Competition law enforcement in the pharmaceuticals sector in Ukraine

1. Is there any specific regulatory framework that deals with competition regulation in the pharmaceutical sector in your country?

The pharmaceutical sector is covered by general competition regulations, including:

  • Law of Ukraine “On the Protection of Economic Competition”;
  • Law of Ukraine “On the Protection against Unfair Competition”;
  • Law of Ukraine “On the Antimonopoly Committee of Ukraine”,

as well as subordinate regulations adopted in line with these laws, including typical requirements for vertical concerted actions of undertakings regarding the supply and use of goods, which is the Ukrainian version of the EU’s Block Exemption Regulation.

Additionally, the Antimonopoly Committee of Ukraine (the “AMCU”) issues recommendations (“recommended clarifications”) on its approaches to competition enforcement in particular sectors. Such recommendations are in place for the pharmaceutical sector, namely AMCU Recommendations on vertical concerted actions on the supply and promotion of medicines dated 21 February 2019, #5. These were the result of a comprehensive inquiry by the AMCU into the sector and subsequent number of cases against the international pharmaceutical companies and the largest Ukrainian distributors.

Under the EU-Ukraine Association Agreement, Ukraine undertook to approximate its competition laws and enforcement practices with the relevant part of the EU acquis. This process is ongoing. In particular, a draft law is currently under discussion concerning comprehensive amendments to competition legislation, aimed at reforming the relevant legislation, strengthening the AMCU’s powers to effectively investigate competition breaches, and ensuring further approximation of Ukrainian competition law with the EU acquis. 

2. Which authorities are entrusted with enforcing these rules?

The AMCU is the key body entrusted with enforcing these rules. In very specific cases, the Cabinet of Ministers of Ukraine also plays a role, in particular as an “appeal” body if the AMCU refuses to authorise particular concerted actions or concentrations.

Decisions by the AMCU may be appealed in court. 

3. What actions can authorities take to tackle anticompetitive conduct and what remedies can they impose?

The actions authorities can take to tackle anticompetitive conduct in the pharmaceutical sector and remedies that may be imposed are non-sector specific.

In particular, the AMCU or Cabinet of Ministers of Ukraine can refuse to authorise  concerted actions or a concentration of undertakings which, in their opinion, constitute anticompetitive conduct.

The AMCU may initiate cases for a breach of competition legislation and has quite substantial investigative powers in this regard. When considering such cases, AMCU can:

  • issue recommendations to undertakings (mandatory for consideration) regarding ending activities that may potentially breach competition legislation, eliminating the causes of these breaches and conditions conducive to them, and if a breach has been ended, regarding eliminating the consequences of these breaches.
  • issue a decision, among others, to:
    • end the breach;
    • block securities;
    • eliminate the consequences of breaches, in particular eliminate or mitigate the negative impact of concerted actions, and the concentration of economic entities on competition;
    • revoke the authorisation for concerted actions in certain cases;
    • impose fines of up to 10% of the revenue of the undertaking or group of undertakings worldwide for the last reporting year preceding the year in which the fine is imposed, or of triple the amount of profit arising from the prohibited activity (whichever is higher), depending on the breach;
    • decide on the compulsory division of a dominant undertaking (in the case of an abuse of dominance);
    • officially refute previously disseminated false, inaccurate or incomplete information (in cases of the discreditation of an undertaking).
  • apply to a court concerning competition legislation breaches, among others, to:
    • terminate an agreement;
    • collect fines and penalties not paid voluntarily;
    • end competition breaches;
    • enforce an obligation to comply with an AMCU decision;
    • seize goods with unlawfully used designation and copies of products of another undertaking;
    • seize property, documents, and media in places of residence and other possessions of a person.

4. Can remedies for damages suffered due to anticompetitive conduct be sought through private enforcement? What kind of remedies and how can they be obtained?

Yes. Under the effective legislation, any person who incurs damages due to a breach of competition legislation may apply to court for compensation of such damages. Damages for specific competition breaches (e.g. anticompetitive concerted actions, abuse of monopoly position) will be compensated to a value of twice the damage caused.

So far, private antitrust actions have not been widespread in Ukraine, although there have been a few successful cases. 

5. Has the antitrust authority conducted any sector-wide inquiry into the pharmaceutical sector in your country and, if so, what were the main observations and consequences?

