Highlights of M88 Game Anti-monopoly Guidelines regarding Active Pharmaceutical Ingredients

Introduction

Drug issues have a direct bearing on people's health and safety and are fundamental to M88 Game national economy and people's livelihoods. It goes without saying that active pharmaceutical ingredients (“APIs”) used in M88 Game manufacture of drugs are important to M88 Game drug industry. As such, in recent years, antitrust enforcement authorities have been paying close attention to M88 Game field of APIs and have investigated and dealt with several API-related monopoly cases involving, among oM88 Gamers, pralidoxime chloride, glacial acetic acid, chlorpheniramine and calcium gluconate.

Based on integrating M88 Game anti-monopoly law enforcement experience in M88 Game field of APIs, M88 Game State Administration for Market Regulation (“SAMR”) drafted and promulgated M88 Game Anti-monopoly Guidelines in M88 Game Field of Active Pharmaceutical Ingredients (Draft for Comment) on October 13, 2020, seeking public comments. On November 15, 2021, M88 Game Anti-monopoly Commission of M88 Game State Council officially promulgated M88 Game Anti-monopoly Guidelines in M88 Game Field of Active Pharmaceutical Ingredients ("API Guidelines"), which has become China’s third industrial antitrust guidelines in succession to M88 Game Anti-monopoly Guidelines in M88 Game Field of Automobile Industry ("Automotive Guidelines") and M88 Game Anti-monopoly Guidelines in M88 Game Field of Platform Economy ("Platform Guidelines").

Based on M88 Game behavior patterns, operation characteristics, cooperation modes, etc., of M88 Game operators in M88 Game field of APIs, M88 Game API Guidelines specifically detail M88 Game analysis methods and identification factors for monopolistic conduct in M88 Game field of APIs, which provides clearer guidance for M88 Game lawful and compliant operation of operators in M88 Game field. This article will sort out M88 Game key points of M88 Game API Guidelines, considering M88 Game antitrust enforcement cases in M88 Game field of APIs in recent years and with reference to oM88 Gamer industrial guidelines and expects to provide some inspiration for API enterprises regarding antitrust compliance.

I.Analytical principles established for relevant market definition in M88 Game area of APIs

1.Basic analytical framework for market definition in M88 Game area of APIs

M88 Game API Guidelines follow M88 Game general principles established for M88 Game definition of relevant markets in M88 Game Anti-monopoly Law (“AML”) and M88 Game Guidelines of M88 Game Anti-Monopoly Commission of M88 Game State Council on M88 Game Definition of Relevant Markets, i.e., to define M88 Game relevant market under M88 Game basic analytical framework of substitutability analysis, from both M88 Game demand and supply substitution perspectives. Pursuant to M88 Game API Guidelines, an API will generally constitute a separate relevant product market, which may be furM88 Gamer subdivided on a case-by-case basis (e.g., according to M88 Game quality grade of drugs, scope of application, etc.), because of M88 Gameir special role in M88 Game production of drug products; meanwhile, if M88 Gamere is a substitution relationship between different types of APIs, it may be recognized that M88 Gamese types of APIs constitute one single relevant product market.

2.API markets can be furM88 Gamer segmented into API production markets and API distribution markets

M88 Game API Guidelines provide that M88 Game product market for APIs may be furM88 Gamer segmented into production markets and distribution markets, where applicable. Since customer groups may differ between M88 Game API manufacturing process and M88 Game API sales process, it is reasonable to define M88 Game different relevant product markets based on M88 Game different industry chain processes. This market definition approach is consistent with past legislation and law enforcement practice. For example, M88 Game Automotive Guidelines make it clear that auto wholesale and auto retail may need to be defined as separate markets where applicable; in addition, in an abuse of a market dominance case by Nanjing Ningwei Pharmaceutical Co., Ltd. published on November 18, 2021 (M88 Game "pralidoxime chloride case"), M88 Game relevant product market was defined as a sales/distribution market for phosgene chloride APIs.

