly Guidelines consolidate several groundbreaking and representative antitrust enforcement case practices from the pharmaceutical industry in recent years, establishing a comprehensive regulatory framework for antitrust supervision in the pharmaceutical sector. Although the Pharmaceutical Anti-Monopoly Guidelines are still in the public consultation phase, it is recommended that pharmaceutical companies begin studying and researching the draft as soon as possible, review their business models, practices, and related agreements from an antitrust compliance perspective, and establish or improve practical antitrust compliance management systems.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