Yes. The AMCU has conducted several inquiries into the pharmaceutical sector in the last ten years, focusing mainly on vertical relations between pharmaceutical companies and their distributors, as well as (on a much smaller scale) on the marketing practices of pharmaceutical companies and pharmacy chains.

The last comprehensive investigation by the AMCU into the pharmaceutical market was in 2014–2016 and culminated in a report on the results of an investigation into the pharmaceutical markets (in Ukrainian).

In this report the AMCU noted that:

  • existing pricing regulations in Ukraine (including maximum wholesale and retail mark-ups for specific medicinal products, e.g. those supplied for public funds) were not effective in ensuring pricing accessibility of medicinal products for final consumers;
  • Ukrainian distributors and pharmacies typically received revenues consisting of: (i) the value of the applicable mark-up compared to the supplier’s price; and (ii) additional revenue received due to applied bonuses, discounts, provided marketing services, etc. Additional revenues may also pertain to the supply of medicines, regarding which maximum permissible mark-ups apply;
  • Ukrainian legislation did not regulate the promotion (marketing) of medicinal products, including by pharmacies;
  • the Ukrainian distributor market was characterised by several distributors holding significant market power, etc.

Based on the results of the AMCU’s inquiries, the AMCU initiated a number of high-profile cases for anticompetitive concerted actions targeting mostly international pharmaceutical companies and their local distributors, in which significant fines were imposed. The most recent cases are described below.

6. What is the rate of enforcement of competition laws in the pharmaceutical sector in your country in the last three years? Is it high compared to other sectors?

The rate of enforcement of competition laws in the pharmaceutical sector in Ukraine has remained quite high over the last five years. The AMCU continuously keeps close attention on the pharmaceutical market given that socially important goods are involved. 

In particular, key AMCU decisions regarding pharmaceutical market players in 2018–2020 were:

  • the 2018 decision against a local subsidiary of a top-five global pharmaceutical company and its distributors for anticompetitive concerted actions, namely setting prices for medicines which resulted in overpricing in tenders. Penalties amounted to EUR 276,240 for a pharma company, and a total of EUR 271,370 for distributors;
  • the 2019 decision against a local subsidiary of a top-ten global pharmaceutical company and its distributors for anticompetitive concerted actions in the form of setting prices for medicines sold via tenders. Penalties amounted to EUR 145,915 for a pharma company, and a total of EUR 113,885 for distributors;
  • the 2019 decision against a local subsidiary of a top-five global pharmaceutical company and its distributors for anticompetitive concerted actions, albeit small-scale, with a minor effect on public spending. Obligatory recommendations were issued to stop the anticompetitive practices, but no fine was imposed;
  • the 2019 decision against a Ukrainian manufacturer for an abuse of dominance on the national market of normal human immunoglobulins for intravenous use. Penalties amounted to EUR 68,180;
  • the 2020 decision against two non-resident entities of a global pharmaceutical company and their Ukrainian distributors for anticompetitive concerted actions in the form of setting prices for medicines. Penalties amounted to EUR 4,112,120 for two pharma companies and a total of EUR 1,584,850 for distributors.

All cases involving penalties have been appealed, some successfully while some are still pending.

7. What type of anti-competitive conduct is most common in the pharmaceutical sector in your country?

In a majority of competition cases in the pharmaceutical sector in the last decade the AMCU has accused pharmaceutical companies and their distributors of engaging in anticompetitive concerted actions, which resulted in alleged groundless increases in prices on products supplied for tenders. 

The background to this is the effective pricing regulation for medicinal products sold with public funds, introduced during the crisis of 2008–2009. Under this regulation (often heavily criticised), a distributor’s mark-up on the resale of medicinal products procured with public funds has been limited to a specific percentage. 

The AMCU alleged that retrospective discounts used in agreements between pharmaceutical companies and their Ukrainian distributors generated additional income for distributors (exceeding the maximum permissible mark-ups under pricing legislation), were not “passed on” to the final consumer, and thus resulted in price increases for medicines in public procurement. According to the AMCU, by entering into agreements with provisions on retrospective discounts, pharmaceutical companies colluded with distributors to have distributors earn revenue on top of that received from maximum permissible mark-ups. In the AMCU’s opinion, pharmaceutical companies were made aware of the pricing policies of distributors and they failed to pass the retrospective discounts to final consumers via reporting provisions in agreements with distributors.

The alleged anti-competitive effects of discounts, according to the AMCU, included evading mark-up regulations and overpricing medicines in public procurement, squeezing out competitors, limiting consumers’ access to substitute medicines, imposing control over markets where distributors resell products (partially related to excessive reporting by distributors), and allocating markets in terms of resale of products through public tenders.  

