China's anti-monopoly watchdog imposes record fine on API distributors 

China's anti-monopoly watchdog SAMR initiated this investigation after receiving a complaint in May 2019. The three concerned parties under investigation included Shandong Kanghui Pharmaceutical Co., Ltd., Weifang Puyunhui Pharmaceutical Co., Ltd. and Weifang Taiyangshen Pharmaceutical Co., Ltd, who are mainly engaged in the distribution of pharmaceutical products including calcium gluconate API. The concerned parties were alleged to have carried out monopolistic activities in calcium gluconate API and caused a soaring increase in prices and a shortage of supply.

After a six-month investigation, SAMR determined that the concerned parties held a dominant position in the relevant market and had abused this dominance from August 2015 to December 2017.

In addition to the confiscation of the parties' illegal gains, SAMR imposed fines corresponding to the levels of severity of the misconduct. Taiyangshen and Puyuhui were each fined 7% and 9% of their sales revenue of the previous year (2018) while Kanghui was fined 10% of its 2018 sales revenue, which represented the ceiling for the penalty range stipulated by China's Anti-monopoly Law.

Highlights of the case

The concerned parties are regarded to have jointly carried out monopolistic activity: In this case, the concerned parties were established as three independent legal entities without any shareholding link between them. They share intensive overlap, however, in personnel and also close coordination in financial and business decisions. Puyunhui was actually controlled by Kanghui, and Kanghui controlled Taiyangshen’s distribution of calcium gluconate API for injection. As a result, SAMR ruled that the concerned parties acted as a whole and jointly carried out monopolistic activity.

Specific definition of the relevant market: In this case, SAMR defined China as a geographic market since no foreign calcium gluconate API distributor had access to the Chinese market. When the concerned parties began their monopolistic activities, strict regulatory measures existed in the Chinese API market, requiring approvals, certificates and operation licenses, etc. to import API into China, which could be onerously time-consuming and uncertain to obtain. Since China issued no approval for the import of calcium gluconate API, the concerned parties' territorial scope for the sales of calcium gluconate API encompassed all of China, which is separate from other markets. SAMR subdivided the calcium gluconate API market into API for injection and API for oral administration and affirmed that the relevant product market is for the sale of calcium gluconate for injection instead of for oral administration, due to the non-substitutable feature of these uses. This helped to counterclaim the concerned parties’ argument on non-control.

Dominant position: SAMR ruled that the concerned parties held dominant positions in this market due to the following reasons –

• The concerned parties controlled a relatively high market share and market competency in the relevant market is not abundant. From August 2015 to 2017, each of the concerned parties occupied 94%, 91% and 87% market share respectively and jointly controlled the sales market of calcium gluconate for injection in China through exclusive sales, bulk purchase and requirements for non-sale to other parties.
• The concerned parties controlled the sales of calcium gluconate for injection from the only three manufacturing companies operating in China and as a result, the downstream companies manufacturing preparation products could only purchase calcium gluconate API from them without bargaining power on price, quantity, etc.
• The downstream companies manufacturing preparation products relied highly on the concerned parties due to the parties' actual control over the relevant market.

Abuse of dominance: SAMR found that the concerned parties abused their dominance by supplying calcium gluconate API for injection at an unfairly high price and by imposing unfair trading conditions. SAMR did not accept the argument raised by the concerned parties that they deal with the downstream calcium gluconate preparation-product manufacturers on a fair basis. Instead, SAMR asserted that the concerned parties abused their dominant position by charging unreasonably high prices and setting unreasonable transaction conditions. Such abuse of dominance impaired the interests of the calcium gluconate preparation-product manufacturers, and also facilitated the soaring prices of calcium gluconate injection, which increased the expenditure of national social insurance premiums and impaired interests for consumers.

Severe penalty due to non-cooperation during the investigation: During the investigation, Kanghui and Puyunhui notoriously impeded the SAMR investigation by refusing to provide relevant materials, concealing and hiding evidence, violently snatching and even destroying evidence. This interference in the investigation resulted in the most severe penalty and Kanghui's maximum fine of 10% of sales from the previous year. In addition, SAMR issued 16 administrative penalty decisions imposing fines against Kanghui and Puyunhui as legal entities and against 14 individuals including their legal representatives and 12 staff members who participated in hindering the investigation.

It is hoped this penalty is a lesson to other market players regarding conduct during an investigation. On the other hand, cooperation during an investigation can lead to mitigated punishment or even exemption from penalties. In 2014, two Japanese automobile parts enterprises engaged in a cartel along with ten other enterprises had their punishments mitigated and even exempted for their self-reporting and cooperation during the investigation.

Compared to other API cases in the past: The anti-monopoly enforcement authorities had imposed penalties on two API cases over the past two years. In December 2018, three domestic glacial acetic acid API manufacturers were fined RMB 12.83 million for price fixing. In January 2019, one manufacturer and one importer of chlorpheniramine API were identified as a whole and were fined RMB 12.43 million for abuse of dominance in the supply of chlorpheniramine API in China by selling the products at unreasonably high prices. Different from these two cases, the concerned parties in the recent case are distributors instead of manufacturers, and were fined for abuse of dominance instead of acting as a cartel, although concerted actions indeed exist between the concerned parties.

Conclusion

Due to the high entry threshold and the strict requirements for technology, research, and production capacity, the API industry has been a hotbed for monopolistic activities. The severe penalties issued in the past demonstrated the authority’s determination to regulate misconduct and protect competition. We believe that going forward, the API sector will continue to be on the radar of China’s anti-trust enforcement authority and all market players are advised to act wisely and with a full awareness of compliance no matter if they are domestic or foreign ones.

The soaring fines in this case signal the SAMR’s determination to battle against infringement, and prove that cooperation is always a better option than impediment when under SAMR investigation.

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