Medtronic being fined by Chinese regulators tolls the bell

The Shanghai branch of US-listed medical equipment maker Medtronic was recently handed a fine of 118.5 million yuan ($17 million) for monopolistic behavior by China’s top pricing regulator, the first such penalty for a foreign company in the medical device sector. Although international media generally interpreted the event as China’s effort to “use the law targeting foreign companies” to “help domestic champions”, Chinese regulators insist they are aiming to promote consumer welfare and economic efficiency.

The National Development and Reform Commission (NDRC), China’s economic planning agency tasked for anti-monopoly enforcement, said it had fined Medtronic (Shanghai) Management Co for its price-fixing behavior related to cardiovascular and diabetes medical device products. One day after the fine was announced on December 7, Medtronic released an e-mail statement, claiming it accepts the NDRC's decision, and the company is committed to ensuring that they are in full compliance with local laws and regulations.

Consumers’ interests

“The surprise inspection didn’t go well at the beginning. Over 40 of us were stuck in Medtronic’s China headquarters for over six hours from 9 am till 4 pm. There was resistance all along. In accordance with related laws, we finally got to search some business venues and found the person in-charge hidden in his office drinking coffee,” Xu Xinyu, a NDRC official involved in the activity later disclosed some details.

Xu noted the NDRC began to investigate Medtronic from 2013. The state planner’s official website clearly stated reasons for penalizing the US medical device manufacturer: at least from 2014, Medtronic had reached monopolistic agreement with its trading counterparts (distributors and local partners) through distribution agreement, e-mail notice and verbal negotiation, in an effort to fix prices and set lower limits on the resale price to hospitals.

Medtronic has put limits on target customers and areas, restricted competition among distributors, in order to assure effects of vertical price-fixing. The NDRC said, “Medtronic is an industry leader in manufacturing cardiovascular and diabetes related medical devices. Its behavior of strictly limiting resale prices has eliminated competition among distributors, medical device brands and maintained high prices. The market pricing mechanism has been inhibited from playing its role; patients are burdened (by high-priced products) and consumers’ interests are sabotaged.”

The commission’s director of antitrust department Zhang Handong said that investigations in the recent years’ have revealed that manufacturers would prohibit distributors from cutting prices and fix resale prices to maintain the high price level for their products.

Competition among distributors plays a key role in ensuring reasonable market prices at a time when high-end implantable medical equipment market competition is not mature in China.

Xu Xinyu explained that considering the products and sales involved and Medtronic’s coordination and rectification actions later, the company was fined 4% of its sales revenue in 2015.

Controversial practices

Medical equipment manufacturers like Medtronic use exclusive agents and agents of various levels to sell their products to hospitals. For example, the price of an imported heart bracket is 6,000 yuan on CIF basis, while when it reaches patients after going through several agents, its price rises to 38,000 yuan or at least 30,000 yuan.

Application of interventional therapy to cardiovascular diseases is on the rise in recent years, with number of heart brackets used for coronary disease amounting to 680,000 in 2015, based on statistics provided by the National Health and Family Planning Commission. Some NDRC official who don’t want to be named said that high profit has led to the high-end medical device being recommended to patients who may not need them.

The CCTV on December 7 reported that the NDRC began to conduct an investigation into the Medtronic business from last October and after collecting sufficient proof, it made a surprise raid on the company’s Shanghai branch.

According to Chinese news resources, the investigators found a large number of internal e-mails proving Medtronic’s price-fixing behavior. “It had over 30,000 e-mails on its server and we collected 105 related e-mails that could prove its illegal practices,” said Wu Dongmei, an NDRC official involved in the probe.

One of the internal e-mails said that there was a type 1 diabetes patient in a children’s hospital who hoped to purchase a 712-model insulin pump and was inquiring about prices everywhere. “It is hoped that all colleagues could safeguard the prices,” the e-mail asked all inquired distributors not to cut prices.

Medtronic’s China unit already made headlines earlier this year by promising in a high-profile way to provide all its sales people sedans for transportation. Medtronic China had its annual meeting on June 15 and announced that it would become the only company to provide sales persons cars for business use.

The generosity is believed to derive from the company’s high profits. According to the earnings report for Q1 of fiscal year 2017 ending July 29, 2016, the company’s China operation made a profit as high as $7.166 billion.

Antitrust enforcement expected to continue

It is a common practice worldwide to give a leading company a big ticket to warn all the other players in the industry. Zhang Handong, the NDRC director in charge of anti-monopoly bureau, admitted the objective of the Medtronic case was to warn and instruct other players and promote fair competition in the medical equipment manufacturing industry.

One shared concern is whether the Medtronic case marks the beginning of antitrust enforcement in the industry. From 2013, the NDRC has begun to probe into the industry; it is insensible to predict one case would be enough. The automobile manufacturing sector exemplified the theory.

The NDRC initiated investigations targeting automobile producers from the end of 2011 till 2014, and handed its first tickets—12 Japanese carmakers fined a total of RMB1.2 billion. From 2014 till now, local NDRC offices and governmental agencies monitoring commodity prices have all fined many carmakers including Nissan, Audi, Chrysler, and Benz. Except for manufacturers, some distributors are also fined for illegal practices.

Since the implementation of China’s anti-monopoly law in 2008, the related enforcement departments tend to focus on a specific industry or sector during a certain period due to limited experience and shortage of personnel. The investigation with a focus on a certain sector would usually last for several years. In the circumstances, the Medtronic case is predicted to be just a beginning.

A source familiar with the NDRC commission said the case sends the message that the focus for the commission next year would be medicine and medical equipment sector. 

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