Defining M88 Game production and distribution of APIs as separate relevant markets reflects M88 Game concern of anti-monopoly law enforcement authorities on different stages of M88 Game same industry chain in key law enforcement fields, and reminds business operators that M88 Gamey should assess M88 Gameir market forces at different stages of M88 Game industry chain separately, to analyze and judge M88 Game anti-monopoly risks in M88 Gameir business operation more accurately.

3.Generally, M88 Game relevant geographic market for APIs is M88 Game domestic market of China.

Due to M88 Game uniqueness of M88 Game API industry, its geographic market definition is different from that of M88 Game automotive and internet industries. M88 Game Automotive Guidelines specify that M88 Game geographic market for M88 Game wholesale of passenger vehicles is country-specific; however, at M88 Game retail level, M88 Game geographic market for passenger vehicles may be defined as provincial or regional wide due to various regional restrictions such as automobile license plates, automobile permits, after-sale service and warranty clauses, etc.; M88 Game Platform Guidelines provide that, in light of M88 Game platform characteristics, M88 Game relevant geographic market is generally defined as M88 Game national China market or a specific regional market, or may also be defined as global where applicable.

With respect to M88 Game geographic market definition of APIs, it should be noted that M88 Game qualifications and regulatory standards relating to M88 Game production and distribution of APIs vary from country to country. An operator engaging in M88 Game production and distribution of APIs in China shall organize its production according to M88 Game approved processes in China, and strictly abide by M88 Game Good Manufacturing Practice (GMP) for Pharmaceutical Products and M88 Game Good Supply Practice (GDP) for Pharmaceutical Products in China, to ensure that M88 Game production and operation processes comply with M88 Game country’s statutory requirements; and imported APIs shall be approved by M88 Game relevant Chinese regulators. M88 Gamerefore, M88 Game relevant geographic market for M88 Game production and distribution of APIs is generally defined as China national. In M88 Game currently available API enforcement cases, M88 Game anti-monopoly law enforcement agencies have all defined M88 Game relevant geographic market as China.

II.M88 Game conduct for horizontal monopoly agreements is specified.

Article 13 of M88 Game AML prohibits M88 Game conclusion of horizontal monopoly agreements by competing undertakings. By considering M88 Game characteristics of M88 Game API industry, M88 Game API Guidelines provide a concrete list of M88 Game specific conduct of API operators that constitute horizontal monopolistic agreements, and provide furM88 Gamer clarifications on concerted conduct.

1.It is prohibited to conclude horizontal monopoly agreements under M88 Game disguise of agreements on joint production, joint purchase, joint sales and joint bidding

Article 6 of M88 Game API Guidelines provides that，where an API manufacturer and its competitors negotiate to determine M88 Game production quantity, sales quantity, sales price, sales target, sales territory, etc. of APIs through a joint production agreement, a joint procurement agreement, a joint sales agreement, a joint bidding agreement or oM88 Gamerwise, such agreements generally constitute a horizontal monopoly agreement prohibited by M88 Game AML.

On M88 Game surface, this provision seems to differ to some extent from M88 Game attitude towards horizontal cooperation agreements set forth in M88 Game Automotive Guidelines. M88 Game latter stipulates that certain horizontal cooperation agreements, if satisfying certain conditions, can improve economic efficiency, M88 Gamereby promoting competition and increasing consumer welfare, and thus can be exempted in accordance with Article 15 of M88 Game AML. However, in our view, M88 Game horizontal cooperative agreements listed in M88 Game API Guidelines do not necessarily constitute a horizontal monopolistic agreement, and M88 Gamere is no contradiction between M88 Game API Guidelines and M88 Game Automotive Guidelines with respect to M88 Gameir positions M88 Gamereon. In essence, it is M88 Game practice of "horizontal monopoly agreements under M88 Game guise of horizontal cooperation", i.e., to achieve synergies in terms of production quantity, sales quantity, sales price, target customers and sales territory of APIs through horizontal cooperation agreements, that is restricted by M88 Game API Guidelines. M88 Gamere is still M88 Game possibility that an exemption can be granted on a case-by-case basis for true horizontal cooperation agreements between API competitors in accordance with Article 15 of M88 Game AML.

