Review of the Annual Report of the Antimonopoly Committee of Ukraine on the Pharmaceutical Industry
Andrii Gorbatenko, Legal Alliance Company, associated partner
The Antimonopoly Committee of Ukraine issued a report for 2016. The first thing that catches our eye is form of the report. This is the first report of the Antimonopoly Committee of Ukraine, and indeed the first report of a state body (at least from those that I have seen) presented in a graphic illustrative form.
The report is very interesting, as it contains a lot of cognitive information about the markets of Ukraine and the factors that influence competition on them. If we fully analyse the report, this publication will be as long as at least a brochure, and to print it, it would be necessary to cut down 2 hectares of forest. Therefore, we will concentrate only on the aspects of the report devoted to the analysis of the pharmaceutical markets.
The report highlighted key issues that adversely affected the competition in the pharmaceutical market in 2016. A number of the problems are tendentious in nature, thus they can also be considered issues the Committee will solve in 2017.
In particular, according to the Antimonopoly Committee of Ukraine, high material and technical requirements to storage facilities established by licensing conditions led to the concentration of market power in hands of the largest market operators. To mitigate the negative impact of this factor on competition, the Antimonopoly Committee of Ukraine suggested that developers of new licensing conditions for wholesale trade in medicinal products provide for a transition period that will allow business entities to adapt to new requirements. This proposal was taken into account by the developers. In such matters usually it is not easy to find a "golden mean", since high material and technical requirements are dictated by harsh necessity to ensure proper control over quality and safety (of production, consumer, environment, etc.). Moreover, in the event of a change in the licensing conditions for the wholesale trade in medicinal products, it was a question of introducing universally recognized standards of good distribution practices (GDP).
Another problem of the pharmaceutical market, to which the Antimonopoly Committee of Ukraine draws attention in its report, is overpricing of medicinal products caused by their revaluation in accordance with the procedure prescribed by the Procedure for the Appraisal of Inventory Balances approved by Order of the Ministry of Economy of Ukraine and the Ministry of Finance of Ukraine No. 37-20/248/07-104 as of May 31st, 1993. To eliminate this problem, the Antimonopoly Committee of Ukraine proposes to abolish the above Procedure. In this regard, I would like to note that there are serious doubts that the abolition of the Procedure can solve the problem. In this case, we are talking about the fact that distributors, as a rule, reassess remnants of medicinal products supplied by foreign suppliers due to the depreciation of hryvnia. We do not think that here the market leaves a choice to distributors. The refusal to recalculate hryvnia value of medicinal products which were purchased for a foreign currency, taking into account that distributors formed three-and-more-month commodity stocks, and also galloping inflation, will cause losses to distributors.
Another trend threatening the competition, which was noted by the Antimonopoly Commmittee of Ukraine in the report, is the tendency of the pharmacy segment to consolidate. The Antimonopoly Commmittee of Ukraine arrived at the conclusion that currently players (pharmacy chains) which seems to have monopoly (dominant) position in the regional markets are appearing in this segment of the market. Let us remind you that during the study of regional drug markets, a report on which was published by the Committee in 2016, structural features of the monopoly (dominant) position of 183 business entities engaged in retail trade in medicinal products through pharmacy chains were reveiled in the studied regional markets. Also, there was a tendency for strong competitors to absorb weaker ones. In this regard, it should be noted that the pharmacy segment is virtually the only channel for selling medicinal products to end consumers. Thus, large pharmacy chains can influence supply in the market and, as a consequence, can limit the consumer’s choice to the most profitable medicinal products.
In addition, one of the common problems adversely affecting competition in the pharmaceutical market is the lack of effective self-regulation mechanisms. In its report the Antimonopoly Committee notes that in 2016 cooperation with public organizations was initiated to develop professional ethics rules envisaged by the draft Code of Ethical Activities of Pharmacy Institutions. The Code can be an effective tool for self-regulation of the service market in terms of the organization of retail trade in medicinal products. It should be noted that the effectiveness of such tools largely depends on the readiness of strong market players to act as drivers of this process, undertaking additional obligations and restrictions that may run counter to their business interests in the short term, but be a guarantee of stable civilized growth. Time will show whether the business is ready for such steps.
Further, the report highlights a number of issues related to public procurement of medicinal products, namely:
- imperfection of legal regulation of public procurement of consumables for hemodialysis;
- untimely declaration of ex-factory prices for medicinal products, which leads to the impossibility for business entities to participate in public procurement;
- formulation of the procurement subject by specifying a specific dosage of a medicinal product.
Undoubtedly, the report could not ignore the loud decisions made by the Antimonopoly Committee in cases regarding the distribution contracts of two international pharmaceutical companies.
In this regard, the report is quite interesting as it points provisions in the contracts that led to the qualification of actions of producers and distributors as anticompetitive concerted actions. In particular, such provisions include territorial sale restrictions (prohibition on export of medicinal products outside Ukraine), preconditions for limiting parallel imports (obligations to prevent third parties from exporting goods outside Ukraine); obligations to provide reports and introduce payment conditions that ensure the control of a pharmaceutical company over commodity flows in the medicinal product markets in Ukraine.
Such conditions, according to the Antimonopoly Committee of Ukraine, attest to the division of the commodity market and the restriction of competition. In addition, the Committee came to the conclusion that the discount system envisaged in the distribution contracts led to double pricing, which did not promote competition and did not reduce final price for consumers.
With regard to discounts, it is also worth reminding that upon consideration of cases, the Antimonopoly Committee of Ukraine came to the conclusion that discounts granted to distributors do not lower prices for buyers and end consumers of medicinal products. On the contrary, in cases where suppliers provide additional discounts to Ukrainian distributors for medicinal products that were sold through public procurement procedure, distributors, with the tacit consent of suppliers, sell medicinal products through public procurement procedure at prices higher than the prices at which these drugs are sold to a pharmacy chain. The Antimonopoly Committee of Ukraine found that such customs of business turnover, in particular, with regard to non-transparent terms of payment, curb parallel imports of medicinal products to Ukraine and lead to hidden increase in the earnings of individual members of distribution markets, providing them additional unreasonable competitive advantages, as well as the possibility of price manipulation in conditions of state regulation, which also provides unreasonable competitive advantages. In addition, the Antimonopoly Committee of Ukraine found that the use of discounts by a company and distributors can serve as a mechanism for distributing markets on a territorial basis, assortment of goods and circle of buyers or consumers.
It is difficult for us to agree with some conclusions of the Antimonopoly Committee of Ukraine in this part. It is for the court to settle this matter.
It can be concluded with confidence that the Antimonopoly Committee of Ukraine in 2016 did a great work that brought activities of this state body and its results to a qualitatively new level. However, not all decisions which were made, in particular, decisions on medicinal product distribution agreements, clarified perception of the boundaries between the permitted conduct of market participants and violations. This circumstance, as well as the tendentious nature of most problems in the field of competition in the pharmaceutical market leave a wide room for the activities of lawyers working in this area.