23 April 2020
Introduction
On 9 April 2020, China’s State Administration for Market Regulation (SAMR) fined 3 pharmaceutical companies for abuse of dominance in the distribution of injectable calcium gluconate Active Pharmaceutical Ingredient (API). The three companies were found to be in breach of the PRC’s Anti-Monopoly Law (the AML) between August 2015 and December 2017, by selling at unfairly high prices and imposing unfair terms on downstream distributors.
The three companies were fined a total of RMB 325.5 million in relation to the infringements, which is the largest penalty imposed in an abuse of dominance case since the fine against Qualcomm in 2015. In addition, SAMR imposed additional fines on two of the three parties (along with 14 individuals) for obstructing the investigations, amounting to RMB 2.5 million. This includes a number of fines at the maximum amount allowed against undertakings and individuals for obstruction of investigations under the AML, reflecting the severity of the actions taken by the fined parties to impede SAMR’s investigation.
The conclusion of this case demonstrates that the pharmaceuticals and medical devices sectors continue to be an enforcement priority for SAMR amid the COVID-19 outbreak, echoing its recent “Notice on Antitrust Enforcement Measures to Facilitate Prevention and Control of the Novel Coronavirus Pandemic and the Resumption of Work and Industrial Production” issued on 5 April 2020.
The SAMR decision sets out detailed analysis on the application of many key concepts, including in relation to the control position of the parties, and when pricing may be characterised as “excessive” such that it amounts to abusive conduct.
Background
According to the SAMR decision, between August 2015 and December 2017, Shandong Kanghui Medicine Company Limited (Kanghui), Weifang Puyunhui Pharmaceutical Company Limited (Puyunhui) and Weifang Taiyangshen Company Limited Pharmaceutical (Taiyangshen) (together, the Parties) jointly abused their dominant position in the distribution of calcium gluconate APIs in breach of Article 17 of the AML, by selling at unfairly high prices and imposing unfair trade terms on their dealings with downstream calcium gluconate injection fluid manufacturers.
The Parties argued that they were independent and unaffiliated undertakings, as the companies were independently registered and there was no cross shareholding or directorships. The Parties further argued that they did not individually command a high market share.
However, the calcium gluconate API operations of the Parties were found to be under common control of Kanghui. This was due to a number of factors, including that: (1) Puyunhui was owned by the senior management of Kanghui and Kanghui made important commercial and strategic decisions on behalf of Puyunhui; and (2) Taiyangshen had agreed to allow Kanghui to conduct business through Taiyangshen, taking instructions from Kanghui in relation to its calcium gluconate API operations and transferring the majority of the profits back to Kanghui. The Parties had therefore operated under a single directing mind and will.
During the relevant period, there were three manufacturers authorised to produce the relevant API product in the PRC. Through a combination of exclusive distribution arrangements, purchasing in very large volumes and imposing other contractual restrictions on all three authorised manufacturers, the Parties controlled the supply of virtually all injectable calcium gluconate API produced in China, and collectively held between 87% to 94% market share in the distribution market during the relevant period. As a result, the Parties were able to control the prices and volumes of injectable calcium gluconate API sales to the downstream calcium gluconate injection fluid manufacturers.
Excessive pricing & unfair contract terms
SAMR found that, after achieving dominance over the injectable calcium gluconate API market, the Parties abused its dominant position by charging unfairly high prices.
This finding of excessive pricing was based on a number of grounds, including:
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Extremely high profit margins: SAMR was of the view that the Parties had sold its products at unfair prices due to the extremely high profit margins achieved. In 2017, the Parties sold the relevant product at prices ranging from 9.5 to 27.3 times higher than the purchase price.
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Comparison to historical prices: SAMR found that prices raised sharply after the Parties achieved dominance in the market. The price for the relevant product in 2017 had increased by 19 to 54.6 times higher than the average market price in 2014.
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Multi-layered “internal” transactions: the three Parties were also found to have used multiple “internal” transactions to artificially increase the prices of the relevant products. Taking one particular sale by Taiyangshen to a third party as an example, Kanghui directed an initial transaction to be made between Puyunhui and Taiyangshen before the product was sold onto the third party, raising the product price by 760% through this “internal” transaction.
The Parties were also found to have imposed various unfair contractual restrictions on downstream buyers, requiring the injection fluid manufacturers to agree to let the Parties buy-back the injection fluid or to act simply as outsourced manufacturers, and to sell the downstream product according to the direction of the Parties.
SAMR imposed a total penalty of RMB 325.5 million on the three companies. In particular, the fines imposed on Kanghui and Puyunhui represented 9% and 10% of their relevant annual turnover, respectively. These fines are at the highest end of the scale of penalties that can be imposed for a breach of the AML, reflecting the severity and duration of the infringement.
Obstruction of investigation
SAMR further imposed separate administrative penalties totaling RMB 2.53 million on Kanghui, Puyunhui and 14 of their respective legal representatives and employees for obstructing the antitrust investigation. According to the relevant decision, during a dawn raid conducted by SAMR at Kanghui’s premises, Kanghui’s employees were directed to destroy, divert and conceal evidence. These employees also tried to physically obstruct the officials from conducting the raid, leading to a number of injuries.
For further information, please contact:
Adelaide Luke, Herbert Smith Freehills
adelaide.luke@hsf.com
Puyunhui refused to provide information and documents that were requested, and repeatedly objected to the conduct of the investigation. Puyunhui directed its employees to destroy certain hard copy documents that were being printed by the officials, and provided false information about the existence of certain evidence.
These fines are a reminder that it is important for businesses in China to understand their duty to fully co-operate with SAMR during an antitrust investigation. Any attempts to conceal or destroy evidence, or to provide false or misleading information, are unlikely to effectively impede an investigation, and may in fact attract further fines.