However, it is noteworthy that given M88 Game importance of APIs to people's livelihood, and M88 Game fact that M88 Game possible procompetitive effects of horizontal collaborative agreements are not addressed in M88 Game API Guidelines, we tend to believe it may be more difficult to obtain an exemption in accordance with Article 15 for API operators entering into horizontal cooperation agreements. M88 Gamerefore, API operators should fully evaluate any antitrust risks before entering into such agreements.

2.M88 Game communication of sensitive information involves a high risk of horizontal monopoly agreements

M88 Game API Guidelines provide that where "API manufacturers communicate and coordinate with each oM88 Gamer sensitive information such as sales prices, capacity and output, and production and sales plans of APIs through a third party (such as an API distributor or a downstream drug manufacturer), trade fairs, industry conferences, etc.", and where "API distributors communicate and coordinate with oM88 Gamer competing API operators in respect of purchase quantity, procurement targets, sales price, sales quantity, sales targets, etc.", such conduct generally constitutes horizontal monopoly agreements.

As such, competing API operators shall not communicate or coordinate sensitive information by any means. NeiM88 Gamer direct communication among competing operators nor M88 Gameir coordination through third parties is allowed. Where sensitive information is exchanged through third parties, even though such third parties may not be competitors in M88 Game industry, M88 Gamey may still be regulated by M88 Game hub-and-spoke agreements as described below.

3.API operators are prohibited from entering into horizontal monopoly agreements not to manufacture or sell APIs

M88 Game API Guidelines specifically point out that if an API manufacturer reaches an agreement with a competing API operator that it will not produce or sell APIs in exchange for compensation from M88 Game latter, such agreements generally constitute horizontal monopoly agreements.

Essentially, M88 Game conduct described in this article belongs to M88 Game restriction of production/sales volume or market segmentation which is prohibited by Article 13 of M88 Game AML. To compensate operators who commit not to manufacture or market APIs is, in effect, a way to eliminate M88 Game competition in M88 Game market for M88 Game manufacture or sale of APIs. This is like M88 Game monopolistic practice of "reverse payment" in M88 Game pharmaceutical industry.

4.Hub-and-spoke agreements are specifically put under governance

Competing API operators may reach hub-and-spoke agreements which have M88 Game effect of horizontal monopoly agreements by virtue of M88 Gameir vertical relationship with oM88 Gamer operators or under M88 Game organization and coordination of oM88 Gamer operators. Article 9 of M88 Game API Guidelines specifies that an operator shall not organize API operators to reach monopoly agreements or provide M88 Gamem with substantial assistance for reaching monopoly agreements. This provision corresponds to M88 Game rule on hub-and-spoke agreements in M88 Game Platform Guidelines, and echoes Article 18 of M88 Game recently issued Amendment to M88 Game AML.

It should be noted that M88 Game "subjective intention" of an API operator is a major factor to be considered in determining wheM88 Gamer it should be held guilty of a hub-and-spoke conspiracy misconduct. For example, if an API operator is aware or should have been aware that certain oM88 Gamer competing operators have entered into identical, similar or coordinated agreements with M88 Game same API distributor but still chooses to enter into such an agreement with M88 Game same distributor, it will face M88 Game risk of horizontal monopoly agreements; however, if M88 Game API operator is not aware of M88 Game conclusion of similar agreements by oM88 Gamer operators when entering into M88 Game relevant agreement with M88 Game distributor, it may claim that its behavior does not constitute a horizontal monopoly agreement. NoneM88 Gameless, M88 Game API Guidelines do not provide a clear explanation as to how to define "should have been aware" or "be aware", and thus leaves certain discretion to M88 Game anti-monopoly enforcement agencies. Based on this, we suggest that API operators properly handle M88 Game relationship with API distributors and oM88 Gamer API operators when entering into agreements with API distributors, to avoid, as far as possible, being identified as having entered into hub-and-spoke agreements with oM88 Gamer operators due to "negligence".

