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Dose of Their Own Medicine

China is getting tough on Big Pharma’s monopolistic practices, slapping huge fines on firms that corner the market in crucial medications. Experts question whether fines are enough to deter the shady behavior when drugs are in short supply

By Xie Ying , Niu He Updated Sept.1

After Chinese regulators slapped huge fines of a combined 321 million yuan ($45.4m) on two pharmaceutical companies for monopolistic practices, experts said the country has too few suppliers of crucial drug ingredients, and more needs to be done to ensure a level playing field for drug producers.  

In one of its latest antitrust investigations, on May 28, China’s State Administration for Market Regulation (SAMR) fined Grand Pharmaceutical Co. Ltd. 286 million yuan (US$39.67m) and Wuhan Healthcare 35 million yuan (US$4.85m) for signing monopoly agreements and misusing their market dominance on active drug ingredients used in emergency medicine.  

The two companies were the only domestic suppliers of norepinephrine and epinephrine, examples of what the industry refers to as bulk drugs. The two drugs are crucial ingredients for medications used to treat allergic reactions and to aid cardiopulmonary resuscitation in cases of cardiac arrest.  

This is not the first case of rampant misuse of monopoly power and price fixing in bulk drug supply in China. According to Li Wei, an associate researcher at the Institute of Industrial Economics, Chinese Academy of Social Sciences, China has seen a growing number of medicine monopoly cases since 2010 and most involve bulk drugs, leading to higher prices for many essential and emergency medications, increasing the cost for both patients and the medical insurance system. 

Backdoor Deals 
Bulk drugs refer to the active pharmaceutical ingredients used to formulate drugs. Bulk drugs cannot be used until they are processed into pharmaceutical preparations.  

According to the SAMR statement, on the Chinese mainland, only Beijing-based Grand Pharmaceutical and Shanxi Zhendong Health Industry Group are licensed to manufacture norepinephrine and epinephrine. Wuhan Healthcare entered into an exclusive sales arrangement with Shanxi Zhendong to compete with Grand Pharmaceutical which had been licensed to produce the two drugs since 2002 and had already received EU approval for its products. The illegality arose when Wuhan Healthcare came to a verbal agreement with Grand Pharmaceutical in June 2016 to make the latter the sole provider of active ingredients for norepinephrine and epinephrine injections on the Chinese mainland.  

After Wuhan Healthcare agreed to stop sales of the two bulk drugs, in exchange Grand Pharmaceutical sold the injections to Wuhan Healthcare at below-market prices, and then bought them back at higher prices. Grand Pharmaceutical also encouraged other preparation companies to sell the same injections to Wuhan Healthcare at a low price so it could sell them for higher prices too. In this way, Grand Pharmaceutical was an ingredient supplier and injection seller, and that allowed it to use its leverage to control sales territories and the supply of ingredients to other drug manufacturers. It bought low-priced injections but forced hospitals to pay high prices, the SAMR said.  

This arrangement lasted three years and one month, during which preparation makers were deprived of any other access to the two bulk drugs.  

“That’s how Grand Pharmaceutical removed competition and abused their dominance, destroying fair competition by locking down the sales of the two bulk drugs,” Meng Yanbei, a professor at the Renmin University of China in Beijing and a member of the State Council’s anti-monopoly committee, wrote for the China Economic Network on May 28. There is a high level of market concentration among bulk drug producers in China, and this encourages monopolistic behaviors, Meng said.  

The SAMR statement revealed that Grand Pharmaceutical forced preparation makers to sell their products at a low price by cutting off or delaying the supply of norepinephrine and epinephrine since 2010. The company forced all related enterprises to enter into an unfair oral or written agreement with them.  

“The victim enterprises couldn’t shift to produce the bulk drugs themselves in the short term,” Sun Jin, a law professor at Wuhan University, told NewsChina. He said that in China, each bulk drug has a separate market where there are only 1-3 suppliers who often reach monopoly agreements to pursue windfall profits.  

These unfair practices were largely halted in 2016 when the government ordered transparency in the procurement of medications for public hospitals. This meant preparation sellers had to show invoices for all their purchases when they resold medications to public hospitals.  

