On November 22, 2016, the AMCU published the results of pharma market survey for 2014-2016 and evaluated the compliance with competition law requirements by the main players of pharma market (manufacturers, importers/distributors, pharmacies). The AMCU’s report provides the details on logistic structure of medicinal products supply to the territory of Ukraine and the peculiarities of cooperation between the players, as well as the pricing components to include the prices for end customers.
According to the AMCU, the competition of pharma market may be influenced not only by noncompetitive behavior of market players, but also by the activities of public authorities legally bound to regulate these markets by creating administrative barriers for entering the market or imposing the red tape on the players already operating on the market during the exercising of their authorities. In particular, the Report emphasized that the described burdens appear in the course of MOH, State Administration on Medicinal Products, public enterprises activities with regard to:
The Report mainly focuses on the operation of business entities at product market and the pricing at each stage of medicines sales. Thus, the AMCU carried out its research in the following areas:
In its analytical report the AMCU provides the details of the interactions between manufacturers/importers and distributors, and indicates the contract provisions bearing the risks to be qualified as competition violations. In the AMCU’s opinion, medicinal products’ export ban, the liability to prevent the third parties from products export from Ukraine, the obligation to provide the reports and the implementation of payment terms that ensure the pharma company’s control over the goods flow at medicines markets of Ukraine testify the market distribution and competition restriction. In their turn, the distributors agree to these terms in exchange for discounts provided by manufacturers. The AMCU believes that the discount system raises a lot of due diligence questions, as this system bears the evidence of duplicate pricing, which hampers the competition development and does not reduce the price for the end customer.
In its Report the AMCU pays special attention to the pricing issues with regard to the discounts provided by the manufacturers/importers to the distributors. In particular, the AMCU notes that the case materials show that the discounts received by the distributors do not provide for price reduction for those who buy and consume medicinal products. In fact, when the suppliers provide Ukrainian distributors with additional discounts for medicinal products that were sold via public procurement procedure, the distributors, with the connivance of suppliers, merchandise these medicines through public procurement procedure at the prices higher than the selling prices for these products for pharmacy chains. The AMCU determined that these business practices, mainly regarding the development of nontransparent payment terms, lead to the restriction of parallel import of medicines to Ukraine and concealed yield enhancement of certain distribution market players. Therefore, these players are provided with additional improper advantages and opportunities for price manipulation under public regulation, which results in improper advantages as well. Moreover, the AMCU found out that discounts used by the company and the distributors may serve as a mechanism for market distribution based on territorial principle, products range, set of buyers or consumers.
The AMCU has already employed the abovementioned approaches and imposed a penalty for anticompetitive concerted actions on Alcon Pharmaceuticals Ltd. and «Servier Ukraine» LLC, as well as on Ukrainian distributors. Currently, as stated in the Report the AMCU conducts the investigation on cases with the participation of distributors and importers of «Roche Ukraine» LLC, «Sanofi-Aventis Ukraine» LLC, «GlaxoSmithKline Pharmaceuticals Ukraine» LLC, «Teva Ukraine» LLC, «Bayer» LLC.
Legal Alliance in its publications has already discussed the issues related to distribution agreements and discount.
Moreover, the AMCU assessed the impact of national and foreign manufacturers/importers and distributors on pricing. In the course of the survey the AMCU made a conclusion that the main objective factors influencing the pricing on medicines’ market were the following: Ukrainian currency exchange rate, inflation rate, changes in taxation system, introduction of additional import fee. For more detailed study the AMCU analyzed the price formation for the marker group of medicinal products, which was comprised of 161 medicinal product including 50 products of national origin and 111 product of foreign manufacture. At the beginning of the survey, upon the analysis of purchase and sale policy of domestic distributors, the repeated cases of price advances, outpacing the increase dynamics of foreign currency exchange, were found during the period from January till April of 2014. In order to prevent the breach of economic competition protection law, on March 5, 2015, the AMCU provided the recommendations obligatory for consideration. The AMCU recommended the largest Ukrainian distributors to withhold the establishment of economically unreasonable wholesale and retail prices for medicinal products. Having analyzed the pricing in manufacturer/importer-distributor chain, the AMCU made a conclusion that in the course of interaction with Ukrainian manufacturers the medicines’ costs were adjusted by such manufacturers on their own resolution. The further analysis revealed that the changes in dynamics of the prices used by domestic distributors to procure medicinal products of national origin testify the connection between the escalation of prices and currency rates. The evaluation of contractual relations with foreign manufacturers and importers confirmed that during the investigated period, which corresponds to the period of unstable economic situation in Ukraine, the supply terms did not undergo substantial transformation. During the period of unstable economic situation the evidences of medicines prices in foreign currency were not found, although the agreements envisage the change in price on the manufacturer’s own discretion. Purchase and sale operations of domestic distributors with medicinal products of foreign origin purchased for foreign currency are characterized by the inclusion into the wholesale and retail price of financial risks related to currency exchange rates fluctuation at interbank market during the period of economic instability in Ukraine.
