Two successive decisions from the SAIC and the NDRC, the Chinese antitrust agencies in charge of prosecuting cartels and abuses of dominance, in the same matter concerning allopurinol, a commonly used generic pharmaceutical product, have cast light on the difficulty of allocating cases under the AML and the consequent risks borne by companies operating in China.

The enforcement of China’s Anti-Monopoly Law (the AML) against anti-competitive conduct is fraught with uncertainty because of the concurrent jurisdictions of the National Development Reform Commission (the NDRC) and the State Administration for Industry and Commerce (the SAIC).

While the NDRC is the competent authority for infringements of the AML which relate primarily to prices, the SAIC’s remit is limited to the enforcement of the AML against anti-competitive non-price conduct. 

From the inception of the AML in 2008, the division of labour between the two agencies had the real potential to become a matter of friction.  Recently, two decisions issued by the SAIC and the NDRC demonstrated that this is not merely a theoretical risk and raised questions about the fairness of the process and the risk of double jeopardy for companies involved in investigations.

The two decisions concern the sales of the allopurinol active pharmaceutical ingredient (API) and the downstream allopurinol tablets.  Allopurinol is a drug preventing the accumulation of excessive uric acid in the blood; it is commonly used to treat gout or kidney stones.

On 28 October 2015, a local branch of the SAIC issued a fine of RMB439,308.53 (approximately EUR61,000 or USD66,500) against Chongqing Qingyang Pharmaceuticals for refusing to supply the allopurinol API to competing manufacturers of allopurinol tablets from October 2013 to March 2014.

Three months later, on 28 January 2016, the NDRC issued fines against five Chinese pharmaceutical companies for a total amount of RMB3.995 million (approximately EUR550,000 or USD605,000) for anti-competitive agreements in relation to sales of allopurinol tablets from April 2014 to September 2015.  The companies fined by the NDRC are Chongqing Qingyang Pharmaceuticals and its distributor Chongqing Datong; Shanghai SINE Pharmaceutical and its distributor Shangqiu Huajie; and The Place Pharmaceutical Jiangsu. 

The AML provisions used as legal bases for the two decisions are clearly different, yet one cannot help but wonder whether the misconducts under review do not form part of the same anti-competitive scheme and have not effectively been sanctioned twice.

The SAIC decision

The SAIC decision relies on the following theory of harm: Chongqing Qingyang Pharmaceuticals’ refusal to supply its downstream competitors with the allopurinol API is an abuse of dominance.  According to the SAIC, Chongqing Qingyang Pharmaceuticals had no objective justification for not supplying its competitors; its only purpose was to control the market and eventually increase both the retail sale price and its own share of the downstream market. 

The SAIC conducted a thorough investigation and provided in its decision a detailed analysis of the facts at hand.  The SAIC first discussed the product market definition, noting that allopurinol had no proper substitute in China for the treatment of hyperuricemia because other available drugs have different therapeutic effects and, perhaps more importantly, are significantly more expensive than allopurinol and not eligible for reimbursement under the national health insurance program.  The SAIC also briefly defined the geographic market as China on the basis that certified domestic manufacturers of APIs can sell throughout China and allopurinol cannot be imported from abroad.

In addition to being active in the downstream market for allopurinol tablets, Chongqing Qingyang Pharmaceuticals is also the only producer of the allopurinol API in China since July 2012.  Other manufacturers had been certified to produce the allopurinol API but, by the time of the infringement, their licences had expired or they had never engaged or had ceased to be active in the production of allopurinol.  The SAIC concluded that Chongqing Qingyang Pharmaceuticals was dominant in the market for the supply of the allopurinol API and further observed that that position was barely contestable because of the relatively high barriers to entry faced by prospective competitors.  According to the SAIC, the dependency of manufacturers of allopurinol tablets on Chongqing Qingyang Pharmaceuticals effectively allowed the latter to control the market.

In September 2013, Chongqing Qingyang Pharmaceuticals entered into an exclusive distribution agreement for both the allopurinol API and allopurinol tablets with a third party yet refused to supply either that third party or its downstream competitors until March 2014. 

The SAIC found that there was simply no legitimate reason for Chongqing Qingyang Pharmaceuticals to do so: in fact, it had the API in stock and continued to manufacture it during that period.  Instead of pursuing its normal operations, Chongqing Qingyang Pharmaceuticals preferred to give up all sales for six months in order to exhaust all stocks of the tablets, increase the costs of its downstream rivals by raising the price for the API, increase its own market share, and generate excessive profits.  That strategy was particularly harmful to competition and the economy in general, with the price of the API more than doubling and both Chongqing Qingyang Pharmaceuticals’ market share and the retail price of allopurinol tablets quintupling as a result of the refusal to supply. 

