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Antitrust in China's pharma sector – Bengbu action following big-bang reform

01 September 2015

On 26 August 2015, the National Development and Reform Commission ("NDRC") made public its first antitrust enforcement decision in the pharmaceutical sector since launching the drug pricing reform earlier this year. Although the target of this enforcement action was a local government entity, pharmaceutical companies should expect continued antitrust intervention in parallel with the implementation of the pricing reform.

The NDRC antitrust action

In April 2015, the Bengbu Health and Family Planning Commission ("Bengbu Health Commission") – a government entity in the city of Bengbu, Anhui province – issued a number of notices as part of the drug procurement process for local hospitals and other public healthcare providers.

NDRC found that, through these procurement notices, the Bengbu Health Commission had prevented non-local pharmaceutical companies from participating in the tenders. In a letter addressed to the Anhui provincial government – but made public on the NDRC website – NDRC described the facts and legal issues in relation to the conduct of the Bengbu Health Commission: first, NDRC found the commission to have identified the names of 30 drug producers already in the tender notice, leaving competitors without an opportunity to bid. Second, the Bengbu Health Commission was found to have set different revenue requirements for local and non-local bidders to be eligible to participate in the tenders.

NDRC concluded that the Bengbu Health Commission breached a number of the "administrative monopoly" provisions in the Anti-Monopoly Law ("AML") which essentially prohibit government bodies from engaging in conduct or setting rules with anti-competitive effects.

Nonetheless, the AML does not empower NDRC to directly sanction government agencies but only to make recommendations to the "superior authority" of the infringing government body on how to eliminate the AML infringement. As a result, NDRC sent a letter, asking the Anhui government to rectify the "administrative monopoly" behavior of the healthcare regulator in Bengbu.

Relevance of the Bengbu antitrust case

The NDRC investigation against the Bengbu Health Commission is important from an antitrust perspective, as it shows an increasing enforcement focus on government-driven anti-competitive conduct. NDRC's actions against "administrative monopoly" conduct in Shandong and Yunnan earlier this year confirm this apparent trend.

Beyond the increasing drive against anti-competitive acts by government, the Bengbu case illustrates the tool box of enforcement measures NDRC has at hand – and is willing to use – in the wake of the landmark reform of drug pricing the Chinese government embarked on in May 2015.

The impact of that reform is far-reaching, as it aims to overhaul the way pharmaceuticals are priced in China. In the past, drug pricing was under direct government supervision. Prices of most drugs, including those on the "national essential drug" and "reimbursement drug" lists, as well as other special drugs, were guided by government, with caps for ex-factory and retail prices. Yet in May 2015, after years of preparation, seven ministries and commissions including NDRC jointly issued the Opinion on the Promotion of the Drug Price Reform ("Opinion") and accompanying documents. According to the Opinion, from 1 June 2015 onwards, prices of most drugs except for anesthetic medicines and first-class psychoactive substances are determined by the market, no longer by government.

At the same time as the Opinion was released, NDRC announced its intention to supervise the pricing reform process and a series of intervention tools in the case of market disruption (for example, surging prices against the government's expectation). Antitrust enforcement figured as a key intervention tool. In particular, NDRC made it clear that it would aggressively intervene against collusion, abuse of dominance by way of excessive pricing and other monopolistic behavior, and launched a six-month nationwide investigation campaign with pharmaceutical companies, hospitals and drug procurement platforms as main targets.

Now the Bengbu antitrust case clearly shows that NDRC is serious about using antitrust enforcement to ensure a smooth transition to the new regime of market-driven drug prices.

Conclusion

The Bengbu case is NDRC's first published antitrust enforcement decision in the pharmaceutical sector following the launch of the drug pricing reform. The fact that NDRC's letter to the Anhui government was made public even before the deadline for the proposed rectification steps expired – yesterday – indicates that NDRC's motivation went beyond the individual case; it is possible NDRC wanted to send out a signal to players in the pharmaceutical sector – government bodies and companies alike – that it is determined to curb anti-competitive actions leading to higher drug prices.

The team

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