Under the antitrust spotlight: the pharmaceutical industry in Asia

Asian competition regulators are likely to continue to focus on the pharmaceutical industry, particularly over product pricing and the market treatment of generic drugs.

A number of investigations are already underway, and we foresee further competition enforcement actions ahead in 2018 as well as a continuation of a holistic approach to the sector in some Asian jurisdictions.

This e-bulletin looks at some of the key developments that have taken place in Asia over the last 12 to 18 months.

China

China has been looking into the pharmaceutical sector for some time now, starting in earnest in June 2015 with its drug pricing reform. Since that time, pharmaceutical and medical device companies have come under fire from the various Chinese regulators, as well as the Courts. Following shortages of critical medicines in the middle of 2017 (blamed on price increases imposed by monopoly suppliers of raw ingredients), there has certainly been a flurry of legislative and enforcement activity in relation to this sector in the latter half of 2017.

Holistic approach to the sector

The Chinese authorities are utilizing multiple tools to address various issues within the industry. While this e-bulletin will focus on the antitrust-related tools, it is worth noting that significant developments have occurred in other areas of law. In October 2017, for example, the State Council issued a notice entitled “Opinions on Deepening the Reform of Examination and Approval System to Encourage Innovation in Drugs and Medical Devices”, which looks at improving transparency and efficiency at various stages of drug development, including (among other things) accepting overseas test data, supporting extended clinical tests, accelerating approvals for urgently needed drugs and medical devices, and promoting the production of generic drugs by issuing lists of drugs that have lost their patent rights but have not yet been copied. At the time, the Deputy Director of the China Food and Drug Administration (Wu Zhen) stated that the new policies are aimed at facilitating the entry of new drugs, including domestic and foreign ones, into the market as soon as possible.

Earlier in 2017, the State Council also promoted a change to the manner in which the pharmaceutical supply chain works aimed at encouraging transparency and curbing drug prices. It sought to do so by encouraging local governments to implement a “two-invoice” system in drug distribution. The system restricts the number of players in the drug-procurement chain by limiting the number of tax-valid invoices that may be issued – one from a supplier to a distributor, and the other from the distributor to a public health institution. As a result of this change, a number of press reports have speculated that consolidation in pharmaceutical sales and distribution is likely to become a trend (some press reports have suggested that one of many reasons for the proposed takeover of Cardinal Malaysia by Shanghai Pharmaceutical was the new two invoice system requirement).

In November 2017, the China Food and Drug Administration (“CFDA”) published a draft of the “Measures for Online Drug Operation Supervision Administration” to collect feedback from the public. The draft measures were formulated in accordance with the relevant provisions of the Drug Administration Law and the Regulations for Implementation of the Drug Administration Law, and seek to regulate online platforms which facilitate the sale and purchase of drugs. The draft measures also set out additional requirements regarding quality control and certification of online drugs.

Finally, in the context of anti-bribery and corruption, the State Administration for Industry and Commerce (“SAIC”) issued a notice in August 2017 calling for investigations into commercial bribery in the medical sector, and the Shanghai AIC has reportedly already conducted dawn raids on several medical companies. In October 2017, the Jianxi AIC published an action plan to target commercial bribery in the pharmaceutical and medical devices sector, including the bundling of supplies and associated equipment in the name of leasing, donations, or installation at medical institutions. Around the same time, the Shanghai city government issued a document stating that any entity found guilty of bribery will be prohibited from participating in centralized procurement and from supplying products to healthcare institutions for two years. In late November 2017, in separate cases, the Shanghai AIC fined two companies, NT Medical Information Consultant (Shanghai) and Sino-American Shanghai Squibb Pharmaceuticals, for bribery-related offences relating to the promotion of drug products to local hospitals.

Antitrust in China has long been closely associated with unfair trading practices, including commercial bribery. For example, prior to its recent amendments, the Anti-Unfair Competition Law (“AUCL”) contained provisions addressing commercial bribery, but also included some of the elements more typically associated with China's primary antitrust legislation, the Anti-Monopoly Law (“AML”). The recent changes to the AUCL, which came into effect on 1 January 2018 (see our e-bulletin here), provide welcome clarity on this issue with the revised wording limiting the references to traditional competition law issues.

Antitrust specific developments

Following the drug shortages mentioned above, the Standing Committee of the National People's Congress of China stated in a report that the supply of some drugs had declined due to monopolistic conduct by the companies that controlled supplies of raw ingredients, which drove up prices. It urged regulators to enhance antitrust enforcement – particularly in relation to anticompetitive practices involving the supply of raw ingredients.