Moreover, the AMCU illustrated in its Report the situation with the reevaluation by the distributors of medicines stock prices due to currency exchange rates fluctuation. The AMCU points out that the main ground for such reevaluation is the Cabinet of Ministers Resolution No 333 dated 25.03.2009, which determined that the price for one imported unit is calculated in consideration of interbank hryvnia exchange rate for each day of product sale. This automatically leads to the reevaluation of medicinal products and medical devices purchase for foreign currency. In addition, the AMCU notes that the same approach is used by the distributors to unregulated group of medicines. As a result, all risks related to the escalation of currency exchange rate at interbank currency market are imposed on the end consumer. The AMCU also points out that according to the distributors, except the interbank currency exchange rate fluctuation, it is possible to re-evaluate (markup/markdown) the price for medicinal products as of the date of balance making and during the reporting period. The markup pricing during the reporting period (at the beginning of each month, in certain cases – at the date of new products supply) is regulated by the Procedure for pricing re-evaluation of inventory balance. As a result, the situation occurred when the Resolution of the Cabinet of Ministers of Ukraine and National Bank of Ukraine became void, and the approved in its pursuance joint act of the Ministry of Economy of Ukraine and the Ministry of Finance of Ukraine continue to be applicable for the business entities of wholesale and retail trade, bearing the signs of market power at the corresponding product markets. In the AMCU’s opinion the reevaluation of medicines’ prices due to the changes in the cost of new batch of products, allows establishing such selling prices for medicinal products that would be impossible to establish upon the existence of significant competition of the market.
In the course of the survey the relations between the distributors and pharmacies have been analyzed within the process of medicines’ retail sales. The AMCU emphasized that the majority of pharmacy chains, despite the incorporation form, during the organization of their retail sales of medicinal products render marketing services to medicines’ importers and national manufacturers. As it was identified during the Report preparation, the parties may envisage financial incentives in such marketing agreements, depending on products sales volume procured under the agreements with distributors and/or manufacturers/importers/other market players. If such financial incentives
there is a high risk of prosecution for the violation of economic competition protection law.
It is worth to mention that during the study on regional markets the Committee determined the structural features of monopoly (dominant) position at investigated regional markets of 183 business entities that conduct retail sales of medicinal products in the form of pharmacy chain. The tendencies for pharmacy segment development in Ukraine regarding the market consolidation by the increasing the role of medicines’ retailing chain, in certain cases may lead to the situation when strong players with the signs of monopoly position on regional markets, shall gradually merge the weaker competitors to include by joining them to existing pharmacy chains and hence strengthening their share in the market. The AMCU believes that taking into consideration the currently existing competition situation on medicines’ retail market, the market players should implement the self-regulation market mechanism together with the establishment of general principles of professional ethics for all market players. This shall let the pharmacy chain, being a healthcare facility according to the law, to target mainly the patients in order to maintain their health.
The Report also includes the AMCUs proposals for public regulator as well as for business entities regarding the securing of effective competition of pharma market. In particular, the AMCU suggests the pharma market players to take actions aimed at the introduction of effective mechanisms of product markets self-regulation together with the implementation of generally binding rules of professional ethics.
Legal Alliance experts plan to analyze in more details the AMCU’s conclusions and to provide market players with the recommendations regarding the further actions within the framework of Summary Conference «PHARMA BUSINESS: 2016 CONCLUSIONS – 2017 ANTICIPATIONS».
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