On 1 June 2016, China’s National Development and Reform Commission (“NDRC”) formally launched a large scale and systematic antitrust and price inspection into China’s pharmaceutical and medical devices industries1. This follows questionnaires previously issued by the NDRC over the past weeks to companies active in the healthcare sector. The investigation focuses on compliance with both antitrust and other price-related laws.

WHAT THIS MEANS FOR YOU?

  • Companies in the sector who have already been contacted by the NDRC should ensure that any replies are prepared carefully, and are subject to legal review before submission. Any documents provided to the NDRC as part of the inspection should also be carefully reviewed.
  • Whether or not you have been contacted, you should – as a priority – consider auditing your business for compliance not only with the Anti-Monopoly Law, but also other applicable laws and regulations (for example, laws on pricing, bidding and anti-bribery).

SCOPE AND PURPOSE OF THE INSPECTION CAMPAIGN

The NDRC’s statement indicates that the focus of this campaign is to crack down on perceived price related violations in the healthcare industry.

The investigation follows earlier moves in China to deregulate pricing in the industry. On May 4, 2015, the NDRC (in association with other government agencies) issued a drug price reform policy, entitled “Opinions for Advancing Pharmaceutical Products Price Reform”. The policy officially withdrew government price setting for a large range of drugs. In the absence of explicit price controls, the NDRC appears keen to use means other than explicit price control at its disposal to crack down on perceived high prices for pharmaceutical and medical device products in China.

The NDRC has a broad remit, not only to police pricing violations of the Anti-Monopoly Law but also other regulations relating to pricing. The statement suggests that the NDRC is focused on a variety of issues, including:

  • Violations of the Anti-Monopoly Law (such as cartels, abuse of dominance and resale price maintenance);
  • Failure to implement prices for those pharmaceuticals still subject to price controls;
  • Misleading relevant price information; and
  • Other violations of the Anti-Monopoly Law and Price Law.

THE TIMELINE OF THE CAMPAIGN

The NDRC’s statement disclosed that this special inspection campaign will have three stages:

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NDRC’S EVOLVING APPROACH TO ANTITRUST INVESTIGATIONS

The approach outlined by the NDRC provides valuable insight into the tools used by the NDRC to conduct investigations. Some of these will be very familiar to industries used to market investigations and studies in other jurisdictions, such as the EU. In 2009, the European Commission conducted a high profile sector inquiry into pharmaceuticals, which begun, controversially, with dawn raids against a number of pharmaceutical companies.

  • The first phase – information gathering

The NDRC will first launch a broad ranging industry survey. This is usually done by collecting the information directly from the industry players by way of questionnaires. The questions will vary across different sectors, but will usually cover the company’s distribution model, pricing mechanism, and marketing strategy. Companies in receipt of such a questionnaire should respond with great care. The answers should be carefully reviewed by the company’s in house or external legal advisors. Any information provided to the NDRC can be used to establish infringements of the Anti-Monopoly Law, for which significant financial penalties may be imposed.

  • The second phase – the formal investigation

The NDRC and its local branches will typically send further information requests and may conduct dawn raids at companies suspected of violating the Anti-Monopoly Law. At this stage, the regulator typically requests and collects a large volume of commercial and business documents from the investigated companies.

The NDRC officials will sometimes summon the senior overseas management (including those based overseas) of the investigated companies for interviews – since the authority is well aware that the pricing strategies of multinational companies are often determined outside of China.

The NDRC may also require the investigated company to conduct a thorough internal audit, often within a short time frame.  The investigated company is usually required to submit the internal audit report to the regulator, which may then be used as evidence against it.

Prevention better than cure

The latest NDRC enforcement campaign shows once again the importance of effective compliance with antitrust law in China. Whilst the current campaign is sector specific, it shows the evolving approach to antitrust investigations by the NDRC, particularly the use of broad ranging market studies to identify violations of the Anti-Monopoly Law, which may be subsequently subject to individual investigations and (if proven) substantial penalties. It is likely that the NDRC will use similar techniques in other sectors where perceived concerns arise.

Businesses in all sectors in China should consider

  • Putting in place a protocol or other action plan in the event of a dawn raid. These surprise inspections can be stressful and need careful management. One particular risk which must be balanced is the need to ensure that the company’s employees do not (even inadvertently) obstruct the officials, but at the same time ensure that the company’s legal rights are protected.
  • Auditing their business practices for legal compliance;
  • Providing more comprehensive training to their employees; and
  • Implementing and monitoring internal compliance policies and protocols.