In response, nine Chinese government bodies joined forces to tackle price collusion and monopolistic conduct. Immediately following high profile abuse of dominance cases against Zhejiang Second Pharma and Tianjin Handewei Pharmaceutical (both involving the imposition of excessive pricing and unreasonable refusals to trade), the National Development and Reform Commission (“NDRC”), took the lead in drafting Price Conduct Guidelines for suppliers of active pharmaceutical ingredients and drugs prone to shortages (the “Guidelines”), which were put out for public comment in August 2017. The Guidelines were designed to prevent distorted competition on price which, in the view of the NDRC, removes the incentive to carry out production activities.

The final Guidelines were published by the NDRC in November 2017. The final Guidelines prohibit suppliers of drugs in short supply and drug ingredients from engaging in illegal price collusion and other antitrust violations, such as price fixing, vertical restraints, and abuse of market dominance, as well as certain other practices such as exclusive trading. Interestingly, they provide detailed guidance on assessing what might be an excessive price, and contemplate several possible approaches including: comparing the prices with those of other business operators; or where costs are stable, assessing whether price increases are reasonable when compared with profit. The final Guidelines also mention the possibility of comparing prices across different periods of time or geographic areas (including historical prices in the same area).

It should be noted that excessive pricing by firms in the pharmaceutical sector is a focus of a number of regulators throughout the world including the European Commission and the United Kingdom Competition and Markets Authority. The key contentious points in these cases typically include: (a) how to define markets where unbranded drugs are involved; and (b) how to determine when a price is excessive. In the abuse of dominance cases against Zhejiang Second Pharma and Tianjin Handewei Pharmaceutical, it was found that both companies held a collective dominant position in the market for isoniazid active pharmaceutical ingredients (i.e. a fairly narrow market definition). This, coupled with the approach in the final Guidelines on how to assess when a price is excessive, is broadly in line with the approach taken by other regulators globally.

In October 2017, China's five central government authorities (the Ministry of Commerce (“MOFCOM”), NDRC, SAIC, the Ministry of Finance, and the Legislative Affairs Office of the State Council) published “Detailed Rules for the Implementation of the Fair Competition Review System” (the “Rules”), based on the AML and the State Council Opinion published in 2016. Although not specific to the pharmaceutical sector, the Rules are aimed at preventing local governments from creating preferential policies for certain companies or industries. Crucially, the Rules provide for the ability for companies to sue local governments and report them to anti-monopoly authorities should such anticompetitive conduct continue.

As recently as December 2017, the NDRC held a seminar attended by antitrust officials and specialists from 47 provinces and cities. The seminar reportedly focused on the pharmaceutical sector, and discussed issues relating to the drafting of China's pharmaceutical antitrust guidance.

Finally, looking ahead, the draft of China's first automobile sector antitrust guidelines is expected to be finalized soon by the NDRC (having been published for public comment in March 2016, and given the promulgation of the Administrative Measures for Automobile Sales by MOFCOM on 5 April 2017), and some of the provisions in the guidelines may extend to the pharmaceutical sector. The draft guidelines provide guidance for evaluating common industry practices in the sector, mostly relating to the vertical relationship between retailers, distributors and manufacturers. The draft guidelines also provide a series of exemptions and outline NDRC's views on practices it considers anti-competitive. One provision in the guidelines grants conditional exemptions for resale price maintenance in certain circumstances, which could be applicable to medical device makers and pharmaceutical firms (specifically where the role of a distributor is limited to that of an intermediary), according to public sources.

Enforcement and activities in other Asian jurisdictions

A number of other competition regulators in the region have also been investigating conduct or undertaking other activities in the pharmaceutical sector.

Malaysia

The Malaysian Competition Commission (“MyCC”) recently conducted a market review of the pharmaceutical sector in Malaysia, with the assistance of Third World Network, an independent not for profit international research and advocacy organization. The MyCC published a draft final report in November 2017 which sets out its preliminary findings.