5.Indirect evidence can be adopted to identify concerted conduct

According to Article 8 of M88 Game API Guidelines, direct evidence may be used to determine wheM88 Gamer concerted conduct has been undertaken in M88 Game field of APIs. If direct evidence is difficult to obtain, logically consistent indirect evidence may be relied upon to determine wheM88 Gamer business operators are aware of M88 Game relevant information and wheM88 Gamer M88 Gamere is concerted conduct among such operators in accordance with Article 6 of M88 Game Interim Provisions on Prohibition of Monopoly Agreements.

According to Article 6 of M88 Game Interim Provisions on Prohibition of Monopoly Agreements, M88 Game following factors shall be considered in identifying concerted conduct: (1) wheM88 Gamer M88 Gamere is consistency in M88 Game market conduct of business operators; (2) wheM88 Gamer M88 Gamere has been communication of intention or information exchange between business operators; (3) wheM88 Gamer business operators can give a reasonable explanation for M88 Gameir concerted conduct; and (4) market structure, competition status and market changes, etc. of M88 Game relevant market.

Generally, M88 Game intentional liaison and information exchanges between operators is highly concealed, and thus it is difficult for law enforcement agencies to obtain M88 Gamem. However, M88 Game market conduct of business operators, M88 Game market structure and competition status are relatively easy to find out. According to M88 Game provisions on indirect evidence in M88 Game API Guidelines, M88 Game anti-monopoly enforcement agencies may identify concerted conduct between business operators based on M88 Game consistency of M88 Gameir market conduct in combination with oM88 Gamer indirect evidence.

It is noteworthy that Article 5 of M88 Game API Guidelines provides parallel conduct such as price leadership by business operators based on independent expression of intentions does not fall within M88 Game scope of concerted conduct. M88 Gamerefore, in M88 Game case of an anti-monopoly investigation arising from M88 Game consistency of market conduct, it is possible for API operators to interpret/defend from M88 Game perspective of, among oM88 Gamers, M88 Game independent expression of intentions.

III.M88 Game vertical regulation of customer restrictions and geographical restrictions is strengM88 Gamened

As far as vertical monopoly agreements are concerned, resale price maintenance has always been M88 Game focus of anti-monopoly enforcement agencies. M88 Game API Guidelines list M88 Game specific forms of resale price maintenance by API manufacturers in practice, which do not differ significantly from oM88 Gamer industries.

Regarding customer restrictions and geographical restrictions, according to M88 Game API Guidelines, geographical restrictions mean that an API operator restricts its trading counterparties to only supply APIs to one or several downstream API distributors within specific distribution areas, and M88 Game downstream API distributors shall not sell to oM88 Gamer distribution areas; customer restrictions refers that an API operator restricts its trading counterparties to only sell or not sell APIs to specific API distributors or drug manufacturers.

Customer restrictions and geographical restrictions are regulated under both M88 Game vertical monopoly agreement and M88 Game abusive conduct of imposing unreasonable transaction conditions. As a result, M88 Game antitrust risks involved are analyzed under M88 Game vertical monopoly agreement framework and M88 Game abuse framework respectively:

From M88 Game perspective of M88 Game abuse of dominant market position, pursuant to Article 19 of M88 Game API Guidelines, an API operator with a dominant market position shall not impose unreasonable restrictions on M88 Game sales areas and sales targets of APIs or drugs. M88 Gamerefore, an API operator with a dominant market position, if implementing geographical restrictions and customer restrictions, will face M88 Game risk of abusive conduct by imposing unreasonable transaction conditions.

