In May, 2015, the National Development and Reform Commission (“NDRC”), the Chinese authority in charge of price-related antitrust violations published the Notice on Reinforcing Supervision over Drug Prices (“Notice”). The Notice includes a range of specific issues on the supervision over drug price, including immediately launching special inspections into illegal conducts under the Pricing law and the Anti-Monopoly Law (“AML”).
The Notice aims to implement the Opinions on Promoting the Drug Pricing Reform (“Opinion”), which was jointly published by the NDRC, also the major authority in charge of the State’s medical price reform and other relevant ministries. In China, the medical reform has been carried out for decades. As a major move in this lengthy and continuous reforming process, the NDRC issued the Opinion and the Notice on the same day, both of which cover the issue of reforming the drug pricing mechanism and reinforcing comprehensive supervision over medical expenses and prices.
This article introduces the Notice with a focus on the antitrust issues that may occur in such special inspections, in order to provide advice for antitrust compliance in the pharmaceutical sector.
- Current Drug Pricing Mechanism
Since 2000, under the Drug Administration Law and its relevant rules and regulations, the price of the following drugs shall be fixed or guided by the government: (i) drugs listed in the directory of drugs for national basic medical insurance (“Directory”), and (ii) drugs which are not listed in the directory but are manufactured and distributed by a single supplier. More specifically, within the scope of the abovementioned drugs, the government fixes the price of drugs relating to the immunization plans and family planning, while it sets maximum retail prices for the others. By contrast, for drugs that are not listed in the directory, or drugs that are not manufactured and distributed by a single supplier, their prices are set by the pharmaceutical companies. Besides, according to the Notice on Issuing the Regulations on the Centralized Procurement of Drugs by Medical Institutions (2010), all non-profit medical institutions shall participate in the centralized drug procurement plan, and medical institutions and pharmaceutical companies shall carry out drug procurement through the centralized drug procurement platforms established by local governments.
Therefore, for drugs whose prices are guided by the government, their pricing shall be subject to the following restrictions in order to be sold to non-profit medical institutions. First, their prices shall not exceed the maximal resale price, or the so-called “Ceiling Price” issued by the NDRC. Second, the NHFPC organizes the provincial centralized procurement process to determine the bidding-winning price and the hospitals then set the retail price of such drugs within the price increase range in accordance with relevant laws and regulations.
Currently, the bid-winning price under the centralized drug bidding process is normally lower than the Ceiling Price set by the NDRC. It suggests that the NDRC’s regulation on the maximal resale price has very limited impact on the actual prices of drugs. Against such a background, it seems to be the right timing to repeal the regulations on the maximal resale price of drugs, and establish a new pricing mechanism for drugs.
- Key Points of the Drug Pricing Reform
Ever since 2012, the NDRC has being working on reforming the drug pricing mechanism. After seeking public opinions, the NDRC has now eventually finalized the Opinion. The Opinion has provided the following measures for reforming the drug pricing mechanism: (i) cancelling the maximal resale price restrictions set by the government, except for narcotic drugs and Class I psychotropic drugs; (ii) forming the procedures, bases, methods and other rules for formulating the reimbursement standards for drugs that are covered by medical insurance, and enhancing medical insurance’s function in price control; (iii) establishing a public and transparent negotiation mechanism participated by multiple parties, in order to set prices for patent drugs and drugs produced by a single supplier; (iv) setting the prices through bidding process or negotiation for blood products, which are not listed in the national drug reimbursement list, immunity and prevention drugs that are purchased by the State in a centralized manner, and AIDS antiviral drugs and contraceptives provided by the State for free; (v) for other drugs, the prices shall be set by the pharmaceutical companies.
- Supervision over Price-Related Conducts in the Pharmaceutical Sector
In order to implement the Notice, the NDRC will launch a six-month campaign against price-related violations in the pharmaceutical sector. The inspection will focus on the prices of drugs for which competition is insufficient and which are particularly used by special patients. In particular, the NDRC will focus on the following conducts which violate the Price Law and the AML:
- Fabricating and spreading price increase information, pushing up the prices to an excessively high level, and disturbing the market order;
- Colluding with each other to manipulate market prices;
- Abusing market dominance by selling drugs at unfairly high price (“excessive pricing”);
- Price frauds such as making up cost price, marking false price, offering discount after increasing the price, misleading price marking, hiding additional pricing conditions; and
- Other illegal price-related conducts.
Besides, the NDRC will step up efforts to monitor drug prices, particularly on the ex-factory (port) prices and actual purchase prices of drugs over which market competition is insufficient. The Notice mentions that special inspections would be launched in cases where the price is frequently or significantly changed, or cases where the price is significantly different from international prices, price of the same product, or prices from other regions.
In addition, the NDRC encourages the public to report illegal price-related conducts via its national price violation report system.