While it had an effect on keeping prices down for drugs, Grand Pharmaceutical changed its tactics, forcing companies to funnel profits to them in the name of promotional or R&D fees. It controlled where preparation makers sold their products and at what price.  

“Monopolists have been refining how they misbehave, but Grand Pharmaceutical’s misconduct has really hit the ceiling,” Sun said. “Their monopoly imposed a negative influence on the upstream and downstream of the industry, as well as on patients and the medical insurance system,” he said.  

After Grand Pharmaceutical cornered the market for the two bulk drugs, other preparation makers found it hard to profit and decided not to produce them, leading to supply shortages. Healthcare authorities in many cities, including Shanghai, listed norepinephrine and epinephrine injections as being in short supply on medical databases.  

The SAMR confiscated Grand Pharmaceutical’s illegal gains of 149 million yuan (US$20.6m), and fined it 3 percent of its 2019 sales on the Chinese mainland, 136 million yuan (US$18.8m). Wuhan Healthcare had to hand over its illegal gains of 30.9 million yuan (US$4.3m) plus a fine of 4.1 million yuan (US$600,000), 2 percent of its 2019 sales volume on the mainland. 

A hospital pharmacy in Nanjing, Jiangsu Province. The price of drugs started to come down after the government cracked down on monopolistic behavior by pharmaceutical firms (Photo by VCG)

Rampant Monopoly
Zhang Handong, former price monitoring director of the National Development and Reform Commission (NDRC), revealed in a 2017 media interview that authorities have been tracking the monopoly of bulk drugs since 2010, and the same year, they issued China’s first anti-monopoly fine to a pharmaceutical company in Shandong Province.  

In an article published in Price Supervision and Anti-Monopoly in China in 2020, a magazine under the Price Association of China, Sun Jin and his associates analyzed a typical monopoly case that involved calcium gluconate, a bulk drug for treating calcium deficiency. Authorities said that three pharmaceutical companies in Shandong Province had conspired as “co-subjects” to exercise a monopoly in the purchase of calcium gluconate for injection preparations by signing an exclusive agreement with the sole bulk drug supplier in China, and then flagrantly increased the price. At the same time, they forced preparation makers to sell them their products at low prices.  

The three companies were fined a combined 313 million yuan (US$43.2m), 10 percent of their previous annual sales, the highest percentage companies can be docked according to China’s Anti-Monopoly Law.  

The next year, Jiangsu-based Simcere Pharmaceutical Group was fined 100 million yuan (US$13.8m) for monopolizing Batroxobin concentrate liquid, a bulk drug used in medications for ischemic diseases.  

In January, Liaoning-based Northeast Pharmaceutical Group was fined 133 million yuan (US$18.4m) for illegal monopoly of Levocarnitine oral solution which is used to treat renal failure.  

From November 2018 to June 2019, Northeast Pharmaceutical Group reportedly raised the price of Levocarnitine oral solution from 2,500 yuan (US$345) per kilo to 8,000-10,000 yuan (US$1,104-1,380) per kilo by using their market dominance.  

“Common means of monopoly include price fixing, pushing prices up, controlling sales channels or signing unfair or conditional agreements. Monopolists include not only bulk drug producers but also the sellers that have exclusive agency,” Wang Beibei, a senior partner of Beijing Yingke Law Firm, told NewsChina. 

Market Manipulations 
According to Professor Meng, there are too few bulk drug producers, and this is why the problem of monopoly is so widespread. In 2017, Li Qing, then deputy director of the Price Monitoring Bureau under the NDRC, said that among 1,500 domestic active pharmaceutical ingredients produced in China, 50 only have one licensed manufacturer, 44 have two and another 40 have three.  

Other issues such as low profits for some drug ingredients and the heavy pollution and waste pharmaceutical plants produce mean the number of plants manufacturing active ingredients is probably much less than the number registered.  

“Ten percent of bulk drugs are produced by less than 10 suppliers and some of the licensed producers are reluctant to make them [due to the low profit], which has further aggravated the concentration,” Meng wrote in his article. He added that bulk drugs usually have no substitute, since different types of drugs may have different effects. This means the types and the dosages of bulk drugs are restricted.  

