Ukrainian regulators are undergoing a challenging period of pushing reforms from inside out and developing an enforcement culture. The country’s competition authority has become more transparent in its activities and many groundbreaking and long-expected changes are being launched.
The pharmaceutical market is a subject of precise attention of the competition authorities worldwide, and Ukraine is no exception. Meanwhile, law firms practising antitrust and competition are becoming more industry-focused, and the pharmaceutical business seeks antitrust compliance solutions with due account of the sector specifics and global enforcement trends in this area.
The dynamic Ukrainian outfit Redcliffe Partners has strengthened its competition practice team with ambitious dedicated practitioners. We’ve met the recently assembled team consisting of Anastasia Usova, counsel, and associates Yulia Eismont and Kateryna Chumak, to find out their practice development plans and share views on antitrust enforcement in the pharmaceutical sector both in Ukraine and globally. UJBL: Redcliffe Partners announced the launch of its competition practice when you joined it. What was the reason for the team’s growth? How have you extended what the practice offers? Can you describe its industrial focus?
Anastasia Usova: Redcliffe Partners has a considerable track record in competition, especially in merger control projects. The recent experience covers industries as diverse as agriculture, energy, oil & gas, financial and insurance services, retail and chemicals. Currently, our competition team has quite a wide-ranging agenda of competition projects, including corrective merger filings under the “amnesty” procedure, merger filing of one of the largest European transactions in the banking sector in recent years, and competition compliance support to our clients. Thus, when we speak about me joining the team, it is rather about strengthening the competition practice than its launch. My main focus will be to expand the practice in advising clients on antitrust matters, such as abuse of market power, anti-competitive agreements, misleading advertisements. I have experience of assisting clients during the investigations and sector inquiries of the Antimonopoly Committee of Ukraine (AMCU) as well as in competition litigation, in particular, in a talked about retail case of the AMCU. Also, since the analysis of pricing and discounts policies has become a hot topic on the AMCU’s agenda, especially in the pharmaceutical sector, we advise companies on ensuring compliance of their commercial policies with competition law requirements. Another important spotlight is comprehensive competition compliance support to business. There is a promising trend that more and more companies wish to develop a sustainable competition compliance culture and to make sure that their employees are aware of competition law requirements and take them seriously. In addition to development of compliance policies from scratch or adjusting global compliance policies to Ukrainian realities, I hold training sessions for the employees of clients to raise antitrust awareness and to outline practical steps that should be taken for timely tracking and mitigation of such risks.
UJBL: The Ukrainian competition authority has recently been looking very thoroughly at particular economic sectors. Some investigations have been already launched, some will be announced soon. Which industries are at particular risk?
Yulia Eismont: Besides the pharmaceutical and healthcare sectors, in 2016 the AMCU closely monitored the gas and electricity supply markets, air transport market, retail market of road fuel, and food products. At the beginning of 2017, the authority announced plans to implement a complex and systematic monitoring of oil and petroleum products markets to enhance their transparency. The AMCU also traditionally keeps an eye on so-called “socially important” food markets, such as eggs, milk, oil, butter, bread, meat, etc. In view of the initiatives of the Ministry of Economic Development to abolish price regulation for the above food items, the AMCU is likely to enhance scrutiny of these markets, especially of potential pricing violations. According to public statements by its officials, the AMCU is going to monitor the above markets on a regular basis to keep track of any changes in the competitive environment.
UJBL: What is the recent foreign practice of regulating competition on the pharmaceutical market? How do the recent decisions affect the industry globally and the competitive behavior of its players?
A. U.: In recent years, competition authorities in Europe and the USA have been particularly focused on “pay for delay” agreements, excessive pricing and application of loyalty discounts by pharmaceutical companies with market power. Since 2008 the EU Commission has been continuously monitoring patent settlements to identify “pay for delay” practices where pharma companies pay manufacturers of generics to delay or hamper the market entry of cheaper generic medicines. Such practices are regarded in the EU as “restrictions by object”, meaning that they restrict competition by their very nature and no inquiry into their effects is necessary for finding infringements.
