Antitrust Challenges in Pharma Distribution: A New Era

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Antitrust Challenges in Pharma Distribution: A New Era

The Pharma business has historically been on the radar of the antitrust authorities. Although free competition plays crucial role in ensuring that patients receive better products at affordable prices, the industry is heavily regulated across the world. This is explained, according to the WHO, amongst other things, "by serious consequences, including injury or death, which can result from the lack or misuse of medications and by impossibility for the patient to determine product quality". Still, freedom of market behavior should not be limited beyond what is absolutely necessary to protect the public interest and policy makers need to aim for ideal balance in this regard.

The Antimonopoly Committee of Ukraine (AMCU) also closely follows how market players behave. With the main focus on assessing concentrations, it also started digging into more complex and problematic issues, such as unjustified marketing services and potentially abusive practices in pharma distribution and retail which, by definition, have more potential to harm competition and consumers' interests. The AMCU once again demonstrated recently that it takes matters very seriously and will not tolerate non-compliance. At the end of 2016 the AMCU completed two major investigations (and several more are pending) into the suspected anticompetitive concerted practices between each of two manufacturers of pharmaceuticals — Alcon and Servier — on one side, and several Ukrainian distributors of pharmaceuticals, on the other, resulting in fines running into millions of UAH.

In the AMCU's view, implementation of retroactive rebate schemes between the manufacturers and the distributors allowed the latter to allegedly circumvent pricing regulations on maximum margins and charge higher prices in tender proceedings if compared to prices at which the same products were sold to pharmacies. Below we provide discussion of certain aspects of the existing decisional practice which appear somewhat ambiguous and may need further elaboration.

Qualification: anticompetitive concerted practices

In the decisions of Alcon and Servier the AMCU concludes that a network of distribution agreements represents anticompetitive concerted practices violating competition rules. However, it remains arguable as to whether the mere existence of an agreement can be regarded as "anticompetitive practice" under the Competition Law. Whether the agreements actually helped the companies align their competitive behavior is not expressly discussed in the decisions. The authority rather focuses on the analysis of abusive pricing strategies, while the existence of concerted practices is presumed.

On the other hand, in asserting the violation the AMCU relies heavily on the arguments based on the alleged market power of manufacturers. First, in assessing the market position of manufacturers, the AMCU takes a rather dogmatic approach to the market definition, concluding that some of the medicines in question are "unique" and have no substitutes, unless the latter are based on exactly the same molecule, have the same galenic form and route of administration, etc. This results in an allegation that the manufacturers hold a dominant (if not monopolistic) market position with respect to such medicines, enabling them to "control the market". Second, having started a discussion on abusive pricing practices by a potentially dominant undertaking, it might have been appropriate to assess whether retroactive rebate schemes constituted a potentially abusive unilateral behavior. Previously, the authority already reviewed a case involving setting prices by TAS-Pharma pharmacy in breach of statutory pricing regulations where the AMCU concluded that the pharmacy violated competition laws by abusing its dominant position. However, there is no indication if the authority intends to further analyze "control over the market" or other circumstances affecting price formation processes in an abuse of dominance context.

In the EU, the substantive analysis of retroactive rebates scheme rather focuses on whether such scheme is capable of having an exclusionary effect (ref. decision of the European Court of Justice in Post Dan-mark ІГ) and include, in particular, evaluation of the (i) criteria and rules governing the grant of rebates, (ii) the extent of the dominant position of the undertaking concerned and (iii) the particular conditions of competition prevailing on the relevant market.

Anticompetitive aim or effect

In vertical (e.g., distribution) arrangements the anticompetitive aim and effect on competition may be presumed only if the parties agree on hard-core restrictions, e.g., on resale prices. Otherwise, to prove that "concerted practices" are harmful to competition, an anticompetitive aim or effect must be demonstrated.

In the Alcon and Servier cases the adverse effect is linked to suspected violation of regulatory rules on maximum margins in tender proceedings as a result of application of retroactive rebates. Though in order to prove restriction or other adverse effects on competition one has to show that the market conditions changed negatively afterwards and because of the introduction of the rebates. Otherwise, if companies involved have sound commercial reasons for introducing a rebates scheme and there is no causal link between such scheme and adverse effect on competition (if any), it appears difficult to justify a conclusion that a rebate was anticompetitive.

Generally, the issue of retroactive rebates is quite controversial and, needless to say, such practices may be employed in an abusive manner and, under certain circumstances, result in unjustified price increases by dominant undertakings or otherwise harm competition. However, it appears that the central issue in today's discussions over the existing practices in pharma distribution is whether the manufacturers and other entities down the chain comply with regulatory rules, particularly with regard to pricing. This clearly is a more complex issue which goes beyond the antitrust context and, thus, cannot be fully and effectively resolved by the instruments designed to protect and promote competition.

Both Alcon and Servier decisions have been contested in court by Servier and distributors. At the time of writing the review was in courts of first instance, so it is not the end of the story and it remains to be seen whether the courts support the AM-CU's position on retroactive rebates.

Broader context

If we take a wider look at the existing situation, the question is whether the regulatory rules in place are sufficient and effective to achieve the aforementioned goal, namely better access to drugs at affordable prices. In pursuit of this goal legislators may not always take account of what effect the regulatory measures influencing pricing strategies of market players may have on the competition environment. This is when the antitrust authorities come into play to ensure that the anticipated positive effect on retail prices does not jeopardize competition or even force manufacturers to withdraw from the market due to un-profitability. It is the antitrust authority which is best positioned to tackle potential competition concerns and help find the optimum balance.

Since the AMCU started publishing its decisions in mid-July 2015, its approach on many policy matters has become more transparent for businesses. By issuing a comprehensive report in 2016 on the functioning of the pharmaceuticals market the AMCU took transparency to a new level in an earnest attempt to develop an integrated approach to market analysis. Generally, the authority is becoming more receptive to the market's feedback on policy proposals, which is another positive trend in the industry. The latest AMCU initiative of organizing public discussions and working groups on strategic matters also shows a further move towards dialogue. The extent to which such dialogue will be constructive and beneficial to all parties involved depends in particular on the pro-active position of market players in finding the right compromise between the necessary restrictions validated by public interests considerations and free competition.

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