China started bulk drug manufacturing at the end of 1990s when university academics and plant technicians shifted to start their own businesses. At that time, the industry was scattered and of low quality.  

After 2010, things started to change when the government decided to upgrade industries and control heavy pollution. In 2015, the authorities issued a new version of the Good Manufacturing Practice of Medical Products (GMP), which was much stricter. Any enterprise that failed the GMP had to shut down. According to China’s Law of Medicine Management, a bulk drug will not be approved for sale until the producer has obtained a production permit, met GMP requirements and the product has passed all necessary tests.  

In 2016, the government proposed indexes for clean production in the 13th Five-Year Plan (2016-2020). This called for standardized emissions in the pharmaceutical industry for pollution control. To meet the new requirements, bulk drug plants had to upgrade equipment and technologies, and build new, advanced workshops which greatly increased fixed costs. In 2018, the government began collecting environmental protection taxes, increasing costs even more. 
Many plants were driven out of the industry. An unnamed manager of a bulk drug enterprise told the Art of Wealth and Health, a social media channel under financial magazine Caijing, in a 2021 interview that the policies multiplied the enterprises’ input in production safety and environmental protection by 100-1,000 times, which was not affordable for many small enterprises. As a result, the production of active ingredients has become increasingly centralized, especially those for which there is low demand.  

“On one hand, the high threshold prevented more enterprises from entering the market, leading to a lack of competition. On the other, some enterprises are not willing to manufacture, even if they are licensed,” Li Wei said. He added that preparation makers are disadvantaged in business negotiations with the dominant bulk drug companies.  

“Behind the unchecked monopolies lie imperfect market institutions and the business environment. When production is highly concentrated, it’s easy for the players to exercise a monopoly. They can’t resist the windfall profits even if they know about the hefty fines for doing it,” lawyer Wang told NewsChina. 

Late to the Law 
Compared to Western countries like the US which issued anti-monopoly laws a century ago, China did not have anti-monopoly laws until 2008. Before that, little attention was paid to how to deal with anti-monopoly issues.  

Chinese enterprises were unclear on what moves would be defined as a “monopoly.” After the three pharma companies in Shandong Province were fined in 2020 as mentioned above, two of them sued the SAMR two months after they were fined. They denied conspiring to become what SAMR called a “co-subject” of monopoly, saying they were independent. The SAMR responded that they had unified or coordinated ideas in the transactions of injectable calcium gluconate. The media did not reveal the final ruling.  

In the 2021 interview with social media news outlet Art of Wealth and Health run by Caijing magazine, lawyer Hou Zhanghui said that any time drug enterprises are fined for monopoly, many others flock to lawyers to consult about whether their practices could be defined as a monopoly.  

The SAMR in 2021 issued guidance on what characterizes a monopoly in the drug business. It said that bulk drug enterprises face a big risk of monopoly due to the small number of producers and highly concentrated market, and the guidance aims to help them improve compliance.  

Sun Jin emphasized the importance of such risk control. He said enterprises should invite experts to tailor a risk control program or set up an internal anti-monopoly system, so firms are aware of their behaviors during daily operations.  

However, Sun and Li agreed that merely imposing huge fines on companies is not the way forward, mainly due to the already small number of producers.  

“We can’t finish an enterprise off with a single fine. The heavier the punishment, the bigger the deterrence, but if it’s too heavy punishment, it will negatively influence the healthy development of the industry,” Li said.  

Sun said curbing the monopoly means having more suppliers and producers to form effective market competition.  

In 2017, the National Medical Products Administration issued a document on adjusting the approval for bulk drugs, pharmaceutical aids and medicine packing materials, replacing the former approval system with a registration system. In December 2021, the NDRC issued a program to promote the high-quality development of the bulk drug industry, proposing to encourage innovation and manufacture of specialized bulk drugs. Experts believe this will attract more enterprises.  

Li believes it is more important to improve policies to encourage high-quality development of the industry, including the approval system, environmental protection policies and innovation encouragement. “We may, for example, lower the threshold for entering and surviving in the bulk drug market, granting more government allowances for green production and increasing input in the research and development of patented drugs,” he said.