At the same time, in most cases the AMCU assumed the anti-competitive effect of discounts without a description of a clear root-cause link or providing sound evidence, applied a very weak economic analysis and narrow approach to the market definition (based on similarities of active ingredients, dosage forms, administration, formulation, etc.), and failed to apply exemptions effective at the time. A fine was imposed for alleged anticompetitive concerted actions, but was effectively based on dominance abuse reasoning, contrary to EU legislation and practice, which Ukraine is obliged to align its legislation and practice to under the EU-Ukraine Association Agreement.

Additionally, in such cases the AMCU relied heavily on Ukrainian pricing regulations while controlling compliance with pricing regulations is out of scope of the AMCU’s powers.

8. Please provide information on a couple of interesting/significant anti-trust cases in the pharmaceutical sector in your country.

The 2020 AMCU decision against a global pharmaceutical company (its two non-resident entities) and its Ukrainian distributors is the most recent case with the highest penalty among all competition cases in the pharmaceutical sector to date.

The case revolved around the supply of insulins, medicinal products for growth disorders and haemophilia in tenders and to pharmacies during 2011–2017.

The AMCU’s reasoning in the case was essentially the same as described in the section above, with some interesting (new) case-specific arguments, demonstrating the AMCU’s logic in more detail, namely that:

  • The contractual mechanism for the compensation of Forex rate fluctuations allowed a pharmaceutical company to profit (despite the mechanism essentially targeting distributors), and in this way to cover its costs for providing discounts to distributors.
  • The pharmaceutical company did not decrease declared manufacturer’s/import prices in line with the provided retrospective discounts, and thus allowed distributors to profit more from sales of its products with public funds, which, consequently, meant more profit via the Forex rate compensation mechanism for the pharmaceutical company. Note: under Ukrainian pricing regulations, MAHs must voluntarily declare the manufacturer’s/import prices for medicinal products to be sold for public funds, and prices along the supply chain must not exceed this declared price; no rules are set regarding how such declared price will be calculated, so this remains at the MAH’s discretion.
  • The AMCU analysed and commented on the practice of the free supply of insulins by a pharmaceutical company via distributors to hospitals, mostly for first-time users of insulins, and noted that no free supply was envisioned for non-insulin, higher-priced products of the company. Confusingly, on the one hand the AMCU concluded that such free supply ensured stable demand for the company’s insulins in subsequent periods, given difficulties that substitution of insulins entails for the patient. On the other hand, the AMCU found issue with the pharmaceutical company offering the possibility of the supply of such free insulins not to all, but only to randomly chosen distributors, irrespective of that this would supposedly only reinforce the “stable demand” the AMCU found questionable in the first place.

The AMCU’s decision is currently being appealed in the court of first instance.

The 2018 decision against a local subsidiary of a top-five global pharmaceutical company and its distributors is one of a few pharma competition cases to date which was successfully appealed in court.

The case revolved around the supply of highly specialised medicinal products, including for hepatitis C, cancer and the prevention of organ rejection after transplantation, via a number of Ukrainian distributors in 2012–2016 in tenders.

The AMCU’s reasoning in the case is essentially the same as described in the section above.

The court rejected the AMCU’s claims and finally ruled in favour of the pharmaceutical company and its distributors based on the following:

  • The terms of cooperation under the agreements between the pharmaceutical company and each distributor were the same for all distributors, i.e. each distributor had equal opportunity to compete with each other, including in tenders.
  • The agreements with the pharmaceutical company enabled distributors to receive bonuses subject to certain conditions. Agreements did not provide for any sanctions for non-fulfilment of such conditions, i.e. a distributor could voluntarily decide whether to aim for a bonus or not.
  • The bonuses themselves could not limit the distributors’ ability to compete, as they were a pro-competitive way to gain advantages in competition both at the manufacturing and wholesale level.
  • By introducing a system of bonuses, the pharmaceutical company provided distributors on equal terms with an additional opportunities to gain a competitive advantage through their own achievements in tenders, thus promoting competition between them and creating preconditions for using bonuses to reduce resale prices in public procurement.
Portrait ofBorys Danevych
Borys Danevych
Partner
Kyiv (CMS CMNO)
Portrait ofOlga Belyakova
Olga Belyakova
Partner
Kyiv (CMS CMNO)