The SAIC consequently found that Chongqing Qingyang Pharmaceuticals had abused its dominant position in the market for the allopurinol API by refusing to supply downstream competitors for a period of six months from October 2013 to March 2014, in violation of Article 17(3) of the AML.  The SAIC refused to consider that the contractual dispute alleged by Chongqing Qingyang Pharmaceuticals over the terms of the exclusive distribution agreement it had entered into in September 2003 could be a valid justification.  The SAIC noted, however, that Chongqing Qingyang Pharmaceuticals had cooperated in the investigation (it was actually Chongqing Qingyang Pharmaceuticals which initially contacted the local SAIC office to inquire about the legality of such an exclusive distribution agreement) and imposed what the SAIC described as a “lenient penalty” of RMB439,308.53 (approximately EUR61,000 or USD66,500), corresponding to 3% of its sales of allopurinol API and tablets in 2013.

The NDRC decision

The NDRC found that all five companies active in the market for the supply of allopurinol tablets in China held four meetings during the period between April 2014 and September 2015 and entered into anti-competitive agreements aiming to increase the price of allopurinol tablets, allocate markets between themselves and rig tender procedures. 

The NDRC noted that these are infringements of a very serious nature and contrary to Article 13 of the AML prohibiting anti-competitive arrangements. 

The companies most severely fined by the NDRC were Chongqing Qingyang Pharmaceuticals (the same company already fined by the SAIC) and its distributor Chongqing Datong because they played a leading role in the formation of the anti-competitive agreements.  Their fine amounted to RMB1.8 million (approximately EUR251,000 or USD272,000), representing some 8% of their 2014 revenues. 

The other participants’ sanctions were only marginally less significant.  They received fines representing 5% of their 2014 revenues, with RMB1.18 million (approximately EUR165,000 or USD179,000) for The Place Pharmaceutical Jiangsu, and RMB495,600 (approximately EUR69,000 or USD75,000) for Shanghai SINE Pharmaceutical and its distributor Shangqiu Huajie.

Complementary or concurrent authorities?

The two decisions by the SAIC and the NDRC demonstrate, somewhat absurdly, how tenuous the distinction between price and non-price conduct can be.

Based on the publicly available facts, it appears that Chongqing Qingyang Pharmaceuticals was determined to manipulate the market for allopurinol for its own benefit in two steps: first by organising shortage of supply and, second, by increasing retail prices through increasing its rivals’ costs as well as direct price-fixing and market-allocation mechanisms. 

In other words, Chongqing Qingyang Pharmaceuticals pursued a single anti-competitive objective through different means at different times.  It would have seemed logical from a policy perspective – and a better use of government resources – that this scheme be prosecuted by only one agency in China.  The institutional framework allegedly prevented this from happening.  It is unclear from the public record whether the NDRC and the SAIC actually reached an agreement on the allocation of the case or whether the SAIC voluntarily and unilaterally limited itself to finding the refusal to supply and did not examine what took place in the market after Chongqing Qingyang Pharmaceuticals resumed supply of the allopurinol API.

From the defendant’s perspective, however, this duality meant having to defend itself on two separate fronts, thereby incurring more costs and getting the management’s attention distracted by two proceedings instead of one.  Seeking antitrust advice prior to entering into an exclusive supply agreement rather than consulting the enforcers afterwards would surely have saved Chongqing Qingyang Pharmaceuticals considerable time and money.

More strikingly, the fact that two proceedings were launched and both eventually concluded with the imposition of fines meant that the overall amount of the fines came very close to the statutory limit set by Article 46 of the AML, which provides for fines ranging from 1% to 10% of the sale amount of the preceding year.  Indeed, the total of the two fines imposed by the NDRC and the SAIC correspond to 9.95% of the 2014 revenues – a record percentage indicating extreme severity that has, to the best of our knowledge, never been previously imposed in China. 

Key take-aways

The allopurinol saga should serve as yet another reminder that both antitrust agencies in China remain focused on the life science sector and are committed to redressing wrongdoings in a resolute manner.

It also illustrates that companies active in China face a number of uncertainties as to which agency (if not both, at the risk of double jeopardy) can possibly investigate an alleged misconduct. This creates additional challenges in devising proper commercial and legal strategies in light of an ever-increasing level of sophistication and determination of Chinese antitrust authorities.