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Chinese Vitamin C Price-Fixing Case Could Alter U.S. Drug Market

Sept. 9, 2019, 9:22 AM

Drug companies have much at stake in long-running antitrust case in which Chinese vitamin C exporters are accused of conspiring to fix prices and to control the U.S. supply.

A loss for Chinese vitamin C companies could encourage similar suits, posing a threat to other manufacturers there, while a win for the vitamin C exporters would hurt the U.S. government and American pharmaceutical companies by taking away a key tool—antitrust law—for curbing China’s attempt to control the drug market, attorneys said.

“Taking that away will enable these Chinese companies to continue their strategy of dominating foreign markets through various means, including price fixing,” said Daniel C.K. Chow, a professor of business law at The Ohio State University Moritz College of Law.

The defendants—Hebei Welcome Pharmaceutical Co. Ltd., among others—argue that Chinese law compelled them to manipulate the market from 2002-2005. They, along with China’s government, argued the case should be dismissed on principles of international comity, or courtesy.

It’s been more than a year since the U.S. Supreme Court vacated and remanded the case back to the U.S. Court of Appeals for the Second Circuit, which originally ruled in favor of the Chinese companies. A new decision could come at any time.

While vitamin C is a dietary supplement and not a drug, the case’s outcome could have “profound implications” for the U.S. pharmaceutical industry, said Yanzhong Huang, a senior fellow for global health at the Council on Foreign Relations. China has become the largest supplier of active pharmaceutical ingredients (APIs) to drugmakers worldwide.

Be Less Deferential

The Second Circuit previously ruled in the case that U.S. courts must give deference to the way foreign governments regulate businesses within their borders.

“You can’t subject a client to criminal or other penalties if they’re just following the law of the nation in which they reside,” said Jonathan Jacobson, of Cohen, Wilson, Sonsini, Goodrich & Rosati, the firm representing the Chinese vitamin C exporters. “The stuff is all manufactured in China. All of the activity takes place in China. The material is shipped not just to the U.S., but all over the world. So why should the law of the U.S. trump the laws of the rest of the world?”

The U.S. Supreme Court vacated that decision in June 2018, saying U.S. courts aren’t “bound” to reach a conclusion based on the position of a foreign government, although they must “accord respectful consideration” to the way a foreign government interprets its own laws. The justices directed the Second Circuit to reconsider price fixing and market manipulation from a perspective less deferential to the Chinese government.

“The idea that you would give companies a get-out-of-jail-free card for clearly violating antitrust law, it’s an absurd notion, because that is a huge hole that the Chinese will drive a truck through,” said Robert Atkinson, an economist and president of the Information Technology and Innovation Foundation.

Chinese officials say price fixing was only mandated through 2008, when the government put an end to it, though many watching the case are skeptical that much has changed.

China’s “grand strategy” is to dominate global markets first through ramping up domestic production, Atkinson said. They then leverage that success by undercutting prices to gain international market share, drive out competitors, and finally control prices.

“If this case goes the right way, it’s one more tool we have in the arsenal to go after China’s innovation mercantilist practices” of maximizing exports and minimizing imports, he said.

Bigger Implications

The vitamin C case is being decided against the backdrop of a major trade war between the U.S. and China and as China moves forward with “Made in China 2025,” a strategy to increase the country’s global dominance in pharmaceuticals.

The case also comes as federal officials are growing increasingly concerned about the extent to which APIs from China have entered the U.S. drug supply and the potential national security and public health threats.

“The vitamin C case lays out China’s playbook for how it will gain control over the supply of our medicine through price fixing and controlling supply to the United States—and this is why we’re having to import all the active pharmaceutical ingredients and raw materials from China,” said Rosemary Gibson, a senior health care adviser at The Hastings Center, a bioethics think tank.

“The same playbook will be used for our generic medicines, which are 90% of the drugs we take,” said Gibson, who is also the author of “China RX: Exposing the Risks of America’s Dependence on China for Medicine.”

“When we lose control over supply, we lose control over price,” she added. “China will be the price setter and we will be the price taker.”

The problem has gotten the attention of the federal government. “The national security risks of increased Chinese dominance of the global API market cannot be overstated,” said Christopher Priest, a senior official at the Defense Health Agency, which oversees medical services for the armed forces, at a July 31 hearing before the U.S.-China Economic and Security Review Commission.

“There is no required registry for API sources, making it extremely difficult to gauge the extent of the risk,” Priest testified. “Based on reports of China’s increasing control of APIs, there is risk that existing regulations, programs, and funding are insufficient to guarantee U.S. independence from unreliable foreign suppliers.”

Shortages, Contamination

The pending decision by the Second Circuit will be critical, as its original opinion “legitimized cartel behavior for all medicinal products,” Gibson said.

If the U.S. companies lose, it will make it easier for China to “drive the U.S. out of production,” she added. “It means we are losing our capacity to make our own medicines. When the supply chain and manufacturing is centralized largely in a single country, those supply chains create risks of drug shortages.”

Notably, China has previously cut off the international supply of a product during a foreign disagreement. In 2010, China briefly stopped the flow of rare earth minerals to Japan during a territorial dispute. Japan ultimately found rare earth deposits within its own territory, but that action signals a willingness by China to weaponize its dominance in international supply chains.

China-sourced contaminated and counterfeit APIs have already led to public health emergencies in the U.S. For example, 81 people died in 2008 after contaminated China-sourced ingredients were found in heparin, a drug that prevents blood clots. Similarly, recalls of China-sourced blood-pressure medication valsartan began in July 2018 after it was discovered that the drug contained a carcinogen found in rocket fuel.

“China’s manufacturing drug quality is not nearly on par with the United States, and we will see that quality decline,” Gibson said. “Patients will see more shortages, they will see poor quality.”

To contact the reporter on this story: Valerie Bauman in Washington at vbauman@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com; Randy Kubetin at rkubetin@bloomberglaw.com