As regards excessive pricing of pharmaceuticals, such issues have just recently come under the enforcers’ scrutiny. In 2014 the competition authority of the Netherlands closed an investigation into AstraZeneca. AstraZeneca offered Nexium to Dutch hospitals at a deep discount, whereas patients had to pay a much higher price when buying them at pharmacies. Despite the availability of cheaper generics from the competitors at pharmacies, patients tend to continue to use the same brand that they had been given by their hospitals, and doctors were inclined to prescribe the same brand. Because of this, the competition authority suspected that AstraZeneca faced little competition and was thus able to offer Nexium at much higher prices at pharmacies that would have been impossible should effective competition exist in a given market. However, since the authority did not find that AstraZeneca enjoyed a dominant position, in particular, given the competition from generics drugs, no violation of competition law has been established.
The competition authorities have generally been reluctant to launch excessive pricing cases because they raise a number of difficult questions such as how to calculate what amounts to an unreasonably high price and how to define a competitive benchmark price. A standard cost-plus pricing method (cost of production plus markup) is not appropriate for analysis of excessive pricing in pharma. To ensure a comprehensive review, a number of other factors need to be assessed such as R&D investments, promotional expenses, and increase in the quality of products, which makes excessive price cases very resource consuming for the authorities. In addition, the authorities take into account that such cases may chill innovation, disincentivise market entry and investment in the sector. Nevertheless, in 2016 pricing issues in the pharmaceutical sector came back to the forefront of antitrust news in Europe. At the end of 2016, the Italian competition authority imposed a EUR 5 million fine on Aspen for abuse of its dominant position by increasing the price of its cancer medications by 300% to 1,500% from the initial price. According to the authority, Aspen increased prices in Italy up to the levels in other EU countries, in order to limit parallel trade of the product outside of Italy. Also in December 2016, the UK’s Competition and Markets Authority (CMA) imposed record individual fines on Pfizer and Flynn Pharma amounting to around GBP 90 million in total for charging excessive prices to the National Health Service for an anti-epilepsy drug.
Y. E.: Loyalty discounts, if applied by dominant companies, will also remain an area of concern in coming years. In June 2015, the CMA issued general guidelines on potential competition concerns regarding discounts and rebates in the pharmaceutical sector. Under the CMA Guidelines, due to a loyalty-inducing effect, certain rebates or discounts offered by a dominant company may be capable of restricting competition by excluding or limiting the ability of competing firms to operate in the market. The approach of the CMA is in line with EU Guidance on abusive exclusionary conduct by dominant undertakings and will remain a benchmark under which such cases will be assessed by the competition authorities in the coming years.
UJBL: The Ukrainian pharmaceuticals market is a socially important one and falls traditionally under the probing eye of the Antimonopoly Committee. What are the main competition restrictions and considerations on this market?
A. U.: The pharmaceutical sector has indeed been one of the biggest priorities of the AMCU in the last few years. After the issue of the recommendations in relation to anticompetitive effects of bonuses for pharmacies’ marketing services in 2014, the AMCU launched a number of investigations into the commercial and discounts policies of pharmaceutical companies. In September 2016, the AMCU imposed fines in two cases alleging anticompetitive concerted practices between pharmaceutical producers and their Ukrainian distributors regarding their discounts practices. Total fines amounted to about UAH 1.65 million in the Alcon case and around UAH 3.56 million in the Servier case, respectively. In both cases, the AMCU, in particular, expressed competition concerns regarding provision of special discounts to distributors for sales through public procurement tenders in the form of credit notes or deduction from future purchases. The AMCU claims that the provided discounts were not reflected in the price at which the products were sold at tenders since the distributors used a nominal contract price (without discount) in setting their tender prices. According to the AMCU, such practices resulted in the overpricing of pharmaceuticals sold through public tenders as compared to other sales channels where the discounts were applied directly in the invoice of the relevant sale. Both of the above AMCU’s decisions are under appeal now and the pharmaceutical market awaits with bated breath as to what the court will say. The AMCU’s increased focus on pricing and discounts practices in pharma makes the companies draw special attention to compliance of their commercial policies with competition law requirements. This is of particular importance for dominant companies, which should make sure that their discounts do not lead to restriction of competition by creating barriers to market entry or ousting other players from the market.