The antitrust concerns of the MyCC broadly mirror those contained in the European Commission's Pharmaceutical Sector Inquiry Final Report adopted on 8 July 2009 (although some further concerns are also highlighted in the report, specifically in relation to excessive pricing abuses). The MyCC's draft final report sets out the following competition law comments and potential concerns:

• market concentration and price-setting power in relation to pharmaceuticals are often examined at a very detailed level, frequently down to molecular level market definition. Dominance may be conferred on an originator company where it has, through patent and other exclusive rights, legal exclusive market rights in relation to a particular molecule. The draft final report refers to the EU case concerning Perindopril (CASE AT.39612 - Perindopril (Servier) [2014]), where the Commission concluded that Servier held a dominant position in the market for the perindopril molecule and no hypertensive medicines other than the generic versions of perindopril were found to be able to meaningfully constrain Servier's sales and prices. According to the draft final report, in Malaysia, dominance is confined to the large MNCs that import patented medicines from their parent companies.
• A potential concern is the use of patent strategies (such as patent clusters or thickets) and product life-cycle management measures (such as the introduction of secondary products or denigration techniques) as a means to maintain dominance and delay generic entry.
• Patent settlement agreements involving a value transfer from the originator company to a generic company could be problematic (so called pay for delay agreements).
• Certain interventions of originator companies before national authorities deciding on marketing authorizations, pricing and reimbursement of generic products could lead to concerns where these are part of a strategy to delay generic entry.
• A common complaint amongst community pharmacists was that they were being charged more for a particular drug than the pricing given to clinics and/or private hospitals (raising the possibility of price discrimination).

The draft final report also contains an examination of a number of cases in relation to the above anticompetitive behaviours, as well as the alleged excessive pricing of pharmaceutical products (including cases past and present from the UK, US, Spain, the EU and South Africa).

The draft final report sets out a number of recommended steps that could be taken by the MyCC and Malaysian Government, including regulating the level of mark-ups in the distribution chain, introducing rules to enhance transparency in pricing policies at all levels of the supply chain and the potential monitoring of certain practices in the industry. It is possible that the MyCC could take enforcement action against companies in the sector following or alongside the publication of its Final Report (which has been the trend when other regulators have undertaken a sector inquiry).

South Korea

In December 2017, the Korea Fair Trade Commission (“KFTC”) launched on site investigations into two pharmaceutical companies including Lilly Korea and an unnamed domestic drug maker into alleged pay for delay practices. The KFTC has been firm about such practices being a key target since the landmark pay for delay case in Korea in 2011 involving GlaxoSmithKline and Dong A Pharmaceuticals.

India

The Competition Commission of India (“CCI”) launched a probe in December 2017 into drug producers Abott, Novartis and Emcure Pharma in relation to price fixing allegations involving certain diabetes drugs. This followed a whistleblower disclosing the existence of this alleged cartel to a number of regulators earlier in 2017.

Another ongoing case being investigated by the CCI relates to an allegation that Max Super Specialty made unfair and excessive profits from sales of disposable syringes provided to patients in hospitals (in breach of the rules prohibiting the abuse of a dominant position).

These cases follow a decision to fine the Kerala pharmacy association for anticompetitive conduct taken by the CCI in November 2017.

Philippines

Officials from the Philippines Competition Commission (“PCC”) announced in September 2017 that there is an ongoing investigation into a healthcare company which is expected to be concluded soon. This is the first full administrative investigation that has been made public by the PCC since the provisions relating to anticompetitive conduct in the Philippine Competition Act came into full force in August 2017.

Japan

Finally, in Japan, the Japan Fair Trade Commission (“JFTC”) announced in December 2017 that it had issued search and desist orders against three companies supplying medical protective clothing for suspected bid rigging in relation to tenders held by the Tokyo Metropolitan Government.

Moreover, the Japanese government is proposing changes to the reimbursement system in Japan. These changes would result in the Japanese Central Social Insurance Medical Council setting and reviewing the prices at which doctors and hospitals can be reimbursed for drugs brought from private companies on an annual basis (as opposed to on a biennial basis under the current system, which typically results in price cuts for older medicines). The proposed changes also include a proposal to completely overhaul the current rule that exempts some drug companies from mandatory price cuts, as well as a proposal to change price reviews for the newest and highest costing drugs, which enjoy sudden market expansion, from every two years to quarterly.

Conclusion

The pharmaceutical sector remains a key focus for competition regulators in Asia. A central theme of the various initiatives and cases discussed above is the pricing of pharmaceutical products (and linked to that the entry of generics into the market). We expect that the focus on pricing in this sector is likely to remain a primary concern for regulators in the region, as is the continuance of a holistic approach to the sector in some jurisdictions. Moreover, we envisage the possibility of further enforcement action in the sector being taken by competition authorities in the near future.