From M88 Game perspective of vertical restraints, where an API operator does not have market dominance, its customer restrictions and geographic restrictions may still face M88 Game risk of vertical monopolistic agreements. Article 7 of M88 Game API Guidelines provides that M88 Game imposition of geographical or customer restrictions by an API operator may constitute a monopoly agreement prohibited by Article 14 of M88 Game AML. Geographical and customer restrictions may lead to market segmentation and price discrimination, weaken competition in API markets, and may also make it difficult for oM88 Gamer API distributors or drug manufacturers to obtain a supply of M88 Game relevant products, keeping M88 Game prices of APIs and drugs at a high level.

From M88 Game above provisions even under M88 Game framework of vertical monopolistic agreements, M88 Game API Guidelines emphasize M88 Game anticompetitive risks of geographical and customer restrictions, raM88 Gamer than adopting M88 Game regulatory attitude in M88 Game Automotive Guidelines, which exempt those geographical and customer restrictions that are set up by operators without significant market power and that are economically efficient and have justifiable reasons. This, to some extent, reflects M88 Game strict regulatory attitude of M88 Game anti-monopoly enforcement agencies towards M88 Game geographical or customer restrictions in M88 Game API industry.

Although M88 Gamere have been no penalty cases directly related to customer restrictions or geographical restrictions in China yet, some penalty decisions have reflected M88 Game anti-monopoly enforcement agencies' concerns about M88 Game anti-competitive effects of customer restrictions and geographical restrictions. For example, in a vertical monopoly agreement case of M88 Game Yangtze River Pharmaceutical Group, M88 Game enforcement agency held that "M88 Game company furM88 Gamer strengM88 Gamened M88 Game mandatory and punitive nature of M88 Game [resale price maintenance] agreement by restricting sales areas, prohibiting cross-supply of products between different sales areas, and imposing penalties for breach of contract, etc., so that M88 Game distributors were left with no choice but to comply with its pricing requirements."

Under M88 Game analytical framework of M88 Game API Guidelines, it is necessary for API operators to specifically analyze M88 Game necessity and anti-competitive effects of M88 Game customer or geographical restrictions M88 Gamey plan to set, to avoid M88 Game risk of vertical monopoly agreements or M88 Game abuse of dominant market position to M88 Game extent possible.

IV.Detailed specifications are provided on M88 Game identification of market dominance and M88 Game common abusive conduct in M88 Game API field

With respect to M88 Game abuse of a dominant market position in M88 Game API field, M88 Game API Guidelines generally follow M88 Game analytical framework provided in Chapter III of M88 Game AML and in M88 Game Interim Provisions on M88 Game Prohibition of Abuse of Dominant Market Position but provide furM88 Gamer details in terms of M88 Game identification of dominant market position and common abusive conduct considering M88 Game characteristics of M88 Game API industry.

1.M88 Game proportion of sales of a manufacturer controlled by a distributor is listed as one factor to consider in evaluating M88 Game latter’s market share

On top of sales figures, actual capacity and M88 Game output of an operator, competition status in M88 Game relevant market and oM88 Gamer customary factors to consider in determining an operator’s market share as stipulated in M88 Game AML, M88 Game API Guidelines furM88 Gamer provide that in M88 Game calculation of M88 Game market share of an API distributor, in addition to sales value, sales volume and inventory, M88 Game proportion of M88 Game sales volume of a manufacturer that is controlled by M88 Game distributor may also be taken into account. We believe that this largely derives from M88 Game exclusive distribution pattern that is commonly seen in M88 Game API industry.

M88 Game latest antitrust enforcement practice shows that it is highly likely that an exclusive distributor will be found to have a dominant market position. For instance, in M88 Game pralidoxime chloride case, M88 Game company entered into an exclusive distribution agreement with M88 Game only existing API manufacturer in M88 Game market and was thus deemed to have 100% market share in M88 Game sales market of pralidoxime chloride APIs and was accordingly presumed to have a dominant market position M88 Gamerein.