Y. E.: Importantly, the AMCU normally takes a very narrow market definition approach in pharmaceutical cases, presuming that a pharmaceutical has no substitutes and constitutes a separate product market if its molecule is not present in any other medicines. As a result, the companies are deemed dominant in a number of markets where they actually face competition from other market players. Dominance entails the special responsibility of the company and makes a number of discount practices illegal due to their potential to exclude or limit the ability of competing firms to operate on the market.
Kateryna Chumak: There are no official guidelines of the AMCU on assessment of competition concerns of discounts and rebates, which makes it difficult for companies to assess what is good and what is bad in the application of discounts. Under EU competition rules, concerns arise if dominant companies offer so-called “loyalty” rebates for reaching a certain volume of purchase and such rebates offer a customer lower prices both on units purchased after reaching the threshold and before. “Loyalty” rebates may take various forms. For example, rebates for reaching a certain threshold of purchased by the end of the year, individual rebates for exceeding previous volumes of purchase within a certain period (e.g. a year or quarter), rebates for buying a certain percentage of the total volume of product which a customer needs from a dominant company. All these types of discounts may have a strong loyalty-inducing effect as they make it less attractive for customers to switch some amounts of demand to an alternative supplier. Customers do not want to lose a long-awaited rebate at the end of the year or another established period, and the higher the rebate and the required volume of purchase to trigger it, the more likely is the ousting of competitors from the market.
UJBL: How about unfair competition in the pharmaceutical sector? Do misleading information violations remain under the AMCU’s radar?
A. U.: Sure, the AMCU keeps an eye on misleading information in pharma, especially given the health risks attached. Unlike the EU, where promotional claims are assessed from the perspective of a reasonable and well-informed consumer, the AMCU applies a benchmark of an average consumer which is supposed to presume that the information about the product is complete and not to question the truthfulness of the claims. Thus, the same promotional claim, which does not raise concerns in the EU, may be deemed misleading in Ukraine. The companies should be particularly prudent in the correct indication of the type of product, its consumer qualities, ingredients and distinguishing characteristics, which play a decisive role in the customer’s choice of the product. For example, in 2016 the AMCU imposed a fine in relation to a promo video of a psychostimulant which claimed that its therapeutic effect started from the 1st day of taking the medicine, however, such claim was not confirmed with any documentary evidence.
Y. E.: A big portion of misleading information cases are initiated by competitors, thus when launching a new promotional campaign, it is important to consider potential complaints from other market players and to verify if claims can be potentially substantiated with supportive evidence and/or scientific studies in case of investigation by the AMCU.
UJBL: Do market players implement antimonopoly compliance as a preventive measure to avoid AMCU investigations?
A. U.: Antitrust compliance programs help companies to reduce the scope for future infringements through raising antitrust awareness of the employees, training and tools for monitoring and uncovering potential risks of violations and timely mitigation of such risks. However, the mere existence of a compliance program as such does not prevent the company from an AMCU investigation, only in the sense that it helps to prevent the committing of a violation. In some countries such as Australia, India, Israel, Italy, France, Singapore and the UK, the compliance program may serve as a mitigating factor in case of competition infringement by the company. For example, in the UK the existence of antitrust compliance may lead to a reduction of fine by up to 10% if adequate steps to ensure compliance have been taken. In Italy a 15% reduction in the fine is possible. Unlike the above countries, in Ukraine competition compliance programs are not regarded as a mitigating factor in case of antitrust violation. On a number of occasions, AMCU officials have expressed the position that they are not going to reduce fines for the mere fact that the compliance programs are in place. The point of compliance programs is to prevent, or at least detect and stop, an antitrust infringement at an early stage. And to achieve this objective it requires commitment by management and a system of incentives and sanctions for non-compliance, risk identification and assessment, monitoring and antitrust concerns-handling systems in place. These must-have elements should help in ensuring that a compliance program is strong not on paper, but in action.
Redcliffe Partners Key facts:
• Year of establishment
(2008 — 2015 Clifford Chance Kyiv)
• Number of lawyers/partners
• Core practice areas
Banking and Finance
Corporate and M&A
Debt Restructuring and