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Highlights of the Anti-monopoly Guidelines regarding Active Pharmaceutical Ingredients

2021.12.27 Yung Yung Janet HuiGONG, Mingfang、Dong Zhe、Zhu Junchen、Wang Sisi


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

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

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

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

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

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

2. API markets can be further segmented into API production markets and API distribution markets

The API Guidelines provide that the product market for APIs may be further segmented into production markets and distribution markets, where applicable. Since customer groups may differ between the API manufacturing process and the API sales process, it is reasonable to define the different relevant product markets based on the different industry chain processes. This market definition approach is consistent with past legislation and law enforcement practice. For example, the 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 (the "pralidoxime chloride case"), the relevant product market was defined as a sales/distribution market for phosgene chloride APIs.

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

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

Due to the uniqueness of the API industry, its geographic market definition is different from that of the automotive and internet industries. The Automotive Guidelines specify that the geographic market for the wholesale of passenger vehicles is country-specific; however, at the retail level, the 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.; the Platform Guidelines provide that, in light of the platform characteristics, the relevant geographic market is generally defined as the national China market or a specific regional market, or may also be defined as global where applicable.

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

II. The conduct for horizontal monopoly agreements is specified.

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

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

Article 6 of the API Guidelines provides that,where an API manufacturer and its competitors negotiate to determine the 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 otherwise, such agreements generally constitute a horizontal monopoly agreement prohibited by the AML.

On the surface, this provision seems to differ to some extent from the attitude towards horizontal cooperation agreements set forth in the Automotive Guidelines. The latter stipulates that certain horizontal cooperation agreements, if satisfying certain conditions, can improve economic efficiency, thereby promoting competition and increasing consumer welfare, and thus can be exempted in accordance with Article 15 of the AML. However, in our view, the horizontal cooperative agreements listed in the API Guidelines do not necessarily constitute a horizontal monopolistic agreement, and there is no contradiction between the API Guidelines and the Automotive Guidelines with respect to their positions thereon. In essence, it is the practice of "horizontal monopoly agreements under the 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 the API Guidelines. There is still the 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 the AML.

However, it is noteworthy that given the importance of APIs to people's livelihood, and the fact that the possible procompetitive effects of horizontal collaborative agreements are not addressed in the 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. Therefore, API operators should fully evaluate any antitrust risks before entering into such agreements.

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

The API Guidelines provide that where "API manufacturers communicate and coordinate with each other 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 other 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. Neither direct communication among competing operators nor their coordination through third parties is allowed. Where sensitive information is exchanged through third parties, even though such third parties may not be competitors in the industry, they may still be regulated by the hub-and-spoke agreements as described below.

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

The 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 the latter, such agreements generally constitute horizontal monopoly agreements.

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

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

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

It should be noted that the "subjective intention" of an API operator is a major factor to be considered in determining whether 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 other competing operators have entered into identical, similar or coordinated agreements with the same API distributor but still chooses to enter into such an agreement with the same distributor, it will face the risk of horizontal monopoly agreements; however, if the API operator is not aware of the conclusion of similar agreements by other operators when entering into the relevant agreement with the distributor, it may claim that its behavior does not constitute a horizontal monopoly agreement. Nonetheless, the 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 the anti-monopoly enforcement agencies. Based on this, we suggest that API operators properly handle the relationship with API distributors and other 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 other operators due to "negligence". 

5.Indirect evidence can be adopted to identify concerted conduct

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

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

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

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

III.The vertical regulation of customer restrictions and geographical restrictions is strengthened


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

Regarding customer restrictions and geographical restrictions, according to the 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 the downstream API distributors shall not sell to other 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 the vertical monopoly agreement and the abusive conduct of imposing unreasonable transaction conditions. As a result, the antitrust risks involved are analyzed under the vertical monopoly agreement framework and the abuse framework respectively:

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

From the perspective of vertical restraints, where an API operator does not have market dominance, its customer restrictions and geographic restrictions may still face the risk of vertical monopolistic agreements. Article 7 of the API Guidelines provides that the imposition of geographical or customer restrictions by an API operator may constitute a monopoly agreement prohibited by Article 14 of the 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 other API distributors or drug manufacturers to obtain a supply of the relevant products, keeping the prices of APIs and drugs at a high level. 

From the above provisions even under the framework of vertical monopolistic agreements, the API Guidelines emphasize the anticompetitive risks of geographical and customer restrictions, rather than adopting the regulatory attitude in the 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 the strict regulatory attitude of the anti-monopoly enforcement agencies towards the geographical or customer restrictions in the API industry. 

Although there have been no penalty cases directly related to customer restrictions or geographical restrictions in China yet, some penalty decisions have reflected the anti-monopoly enforcement agencies' concerns about the anti-competitive effects of customer restrictions and geographical restrictions. For example, in a vertical monopoly agreement case of the Yangtze River Pharmaceutical Group, the enforcement agency held that "the company further strengthened the mandatory and punitive nature of the [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 the distributors were left with no choice but to comply with its pricing requirements."

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

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

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

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

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

The 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 the pralidoxime chloride case, the company entered into an exclusive distribution agreement with the only existing API manufacturer in the market and was thus deemed to have 100% market share in the sales market of pralidoxime chloride APIs and was accordingly presumed to have a dominant market position therein.  

2.The criteria for assessing collective market dominance is further clarified 

It is clearly stipulated in Article 22 of the API Guidelines that " when two or more API operators share responsibilities and cooperate with each other to implement the 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 the relevant market, degree of homogeneity of relevant products, and consistency of the operators’ behaviors."

According to the dominant academic views and the practice in other 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 the absence of explicit collusion but to maintain a tacit understanding of reducing the competition between them based on the anticipation of the conduct and strategies of other competitors. In the absence of the guarantee of concerted conduct, such tacit understanding is very unstable, and thus there are strict market and economic condition requirements for the formation of collective market dominance.

Neither the AML nor the existing anti-monopoly law enforcement practice provides a clear standard for the determination of a collective dominant position. The API Guidelines makes a breakthrough on top of the relevant existing principle-like rules, and enhances the predictability of anti-monopoly law enforcement, which is undoubtedly of great significance for the compliance operation of enterprises. 

3.The common abusive practices in the API field are specifically listed

Article 14 of the API Guidelines specifies common abusive conduct in the API area, including, among others, 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 the same conditions. 

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


Given that the 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 other industries. The promulgation of the API Guidelines will enhance the predictability and transparency of the law enforcement activities in this industry and will also bring benefits to API business operators in delimiting their conduct boundaries. From the perspective of enterprise compliance, we recommend that API business operators conduct a comprehensive review and self-examination of their business models and business activities in accordance with the API Guidelines as soon as possible, and establish a feasible anti-monopoly compliance system, to adapt to the new market system and regulatory environment as far as possible and ensure the compliance of their own operations. 

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