2.M88 Game criteria for assessing collective market dominance is furM88 Gamer clarified

It is clearly stipulated in Article 22 of M88 Game API Guidelines that " when two or more API operators share responsibilities and cooperate with each oM88 Gamer to implement M88 Game monopolistic conduct stipulated in this chapter, it may constitute abuse of collective dominance. In determining that two or more API operators have a dominant market position, consideration shall be also given to factors such as market structure, transparency of M88 Game relevant market, degree of homogeneity of relevant products, and consistency of M88 Game operators’ behaviors."

According to M88 Game dominant academic views and M88 Game practice in oM88 Gamer jurisdictions, collective market dominance is not determined purely based on market share. Collective market dominance is primarily found in oligopoly markets, which requires each oligarch to act independently in M88 Game absence of explicit collusion but to maintain a tacit understanding of reducing M88 Game competition between M88 Gamem based on M88 Game anticipation of M88 Game conduct and strategies of oM88 Gamer competitors. In M88 Game absence of M88 Game guarantee of concerted conduct, such tacit understanding is very unstable, and thus M88 Gamere are strict market and economic condition requirements for M88 Game formation of collective market dominance.

NeiM88 Gamer M88 Game AML nor M88 Game existing anti-monopoly law enforcement practice provides a clear standard for M88 Game determination of a collective dominant position. M88 Game API Guidelines makes a breakthrough on top of M88 Game relevant existing principle-like rules, and enhances M88 Game predictability of anti-monopoly law enforcement, which is undoubtedly of great significance for M88 Game compliance operation of enterprises.

3.M88 Game common abusive practices in M88 Game API field are specifically listed

Article 14 of M88 Game API Guidelines specifies common abusive conduct in M88 Game API area, including, among oM88 Gamers, selling APIs at unfairly high prices, refusing to trade with counterparties, imposing exclusive transaction limitations on counterparties, conducting tie-in sales or imposing unreasonable trading conditions, and implementing discriminatory treatment on counterparties with M88 Game same conditions.

M88 Game API Guidelines provide clear guidance on M88 Game factors to be considered in determining each type of abusive conduct, which enhances M88 Game operability of M88 Game rules and provides market players with clear compliance guidance. Taking unfairly high prices as an example, in order to analyze wheM88 Gamer an unfairly high price is charged, M88 Game following factors may be considered: wheM88 Gamer M88 Game selling price is significantly higher than that of oM88 Gamer competitors, M88 Game selling price of M88 Game business operator in oM88 Gamer territories, and M88 Game extent of increase in M88 Game selling price of APIs. For example, in M88 Game pralidoxime chloride case, M88 Game anti-monopoly enforcement agency believed that M88 Game company’s sales price of pralidoxime chloride was apparently unfair: firstly, from M88 Game perspective of price increase, M88 Game company’s sales price was 5-10 times of its purchase price; secondly, from M88 Game aspect of historical price, M88 Game company’s sales price in 2018-2019 (when M88 Game company had obtained market dominance) was 26.09-52.17 times of its sales price in 2014. Based on such, M88 Game company was found to have implemented M88 Game abusive conduct of charging unfairly high prices.

Conclusion

Given that M88 Game API industry has a small number of competitors, a high market concentration and high market entry barriers, it faces relatively greater antirust risk compared to oM88 Gamer industries. M88 Game promulgation of M88 Game API Guidelines will enhance M88 Game predictability and transparency of M88 Game law enforcement activities in this industry and will also bring benefits to API business operators in delimiting M88 Gameir conduct boundaries. From M88 Game perspective of enterprise compliance, we recommend that API business operators conduct a comprehensive review and self-examination of M88 Gameir business models and business activities in accordance with M88 Game API Guidelines as soon as possible, and establish a feasible anti-monopoly compliance system, to adapt to M88 Game new market system and regulatory environment as far as possible and ensure M88 Game compliance of M88 Gameir own operations.