- Suggestions for Compliance of Pharmaceutical Companies
Drug prices, especially the high prices of patent drugs have always been in the spotlight. Partly because of the implementation of mandatory Ceiling Price, the antitrust authorities rarely punish pharmaceutical companies for excessive pricing under the AML. After the reform, since the Ceiling Price for most of the drugs would be removed, pharmaceutical companies will be more susceptible to excessive pricing challenges, which is exactly the focus of the NDRC campaign.
- Relevant Market
Under the AML, a business operator could be liable for excessive pricing only if it holds a dominant market position, the determination of which depends on the definition of the relevant market. According to the Guidelines on Defining Relevant Markets, the relevant market refers to “the product scope or geographical scope within which an operator participates in competition during a certain period of time with respect to a specific product or service”. The relevant market can be defined by methods such as the functionality test by analyzing the substitutability of products on demand/supply side, or SSNIP test. In the human drug area, the antitrust authorities would take special approach to define the relevant market based on the specific characteristics of drugs. For example, MOFCOM, the Chinese antitrust merger review authority, has adopted the functionality test, and in particular the ATC 3 classification (Anatomical Therapeutic Chemical level 3, i.e. a classification based on targeted symptoms) to define the relevant market. Besides, the SSNIP test generally also plays an important role in defining the relevant market. However, the influence of price change on customers’ choice of drugs is very complicated, because the pricing and purchase process of drugs are subject to governmental regulations, while the customers’ choice on drugs is influenced by various factors such as the doctors’ preference in prescriptions and the payment system under medical insurance. Therefore, various factors shall be taken into account if the SSNIP test is applied to define the market.
- Dominant Market Position
Dominant market position refers to the position with which business operators would be capable of controlling the prices or quantities of commodities or other transaction terms in a relevant market, or preventing or imposing an influence on the access of other business operators to the market. According to the AML and relevant regulations, various factors, such as business operators’ market share and technical capabilities, shall be considered when assessing the market position. Among those factors, patent is a particularly important one. The pharmaceutical industry relies heavily on patent protection. According to industry study, but for patent protection, 60% of drugs would not have been developed in the first place, and 65% of drugs would not have been clinically applied. Because of patent protection, patent drugs may, to some extent, have certain advantage in the market. But in assessing the market position, it is still necessary to comprehensively analyze all relevant factors, such as the market share of the pharmaceutical company, its financial status, and its controlling power over the channels, etc.
- Excessive Pricing
Once concluded that the business operator holds the dominant market position, it is necessary to determine whether the drugs are sold at “unfairly high price”. According to the Provisions on Anti-price Monopoly promulgated by the NDRC, factors to consider in determining “unfairly high price” include (1) the price offered by other business operators for the same kind of product, and (2) the cost change of such product, etc. However, the AML and relevant regulations do not provide further details on how to select the benchmark price for comparison. If one only compares the overseas price and the domestic price for the same drug, the result may not be convincing, because the market situation, the regulatory framework and the payment systems are different. Moreover, for patent drugs, the production cost would not be sufficient to demonstrate the actual investment of producers in light that the R&D expense is significant while the production cost is relatively small.
The pharmaceutical sector has been under close scrutiny by antitrust enforcers globally, and pricing in this sector has long been one of the most sensitive issues. Because of the special regulatory provisions and the significant R&D investment, the pricing system of drugs differs from that of other products. In the context of the current State medical and health reform, we expect that more reforming policies would be published in the future, which call for the continuous attention of pharmaceutical companies on antitrust
 According to Article 6 of Opinions on Reforming the Pricing Mechanism of Drugs and Medical Service, in the scope of drugs whose prices are regulated by the government, the prices of drugs relating to immunization plans and family planning are fixed by the government, and the prices of other drugs are guided by the government.
 According to Article 12 of the Implementation Opinions on Establishing the National Basic Drugs System, in the county (city, or district) where the basic drugs system is implemented, the basic drugs used by basic-level medical institutions shall be sold with zero margins. All local government shall implement relevant governmental subsidy policy. According to Article 14 of the Opinions on Reforming the Pricing Mechanism of Drugs and Medical Service, during the transition period of reforms, the markup percentage of drugs used by medical institutions shall be gradually reduced. The policies regarding markup percentage can be varied depending on the price level but shall be under the maximal rate of 15%.
 In the SSNIP test, under the circumstance that a hypothetical monopolist continuously raise the price at a moderate rate during a certain period of time, if sufficient numbers of buyers are likely to switch to alternative products and the lost sales made such price increase unprofitable, then the alternative products and the hypothetical monopolist’s products shall be considered as in the same product market. Otherwise, those two products shall not be considered as in different product market.
 See MOFCOM Announcement [2009. No. 77] on its Decision on Conditionally Approve the Acquisition of Wyeth by Pfizer Following Anti-Monopoly Review. Nevertheless, ATC 3 is not the only basis to define the relevant market in the pharmaceutical industry. For example, apart from the ATC 3, the EU antitrust authorities used other methods, such as ATC 4 (i.e. a classification based on curative effects or pharmacodynamics) to define the relevant market.